Export Production, Finance and Distribution

Special Economic Zone

A special economic zone (SEZ) is a geographical region having liberal economic laws compared to country's domestic economic laws. SEZ were formed in 2000 with an objective of generation of additional economic activity, promotion of exports of goods and services, promotion of investment from domestic and foreign sources, creation of employment opportunities and development of infrastructure facilities. It is also considered as a Duty Free Business Area deemed to be a Foreign Territory though located within a country's national borders.

SEZ Facts

1. There are 6,279 units approved under SEZ as of 31st March, 2024.

2. The land allotted for SEZ is 43,774 hectars.

3. A total investment of Rs. 7,07,341 Crores has been made on SEZ as of 31st march, 2024.

4. Number of people employed with SEZ in India is 31,94,104 as of 31st March, 2024.

Several SEZs in India are involved mainly in service, production, processing, assembling, trading, repair, remaking, reconditioning, re-engineering, making of gold / diamond jewelry which are exclusively sold in various external markets. Units in SEZ are also allowed to manufacture items reserved for Small Scale Industries like pickles, chutneys, mustard oil, glass bangles, wax candles, steel chairs, laundry soap, stainless steel and aluminum utensils, etc.

SEZ in India covers Free Trade Zone (FTZ), Export Processing Zone (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, etc. Exports from SEZs have increased from 22,840 Crores in 2005-06 to 14,56,930 Crores in 2024-25. As of March 2025, there are 277 SEZs operating across India with Tamil Nadu (49), Karnataka (38), Telangana (37), Maharashtra (36), Andhra Pradesh (25), Gujarat (21), Kerala (20), Uttar Pradesh (14), Haryana (08), Odisha (05), Punjab (03), Rajasthan (03), Chandigarh (02), Jharkhand (01) and Chhattisgarh (01). 

• View SEZ Operations on Operational SEZs 

The incentives and facilities offered to the units in SEZs include:-

1. Duty free import / domestic procurement of goods for development, operation and maintenance of SEZ units.

2. 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. 

3. Exemption from GST and other taxes. Supplies made to SEZs (Deemed Exports) are zero rated under IGST Act, 2017.

4. Single window clearance for Central and State level approvals.

For more read: http://sezindia.nic.in/

Agriculture Export Zone

The Government of India, in March 2011 announced a policy of setting up of Agri Export Zones (AEZs) across the country with a primary objective of boosting exports. At present, 60 AEZs have been sanctioned with 40 agricultural commodities being operated across 20 Indian states. Efforts are put to identify potential products, the geographical region in which these are grown and adopting an end to end approach of integrating the entire process, right from the stage of production till it reaches the market. 

Setting up of such AEZs shall lead to:

1. Strengthening of backward linkages with a market oriented approach

2. Product acceptability and its competitiveness abroad as well as in the domestic market

3. Value addition to basic agricultural produce

4. Bring down cost of production through economy of scale

5. Better price for agricultural produce

6. Improvement in product quality and packaging

7. Promote trade-related research and development

8. Increase employment opportunities.

9. Promotes trade related research and development, quality improvement, better prices, value addition, product acceptance abroad, increase in employment opportunities, improved packaging of agri produce.

Some Agri Export Zones in India - Examples:

1. Mango, Mango Pulp, fresh vegetables, Gherkins and Chilli are the focused products in various regions of Andra Pradesh namely Medak, Mahaboobnagar, Chittor, Guntur, Barpeta, Nagaon, etc.

2. Horticultural products and medicinal plants in certain regions of Kerala.

3. Potatoes, Onion and garlic in Madhya Pradesh.

4. Pune, Nashik, Kolhapur and sangli of Maharashtra for flowers.

5. Ratnagiri, Sindhudurgh, Raigadh and Thane of Maharashtra for Alphonso Mangoes.

6. Amritsar and Jalandar of Punjab for Basmati Rice.

Benefits to Agri Export Zones in India

1. Central, State Government and their agencies are providing a variety of financial assistance towards Training and Extension, R&D, Quality Upgradation, Infrastructure and Marketing etc. so as to boost agriculture export.

2. Benefits of Export promotion Capital Goods Scheme is also provided to Agri Export Zone exporters.

3.  Exporters of value added agri products will be eligible for sourcing duty free fuel for generation of power, provided the cost component of power in the ultimate product is 10% or more and the input-output norms are fixed by the advance licencing committee of the DGFT. 

The following places are notified as Agriculture Export Zones for the products mentioned therein. 

