The Merchandise Exports from India Scheme (MEIS) in the new FTP that replaces erstwhile Chapter 3 incentive schemes, promises to address complex procedures, manufacturing hurdles and boost India’s merchandise exports. Can it prove to be the single greatest instrument of change for ‘Make & Export from India’?

The Dollar Business Bureau | May 2015 Issue

Several exporters feel that there is not much in the new FTP that will really help boost value-added merchandise exports from India

While addressing the industry, during the unveiling of the new Foreign Trade Policy (FTP) 2015-2020 at New Delhi on April 1, 2015, the two phrases that Nirmala Sitharaman, Minister of State (Independent Charge), Commerce and Industry, used most often were – “Make in India” and “Ease of doing business”. Read between the lines of the new policy. These phrases appear anthems that help onlookers comprehend the idea of India becoming a merchandise trade giant by 2020. Attempting a convergence of thoughts, we’d presume you’ll find that these two high-focus areas finding mention in almost all schemes and procedures of the new FTP is more than just a mere coincidence. Reason? Simple enough. While India ranks 76th globally in terms of manufacturing value added as a percentage of GDP, the country’s position has slipped to a pathetic 142nd (2014) on the World Bank’s ease of doing business rankings of 189 countries. And it was high time India came up with a foreign trade policy that supports value-added exports on one hand, and improves the ‘ease of doing business’ on the other, apart from, of course, catalysing overall exports from the country. Considering this, one area that saw the maximum overhauling was Chapter 3 of FTP, which deals with various export focus and promotion schemes. Talk of the most sensitive change spot – schemes that were meant to boost merchandise exports in the earlier policy were replaced by one scheme – Merchandise Exports from India Scheme (MEIS).

Several products like homeopathic medicines (top) and Orchids (below), earlier a part of VKGUY scheme, are missing from MEIS

The new shaken up MEIS (Scheme) is a result of guardians of India’s foreign trade getting the doctor on their wrists. The display of honesty, is mildly encouraging for India’s foreign trade community. There was a need to reduce complexity – even if that meant blowing away the cobwebs – in the FTP. And that’s what makes the MEIS redo so special. Simplicity is a virtue that India’s policies have done without for aeons – this change, this one time, is quite a wonderful start. Focus Product Scheme (FPS), Focus Market Scheme (FMS), Market Linked Focus Product Scheme (MLFPS), Agri-Infrastructure Incentive Scrip (AIIS), Incremental Exports Incentivisation Scheme (IEIS) and Vishesh Krishi Gramin Udyog Yojana (VKGUY) – all that offered unique duty credit scrips with varying conditions that existed in the earlier policy are now one. Read our lips – MEIS.  

That MEIS credit scrips as well as goods imported or domestically procured against them have now been made unconditionally freely transferable is quite a change of heart on the part of FTP architects. Earlier, even those scrips that were transferable, were given with strings attached. They were not usable across-the-board. A case in point is the Agri-Infrastructure Incentive Scrip that earlier, came with an actual user condition and could be used for a very narrow list of products. But the scrips can now be utilised for a wide range of duty, tax and fee. If nothing, the exporter can simply transfer and encash them. “Overall, the new Foreign Trade Policy is good. It will facilitate ways for importers and exporters. In the new FTP, a better coordination can be seen between the Ministries of Finance and Commerce & Industry,” tells S. C. Ralhan, the newly appointed President of FIEO to The Dollar Business.

Small change?

Although policymakers claim to have removed confusion and overlappings that existed in the previous Foreign Trade Policy besides making arrangements for rising exports from India, there are critics who are calling MEIS a classic case of old wine in new bottle. “MEIS is nothing but an amalgamation of various old schemes with reduced benefits,” Raghunath S. Rana, Chairman, Sports Goods Export Promotion Council (SGEPC), tells The Dollar Business. Agreed T. V. Maruthi, Chairman, Indian Silk Export Promotion Council (ISEPC), as he told The Dollar Business, “New policy has cut down most of the sops and incentives. The interest subvention has also been withdrawn. There should have been some radical changes in the new FTP to support export-oriented labour intensive sectors. Unless the government incorporates such changes, it will be difficult to arrest falling exports.” Considering that India’s exports have remained stagnant around $300 billion for the last three years, there lies a concern. It’s definitely time to encourage India’s exports and reward our exporters for earning precious forex for the country. But are their arguments valid?

A detailed analysis by The Dollar Business Intelligence Unit points out such disparities between the old schemes and the new MEIS. For instance, one look at Appendix 3B or MEIS Schedule (that lists out HS code-wise products with reward rates under MEIS), reveals that the Policy specifically excludes several agriculture and forest products that were earlier eligible for duty credit scrips under VKGUY. 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), Homeopathic medicines (HS Code: 30049014) are just a few of the many product categories that have been stripped of the 5% VKGUY benefit under the new MEIS. There may be larger foreign policy reasons why certain names are ‘included’ or ‘not included’ in this particular scheme, but then the policymakers should have ensured that the very purpose of the scheme is served – augmenting India’s exports. Not to forget, a large section of the population in India still depends on agriculture or allied sectors for its livelihood. As of now, exporters of these products are worried.

