The government has an opportunity to make a fresh beginning in the proposed foreign trade policy (FTP) for the period 2014-19 by laying out a new framework which is broad-based, inclusive, robust and transparent. Industry expects the new policy to have distinct focus on providing support to services export, introduction of new measures to ensure increased effectiveness, and utilisation of current schemes by merchandise exporters and increased usage of modern data analytics tools in impact assessment of various trade policy schemes.
Traditionally, FTP has only provided policy support to export of merchandise. Other areas of focus in international trade such as services export, technology export, policy support to innovation, and domestic value addition in exports did not receive full attention of the policymakers.
Industry expects the new policy to rise above the past and make a fresh beginning.
Policy support to export of services, technology and innovation: Services contribute 65% to country?s GDP and India is the seventh-largest exporter of services. Compared to the contribution made by the services sector to the economy, policy support to services export has been very limited. Industry expects a clear articulation of policy support for services export, which could mean a new policy for export of services, technology and innovation as different from trade policy for merchandise export.
Services exporters cannot be relying on the Served from India Scheme (SFIS) as the only instrument of policy support exclusively dedicated to services export. Industry expects introduction of input service tax exemption for service exporters, change in the Export Promotion Capital Goods (EPCG) scheme and a new Export Oriented Unit (EOU) scheme for service exporters adopted to suit the specific compliance needs of the services sector.
The absence of a scheme drafted specifically with service business in mind results in unwarranted compliances and consequent inefficiencies, working capital locked in accumulated credits, refund of input credit not forthcoming.
Also, some of the archaic and redundant controls such as bonding of services EOU, filing of ER2 returns by service provider, etc, should be dropped for efficiency and effectiveness.
Further, export obligation norms for the services sector should be revisited to align with the fact that revenue productivity of capital goods for the services sector is very different from revenue productivity of capital goods investment for the manufacturing sector. Hence, the quantum of export obligation and the time limit for fulfilment of export obligation for the services sector should be dramatically different from that of the manufacturing sector.
Also, deemed export benefits should be extended to the services sector. As an illustration, service provided to World Bank funded projects, EPCG licence holders, EOUs, STP units, etc, should be exempted form payment of service tax.
Services export sector delivers trade surplus of around $7 million every month. It also shows strength and robustness to compete in the international market. Given better policy support, services export can help in generating additional employment and bridging the current account deficit for the country.
Simplifying and strengthening the current schemes for merchandise export: Manufacturers need support in the form of simplification of ongoing scheme such as advance authorisation. The architecture of the current schemes based on SION, Nexus, etc, are so dependent on micro level detailing that it makes it difficult to utilise and compliance becomes burdensome. The inverted duty structure of imported goods adds to the pain as 4% additional duty of customs contributes to credit accumulation and corresponding locking of working capital for an extended period of time.
New automobile manufacturing projects set up with a focus of making India an export hub are a live illustration of the suffering of the manufacturing sector ?not being able to utilise the advance authorisation scheme and a huge amount of cash getting locked as credit because of inverse duty structure on import of inputs for manufacturing.
These sufferings are on account of structural issues in the current policy and tax structure. It would be a great relief if exemptions are linked to high-level economic or financial indicators which are simple to implement and monitor.
Use of modern data analytics tools for robustness, accountability and transparency: In 2005, the WTO had issued a detailed framework and a Practical Guide to Trade Policy Analysis. It aims to equip policymakers with the knowledge of quantitative economic methods and data sources for trade policy analysis. An integral part of change should be to introduce a rigorous process of ex-ante and ex-post impact assessment of trade policy schemes and trade policy changes and make the impact assessment document available for public discussion.
Analytics of trade data will enhance robustness and accountability of the trade policy formulation process, give early indicators of the need for change or sunset of schemes and help sharpen the quality of debate on trade issues, which is currently cloaked in the haziness of bureaucratic decision-making.
Analytics will also help in bringing focus on qualitative aspects of trade policy utilisation which can help in deepening the understanding of policymakers and use it to the benefit of the country. Currently, no analysis or research is available in public domain which brings out the relative contribution of trade policy and trade agreement to growth in India?s contribution to global trade in the past five years. It will be important for policymakers to know this linkage and, accordingly, fine-tune the focus of policy initiatives.
Assisted by Himanshu Tewari of BMR
The author is partner, BMR & Associates LLP