1. Pineapple - West Bengal: Darjeeling, Jalpaiguri, Uttar Dinajpur, Cooch Behar, Howrah

2. Gherkins – Karnataka: Tumkur, Bangalore Urban, Bangalore Rural, Hassan, Kolar, Chitradurga, Dharwad and Bagalkot

3. Lychees – Uttranchal : Udhamsingh Nagar, Dehradun and Nainital

4. Cut Flowers - Tamil Nadu: Dharmapuri, Krishnagiri

5. Grape & Grapevine : Maharashtra Nasik, Sangli, Sholapur, Satara, Ahmednagar

6. Mango Pulp & Fresh Vegetables : Andhra Pradesh,Chitoor

7. Pineapple - Tripura: Kumarghat, Manu, Melaghar, Matabari and Kakraban Blocks

8. Mangoes-Maharashtra :Rantagiri, Sindhudurg, Raigarh and Thane

9. Apples-Jammu & Kashmir: Srinagar, Baramula, Anantnag, Kupwara, Kathua and Pulwama

10. Potatoes, Onion and Garlic-Madhya Pradesh: Malwa, Ujjain, Indore, Dewas, Dhar, Shajapur, Ratlam, Neemuch Mandsaur and Khandwa

11. Cabbage, Broccoli, Okra, Peas, Carrot, Baby Corn, Green Chillies, Green Beans, Tomato –Punjab: Fatehgarh Sahib, Patiala, Sangrur, Ludhiana and Ropar, Abohar, Bhatinda, Muktsar & Hoshiarpur

12. Potatoes-Uttar Pradesh: Agra, Hathras, Farrukhabad, Kannoj, Meerut, Baghpat and Aligarh, Janpad Badaiyun, Rampur, Ghaziabad, Firozabad & Etawah

13. Mangoes and Vegetables-Uttar Pradesh: Lucknow, Unnao, Hardoi, Sitapur and Barabanki

14. Mangoes-Uttar Pradesh :Saharanpur, Muzaffarnagar, Bijnaur, Meerut, Baghpat and Bulandshahr, Jyotibafulenagar

15. Potatoes-Punjab:Singhpura, Zirakpur Distt. Patiala and satellite centres at Rampura Phul, Muktsar, Ludhiana, Jullundur

16. Kesar mango-Maharashtra: Aurangabad, Beed,Jalna,Ahmednagar and Latur

17. Flowers-Maharashtra: Pune, Nasik, Kolhapur and Sangli

18. Walnut-Jammu & Kashmir: Baramulla, Anantnag, Pulwama, Budgam,Kupwara, Srinagar, Doda, Poonch, Udhampur, Rajouri and Kathua 124

19. Lychee-West Bengal: Murshidabad, Malda, 24 Pargana(N) and 24 Pargana(S)

20. Lychee & Vegetables-Bihar: Muzaffarpur, Samastipur, Hajipur, Vaishali, East and West Champaran, Bhagalpur, Begu Sarai, Khagaria, Sitamarhi, Saran and Gopalganj

