The government has been incentivising the export of agri-commodities via the Vishesh Krishi Gram Udyog Yojana (VKGUY)
The Market Development Assistance (MDA) and Market Access Initiative (MAI) schemes too seem to have fallen short of expectations. Under these schemes, the government provides monetary assistance to help exporters attend trade fairs/exhibitions/buyer-seller meets and also to export promotion councils, industry and trade associations and other such entities organise export promotion activities. However, industry insiders tell The Dollar Business that either these schemes are just on paper or the funds are grossly misused.
Similarly, the government provides incentives under the Focus Market Scheme (FMS), when exports are made to certain specific countries. The trouble is, the total number of countries covered under the FMS has now reached 125 and does not include US and key European markets!
Of the many reasons why the Focus Market Scheme (FMS) was constructed, one was definitely to encourage India’s exports. It wasn’t solely made as a social service tool to delight LDCs (Least Developed Economies). So while you have encouragement of India’s exports to far flung and least known nations in Latin America through FMS, why is it that Brazil is the only name missing from Latin America – India’s biggest export market in Latin America, and yet one that accounts for under 1.8% of its exports! This is proof that this scheme ignores countries that are in fact, India’s main markets with high disposableincomes and consumption patterns! Is that the right approach to any developing nation’s foreign policy – one that has struggled in recent years to breach the 2% mark in contribution to global merchandise trade? The objective of FMS as laid down in the previous FPS was “to offset high freight cost and other externalities to select international markets with a view to enhance India’s export competitiveness in these markets.” What is the methodology of choosing nations in this category? There may be larger foreign policy reasons why certain names are included in this particular scheme, but is the very purpose of the scheme being served? Going by the fact that India accounts for just 2.1% of the world’s merchandise trade (2013), our nation’s export competitiveness needs to be enhanced in all countries; not just across LDCs. Additional duty credit scrip can be granted for exports to select markets (the 125 nations), but to encourage an overall growth of India’s exports base, a minimal value of duty credit should be given for all markets. All.
Then there’s also the Served From India Scheme (SFIS), that was intended to create a brand equity for Indian services. The objective of the scheme was to accelerate growth in the export of services to create a powerful and unique brand, instantly recognised and respected all over the world. As per the scheme, any service provider, with at least Rs.10 lakh worth of foreign earnings in a financial year, was eligible for duty credit scrip of 10% of total forex earnings that can be used in the following year. While in case of Star hotels, the duty credit was 5% of forex earnings, in case of standalone restaurants it was 20%. The duty credit was allowed to be used while importing any capital goods including spares, office equipment, professional equipment, office furniture & consumables and even food items & alcoholic beverages. [Later, via the notification dated January 18, 2011, the eligibility was brought down to just Rs.5 lakh for individual service providers.] Under this scheme, services exporters get back a certain percentage of the value of their exports in the form of duty credit scrip. In 2013, when SFIS was still in its infancy and the basic objectives for floating it had barely been achieved, the government dropped a bomb while announcing the annual supplement to the FTP by changing the rules for calculating duty credit scrip entitlement. Post the supplement, a service provider is now entitled for 10% duty credit only on net forex earnings and not gross forex earnings, as was the case earlier. This came as a rude shock and ended up making SFIS just a forex earning scheme instead of a brand building exercise for the Indian services sector. For, if the idea is to build a unique, powerful, recognisable and globally respected brand, as was envisaged in the FTP 2004-2009, just how many dollars one contributes to the economy can never be the criteria for incentivising service providers. This rationalisation will have a much bigger impact on smaller service providers because the large players don’t have a huge expenditure as compared to their earnings. What really stops Indian service providers from fully benefitting from the scheme is the fact that the duty credit scrip is non-transferable. This makes it useless to a lot of service providers who have no need for imports in the near future. Non-transferable duty credit doesn’t give a level playing field to all service providers and definitely does not help build the ‘Served From India’ brand. On the part of the government, if the aim is really to serve India’s greatness to the world by promoting its services sector, the government has to be liberal and provide tangible benefits to exporters.
Being a country, in which a large section of the population still depends on agriculture or allied sectors, the government has also floated the Vishesh Krishi Gram Udyog Yojana (VKGUY), under which duty credit scrip is provided in case of exports of specific agri-products – from tea to furniture and bamboo to homeopathic medicine. While the main aim of the scheme is to offset high transportation costs for exporters of these items, the incentive appears to be way too small, particularly in recent years when freight costs are continuously heading north. However, with incentives worth Rs.1,697 crore provided under it just in the first eight months of FY2013, this is one scheme that is no doubt doing a reasonable job in promoting exports of a sector, which is often overlooked. If only we could do something more.
Incentives provided by the government under the Vishesh Krishi and Gram Udyog Yojana (VKGUY) are primarily meant for offsetting high transportation costs.
But since freight costs have increased significantly in recent years, I feel the incentives should be increased by a few percentage points. Our Chinese counterparts get massive incentives from their government and hence, it has become very difficult for us to compete with them.
When it comes to honey in particular (it being a product with very volatile prices), companies like ours face a lot of problems and our margins are shrinking by the day.
In my opinion, incentives under VKUY should be increased to at least 12% and some incentive should also be provided in terms of income tax. Since it’s an incentive provided by the government it should not be taxed at all.
