The government recently relaxed the norms for incentivising exporters under the the erstwhile Incremental Export Incentivisation Scheme (IEIS). But isn’t it too little and too late to motivate exporters to export more? And isn’t the time apt to re-introduce the scheme which was successful in achieving its objective? The Dollar Business finds answers to these and many other such questions.

Ahmad Shariq Khan | June 2016 Issue | The Dollar Business

Paying heed to the country’s exporters’ grievances and the rather depressing news of India’s exports contracting for a 17th straight month in April 2016, Directorate General of Foreign Trade (DGFT) recently provided a respite to India’s exports fraternity – it relaxed conditions to claim benefits under the erstwhile Incremental Export Incentivisation Scheme (IEIS). The much-awaited, or rather much delayed, respite to the country’s exports fraternity that is already feeling the pinch of a gloomy global trade outlook, could surely be seen as a right step in the right direction. So, what exactly is this good news?

The Plot

IEIS was introduced on December 28, 2012. The objective of the scheme was to incentivise incremental exports. Under the scheme, an IEC holder was entitled for duty credit scrip of 2% on incremental growth during the January 1, 2013 to March 31, 2013 period over the corresponding period last year (from January 1, 2012 to March 31, 2012) on the FOB value of export. For the purpose of the scheme, export performance was not allowed to be transferred from any other IEC holder and an exporter who made no export between January 1, 2013 to March 31, 2013 was entitled for the benefit. Further, deemed exports, services exports, third party exports, exports from SEZs, EOUs, etc., and products like diamond, gold, silver, platinum, sugar, cereals, etc. were kept out of the scheme’s gambit. Interestingly, the scheme was region specific and only covered exports to India’s traditional markets which included USA, Europe and some Asian countries.

Well, on September 29, 2013, it was announced that the quantum of benefit IEIS (for the last quarter of FY2013) was limited to 25% growth or incremental growth of Rs.10 crore in value, whichever was less, and the claims in excess of the value were subject to greater scrutiny by Regional Authorities (RAs). Thereafter on September 29, 2014, a clarification was issued by DGFT to RAs saying that both the conditions (with respect to quantum of benefit under IEIS) were independent. It said the applicants were not entitled to higher levels of benefits than the already prescribed limit under the scheme. And RAs were supposed to exercise caution while dealing with cases of incremental growth of export under the scheme.

The restriction came as a huge setback to a large number of exporters across the country, who toiled hard and increased their exports share over and above their previous year’s figures, all in the hope of securing the incentives. The limiting of entitlement was even challenged by many exporters in different High courts.

Good news at last

Thus, in view of the decisions of the various High Courts, the matter was then re-examined in consultation with the Department of Legal Affairs and the Directorate General of Foreign Trade (DGFT) has recently issued a clarification regarding benefit under IEIS which states: “In supersession of clarification dated 23.09.2014, RAs may further process the cases without imposing any cap on account of the earlier stipulated of restricting growth to 25% or incremental growth of Rs.10 crore in value, whichever is less.” Finally, some good news!

By and large, industry and trade bodies have lauded the government’s move of reinstating the benefits given to exporters under IEIS. Welcoming the DGFT’s announcement, Dr. A. Didar Singh, Secretary General of FICCI, tells The Dollar Business, “Government’s move to relieve exporters from any restrictions to claim benefits under the IEIS Scheme is a positive step as it would provide much-needed encouragement to Indian exporters. The present cap limited the entitlement under IEIS only to such exporters who could either realise export growth by 25% or incremental export growth of Rs.10 crore in value, thereby negatively impacting a large section of the trading community. We are confident that removal of this restriction would help our exporters improve their liquidity position, which is a critical factor given the continuing contraction in our exports and the bleak global trading scenario.”

Then there are some like Ajay Sahai, Director General & CEO, Federation of Indian Export Organisation (FIEO), who feel that though it’s a positive announcement, it definitely has come very late. “The relief given by the DGFT notification for Incremental Export Incentive Scheme is welcome though it has come quite late. Had the notification come earlier a lot of the litigation on this issue could have been avoided,” Sahai tells The Dollar Business.

A great idea

IEIS was introduced in the backdrop of India’s exports taking a hit. The scheme was floated to encourage exporters to make additional exports over and above their previous year’s exports on a quarter-by-quarter basis for January-March 2013. Subsequently, the scheme was extended to be applicable on an annual basis to incentivise those who provided additional exports in FY2014 over and above the exports in FY2013. And the scheme perhaps achieved what it was supposed to achieve. For instance, India’s exports in Q1 2013 were up about 4% y-o-y to $81.38 billion from $78.33 billion in Q1 2012. Even if we compare India’s exports for FY2014 with exports during FY2013, there was a growth of 4.66%, with exports in FY2014 reaching $314.40 billion from $300.40 billion in FY2013. The objective of the scheme was was to enhance exports and earn ‘precious’ foreign exchange. And it did!

Today, the scenario is almost same as it was when IEIS was first introduced. India’s merchandise exports have been on a downhill journey for 17 consecutive months now. While policymakers blame it on gloomy global outlook, exporters blame it on loss of competitiveness due to reduction in government incentives to exporters through various schemes. So, isn’t it an appropriate time to relaunch a better version of IEIS, a scheme that can perhaps motivate exporters to export more and earn some ‘precious’ foreign exchange for the country. But the bigger question is if the government is willing to reintroduce IEIS in a much bigger form (considering that the has been regularly cutting on sops and incentives since the introduction of FTP 2015-2020)! “It is rather strange as in these difficult times when the government is supposed to be rewarding the exporters who are working hard, they are being discouraged by cutting on incentives. If this remains the case, how will we become competitive in the global marketplace?”, K. K. Lalpuria, Executive Director, Indocount Industries Ltd., India’s second-largest exporter of bedspreads and one of the top 15 home textile suppliers in the world, tells The Dollar Business.

The need of the hour

No doubt incentives and subsidies are illegal under WTO, and the Indian government hides them under various cloaks. While most export incentives are given on the pretext of negating high transportation costs in the country, some others are given on the pretext of employment generation. That none of these reasons will hold ground for long is also an open secret. Given this reality, the government has two choices – either reduce domestic taxes, interest rates and bottlenecks to make Indian goods more competitive in the international market, or continue providing incentives. And if none of the two, wait for a miracle to happen!