21. Mango & Grapes-Andhra Pradesh: Rangareddy, Medak, Mehboobnagar

22. Mangoes & Vegetables-Gujarat: Ahmedabad, Khaida, Anand, Vadodara, Surat, Navsari, Valsad, Bharuch, Narmada

23. Potatoes-West Bengal: Hooghly, Burdhwan, Midnapore (W), Midnapore(E), Uday Narayanpur, Howrah

24. Flowers-Uttranchal: Dehradun, Pantnagar,udhamsingh Nagar, Nainital and Uttarakashi

25. Flowers (Orchids)& Cherry Pepper-Sikkim: East Sikkim

26. Ginger-Sikkim:North, East, South & West Sikkim

27. Rose Onion –Karnataka: Bangalore (Urban), Bangalore (Rural), Kolar

28. Flowers-Karnataka: Bangalore (Urban), Bangalore (Rural), Kolar, Tumkur, Kodagu and Belgaum

29. Apples-Himachal Pradesh: Shimla, Sirmaur, Kullu, Mandi, Chamba and Kinnaur

30. Basmati Rice-Punjab: Gurdaspur, Amritsar, Kapurthala, Jalandhar, Hoshiarpur And Nawanshahar

31. Flowers-Tamilnadu :Nilgiri

32. Mangoes-Andhra Pradesh: Krishna

33. Onion-Maharashtra :Nasik, Ahmednagar, Pune, Satara, Jalgaon, Solapur

34. Ginger and Turmeric-Orissa: Kandhamal

35. Vegetables-Jharkhand: Ranchi, Hazaribagh and Lohardaga

36. Seed Spices-Madhya Pradesh: Guna, Mandsaur, Ujjain, Rajgarh, Ratlam, Shajapur and Neemuch

37. Basmati Rice-Uttaranchal: Udham Singh Nagar, Nainital, Dehradun and Haridwar

38. Mango-West Bengal: Maldah and Murshidabad

39. Vegetables-West Bengal:Nadia, Murshidabad and North 24 Parganas

40. Mangoes-Tamil Nadu: Madurai, Theni, Dindigul, Virudhunagar and Tirunelveli

41. Wheat-Madhya Pradesh: Ujjain Zone (Neemuch, Ratlam, Mandsaur and Ujjain), Indore Zone (Indore, Dhar, Shajapur and Dewas) and Bhopal Zone ( Sehore, Vidisha, Raisen, Hoshangabad, Harda, Narsinghpur and Bhopal) & Sagar

42. Horticulture Products-Kerala: Thrissur, Ernakulam, Kottayam, Alapuzha, Pathanamthitta, Kollam, Thiruvanthapuram, Idukki and Pallakad

43. Fresh and Processed-Assam: Kamrup, Nalbari, Barpeta, Darrang, Nagaon, Morigaon, Karbi Anglong and North Cachar 125 Ginger

44. Basmati Rice-Uttar Pradesh: Bareilly, Shahjahanpur, Pilibhit, Rampur, Badaun, Bijnor, Moradabad, JB Phulenagar, Sharanpur, Mujjafarnagar, Meerut, Bulandshahr, Ghaziabad And Baghpat

45. Medicinal & Aromatic Plants-Uttaranchal:Uttarkashi, Chamoli, Pithoragarh, Dehradun And Nainital, Haridwar and Uddamsinghnagar

46. Dehydrated onion & Garlic-Gujarat: Bhavnagar, Surendranagar, Amreli, Rajkot, Junagadh and Jamnagar districts

47. Gherkins-Andhra Pradesh: Mahboobnagar, Rangareddy, Medak, Karimnagar, Warangal, Ananthapur and Nalgonda

48. Pomegranate-Maharashtra: Solapur, Sangli, Ahmedabagar, Pune, Nasik, Osmanabad, Satara, Latur

49. Banana-Maharashtra: Jalgaon, Dhule, Nandurbar, Buldhana, Parbhani, Hindoli, Nanded and Wardha

50. Oranges-Maharashtra: Nagpur, Amraoti, Wardha, Buldhana, Yeotmal;, Washin, Yeotmal

51. Lentil and Grams-Madhya Pradesh: Shivpuri, Guna, Vidisha, Raisen, Narsinghpura, Chhindwara

52. Oranges & Vegetables-Madhya Pradesh: Chhindwara, Hoshangabad, Betul

53. Cashewnut-Tamil Nadu: Cuddalore, Thanjavur, Pudukottai and Sivaganga

54. Sesame seeds-Gujarat: Amerali, Bhavnagar, Surendranagar, Rajkot, Jamnagar

55. Vanila-Karnataka: Districts of Dakshin Kannada, Uttara Kannada, Udupi, Shimoga, Kodagu, Chickamagalur

56. Chilli-Andhra Pradesh: Guntur District

57. Medicinal Plants-Kerala: Districts of Wayanand, Mallapuram, Palakkad, Thrissur, Idduki, Pathanamthitta, Kollam, Thiruvananthapuram and Ernakulam

58. Darjeeling Tea-West Bengal: Darjeeling

59. Coriander-Rajasthan: Kota, Bundi, Baran, Jhalawar and Chittor

60. Cumin-Rajasthan: Nagaur, Barmer, Jalore, Pali and Jodhpur

For more info: http://agriexchange.apeda.gov.in/

Towns of Export Excellence

• Objective: Development and growth of export production centres. A number of towns have emerged as dynamic industrial clusters contributing handsomely to India’s exports. It is necessary to grant recognition to these industrial clusters with a view to maximize their potential and enable them to move up the value chain and also to tap new markets.

• This Scheme gives recognition to certain strategic (manufacturing / cultivation) areas as “Towns of Excellence” to maximize export potential.

• Indian Towns are granted this recognition to maximize their manufacturing potential and enable them to move up in the value chain and grab new international markets.

• As per the Foreign Trade Policy 2023, an area/cluster that realizes an annual export turnover of Rs. 750 crores or more will be declared as ‘Town of Export Excellence. However, for TEE in handicraft, handlooms, agriculture and fisheries sector, threshold limit would be Rs. 150 crore.

