Scrap The NFTP

Updated: Aug 12 2004, 05:30am hrs
The National Foreign Trade Policy (NFTP), successor to the Exim policy, is due at the end of the month. What is it supposed to do

The ritual of exim policy belongs to an era of quantitative restrictions. For the most part, theyve gone now.

Foreign exchange is no longer a scarce commodity and has been built up through capital inflows and export of services. Shadow exchange rates, with premium on foreign exchange, no longer make sense.

That apart, primary constraints to exports (other than demand-side effects and exchange rates) are infrastructure, labour laws and the like. These require general reforms and there is little that the NFTP can do.

Not realising this results in liberalisation in selective enclaves, such as special economic zones, agro-export processing zones, export-oriented units and the like. And a lot of effort is wasted in the NFTP or Exim policy on related procedures.

Liberalisation in selected enclaves and segregating the domestic tariff area from such enclaves is dysfunctional. For that matter, with import duty reductions, present and expected, even the Export Promotion Capital Goods scheme has lost relevance.

Indeed, it is now time to do away altogether with a specific policy targeted at exports. There remains the matter of procedures linked to export incentives.

Exports of both, goods and services should rightly be exempted from domestic indirect taxes. This is not construed as export subsidies under the World Trade Organisation.

The principles of domestic indirect taxation are straightforward. There will be a single unified goods and service tax (GST), all other indirect taxes will be eliminated and countervailing duty will be equal to this tax.

But because this isnt appreciated, the NFTP will quibble about whether import duties should not be paid at all (the advance licence route) or whether they should be paid and then reimbursed, factoring in domestic indirect taxes (the duty drawback and DEPB route).

This non-transparent system encourages corruption and makes it difficult to defend cases where trading partners interpret incentives as subsidies.

It is high time that the commerce ministry gave up this exercise and announced a formula based on GST. The commerce minister should worry about trade negotiations rather than the NFTP.