Both the Focus Product Scheme (FPS) and the Focus Market Scheme (FMS) have definitely helped improve the export competitiveness of the Indian apparel industry and also, to some extent, broaden our export basket and allowed us to reach markets which earlier seemed out of bounds. However, I believe that instead of these two schemes we need to focus more on Market Linked Product Focus Scheme (MLFPS), which combines both the market and the product focus. I believe we cannot ignore the fact that US and EU are by far the largest consumers of apparels in the world and in these key markets our competitors have a much higher market share than us, thanks to greater incentives by their respective governments. Hence, a duty credit scrip must include these markets. In fact, AEPC has already recommended to the government to have an MLFPS where exporters are entitled to 5% duty credit scrip for the US, EU and Japan and 7% duty credit scheme for far off markets such as South America. The duty credit scrip should be left at 3% for all other markets.
Duty drawbacks and incentives that are provided by the Government of India to exporters are primarily intended for labour intensive industries since unemployment is a major issue in our country. Despite this, duty drawback on bicycles – manufacturing which is a very labour incentive process – was reduced from 12.3% to 11.7% last year. We feel, it should be increased to at least 14% of the FOB value, without any value restriction because that is what the Chinese government provides to its exporters, who are our biggest competitors in global markets. We also feel the Focus Product Scheme has succeeded in providing the desired impetus to the product group covered under it and should be continued.
What we would also like to see in the upcoming Foreign Trade Policy is some kind of announcement that would give a level playing field to companies like us and make our exports competitive. One way of doing this is to reimburse/subsidise inland freight up to the port. For example, at present, the inland freight Ex-Ludhiana to Nhava Sheva in Mumbai is more than the ocean freight Ex-Mumbai to Europe. It becomes very difficult to compete at a global level if we spend so much to transport our products within our country. We would also like to see the announcement of a scheme, whereby an exporter is insulated from exchange rate fluctuations. Moreover, to facilitate promotion of Indian products abroad, the government should sponsor the participation of Indian exporters in more fairs and exhibitions and increasing the ceiling for eligibility.
Export incentives and transaction costs are the two most important areas that need attention, particularly when it comes to the textile sector. For, while the former compensates for the disadvantages of infrastructural infirmities and low labour productivity in our country, the latter makes both production and exports difficult.
The incentives currently available on export of textiles from India are being questioned in WTO on the ground that according to its Agreement on Subsidies and Countervailing Measures (ASCM), a country is not entitled to incentivise exports of a product in which it has reached 3.25% of global trade for two consecutive years. ASCM provides for a period of eight years in the case of a developing country like India for gradually phasing out all export subsidies on such a product. In textiles and clothing, which are together considered as one product under ASCM, India had exceeded 3.25% of world trade in 2009 and 2010 and this would mean that all our export incentives on textile products would have to be phased out by 2018. Among the major export linked incentives that the textiles industry gets now are the benefits of Focus Schemes, EPCG Scheme, Market Development Assistance, Interest Subvention on Export Credit and the 3% Import Entitlement for embellishments that the garment exporters get. Whether any of these can claim exemption under ASCM is a matter of negotiation. Research activities and some of the region specific incentives may get exemption under ASCM.
We need to address this issue with imaginative solutions and some of them may have to go beyond the FTP. The first priority should be to operate the relatively more attractive schemes more forcefully and for the maximum possible period. If interest subvention is extended to working capital taken by all textile units rather than by exporters alone, it should not come within the purview of ASCM and the additional expenditure of government will be going for a productive cause. Prohibited export subsidies can also be phased out relatively less painfully. Transaction costs are our own making and the government alone can save the industry from them. FTP can address some of them. For example, the paperwork and procedures involved in clearing goods for exports and imports can be simplified further. HS lines at eight digit level can be provided for technical textiles. Refusal of government to share the quick estimates of DGCI&S on export data with the exporting community is an entirely avoidable transparency issue. Similarly, mandatory registration of contracts for export of cotton has been stipulated for statistical monitoring, but the data is not shared with the industry or the market, though similar data for cotton yarn is shared. A broader issue is the border agonies that our goods suffer for entering every State in their journey within the country. At times, exporting takes less time and money than internal transport!
The government has focus schemes to incentivise exports based on the following objectives: To help exporters overcome freight costs to distant markets/not so well developed markets; to encourage creation of jobs through increased export activity; to earn more foreign exchange and to encourage growth of Indian exports. Textile manufacturing and exports garner highest points on every score, over all other exports from India. Textiles need higher freight compensation as a percentage of FOB value given its lower per container value. This segment creates between 5 and 20 times more jobs per rupee of incentives received compared to engineering products, furniture or assembled electronic items. It has almost zero percentage import intensity in its exports.
The export of textiles is perfectly elastic, even 2% or 3% price reduction can help garner substantial additional exports. Most textile exports are profitable only with incentives as the industry in general operates with one of the lowest profits on turnover. Highly profitable companies/sectors will not increase exports with incentives as they would any way export to their potential. Given the very high targets that textile exports have achieved, they should get the highest incentives. The policy needs to be implemented in a transparent manner giving true weightage to all stated objectives.
Textile exports should also get additional budgetary allocation to help create at least 25 lakh new jobs and $10 billion additional exports each year with the lowest incentive outflow per job created or per additional dollar earned. Based on the above logic, Texprocil has identified the products for incentives and also the markets where support is needed on the basis of potential of the market, India’s present position and the advantages enjoyed by the countries that have a deeper penetration.
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