Benefits to Towns of Excellence

• Market Access Initiative (MAI) Scheme: Recognized associations of units will be provided financial assistance under Market Access Initiative (MAI) scheme, on priority basis, for export promotion projects for marketing, capacity building and technological services.

• Export Promotion Capital Goods Benefits: Benefit towards purchase of Firsthand and Secondhand Capital Goods for manufacturing export-oriented goods. Common Service Providers in these areas shall be entitled for Authorization under EPCG scheme.

•  Assistance to States for Development of Export Infrastructure Benefits: General benefits like road connectivity, infra equity, common effluent treatment facilities, power supply, freight stations.

Integrated Industrial Areas

IIA is a Public Private Partnership (PPP) to set up industrial parks and head towards development. In Maharashtra, this area declared by MIDC where industry, residential and other facilities are integrated for increasing investment, productivity and employment generation. It applies a clause of land use of minimum 60 : 40 (Industrial : Residential). As per the IIA scheme for setting up Integrated Industrial Areas, 60% of the land should go for industrial use, 30% for residential and 10% for commercial activities. In the current scenario, Maharashtra is in lead across India. The scheme allows waiver of 50% Stamp Duty on the first agreement between promoter and buyer of the plot. 

1% of Ready Reckoner Rate (Standard Value of an immovable property) is charged by MIDC (Maharashtra) which is further subject to 50% waiver. It is also projected that 54 SEZ may get converted into IIAs soon.

• Reliance Industries signed an MOU with Navi Mumbai SEZ sub-leasing around 4000 acres of land to set up an Integrated Industrial Area. 

• Chordia Industrial Park has been set up in Shirwal, Pune under a 99 year lease with the MIDC. Several potential investors have sparked interest in the park including manufacturing companies from Germany, Thailand and the US. Companies like Asian Paints, Godrej & Boyce Appliances, Thermax, NIPRO Corporation, Finolex J Power and KSB Pumps are already operating at Shirwal industrial area. 

• MIDC has also approved an industrial park by Lodha Developers in Usatane village in Thane along with one in Bhiwandi and Talegaon.

Incentives under Integrated Industrial Area - 2018

1. Relaxation in Minimum Area Required for IIA from 40 Hectares (100 acres) to 20 Hectares (50 acres) depending on location, difficulty in land acquisition, availability, etc.

2. Relaxation in Minimum Width Approach Road from 24 Meters to 12 Meters depending on location, difficulty in land acquisition, availability, etc.

3. Concession in Stamp Duty to the extent of 50%. 

4. Grant of Government Land if the land is free from encumbrances. Such land can be transferred to MIDC, which can be allotted to the developer by the MIDC as per market rates.

5. Additional Permissible Floor Space Index under Special Township Policy.

Check: https://www.midcindia.org/

International Payment and Settlement

Trade involves movement of not only goods, but also money. A successful trade is where goods are promptly received by the importer and accurate money is realized by the exporter. In short, none of the party should be disappointed with goods, service, value for money and payment. Realizing export proceeds is one of the most challenging task for any exporter depending on various situations. When the exporter and the importer are well known to each other, there is a level of trust and hence, there is less / tolerable risk associated to payments. But when they are unknown (in case of first export contract), there is high amount of risk associated to payment. This is the stage where the exporter and the importer have to talk and get into terms. So, payment can be agreed to be made in several ways like advance payment, letter of credit, document collection and open account. An exporter may also consign goods to his importer where payment can be received only after sales made by the importer (consignee). Let's understand these methods in detail.

1. Cash in Advance: An exporter can bypass credit risk by quoting cash in advance. Under cash in advance payment mechanism, the importer agrees to make payment to the exporter before delivery of goods. This payment is initiated by the importer through direct bank transfer through intermediary banks. This mechanism offers less risk to the exporter compared to other payment methods.  The following options can be preferred by the party's as per their interaction.

• Wire transfer - For this, one has to register with a bank / money transfer organization like Western Union and select the country to which payment is to be done. One will have to enter valid details like beneficiary name and address, Bank name and branch, Bank account number, IFS code, SWIFT code and the amount to be sent. There are charges levied for for making such wire transfers and the money gets transmitted within 1-4 working days.

• Escrow Service - This is method that offers protection to both the parties. The amount is first handed over to a trusted party (registered, recognized and authorized). Once all the trade conditions are met, the third party transfers the amount to the exporter.

