Export ‘incentives’ or fixing disabilities?

By: |
August 4, 2020 7:15 AM

Abrupt stopping of payments is hitting exports, but other than that, govt is mixing this up with production incentives

More worrying, however, is that a cash-strapped government is playing fast and loose with various export incentives and, as a result, exporters are left stranded.More worrying, however, is that a cash-strapped government is playing fast and loose with various export incentives and, as a result, exporters are left stranded. (Representative image)

Given that 22 firms, both Indian and local, have applied to produce under its production-linked-incentive (PLI) scheme—they will produce goods worth Rs 11.5 lakh crore over five years, of which Rs 7 lakh crore will be exported—it is not surprising the government is looking to see if this can be replicated across sectors. Indeed, one such scheme has already been notified to boost domestic production of Active Pharmaceutical Ingredients (API), though this is hardly as generous as the one for mobile phones because, in the case of the latter, a clear-cut—and large—export benefit is visible while, in the case of API, this is not the case.

More worrying, however, is that a cash-strapped government is playing fast and loose with various export incentives and, as a result, exporters are left stranded. Payouts under the Merchandise Exports from India Scheme (MEIS) scheme were, for instance, Rs 43,500 crore in FY20—they were Rs 20,232 crore in FY16—and these have abruptly been reduced to just Rs 9,000 crore for April to December this year; so exporters who quoted prices to foreign buyers on the assumption they would get around last year’s level of incentives suddenly find themselves staring at a 75-80% shortfall.

How are they to do business in an environment like this where there is no certainty over how much money they will get to compensate them for various costs? Indeed, last year in September, finance minister Nirmala Sitharaman spoke of a Rs 50,000-crore Remission of Duty or Taxes on Export Products (RoDTEP) scheme that was on the anvil to replace existing export schemes. A few months later, in the case of mobile phones, the MEIS for phones and chargers was cut from 4% to 2%; it was raised from 2% to 4% in December 2017. And, in April this year, exporters were told the MEIS would be valid till just December 31, 2020, instead of March 31, 2021; last week, they were told the scheme would be curtailed at just Rs 9,000 crore for even this period! But surely if RoDTEP is to start from January 1, the industry should know what are the amounts it will get, and on what products? And, on what basis is this being fixed?

Indeed, there is even more confusion now as there is, at a conceptual level in the government, a lack of clarity on what is an incentive and what is a payout to take care of a ‘disability’; nor is it clear how much money is to be allocated to either. In the weeks after the abrupt decision to restrict MEIS, officials were giving off-record briefings on how MEIS had failed to boost exports and even on how the money saved from schemes like MEIS could be used to fund more PLI-type schemes for sectors where—like mobile phones—large imports took place, and this could be more than neutralised by large exports.

The PLI scheme, as it happens, is a payment being made to make up for the problems or the costs associated with doing business in India. The way it has been structured—PLI-incentives are to be given only for phones that cost more than $200 ex-factory—though, makes it an export-incentive scheme for all practical purposes since few phones that cost so much can be sold in the country. But the problem is, it is not possible to design a similar scheme for all products that are exported; how do you design such a scheme for garments?

Meticulous groundwork by the mobile phone manufacturers, for instance, helped work out how much cheaper it was to manufacture in Vietnam, and how much of this was due to higher electricity costs in India, how much due to the R&D subsidy offered there (versus that in China and India), how much due to government subvention to lower costs of working capital, lower costs of productivity-adjusted wages, etc.

But, surely it cannot be the government’s case that such ‘disabilities’ apply to only the mobile phone or electronics’ manufacturers? So, on what basis is it planning to restrict incentives to just a few sectors like mobile phones or API? And, what happens to the export potential of sectors that do not get this benefit? If their exports fall, as they will, the trade deficit will rise. So, the government needs to come up with a scheme to see how it is going to counter the disadvantages associated with manufacturing in India. And, while RoDTEP will fix some of the issues, by its very definition, this is about unrebated taxes, not the higher costs of labour in India or those related to poor infrastructure or low ease of doing business.

Ideally, as was done by the mobile phone manufacturers, the industry needs to do very detailed calculations to prove its cost disadvantage—per unit of their production—and the government then has to come up with various schemes to address each one of them, whether by way of RoDTEP, reduction in corporate tax rates, reduction in the cost of electricity and real estate, etc.

Failing a comprehensive exercise—and solution—the government keeps coming up with patchwork solutions like raising import duties on select products; since the underlying problem like high electricity or labour costs is never addressed, all this results in is India becoming a high-cost economy. So, even as the government comes up with temporary solutions like MEIS or PLI or RoDTEP—and it needs to ensure it has enough money for all, unlike what is happening now—it needs to come up with a more permanent solution. India does not have the money, in either the short- or the long-term, to keep paying PLI-type incentives to make up for the disadvantages caused by poor policy decisions.

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