fdi in india and its growth linkages - Department Of Industrial Policy ...

FDI IN INDIA AND ITS GROWTH LINKAGES
per cent reduction of income tax in the following three years); exemption from income tax on the remitted share of
profits; exemption from export duties and from import duties for equipment, instruments, and apparatus for producing
export products; and the easing of entry and exit formalities.
4.10.6 Foreign Trade Management
In 1978, almost all trade was carried out through 13 Foreign Trade Companies (FTCs) responsible for implementing
the central plan. In 1984, the FTC monopoly was abolished. The system was decentralised by allowing branches to
become independent and competing operating entities and to operate as agents of the enterprises, which meant that they
could charge a fee for their services, but could not absorb profits or losses on goods traded. In 1988, further reform led
to a reduction in goods covered by the mandatory export plan by about 30 per cent, an increase in retention quotas and
access to the foreign exchange. In 1991, the mandatory export plan as well as fiscal subsidies for exports was abolished
leading to greater competition among the FTCs in purchasing products from enterprises and better prices for export
suppliers. By 1994, there were more than 9,000 FTCs actively competing for exporters. With the unification of the
exchange rate, there was also a change in the tax system regarding the treatment of exports under the VAT.
Zero rating for exports was introduced, which meant that exporters could claim a refund of the VAT paid on inputs. By
1996, when the renminbi became convertible on the current account, the FTCs and China’s foreign trade were almost
entirely market-driven.
4.10.7 China’s Liberalisation: A Focus on Overall Growth, Not Enclaves
The preceding discussion makes it clear that the SEZs in China were not an experimental approach to increasing
exports. Instead they were the vanguard of an alternative market-based growth strategy that took advantage of FDI and
the cultural and geographical proximity of strong market economies like Hong Kong and Taiwan. The geographical
spread of SEZ policies ensured that the provinces around the SEZ provided essentially similar investment environments.
Indeed, much of the export boom came from them and not directly from the SEZs. As provinces such as Guangdong
began to show signs of congestion, the growth process spread beyond it. This spread was facilitated by the regional
approach to infrastructure development. These strategies, that is, (a) choosing a large established area that leveraged
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Why Did China Set Up SEZs?
The creation of the four SEZs not only symbolised the beginning of China's economic reform but also constituted an integral part of
the overall open-door policy. However, the interesting question is whether it was necessary to set up SEZs when China had decided
to implement the open-door policy nation-wide. First, there was a strategic plan to resume sovereignty over Hong Kong, adjacent
to Shenzhen, by 1997. It was believed that the SEZs could contribute positively to the peaceful handover of Hong Kong to China.
Second, the geographic proximity of the SEZs, which are the original home of many overseas Chinese, to Hong Kong, Macau,
Taiwan, and ASEAN, made it possible to exploit the overseas Chinese business network to obtain capital, productive technology,
and management skills, and to gain access to the international market. Third, at the start of carrying out market-oriented
economic reforms, the establishment of a small number of selected SEZs also served as a laboratory for China's overall economic
reforms. The idea was to introduce the successful experience drawn from the actual practice of market-oriented economic
reforms in a small number of SEZs into other areas and, meanwhile, to limit it so that it could be easily controlled if something
went wrong. In addition, from the perspective of their geographical diffusion, the establishment of the SEZs could be viewed as a
pilot project for the more extensive operation of the uneven development strategy that was implemented in 1988. Fourth, the
creation of SEZs was aimed at providing a favourable investment environment for foreign investors, while trying out preferential
FDI policies to be implemented later in the rest of the country. Finally, there was the reformers' strategic consideration of reducing
possible political resistance from the conservatives against market-oriented economic reforms in order to carry out the overall
economic reform scheme more smoothly and effectively.
Based on Chen, Chunlai (1997). The Evolution and Main Features of China's Foreign Direct Investment Policies. (Working Paper No. 97/15). Chinese Economies
Research Centre, University of Adelaide.