] Despite export of milk and milk products being outlined as an ineligible category under MEIS, products like butter (HS Code: 04051000) and malted milk (HS Code: 19011010) find place in Appendix 3B (MEIS Schedule). This has lead to a lot of ambiguity among exporters

Shades of grey

Ambiguous formulae in any macroeconomic policy is a recipe for disaster. It not only creates variations in interpretations, unwanted loopholes, but also makes a policy prone to litigations, particularly one which deals with incentives running into lakhs and crores of rupees, like FTP. There are several conditions/clauses in the new FTP that seems to be contentious or might lead to situations where the government funds could be grossly misused. One such clause that has left room for a lot of ambiguity is para 3.06 of FTP that clearly outlines ineligible categories under MEIS. Sugar of all types and all forms, export of milk and milk products and export of meat and meat products have been added to the list. However, there are products like: (a) Sugars, chemically pure, other than sucrose, lactose, maltose, glucose and fructose; sugar ethers, sugar acetals and sugar esters, and their salts (HS Code: 29400000); (b) Butter and melted butter (HS Codes: 04051000, 04059020); (c) Malted milk (including powder; HS Code: 19011010); and (d) Various fish products (HS Codes: 03031900, 03049900, 03073910, 16041210), etc., which find place in Appendix 3B and are thus eligible for MEIS rewards. This not only violates the very provision of para 3.06, but also leaves room for a lot of confusion. Can one produce malted milk without using whole milk? Not possible biologically. Isn’t fish meat, meat? Perhaps its fit for vegetarians then.

Definition of “Artistic work” is another area that prevents many experts from nodding in uncontested praise of the new FTP. Earlier, there existed a methodology of classification of certain exports as artistic work(s). As per DGFT Circular No. 3, dated August 10, 2007, titled, ‘Methodology for distinguishing Artistic Work for grant of benefit under VKGUY Scheme (for export of identified ‘Artistic Wooden Furniture’ items as in Appendix - 37A)’, it was stated that for the purpose of grant of benefits under VKGUY scheme, exporters shall be required to get the invoices duly certified/authenticated by a shortlisted central/state/industry authority. This provision is missing in the new policy. Who verifies a claim that a wooden chair built a block away is a work of art? “Earlier there were certain additional benefits if the products were handicrafts. They used to get some 2% additional incentive. Now we have not granted anything like that. The benefit is given on 8-digit HS code basis. So there is a representation and furniture is one product that is entitled for highest benefit – 5% across all markets. Whether that furniture has artistic value or not, we are not going into those details. To make it simpler, all types of furniture have been included in MEIS,” reasons D. K. Singh, Additional DGFT, in an exclusive interaction with The Dollar Business. Agreed, but what about other handicraft items that have been granted global support under the new policy [Read: Annexure 1 (I) (E) of the Highlights of The Foreign Trade Policy 2015-2020].  

“New policy has cut down most of the sops and incentives. The interest subvention has also been withdrawn. Considering this, it will be difficult to arrest falling exports.” T. V. Maruthi, Chairman, Indian Silk Export Promotion Council (ISEPC)

The look west policy

One good thing about the new policy is that the government has realised that, for India, traditional markets are as important as emerging or new markets when it comes to exports. First World markets like USA, Canada and EU nations, which were more often than not excluded from sops offered under Chapter 3 schemes previously, have now been treated fairly. This is really a logical move. Considering that India accounts for just 1.66% of the world’s merchandise exports (WTO data), our nation’s export competitiveness needs to be enhanced in all countries; not just some select countries with low disposable and consumption patterns, which was the case with the list of favoured nations under Chapter 3 of FTP 2009-14! A case in point could be the old Focus Market Scheme (FMS), which aimed at encouraging India’s exports across the globe. But, its construct was such that it turned out to be a social service tool to delight LDCs (Least Developed Economies). So while there was an incentive to export to far flung and least known nations in Latin America through FMS, countries like Brazil – India’s biggest export market in Latin America, and yet one that accounts for under 1.8% of its exports – was the only name missing from Latin America in the FMS list! The same held true for US and some key European markets. This is a proof that the old schemes ignored countries that are, in fact, India’s real markets with high disposable incomes and consumption patterns! Thanks to such schemes, even for FY2015, we’re expecting to miss merchandise exports targets of $350 billion by about 8%!  

“Since benefits under ‘MEIS’ are less both in terms of percentage and number of items entitled to benefits, it cannot be said that the new FTP was worth the wait.” Lekhraj Maheshwari, Chairman, Export Promotion Council for Handicrafts (EPCH)

 Change...just for change’s sake!

No doubt, certain clauses of the new policy indicate that FTP 2015-2020 is in sync with the government’s “Make in India” programme and has a clear cut mandate to support exports along with improving the ease of doing business in India. But, there are some who remain unconvinced. “The intentions of the government to ‘Make in India’ is very good, but unfortunately things are not moving as intended,” Vinod Sharma, Chairman, Electronics and Computer Software Export Promotion Council (ESC), tells The Dollar Business. Manufacturers who are also status holders (3-star and above) are empowered by the new policy to self-certify the origin of their manufactured goods. The intent is good, but considering the involvement of a foreign government the feasibility of this proposal appears doubtful. Will India’s trading partners – under PTAs, FTAs, RTAs, etc. – agree to such a condition? Time will tell. Coming against the backdrop of a difficult global trade environment, the new MEIS is definitely a bold initiative to increase competitiveness of Indian products. Despite criticisms and complaints from many quarters, it’s a document that aims to outline a simplified approach to growth of India’s foreign trade, and brings in the necessary tweak through introduction of free transferability of credit scrips. Many outrightly voice concerns about the “only incremental” nature of the new FTP. But really, change for change’s sake, isn’t a good thing. And perhaps, simplicity and transferability will do to India’s manufacturing exports what many schemes tried to achieve all these years.  

Raghunath S. Rana, Chairman, Sports Goods Export Promotion Council (SGEPC)

“Product-country matrix under MEIS requires more calibration” – Siddhartha Rajagopal, Executive Director, The Cotton Textiles Export Promotion Council (TEXPROCIL) Siddhartha Rajagopal, Executive Director, The Cotton Textiles, Export Promotion Council (TEXPROCIL)  

M. Rafeeque Ahmed, Chairman, Council for Leather Exports (CLE)

Industry: Foreign Trade