India Traditionally a Trade Deficit Country. India’s Exports in 2018-19 stood at $331 billion, while Imports soared high of $507.44 billion, taking India’s trade deficit to reach a record high of $176 billion. India’s GDP reaching Rs 170.95 trillion (US$ 2.47 trillion) in 2017-18*, and Rs 190.54 trillion (US$ 2.76 trillion) in 2018-19. The Trade gap is primarily attributed to un-avoidable Oil Imports. However various other factors are also contributing to the trade deficit, like continued encouragement to Imports in the name of Promotion of Exports.
Falls Placed “Import led Export Growth” Philosophy:
All the Export Promotion Schemes of Foreign Trade Policy are designed with theme of “Import led Export Growth”. With this falls placed hypothesis more and more Imports are encouraged with liberally imposed export obligation. As a net the benefits are imaginary but puncturing huge hole into the Exchequer and also killing the Domestic Industry.
For Example, under Advance Authorization Scheme, a Duty Neutralization Scheme under Chapter 4 of Foreign Trade Policy, Duty Free Imports are allowed as per SION (Standard Input Output Norms) (a Very Liberally worked out Norm which allows Excesses Inputs to benefit the Exporters with Assumed (hiked) wastes and losses), with meager Value Addition, in general in most of the cases it is 15% only.
However, if we look into revenue loss in terms of Customs Duty Exemptions including IGST, Anti-Dumping Duty and Safeguard Duty and many other benefits like MEIS incentive and EPCG Scheme benefit under Chapter 3 & 5 respectively of Foreign Trade Policy; Pre & Post Shipment Finance with interest subvention, the trading off benefits of Exports goes to negative figures.
Moreover, the holder of Advance Authorization is allowed to import required inputs like Raw Materials, Consumables & Packing Materials in advance and then after coolly, calmly and casually allowed to Export within 18 months period with still one more option to get extension of 6 months on payment of 2% fee on the balance export obligation. Exporters, generally taking this liberty, import the required inputs much in advance by enjoying the duty exemption and use such inputs for domestic sale (though strictly such diversion is not allowed as per FTP) or even dispose it off in the domestic market and latter discharge export obligation leisurely at the trailing end of the obligation period.
If we look into Employment angle also with such very little value addition and domestic content no much manufacturing activity taking place, therefore can’t expect much employment generation too. Mostly it is like a trading activity of Buying (Importing) and Selling (Exporting) with margin of 15-20%.
Much worst in case of much hyped and fancied, the so called Chinese Model of SEZ Policy (which is proving to be a land grabbing policy) through which huge imports are taking place with ambitious and aspirational expectations of spiral up export growth but ambiguous and abstruse trending outcome proves otherwise. The SEZ policy envisages Positive Value Addition only, not even 15%, thereby proving as import hub only.
Suggestion: Focus on Domestic Content & Value Addition
To improve the domestic content in our exports, Value Addition in case of Advance Authorization must be increased to Minimum 25% from present 15%.
The Obligation Period for Exports for Advance Authorization must be Restricted to 6 months only which is very reasonable to curb misuse of the provision instead of 18 months at present.
In case of SEZ, the Domestic Content must be Minimum 25% and at least 15-20% of the SEZ area be mandatorily earmarked to MSMEs. This will promote in true sense Sustainable Exports, Employment Creation through Strengthening MSMEs, thereby justifying the benefits, exemptions, incentives extended to these units.
Encourage Indigenous Sourcing in Place of Imports:
As discussed the Advance Authorization Scheme and EPCG Scheme are primarily focused and tilted heavily Imports by Exempting of Customs Duties. Though indigenous procurement is allowed in the policy instead of imports, the Procedures are very cumbersome and time consuming. The Authorization holder has to apply separately for Invalidation for Imports and on the basis of invalidation letter he may source from the domestic suppliers. The Domestic Supplier on the strengths of Invalidation Letter may apply for Advance Authorization.
In case of Domestic Sourcing, GST as normally applicable shall be paid first and then after may claim as deemed export refund. All these Procedures are very Cumbersome, Time Consuming and involving cost.
Because of the hassles and cost disadvantage in comply with procedures, exporters are generally avoiding to source from domestic suppliers even though those items with comparable quality and price are available in the domestic market.
Therefore, it is essential in the true national sprite and in public interest to encourage and promote Indian industry by putting them in the same platform compared to imports. It is wrong in the policy provisions to spend (waste) huge amounts from national exchequer for promoting import of foreign products in to the Indian market in the name of export promotions. To make the schemes truly national (SWADESHI) following suggestions are made:
Suggestion: Make Foreign (Videshi) Trade Policy SWADESHI
Since application and issuance of Advance Authorization and EPCG scheme are made online, provision shall be made for the authorization holder to opt anytime for Domestic Procurement by self-declaring and invalidating imports online. This way it provides greater flexibility and easiness to procure from domestic sources.
