While the commerce ministry has sought a review of the revenue department’s decision to cap benefits under the Merchandise Export from India Scheme (MEIS) at just Rs 9,000 crore for the April-December period, the finance ministry apparently feels the massive cut is justified, as the scheme has been a “miserable failure”.
Government sources argue that while the scope of the MEIS continued to widen over the last five years, leading to a higher liability, it didn’t result in any tangible growth in exports. They added that sector-specific performance-linked incentives (PLIs) was a more appropriate strategy to promote exports.
The sources said that the revenue department has requested the commerce department that MEIS incentives should be re-calibrated so that it promotes exports, instead of the wide-ranging incentive structure it has come to acquire. “Post-covid, the government faces a serious fiscal constraint and the limited resources are to be used optimally. Re-directing the resources to well-thought-out PLI Scheme and other schemes under Atmanirbhar Bharat is the immediate need,” an official said.
On their part, exporters argue that they firm up contracts, factoring in MEIS benefits, and any retrospective suspension or reduction of the incentives will only erode their cash flows at a time when they are battered by the pandemic. As such, any retrospective order adds to policy uncertainties. Also, subdued export growth is a result of the absence of both structural reforms and adequate incentives to improve competitiveness, they contend.
As FE reported, the revenue department has asked the commerce ministry to review and cap the outlay MEIS at Rs 9,000 crore for the April-December period, depriving exporters of over two-thirds of the duty remission benefits they are entitled to. MEIS scheme was introduced in 2015 and would be wound up on December 31 this year.
Merchandise exports have been contracting since March. They witnessed a record 60% crash year-on-year in April, although the contraction narrowed to 37% in May and 12% in June, as lockdown curbs were lifted last month.
MEIS has already been replaced by PLI schemes for a few identified sectors where India has competitive strength and assist companies to enhance their size and scale to create ‘global champions’, another official said. “Sector-specific PLI schemes have been introduced for electronics, pharma, medical equipment and more PLIs are in pipelines for few other sectors also,” the official added.
Further, the remission of embedded taxes and other levies on exports would be allowed through a new scheme Remission of Duty or Taxes on Export Products (RoDTEP) scheme.
At the time of its launch, the MEIS replaced five similar incentive schemes. However, while MEIS initially covered 4,914 tariff lines with rates of 2%, 3% or 5% on exports which were divided over 3 sets of export countries for a market focus of the scheme, it now covers 8,059 tariff lines. “This means 75% of total tariff lines are now covered under MEIS. Over a period of time, MEIS was given at the rates varying from 2% to 20%,” another official dealing with the matter said.
However, the scheme failed to perform as MEIS liability continued to grow to Rs 45,000 crore in FY20 from Rs 20,000 crore but the exports flatlined to $313 billion in FY20 compared with $310 billion in FY 15.
“This is despite the fact that during the same period rupee had devalued by about 20%, giving as much additional gains to Indian exporters under MEIS scheme,” the official quoted above said.
Wide coverage of MEIS meant that resources are spread across a number of tariff lines without focus. Additionally, liabilities on accounts of MEIS have grown faster than the exports growth rate (see chart). Apart from the inefficiencies that have crept into the MEIS scheme, India has also faced hurdles at the WTO in respect of the continuation of MEIS, sources said.
“The idea of reviewing the MEIS has been to use resource optimally and in a targeted way. NITI Aayog has also echoed the need for replacing the inefficient MEIS with focused and efficient schemes like PLIs,” one of the officials quoted above said.