Deemed Export &Rupee Convertibility

ANANDAPADMANABHAN JS 2. M.com

Deemed Export"Deemed Exports" refers to those transactions in which the goods supplied do not leave the country. Deemed export means that the goods are considered to have been exported even if they have not moved out of the country. Under deemed export, the goods can be sold within India to a anybody who holds a licence for import of these very goods. The seller selling the said goods against an import licence is the deemed exporter and the buyer is the deemed importer.

The following categories of supply of goods by the main/ sub-contractors shall be regarded as "Deemed Exports" under this Policy, provided the goods are manufactured in India:

Supply of goods to Export Oriented Units (EOUs) or Software Technology Parks (STPs) or Electronic Hardware Technology Parks (EHTPs) or Bio Technology Parks (BTP);

supply of capital goods to holders of licences under the Export Promotion Capital Goods (EPCG) scheme;

Supply of goods to nuclear power projects through competitive bidding as opposed to International Competitive Bidding.

supply to projects funded by UN agencies.

Rupee ConvertibilityThe term convertibility of a currency means that it can be freely converted into any other currency. It helps in the removal of quantitative restrictions on the trade.After the announcement of economic liberalisation in July 1991, Govt. of India announced partial convertibility of Rupee from March 1, 1992. Under this partial convertibility 40% of the current account transactions were convertible in rupee at officially determined exchange rate and remaining 60% at market determined exchange rate.

The Govt. of India, in March 1993, introduced a fully unified market determined exchange rate system. Thus the unification of exchange rate and floating rupee was started in 1993-94.

The final step is the announcement of full convertibility of the rupee on current account in August 1994 by accepting the obligation under article VII of the IMF.

Currency Convertibility

Current Account Convertibility

Capital Account Convertibility

Current Account ConvertibilityConvertibility on current account is

defined as, “the freedom to buy or sell foreign exchange for the following international transactions:

All payments due in connection with foreign trade, other current business including services and normal short term banking and credit facilities.

Pursuing Higher education abroad.Tourism. Moderate remittances for family

living expenses.”

ImplicationsNow the authorised dealers are

empowered to release exchange without prior approval of Reserve Bank of India.

Exporters find it easy to transact the business.

Many bureaucratic hurdles are eliminated in the process of obtaining foreign exchange for imports.

More than 100 countries in the world allowed full convertibility of their currencies on capital account.

Capital Account ConvertibilityCapital Account

Convertibility (CAC) is the freedom to convert local financial assets into foreign financial assets at market determined exchange rates.

Non-Convertible capital Cuba(peso) and North Korea(won) Non participation in FOREX market Major challenge for domestic currencies there.

Partial Convertible Capital-

Indian Rupee RBI’s restriction on the inflow and outflow of capital

Full Convertible Capital-

US dollarsNo restrictions or limitation on the amount to be tradedThus, this is one of the major currency traded in FOREX market

Upto 1991, there was rigid control on both Capital and Current account.

Capital account convertibility was introduced in India in August 1994.

In 1997 the government had set up a committee (Tarapore committee) to spell out a road map for the full convertibility of the rupee.

Tarapore CommitteeCommittee on capital account

convertibility, set up by RBI(Reserve Bank of India) under the chairmanship of former RBI deputy governor S.S. Tarapore.

Economists Surjit S Bhalla, M G Bhide, R H Patil, A V Rajwade and Ajit Ranade were the members of the Committee.

The report submitted by this Committee in the year 1997 proposed a three-year time period (1999-2000) for total conversion of Rupee

Reserve Bank of India appointed the second Tarapore committee to set out the framework for fuller Capital Account Convertibility.The report of this committee was made public by RBI on 1st September 2006. In this report, the committee suggested 3 phases of adopting the full convertibility of rupee in capital account.

First Phase in 2006-7 Second phase in 2007-09 Third Phase by 2011.

The Second Tarapore Committee on Capital Account Convertibility

The government is adopting a cautious approach, taking into consideration all aspects and the risks involved in opening up the economy by allowing convertibility of the currency.

International trade & financial Environment. M.K.Bhat – Ane Books Pvt. Ltd.- New Delhi-2009

International Business, Text and Cases, P.Subba Rao Himalaya Publishing House, Mumbai.

References