Column: Fine-tuning the export regime

Written by Biswajit Dhar | Updated: Aug 29 2013, 06:05am hrs
A few weeks ago, commerce minister Anand Sharma announced yet another dose of export sops to boost the countrys sagging exports. In the first quarter of the present fiscal, Indias exports had declined by more than 1.6% as compared to the corresponding period in FY13, with most principal commodity groups registering either a decline or at best a nominal increase.

The focus of the sops offered by the minister this time around was the interest subvention granted on rupee export credit. Over the past few years, exporters in select sectors enjoyed interest subvention to the extent of 2% on pre- and post-shipment rupee export credit for certain employment oriented export sectors. Interest subvention has now been increased to 3%, with the expectation that the beneficiaries will be able to become more price-competitive vis--vis their competitors in the global markets.

Interest subvention was initially offered to traditional exports including textiles, handicrafts, carpets, leather, gems and jewellery, and marine products, besides the small and medium enterprises. Subsequently, the list of sectors benefiting from this scheme has undergone several changes. In course of the amendment to the Foreign Trade Policy (FTP) in 2012-13, sectors engaged in agro-processing, sports goods and toys production and a few specific production lines in the garment sector have been included in the list.

Concerned over the dismal export performance of the engineering goods sectors, the government decided to extend the interest subvention scheme to this sector from the beginning of this calendar year. Initially, 134 tariff lines (at 4-digit of the harmonised system of trade classification) were included, which was increased to 235 when the commerce minister announced the annual amendments to the FTP in April this year. This sector, which is the second-largest commodity group in Indias export basket, needs some serious support for it had registered a decline of almost 7% in the first quarter year-on-year. Clearly, international markets were among the factors contributing to the slide of the domestic capital goods industry in recent months.

Since the export incentives regime was re-oriented in keeping with Indias commitments to the World Trade Organisation, the major focus of the incentives has been on providing to the Indian industry, a window for duty-free import of inputs and machinery necessary for the production of export items. Four schemes, namely Advance Authorisation, Duty Free Import Authorisation (DFIA) scheme, Export Promotion Capital Goods (EPCG) scheme and Duty Entitlement Passbook scheme (replaced by a Duty Drawback scheme since 2011), have thus formed the core of the export incentive regime maintained by the government. Under each of these schemes, the beneficiaries are required to fulfil export obligations by exporting specified quantities/values of the resultant products.

Although these schemes have been designed to meet defined objectives, there seems to be a case for rationalising them, both for the ease of compliance and monitoring. Some steps have been taken in this direction a few months earlier through the introduction of the Zero Duty EPCG scheme. The distinction between sectors like engineering and electronic products, basic chemicals, textiles and apparels, and leather products, which were allowed duty-free import of capital goods, and others that were paying import duty at a concessional rate of 3%, was abolished. At the same time, the export obligation, equivalent to 6 times of duty saved by importing capital goods imports under EPCG scheme to be fulfilled in 6 years, was applied uniformly to all sectors.

In the same vein, there seems to be a case for harmonising the Advance Authorisation and the DFIA schemes, for they are largely similar in scope and coverage. The two major differences in the schemes, the minimum value addition criteria and the transferability of the authorisations and/or imported materials (currently allowed only under the DFIA scheme) could result in more efficient utilisation of the incentives.

Fulfilment of export obligations by the beneficiaries of the duty-free imports has been one of the more piquant problems. Several reports, including comments made by the CAG, have pointed to the non-fulfilment of export obligations by the beneficiaries of the export sops and the delay in bringing the defaulters to book. With a widening of the export incentives and the desperate need to increase exports ensuring better results from the incentives regime is a major challenge for the government.

In our view, the export incentives regime raises two sets of issues. The first is whether the support provided by the government is adequate to bring the much-needed vibrancy in the exports. A second set of issues relates to the complementary set of policies/mechanisms that the government can adopt to provide the support necessary for the exporters to gain from participation in the external markets.

What is the financial burden that the export incentives impose on the government exchequer As most of the export incentives are in the nature of concessions granted to the exporters, the burden that these cops impose on the government is in the form of revenue forgone. The annual report of the revenue forgone appended to the budget provides an idea about the magnitude of support that the exporters have been benefiting from since 2004-05.

In aggregate terms, the export incentives imposed a burden of nearly R55,500 crore in 2012-13. It may be noted that this figure has been on a decline during the last three years, a period in which Indias exports have been going through uncertain times. Further, export incentives have suffered a significant squeeze in real terms after the onset of the global economic crisis in 2008.

There is, however, a glimmer of hope at the end of the tunnel. While formulating the current FTP, the government had laid emphasis on a few new programmes, which, if implemented effectively, can provide the much-needed impetus to Indian exports. The Focus Market and Focus Product schemes, the Vishesh Krishi and Gram Udyog Yojana and, Served from India scheme, each of which has a clear focus in directing exports in the right pathways, have emerged as the major focus areas of the export incentives regime. There is, however, a need to ensure that these schemes should work in sync with the two major programmes of the department of commerce, namely the Market Development Assistance and Market Access Initiative that provide a plethora of channels for the businesses in India to enhance their presence in the global markets.

It must be mentioned, however, that coordination between these complementary programmes has been a major challenge for the government. While there is considerable room for improvement on this count, the government may consider going the way several major countries have done in the past, which is to establish a multifunctional trade promotion organisation (TPO) in order to lend greater focus to trade promotion. In fact, most countries in the Asia Pacific region have used their TPOs to act as a hub of all the trade and investment promotion activities. TPOs in these countries find themselves in this position because of a longer term perspective that the governments had developed in respect of trade promotion. Besides providing the usual services to the exporters and other businesses in the form of buyer-seller meets and organising trade fairs, TPOs in most countries have involved themselves in the development of support services for facilitating growth of exports and investments. More importantly, these organisations have linked trade and investment promotion activities in order to develop effective synergies between these intrinsically related activities.

The author is the director general, Research and Information System for Developing Countries