2. Letter of Credit: L/C is one of the most popular and secure mode of making international settlements. It is a commitment given by the importer's Bank about timely payment to the exporter as per the L/C terms and conditions upon furnishing of documents. This means the exporter gets a guarantee of payment while offering the importer reasonable payment terms. Following are the points to note:

• The importer instructs his bank to pay the agreed amount to the exporter's bank. 

• Following the instruction, the importer's bank sends the Letter of Credit to the exporter's bank as a proof of sufficient and legit funds. 

• Payment is made by the importer's bank only upon fulfillment of all the conditions mentioned in the Letter of Credit, post shipment of goods. 

The Letter of Credit is also called Banker's Commercial Credit or Documentary Credit. The core benefit of having an L/C is the exporter can obtain reliable evidence about the importer's credit / financial status from the importer's bank before shipment of goods. The L/C creates an obligation for the importer and the exporter to fulfill the agreed conditions before executing the transaction. Also, in case of a payment default by the importer, the importer's bank arranges to pay the exporter through the exporter's bank. In simple words, L/C is a low risk instrument and can be used as a reliable element to mitigate it. 

Check the below image to understand the mechanism of Letter of Credit

3. Documentary Collections: Documentary Collection is a settlement mechanism where banks play the role of facilitators between an exporter and an importer. Here, trade documents are treated as the most important instrument, against which payment is initiated. The exporter is required to submit important documents to his bank which enables transfer of title and ownership to the importer. The exporter's bank will send these documents to the importer's bank with payment instructions. The importer's bank releases these documents (to the importer) strictly against payment from the importer as per the agreed terms. This money is remitted to the exporter's bank and later to the exporter. This system is also called Bills of Exchange, as the bank exchanges the document against payment from the importer. From the exporter's perspective, the task of collection is handed over to his bank. If by chance importer does not pay, the exporter will have to find another buyer, bear the return logistical cost, or abandon the merchandise. 

Mechanism of Documentary Collection Payment:

1. The exporter and importer should mutually agree and adopt documentary collection for payment in their trade agreement.

2. The exporter prepares a Bill of Exchange and sends it to his bank, which is forwarded to the importer’s bank.

3. The Bill of Exchange provides clear instructions to the bank about the documents required, amount of payment, terms of payment and transfer of title to goods.

4. The importer’s bank hands over the documents to the importer according to the options specified in the bill of exchange, which can be as follows:

• Release of documents against receipt of full payment from the importer.

• Release of documents against receipt of an acceptance committing for future payment signed by the importer.

5. After payment / acceptance, the importer receives the documents and uses the same for getting custom clearance of the goods.

6. The importer’s bank forwards the importer’s payment back to the exporter’s bank account.

Check out a few sample of Letter of Credit below:

4. Open Account: Under Open Account payment method, goods are shipped and delivered to the importer before receipt of payment. This is one of the most beneficial option for the importer, as he can avail 30, 60 or 90 days credit period. This enables importers to retain cash for a desired period of time, which can be diverted into other operations. But on the other hand, this is one of the most riskiest option for the exporter. The exporter's receivable gets blocked for a certain period of time creating working capital issues. With intense demand in international trade, exporters are bound to accept Open Account option so as to make, retain and sustain international buyers. Exporters may loose a transaction if they are reluctant to extend desired credit period to the importer. With Open Account method of payment, an exporter should mitigate commercial risk by opting for export credit insurance. In India, it is Export Credit Guarantee Corporation Scheme. 

5. Consignment: Consignment method is very much like Open Account method. That means, goods are shipped and delivered to the importer and the payment is received later.  The only difference is that payment is received only after selling the goods to the final consumer. In simple words, goods are consigned by the exporter to a consignee. The consignee undertakes marketing risk and sells them off in his foreign market or may distribute to retailers / wholesalers. Once the money is received by the importer (consignee), only then he remits the principal amount to the exporter. This method is possible only with strong trust and relationship with the overseas buyer. The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. 

Countertrade

In international trade, countries exchange goods and service for money. Counter trade is a mechanism where goods and services are exchanged for other goods and services and not for money. You would have been reminded of the word 'barter', and you are right. As markets become more global, companies are realizing that selling a product does not necessarily bring in a currency. It may bring in scotch, a voucher for a European tour package, infrastructural investment or even advertising space. However in countertrade, monetary evaluation can be applied for accounting purpose. Countertrade is in existence since 1972 and has involved around 100 countries by 1990s. A major part of countertrade involves supply of military equipment. 

Why nations countertrade?

• Countertrade allows nations with limited access to liquid funds to exchange goods and services with other nations.

• Facilitates nations to build strong relations through corporate and government tie ups.

