Shrinking the MEIS has hurt the Indian aluminium industry; with domestic demand weak, the industry must rely on exports, and the govt must support it on this
By R Gopalan
Prime minister Narendra Modi had taken the bold and progressive step of announcing the world’s largest relief package, of Rs 20 lakh crore, in May this year, to alleviate the pandemic pain and to support exports and Atmanirbhar Bharat, but Industry is yet to get significant relief on exports.
To the contrary, benefits extended to the industry before the pandemic are being taken away, which bodes ill, especially for exports that, it can be argued, had kept the economy afloat in the face of the domestic consumption slowdown. Now, the government has trimmed the fiscal relief package extended to exporters under the Merchandise Export from India Scheme (MEIS), which has been termed as “unsustainable” by the finance ministry.
In June, the plan was to cut the allocation for exporters under the MEIS scheme by around 80%, to Rs 9,000 crore, as compared to about Rs 45,000 crore in FY20. This fund is expected to be used to fund the Production Linked Incentive Scheme (PLI) to boost domestic manufacturing.
Now, as per the DGFT notification issued recently, the MEIS allocation has been further cut to Rs 5,000 crore, while imposing a limit on MEIS reward rate at Rs 2 crore per IEC (The Importer-Exporter Code) for exports during September-December 2020, even as further downward revision to ensure the total claims are within the prescribed allocation is envisaged.
The argument that MEIS failed to boost exports and capture new markets has often been proffered to justify downsizing of the scheme. India’s exports moved to $313 billion in 2019-20 from $310 billion in 2014-15, while the forex earnings from aluminium exports have almost doubled, from $2.8 billion to $5.1 billion, in the same period.
Boosting indigenous production of domestic industries that have good export potential is a great way to strengthen indigenous manufacturing industries, increase exports and, eventually, make India self-reliant.
But, cutting the benefit package under MEIS at a time when exporters/industries are already facing a prolonged economic slowdown and Covid-19-induced liquidity crunch is a poor way to go about it.
Exporters factor in external volatility and can often sense such changes. What is difficult for them to factor in is sudden internal policy changes, especially those with retrospective effect.
In this case, the sudden decision to stop MEIS can have a debilitating impact on exporters’ ability to survive in these difficult conditions as they have priced in their MEIS benefit after the government announced that MEIS benefit would be extended till December 31. It will hurt exporters that work on long-term contracts, particularly in manufacturing industries like aluminium.
Being a continuous process industry, all Indian aluminium smelters are operating in the country at around 90% capacity. The slump in domestic demand is hurting the domestic aluminium industry, and it would take substantial time for the domestic demand to pick up.
The only option left for the industry to sustain is to export aluminium products to survive the current situation due to the Covid-19 pandemic. However, it is not that simple, given that aluminium demand is expected to remain weak due to the demand-slump globally.
Indian aluminium exporters are struggling to remain globally competitive due to the high incidence of unrebated central and state taxes & duties, constituting ~15% of the aluminium production cost—amongst highest in the world.
This is in sharp contrast to the aluminium industry being heavily supported by major aluminium-producing countries, especially China, by way of various incentives and subsidies for raw materials, tax benefits & export tax incentives, low-interest rate loans, etc, to enhance the cost-competitiveness.
Indian aluminium exports are already in an extremely precarious situation, with a decline of 11% from $5.7 billion in FY19 to $5 billion in FY20. And, the new directive with regards to MEIS will render aluminium exports vulnerable and uncompetitive vis-à-vis global players in international markets.
Aluminium has been identified amongst the champion sectors, and it is extremely important to have a full-scale MEIS reward to realise the potential of aluminium exports.
Aluminium is a metal of strategic importance and an essential commodity for various core industries due to its critical role in diverse applications.
What is required is the continuation of MEIS with enhanced rate, up from 2% to 5%, for all aluminium products, if the industry is to survive the current economic situation.
The government has announced a scheme for Remission of Duties or Taxes on Export Product (RoDTEP) in September 2019 to replace MEIS by December 31. The new scheme must include aluminium on priority to make India’s aluminium exports competitive and create a level playing field for Indian exporters vis-à-vis global players in international markets.
It is heartening to know that India’s exports are almost 88% of the level in July 2019. These numbers can be further improved by boosting the aluminium industry.
Our country has massive potential to double aluminium exports to the tune of $10 billion forexes earning in the near future from $5.1 billion in FY20, i.e., 1.6 % of total Indian exports ($313 billion).
The aluminium industry is a huge employer and a visible symbol of progress. It has extensive forward and backward linkages in the economy. The sector is already in bad shape, and inadequate export incentives will make conditions even worse.
The author is Former economic affairs secretary
Views are personal