As an incentive for Domestic Procurement, a 10% concession shall be provided in fulfilling Export Obligation under Advance Authorization and EPCG scheme.
Further GST exemption may be allowed for Domestic Sourcing (Deemed Exports) as against present practice of first pay GST and then claim refund which is time consuming and involving cost.
These proposals shall make the Advance Authorization and EPCG schemes more attractive as it will open up yet another option of Domestic Sourcing to the certificate holder in addition to import route. This is especially beneficial for those who have no interests in imports for one reason or the other. The need for import thus shall be over shadowed by the provision to procure indigenous inputs and capital goods which turns to be attractive. This will also encourage domestic procurement as an alternative to imports, thereby make the scheme more “SWADESHI”.
Stop Import of Second hand Machinery under EPCG Scheme
With Flip-Flop Policy on Import of Secondhand Machinery under EPCG Scheme, wisdom of policy makers shifted the stand to continue to allow secondhand goods, making India a dumping ground defeating the objective of the Scheme to Support in Modernizing Indian Manufacturing Sector for Promoting Exports.
Suggestion : Import of Secondhand Goods under EPCG Scheme should not be allowed.
Exports Oriented Economic Policy
Foreign Trade promotes economic growth of a country as “an engine of growth”. We should lay stress on export promotion in our strategy of development for accelerating economic growth.
The Concept of Comparative Cost Advantage Model is fast fading out its relevance as the Comparative Cost Advantage has dynamic shifts based various factors such Disruptive Technologies & Technological Advancements, Govt. Policies & Incentives, Infrastructural Development, Resources Availability, Allocation or Depletion, Transmission of Technical know- how, Investments, Specialized & Focused Skill Training for promotion of Business etc. Therefore, Competitive Advantage can be Created, Nurtured, Harnessed and Fostered through right policy frame work like developing Industrial Clusters initiatives, SME Clusters, Towns of Excellence, SEZs etc.
Suggestion : Industry / Sector Specific Export Policies are need to be Implemented
We should shift from our policy of Exporting of Surplus, to Manufacturing, Generating & Creating Exclusively for Exports. In this direction Agriculture Export Policy, 2018 is a noteworthy measure and many such Industry / Sector Specific Export Policies are need to be implemented.
The Objective of Agriculture Export Policy, 2018 is to Double Agricultural Exports from present ~US$ 30+ Billion to ~US$ 60+ Billion by 2022 and reach US$ 100 Billion in the next few years thereafter, with a Stable Trade Policy regime.
The Policy has Strategic & Operational framework and addresses agricultural value chain and highlighted certain structural changes that were required to boost agricultural exports on Sustainable and Stable manner including infrastructure & logistics, Reforming Mandi operations, involvement of State Govt. in Promotion of Exports.
Ministry of Micro, Small and Medium Enterprises (MSME) has recently established an Export Promotion Cell with an aim to create a sustainable ecosystem for entire MSME development.The benefits likely to accrue to the MSMEs are:
MSME DC has established an Export Promotion Cell in every MSME DI centers. The cell aims to create a sustainable ecosystem for micro, small and medium enterprises (MSMEs). Benefits of the Promotion Cell MSMEs are the pillars of the Indian economy. The promotion cell aims to create a sustainable ecosystem for MSMEs.
The Promotion cell will aid the MSME sector in the following ways:
Integration of MSMEs into the global value chain.
Evaluation of readiness of MSMEs to export their products and services.
Recognition of areas where improvements are required in order to be able to export effectively and efficiently
Suggestion : Integrate & Synchronize Departmental Functions
It’s is a welcome measure to promote MSME Sector. However, the Need of the hour is to integrate many disintegrated departments and councils – Synchronize their varied functions as at present many of the councils & departments are functioning in silos
Since at present no accurate, reliable and authentic data is available regarding MSME – the Levels of Investment, Employment, Turnover, Exports etc. Therefore, it is suggested to integrate Udyog Aadhar with PAN. Since PAN is linked with all types of business transactions related to Bank, GST, Customs, DGFT etc, data linkage will easy and reliable.