• Allows nations to develop international contracts.

• Enables saving of foreign exchange for nation deprived of resources.

• Acts as an alternate source of finance for companies as there is no application of money.

• Countertrade also can mitigate the risk of price movements or currency-exchange-rate fluctuations. As countertrade deals in real goods, not financial instruments, countertrade can solve the inflation risk involved in foreign currency procurement.

• Restrict outflow of currency enabling a country to bring profits in the form of goods than money.

Some example of Countertrade

1. In 1959, American Vice President Richard Nixon and Soviet Premier Nikita Khrushchev attended the American National Exhibition in Moscow, Russia. During the meet, the head of the Pepsi International Donald Kendall splashed the two gentlemen to sip his so called sweet soda. The Soviet Premier was impressed with the drink and immediately struck a deal for shipment of the beverage. The Russian currency (Rubble) was termed useless for the Americans and the final deal was to exchange 'the Russian Vodka' for the Pepsi beverage. The two agreed that Russia shall receive the Pepsi beverage and in return would provide Stolichnaya Vodka for resale in the United States. This relationship was shattered during 1980 when the Soviet invaded Afghanistan which lead to boycotting of Russian products in America. Though the Americans expressed a boycott, the Russians still loved the American Pepsi and its beverage. With all the love for Pepsi beverage, the Soviet offered a Marine Cruiser, a frigate, a Destroyer, 17 submarines and some oil tankers. All this, for a onetime $ 3 Million. This treaty made Pepsi International the 6th largest navy in the world.

What happened later? Pepsi Co sold all the warships to a Swedish scrap recycling company. Donald Kendall, Pepsi Co CEO said "I am dismantling the Soviet Union faster than you are."

2. In 1984, a Saudi Arabia airline company named Saudia purchased 10 Boeing 747 jumbo jets from Boeing Company, USA in exchange for the Saudi oil worth $ 1 Billion. The company had already purchased 39 airliners from the same company by paying cash. The strategy behind the deal was to save Saudi Arabia from from falling into foreign exchange drain. The Boeing Company didn't take the oil in its custody. Rather, authorized Petromin (the national oil company of Saudi Arabia) to get the oil marketed through a big financial institution. Boeing Company received cash in the future date, which valued more than 30 Million barrels of Saudia Arabian oil. 

3. In 1994, Daimler Benz (Mercedes) from West Germany agreed to sell 30 trucks to Romania in exchange with 150 Romanian made jeeps. These Jeeps were sold to Ecuador in exchange for bananas. These bananas were brought to West Germany and sold to a West German super market chain in exchange for domestic currency. Through this circuitous transaction, it finally achieved payment in domestic currency.

4. In 1988, Pepsi Company entered Indian markets seeing the exit of Coca Cola. Having a joint venture with Punjab Agro Industrial Corporation (PAIC) and Voltas India Limited, the Pepsi Company sold beverage in the name of 'Lehar Pepsi' and committed the Indian Government to provide 50,000 employment opportunities, make 75% investments in food and agro processing, bring advanced technology to India and sell 50% of the production abroad as exports. This creamy offer was accepted by the Indian Government and since then, Pepsi has touched the taste of India.  Prior to this, Pepsi tried to gain access to Indian market through a venture with RP Goenka Group in 1985, where the deal was to exchange cola concentrate with juice concentrate from the state of Punjab. The plan was however rejected by the Indian Government on two grounds which were (i) bar the import cola concentrate for exchange of juice concentrate and (ii) disallow use a foreign brand name (Pepsi) in India as per the regulatory framework. 

So, what happened later?

Pepsi's tomato farming project was primarily responsible for increasing India's tomato production. Production of tomatoes increased from 4.24 million tonnes in 1991-92 to 5.44 million tonnes in 1995-96. The company used high yielding seeds for enhance cultivation. In When Pepsi set up its Tomato paste plant in 1989, Punjab cultivated 28,000 tonnes of tomatoes against their need of 40,000 tonnes. This touched 2,50,000 tonnes by 2000 crossing all boundaries. Entry of Pepsi in India gave a tough competition to existing brands like Parle's Thumbs Up (which was later acquired by Coca Cola), Gold Spot, Limca, Dukes and Campa Cola.

Types of Countertrade

Countertrade is not just limited to barter. There are a variety of options nested in ball of countertrade. Let's understand a few of them.

