Trade Promises With Implementation

Written by S Narayan | Updated: Sep 1 2004, 05:30am hrs
The Exim policy, this year called the National Foreign Trade Policy for 2004-2009, has several new and innovative features. It replaces the Exim Policy 2002-2007, whose life has been cut short after change of government though several arms and legs are still alive and kicking in the new avatar.

The new initiatives announced include the setting up of a Board of Trade and the Service Export Promotion Council. Exemption of EOUs from service tax, simplification of EPCG benefits, permission to transfer capital equipment to group companies, duty relief on fuel consumed by exporting units, extension of duty free entitlement benefits to more sectors, a determination to double exports and special focus on agriculture are all part of a larger focus to make India a strong exporter.

The DEPB scheme continues, much to the relief of exporters. This is a cash reimbursement scheme on duties paid on inputs, on the basis of an entitlement list of customs department, except that the entitlement is based on duties suffered on a notional, not on an actual basis. Since these incentives are actually export subsidies, several countries consider them non-compliant under WTO guidelines and levy countervailing duties once the product reaches their shores. Revenues foregone here become revenues for the countries to which these goods are exported. This does not faze exporters who collect the entitlements for themselves, but the loss is to government revenues. This is a scheme which everyone knows is WTO non-compliant, but the exporter lobby has once again been able to resist the scrapping of this scheme, which is difficult to administer.

The duty free entitlement scheme introduced in 2003 has been further strengthened to cover more products. Incremental exports over the previous year provide an entitlement for duty free imports up to a percentage of these incremental exports. In the case of hotels, this enabled them to bring in consumables and liquor. The percentages have been enhanced and the benefits extended to restaurants as well. This scheme, by its very nature, has been difficult to administer and susceptible to leakages.

Other benefits, such as to EOUs and service industry, are welcome, though the issue of second-hand capital goods import is a contentious one for local industry as well as for customs valuation.

The crown jewel of the Exim policy of 2002-2007 was the initiative to set up Special Economic Zones (SEZs) on the Chinese model. Great enthusiasm and much paperwork later, the programme awaits the passing of enabling legislation. When China pioneered the concept in 1978, the strategy was activated on a different plank the need to provide massive employment. These zones became huge factories employing millions and producing goods for international markets. All facilities were provided to MNCs to set up production facilities, which became huge export hubs. Normal laws, including labour laws, were excluded. Twenty-five years later, there has been enough absorption of skills and technology to ensure that new zones are not needed.

The Indian strategy is not so clear since it is product-based and promoter-based. There are also doubts that the plethora of SEZs that are being announced may not materialise. The new policy was also expected to address the contentious free trade agreements (FTAs). Local industry is very wary of these: Concerns have been expressed about free imports of automobile ancillaries from Thailand, and a host of goods from Singapore. Duty free imports from Sri Lanka and Nepal also worry local industry.

If the trade policy were to encourage trade, then one would have expected that several issues would be addressed. First, a cleaning up of the different export schemes in-to a single, streamlined version, internationally compliant, where there is no arbitrary exercise of discretion. In plain words, remove the opportunities for revenue leakage and corruption.

Second, clarity on just what the SEZs are expected to achieve: Is it targeted exports of particular types of products or services or like China, creation of employment opportunities If the last, the promoter should be transparent on the kind of industry that is proposed to be set up in these zones. If the latter, government should address itself to labour reform legislation, at least for these zones. Third, remove ambiguity regarding FTAs. It is quite absurd to remove tariffs on Sri Lankan biscuits and impose non-tariff barriers on consignment inspection of each variety (this is happening!). FTAs are meant to encourage two-way trade and the commerce ministry must ensure that agreements are implemented.

Next, bring about cohesion in the regulatory framework for exports and imports. There are any numbers of NTBs, homologation requirements, phyto-sanitary obstacles, which make the process extremely cumbersome. Different ministries prescribe norms which the hapless customs authorities have no expertise to administer. The result is corruption. Finally, there is significant export growth in normal, non-zone areas. Auto ancillaries, petro-products and chemicals, pharma etc contribute significantly to exports and are growing. The policy could have addressed these.

It is welcoming to see the special focus initiative on agriculture, which is a well-thought out, comprehensive scheme and covers capital equipment, seeds and planting material and export facilities. Its important to put in place the administrative machinery to implement this scheme and to supervise it, particularly since it is spread over several states and several agro climatic zones. The free trade and warehousing scheme, with a 100% FDI content is hopefully not a reminder of history of Hawkins and Roe asking Emperor Jehangir for warehousing facilities and the later objections of the East India company of Aurangazebs efforts to supervise the warehouses. We all know where that led!

Once again, the policy document is full of promises for the future, which could have been stronger on implementation suggestions.

The author is a former finance secretary and economic advisor to the PM