The death of India’s most popular export incentive scheme – Duty Entitlement Pass Book (DEPB) Scheme was inevitable. Not only was the WTO at the Indian government’s throat because of subsidies hidden in the scheme, but also the latter itself was uncomfortable with the amount of duty it was forgoing because of DEPB. But as desperation grows to increase the country’s exports, isn’t it time for a reincarnated version of this former darling of Indian exporters?

Shakti Shankar Patra | @TheDollarBiz

With the Modi government delaying the announcement of Foreign Trade Policy 2014-19 from August to September and now from September to October, speculation is rife as to just what that magic pill is, which the government thinks will help India escape becoming a basket case for the proponents of the twin deficit hypothesis. According to the hypothesis, there is a strong direct relationship between a country’s trade and fiscal deficits – something that can be proven mathematically and hence difficult to argue against.

Since the Union Budget hasn’t done anything drastic to address fiscal deficit by way of reducing spending or increasing taxes, it’s a no brainer that the government has decided (or has to decide) to reduce trade deficit first. And the only way to do it is by increasing exports, reducing imports or better still, both. But since it’s almost impossible for a growing economy to reduce imports substantially, the only option the government has is to boost exports significantly. Probably, this is why the release of the new FTP is taking so long.

Under the lens

A recent Comptroller and Auditor General (CAG) report on the efficacy of the DEPB Scheme – by far the favourite among exporters till it was shown the door in September 2011 – makes some startling observations. The report, which was tabled in Parliament in July, claims that “achievements of the scheme as claimed by the Department of Commerce are mostly unsubstantiated.” It also states that “computation of DEPB credit has been treated as countervailable because of the subsidies provided by it.” This, more than anything else, is the biggest argument of the detractors of the scheme – the belief that DEPB didn’t stop at just neutralising the incidence of customs duty on the imported component(s) of an export good as mandated but also went onto incentivise exports, almost to the extent of subsidising several items.

Kamal Jain, Director, Cargomen Logistics, although a supporter of the DEPB Scheme, agrees with this particular observation of the CAG. Speaking to The Dollar Business, Jain said, “DEPB scheme was the most preferred tax-saving scheme offered to exporters. However, it is a known fact that it had a hidden subsidy component.” And that’s not something which WTO takes lightly.

Too good. Too long

Introduced in 1997, DEPB substituted the Value Based Advance Licensing (VABAL) and the Pass Book Schemes. As mentioned earlier, its mandate was just to neutralise the incidence of customs duty on the imported component(s) of an exported item by way of duty credit, which was transferable. The fixation of DEPB rates took into account fixed Standard Input Output Norms (SION). Because of the issues discussed earlier, the government finally got rid of DEPB on September 30, 2011 and incorporated the DEPB items into the Duty Drawback Schedule, which has substantially lower rates. And this hasn’t gone down well with the exporting community, which had for almost 15 years, milked it to the maximum. Trying to give a balanced picture Jain says, “For any given product, drawback rates are at least a couple of percentage points lower than the corresponding DEPB rates. If the government could increase the drawback rate of a product to at least close to, if not equal to its erstwhile DEPB rate, India’s exports would get a major boost. Agreeing with Jain, Turshal Jarwal of law firm Dutt & Menon said, “Just neutralising the incidence of customs duty is not enough. We badly need to add a bit more in terms of incentives if we want to stop our $100 billion+ per annum trade deficit from becoming systemic.”

The need for more

Explaining his point further, Jarwal added, “Anyway, we can’t impose customs duty on an item which is part of something that is being exported because the imported product is anyway not being used in India. So, just neutralising that incidence of customs duty, which DEPB was mandated to do, is not enough. Our exporters need more.” Similarly, Jain is of the view that the abolition of the DEPB Scheme has hit the small-scale industry very hard. “The government should also keep in mind the interests of small-scale industries that will not be able to import duty-free raw materials (under DEEC scheme) because of their smaller quantities. The DEPB scheme was helping the export community and even smaller industries to compete in the global market. The government should have withdrawn the DEPB benefit only after working out an alternative workable scheme, especially taking into account the interests of small and medium industries as well,” Jain added.

Balancing act

As everyone waits with bated breath to see what India’s new FTP has to offer to our exporting community, one can be certain of two things: (1) there will be something radically big to help exports growth since that’s the only way India can get its fiscal house in order; and (2) DEPB scheme won’t be brought back because (a) it was just too generous and (b) WTO won’t allow it. So, what’s the way out? May be a scheme that can incentivise exports as much as DEPB, but not with the same features. Possible?