1. Barter Trade: Barter trade refers to direct exchange of merchandize of comparatively equal value. There is no involvement of money as an exchange medium and the trade takes place only between two parties. A perfect example of barter can be a local Bhandi Wali, who collects old cloth, scrap, etc. in return for metal vessels as per the value and her valuation. Some corporate examples can be:

(i) The Malaysian Government purchased 20 diesel electric locomotives from General Electric against the supply of around 2,00,000 metric tons of palm oil over a period of 30 months. 

(ii) Minerals and Metals Trading Corporation of India (MMTC) imported 50,000 tons of rails valuing $38 million from a Yugoslavian company in exchange with iron ore concentrates and pellets of the same value. 

2. Buyback: Buyback is a smart situation where a company facilitates infrastructural development by way of supplying technology, AI, equipment, knowhow, training, etc. to one country and agrees to take a specific percentage of the supplied output as a partial payment for the contract for a certain period of time. Such agreements lead to transfer of technology and development from high developed nations to less developed nations. This allows long lasting global and mutual relations, utilization of technology and inflow of goods without outflow of cash for the exporting company. Whereas the importing country receives technological support, scope for manufacturing and export along with increased business and employment opportunities. Check the below examples: 

(i) Pepsi Company supplying tomato paste making machine and equipment to India with an agreement to take over 50% of the produced tomato paste to the US as consideration. This is also called Compensation Trade.  

(ii) National Textiles Corporation of India signed a buy back agreement of Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The buyback ratio was 75% textile produce from these looms and the remaining was in cash 

3. Counter Purchase: Counter Purchase is a transaction where two parties engage in two different contracts one after the other. These contracts obliges both the parties to buy and sell from each other. Both the contracts can have its own value to be delivered in cash. The exporter sells a product to the importer for a given price and agrees to purchase some other product (which is not related to his business) from the importer to offset (compensate) the importer's cost. In short, the exporter will receive cash today but commits to buy goods from the importer within a specific period of time. In real practice, this mechanism allows the importer to recover the money paid during the first contract. Whereas, the goods purchased by the exporter in the second contract can be sold to another party though a trade merchant. Example, General Electrics , USA supplied aircraft engines for Jas Gripen figher jets to SAAB, a Swedish defense and civil security technology Company for $ 300 million payable in cash, only after agreeing to buy Swedish industrial products over a period of time. 

4. Switch Trading: Switch Trading is a three party based transaction which involves flow of goods and cash as well. Here, goods are supplied by an exporter to an importer under a Switch Countertrade Agreement. During a situation where the exporter in the countertrade is disinterested to accept the goods offered by the importer as barter payment, he (exporter) can instruct the importer to ship the goods to the third party. Now, the third party will pay cash to the exporter for the goods he received from the importer. In short, the goods offered by the importer to the exporter will go to the third party and the third party shall make payment in cash to the exporter. Example, an Indian exporter sold temperature containers to an Italian importer. The Italian importer offered Italian Cheese to the Indian exporter for which, the Indian exporter did not show any interest. The Indian exporter will request the Italian importer to ship the Italian Cheese to a trader in Egypt. Now, this Egyptian trader will receive the Italian Cheese and will be bound to pay the Indian exporter in US Dollars.

5. Clearing Arrangements: This type of trading is between two or more than two countries in the shape of an agreement, under which agreed volume of goods are imported and exported over a specific time period without the payment of foreign currencies. At the end of the agreed time period, the balance is settled in an agreed foreign currency for example US Dollars. Let us take an example of two countries India and Bangladesh in the below diagram. 

Let's assume India and Bangladesh sign an agreement for a specific period of time, say one year. The Indian exporters will export goods to the Bangladeshi importers who, instead of paying directly to the Indian exporters will pay to their (Bangladeshi) Government. The Bangladeshi Government will inform the Indian Government that the payment for such specific goods have been received. Upon receipt of this information of from the Bangladeshi Government, the Indian Government will release payment to Indian exporters in Indian Rupees. 

Similarly, the Bangladeshi exporters will also export goods to Indian importers considering the same mechanism. It can be noticed in the above example that no payment in foreign currency has been done by any of the government to other government. Only the information of payments has been shared by both the governments during the period of the agreement. 

At the end of the period of the agreement, only the balance amount outstanding (if any) will be paid by the deficit Government in an agreed foreign currency like USD. For example, India exported goods worth USD 10 million to Bangladesh and Bangladesh exported goods worth USD 8 million to India. Here, India has exported in surplus to Bangladesh, which stands at USD 2 million. This balance of USD 2 million will be paid by Bangladeshi Government to the Indian Government at the end of the period of the agreement. This method saves the foreign exchange of a country as payment for every individual transaction need not be made. This method focuses on paying only the deficit balance aroused during a given period of time. 

