The new FTP that was unveiled on All Fools’ Day by the Modi government, while simplifying things, pulled a very cruel joke on exporters of several goods and commodities. For, not only were export incentives reduced for many goods, the same were altogether revoked for some others. Though WTO mandate will ensure export incentives ultimately dying in the future, what was the justification for the government to continue bestowing them on some, while treating others miserly?

The Dollar Business Bureau | June 2015 Issue 

Until the 31st of March, 2015, the Indian government had five schemes – Focus Product Scheme (FPS), Focus Market Scheme (FMS), Market Linked Focus Product Scheme (MLFPS), Agri Infrastructure Incentive Scheme (AIIS) and Vishesh Krishi and Gram Udyog Yojana (VKGUY) – to incentivise exporters. These schemes, between them, covered a host of products and countries and had variable incentive rates. In case there was a clash – say, if a product included under FPS was exported to a country that came under FMS – an exporter was allowed to avail scrips under just one of the schemes. But in the new FTP, all these five schemes have been merged into one single new scheme call Merchandise Exports from India Scheme (MEIS). Under MEIS, an incentive rate has been fixed for each product that comes under it, depending on the country it is exported to. But while MEIS covers most products that came under one or more of the erstwhile schemes, the incentive rate has either been reduced for some products, or the same has altogether been revoked for some others, thereby giving absolute nightmares to their exporters.

 

 

None spared

Commenting on this reduction/ omission of incentives under MEIS, particularly when it comes to sports goods, Raghunath S. Rana, Chairman, Sports Goods Export Promotion Council, says, “The items missing in the list will have negative impact on exports. Moreover, the reduction in benefit from 7% to 5% will also impact the overall performance of the industry.” Rana is not alone, neither are sports goods. T. V. Maruthi, Chairman, Indian Silk Export Promotion Council, says, “The new policy has cut down most of the sops and incentives. Considering this, it will be difficult to arrest falling exports.” On a similar note, M. Rafeeque Ahmed, Council for Leather Exports (CLE), says, “As far as the leather and footwear industry is concerned, the major issue (with the new FTP) is the overall reduction of duty credit scrip under the newly notified MEIS.” In fact, a detailed analysis reveals that several items, whose exports were earlier entitled to incentives scrips, particularly under VKGUY, have been left in the lurch under MEIS. For example, several agricultural and forest products like mushroom spawn (HS Code: 06029020), orchids (HS Code: 06031300), hazelnuts (HS Code: 08021200), chestnuts (HS Code: 08024100 & 08024200), olive oil and its fractions (HS Code: 1509), asparagus (HS Code: 20057000), bamboo shoots (HS Code: 20059100), orange (HS Code: 20083010), pears (HS Code: 20084000) and homeopathic medicines (HS Code: 30049014), which were earlier entitled to duty credit scrips, are completely missing from MEIS.

The question then is if this reduction/omission is by design and part of a bigger strategy or is just bureaucratic apathy?

 

Just on paper

Answering this question, during an exclusive interaction with The Dollar Business, Pravir Kumar, Director General, DGFT, says, “Principles like encouraging value addition in the country, supporting labour-intensive industries and domestically produced products etc., were followed in deciding inclusion and exclusion of products under MEIS.” Citing an example, Kumar adds, “In the case of tea, earlier a 5% incentive was granted under VKGUY. Now, if it is exported in kilograms, i.e., in smaller quantities, a 5% incentive is given, but if it is exported in bulk, only 3% incentive is given, because the default logic is that if it is being exported in bulk, value addition is happening outside the country. So, we will still support it, but at a lesser level.” While Kumar’s explanation sounds fine in theory, in the real world, things work differently, very differently.

Too many handicaps

One of the biggest disabler for every single Indian exporter, trying to compete in the international market, is the high rates of interest in India. At the time of this article going to print, while the US 10-year yield was quoting just below 2.2%, the Indian 10-year was quoting at just below 8%. This means, caeteris paribus, an Indian good is 580 bps costlier than its American peer. Secondly, given the fact that India has one of the highest tax rates on fuel, which has always been an ‘official’ reason to provide export incentives, there’s absolutely no way for Indian goods to be globally competitive in the international market, without incentives. Lastly, and most importantly, given that the profit margin for even India Inc., as a whole, has mostly hovered between high single digits and early teens, the elimination of up to 5% exports incentives for certain goods might mean a death knell to their exporters.

 

 

The only option

Given the fact that incentives and/or subsidies are illegal under WTO, 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. But since the former would need nothing short of a miracle, at least to achieve them in the short to medium term, the only option left for the government is to stick to the latter. In that case, the obvious question to ask is: why this miserliness?