Policy to Check Flooding of Cheap Imports
The policy of Controlled Import to Check Flooding of Cheap Imports from China may be placed in view of India’s increasing Trade deficit and possible threat to Domestic Industry. Unscrupulous Under Valuation and Wrong Classification to minimize Customs Duty impact is also widely rambling practice specially in case of Import from China which need to be Curbed
Suggestion: IT enabled Trade Intelligence
With better IT enabled Trade Intelligence, Volume & Price, Product -Country & Entry Level Commercial Data & Information with reliable, current and updated data may be gathered and sharing such data to all customs stations to curb valuation related tax evasion, detect cases of cases of smuggling, trade–based money laundering and financial frauds.
It will also prevent Circular Trade (Export to Countries with whom we have Trade Agreements and Grab all the Export Incentives & Benefits and again Import the same Item with Concessional or Fully Exempted Duty benefit under the Trade Agreement) to some extent.
Timely initiating and imposition of Anti-Dumping, Safeguard measures and also adopting other Non-Tariff and Contingent Trade Protective measures may be opted to act gain wrong trade practices and to provide proper protection to the Domestic Industry.
Free Trade Agreements : Increased Economic Growth
India has negotiated many bi-lateral and multi-lateral trade agreements with several countries and trade groupings. FTAs are instrumental in creating seamless trade blocs that can aid trade and economic growth. However, India’s exports to FTA countries have not shown positive signals and statistics reveals that India’s trade deficit with these partner countries deepened rather boosted exports. For example, India’s trade deficit with Asean (Association of Southeast Asian Nations), South Korea and Japan has doubled to $24 billion in FY2017 from $15 billion in FY2011 (with the signing of the respective FTAs) and $5 billion in FY06. Also there are issues related to duty inversion.
Lack of information on FTAs, low margins of preference, delays and administrative costs associated with rules of origin, non-tariff measures, flouting of rules of origin are major reasons for such low performance.
Suggestion : Selective Review of Trade Agreements & Tighten Rules of Origin
India should review its existing FTAs in terms of benefits to various stakeholders like industry and consumers, trade complementarities and changing trade patterns in the past decade. Negotiating bilateral FTAs with countries where trade complementarities and margin of preference is high may benefit India in the long run.
Circumvention of rules of origin should be strictly dealt with by the authorities at the same time measures must be taken to reduce compliance cost and administrative delays
Duty Credit Scrip :
Under Chapter 3, there two types of Incentive Schemes ie MEIS & SEIS. Under these schemes Duty Credit Scrips are issued to exporters on certain percentage of FOB value. These Scrips can be used to upset Customs Duty on any eligible Imports. In case the Exporters do not want for any reason to utilize on actual basis, then an option is provided to Transfer (Sell) the Scrips on discount.
Suggestion: Allow Refund Instead of Transferability
Since transferability of Duty Credit Scrip encourages non-export-importers to snatch a major junk of benefits from the real exporters, this practice should not be allowed. Duty Credit to encourage export of specified products and to select markets, as a matter of principle of objectivity, should be passed on to the exporters only on exclusive basis. By making the Duty Credit Scrip non-transferable the issues regarding sale proceeds and litigations in respect of exemptions of income tax etc. also shall not arise. The Duty Credit shall be allowed to utilize for import of inputs or goods including capital goods on “Actual User” condition by the holder of the scrip (actual exporter), and in case the credit remained un-utilized, the same shall be allowed refund, within 15 days of the claim. When refund is allowed the need for transferability does not arise which is a major dispute in WTO.
WTO-compliant Schemes to Promote
Existing MEIS Scheme under Chapter 3 of FTP is under scanner as US has challenged India’s export subsidy schemes at WTO on the grounds of its incompatibility with multilateral rules. It may face exit any time. New scheme on production-based support and refund of all un-rebated central and state taxes and levies scheme are under consideration for replace of existing MEIS scheme.
The new scheme will be on the nature of refund of all un-rebated central and state taxes and levies scheme on inputs consumed in exports in all sectors. The major un-rebated levies are state value added tax/ central excise duty on fuel used in transportation, captive power and farm sector, mandi tax, duty on electricity, stamp duty on export documents, purchases from unregistered dealers, embedded central goods and services tax (CGST) and compensation cess, coal used in production of electricity.
Suggestion : Align Export Promotion Schemes with WTO Norms
India will need to restructure its export promotion schemes by making them aligned with WTO Norms. Otherwise such schemes become counter effective as the Importing Countries may impose anti subsidiary duty as per WTO Agreement on Subsidies and Countervailing Measures (ASCM) The above suggestions may be Considered in New Foreign Trade Policy which is now under Draft stage.
Disclaimer: The views and opinions; thoughts and assumptions; analysis and conclusions expressed in this article are those of the authors and do not necessarily reflect any legal standing.
Author: SN Panigrahi, GST & Foreign Trade Consultant, Practitioner, Corporate Trainer & Author.
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