In reality, Malaysia has clearing arrangement with 23 countries namely Albania, Algeria, Argentina, Bosnia, Botswana, Chili, Fiji, Indonesia, Iran, Laos, Mexico, Peru, Philippines, Romania, Seychelles, Thailand, Tunisia, Vietnam, Zimbabwe, etc.  

6. Offset: Offset is an international agreement where the exporter is required to manufacture the product in the importer's country or purchase components from the importer's country as an exchange for the right to sell his product in the importing country. This mechanism is usually seen during high involvement and strategic purchases like defense equipment, aircraft, etc. At a macro level, it helps the importing nation to get its goods or resources purchased for a physical inflow. Such an exchange can be in the form of co-production, license, technology transfer, overseas investment, research & development, technical assistance, training, IPR, etc. Offset can be of two types as follows:

• Direct Offset - A situation where some components of an finished exportable product is manufactured in the importing country. The exporter is required to purchase such components from the importing country, assemble along with his manufactured components and sell the final finished product to the importer. Example, a French aircraft manufacturer sells a passenger plane to an importer in Pakistan and agrees with Pakistan that some of the spare parts of the plane will be ordered and purchased in Pakistan and will be attached to the plane. 

• Indirect Offset - A situation where the importer requests the exporter to enter into a long term industrial investment unrelated to the goods supplied by the exporter. Example, a French aircraft manufacturer sells a passenger plane to a Pakistani importer but here instead of buying the spare parts of passenger plane from Pakistan, the exporter agrees to rather invest in a chipboard factory in Pakistan, as chipboards are unrelated to passenger planes. 

Shipment Financing in Export

Export business is highly volatile and is subject to availability of funds with the exporter. A potential exporter requires adequate money at several stages so that his export business runs prompt and stable. A manufacturer exporter may require fund for meeting an export contract like acquiring materials, processing it down, pay wages to laborers, inspection, freight packaging, etc. Besides, an exporter is also exposed to credit risk after successful export of goods. After every credit sales, the exporter's money gets blocked with the importer for a certain period of time and hence, the exporter requires finance. Here, we will see export financing from two angles (i) finance before shipment and (ii) finance after shipment.

I. Pre-Shipment Finance: Pre-Shipment Finance can also be called 'Packaging Credit / Purchase Order Finance / Contract Monetization Financing'. It involves financing facilitated by a Government or credit / financial institution to a manufacturer exporter for meeting several needs like acquisition of materials, processing of materials, converting materials into finished goods, packaging and delivery to the final consumer. Technically, pre-shipment finance covers working capital requirements of the manufacturer exporter to achieve operational commitments. Pre shipment is mainly required when an exporter gets into an Open Account payment contract where the exporter is exposed to maximum credit and commercial risk. Pre-shipment finance requires the exporter to submit contract details, against which the financer advances a certain percentage of the order value initially and later disburses the balance amount as the contract gets executed. Let's check out some features of pre-shipment finance.

1. Parties Involved: Parties involved in a pre-shipment financing activity are two. One is the manufacturer exporter and other is the export finance provider. It is very important to know the history of commercial relationship between the exporter and the importer before releasing of funds by the financer.

2. Contractual Relationship and Documentation: As the matter is about financing, there exists a financial agreement detailing terms, tenure and structure of payment along with security details. The manufacturer exporter may grant inspection rights to the financer for the concerned period of financing. Documents involved are confirmed export order, letter of credit and other shipping documents. 

3. Security: A security agreement has to be executed covering rights like transfer of title or pledging of goods before shipment along with the expected receivables from the export.

4. Risk and Mitigation of Risk: Maximum risk is borne by the financer, but the same is covered through pledging of goods and having a lien on export proceeds. Major ways of risk mitigation are hypothecation of goods, pledging of goods, discounting of export bills, retention of export proceeds, etc. This is the only source of security for the financer.

5. Financing period: Pre-shipment finance is granted for a maximum period of 180 days and can be further extended for a period of 90 days with a prior permission of the RBI. It can be granted for short, medium and long term for periods ranging from 90 days to 12 years depending upon the nature of exports. 

6. Benefits: The exporter gets finance for meeting export orders. This finance s used for acquiring materials, employing labor, packaging, carriage and other trade expenses. Without this finance, an exporter would be unable to carry out these operations. Such finances are also extended to deemed exporters.

7. Finance Load and Distribution: Export finances are generally offered by one financer. But in case of large funding, there can be more than one financer.