Despite government announcing a concessional rate of export obligation (EO) under the Export Promotion Capital Goods (EPCG) scheme for Northeastern states and Jammu & Kashmir, manufacturing in these states remain abysmally low. The Dollar Business digs deep into the reasons for this underperformance.

Manisha Choudhari | December 2015 Issue | The Dollar Business

The Export Promotion Capital Goods Scheme, or EPCG as it is better known, was introduced to allow duty free import of capital goods (machinery and parts) against an obligation that the firm would export a specific value of goods within a specific time. When introduced in the early 90s it was expected to help the manufacturing sector produce export quality goods through upgradation of production machinery. In 2011 the export obligation (EO) was reduced to 25% of the normal value for the Northeastern states and in 2015 Jammu & Kashmir (J&K) was also included amongst the states who enjoyed reduced EOs under the EPCG scheme.

The reduction in EO was not only supposed to boost exports from these regions, but also give impetus to the “Make in India” initiative by allowing manufacturers to import modern machinery and technology that could augment their productivity and make them competitive in the world market. But has the initiative really achieved that objective?

Despite being endowed with munificent resources, and to add to that the impetus extended by the Centre through many incentives and subsidies, India’s hilly northeastern region continue to be on a plateau in export performance. Even the concession extended to the Northeast of meeting only 25% of the export obligation vis-à-vis the normal target set for other states in the country in return for zero duty under the EPCG scheme has failed to enthuse, motivate or inspire the industry in this region to up the ante and make forays into overseas markets. Behind this picture perfect bouquet of rich marketable resources, supportive incentives and subsidies in place, is a narrative of procrastination and a lack of rational approach to solve intrinsic and extrinsic problems. The Northeast has been flaunted as the gateway to the South East Asian nations since years, but, except for the announcement of muniferous policies by those who matter in decision making hierarchy, and a roadmap of sorts, the impact is yet to be seen.

Intent vs. Impact

One conspicuous indication that subsidies are not the solution to spruce up industrial growth, was the suspension of North East Industrial and Investment Promotion Policy (NEIIPP) last year. Commerce Minister Niramala Sitharaman attributed the shelving of subsidies under NEIIPP to a financial crunch. But amidst this contention, the fact that the policy had not produced the expected results in the Northeastern states – except maybe in Assam – is also equally conspicuous. It is not just the NEIIPP, but even the 25% EO policy is yet to trigger any significant transformation in the Northeast. The obvious question is why have these measures or policies proved to be damp squibs? Though good in intent, the purpose was never achieved obviously due to the absence of an appropriate structured approach to the problems within. The NEIIPP was expected to ensure proliferation of industries and also a spurt in investments. That never happened. Likewise, the pruned export obligation was also aimed at creating an environment for export growth, but that has also not borne fruit, going by the performance indicators.

A quick analysis of the policies reveals that the decisions related to both NEIIPP and the EO was considered in isolation without factoring in the bigger picture and the deficiency in support systems. Export Obligation of 25% has had few takers since it was introduced in the year 2011 which is reflected in the absolutely negligible share of the Northeast in India’s total exports – a large chunk of it comprising Assam’s Tea exports during the five years. For instance, if we take the major items from this region – mineral resources, handicrafts, food processing industries and bamboo based products – the growth rate since the inception of the export obligation concession, have never even qualified for mention. Here are some facts that point to why all calculations related to export obligations are going awry. Let us presume that a manufacturer-exporter from Northeast, who has had an average export of Rs.2 crore per year, had procured new machinery under EPCG and saved around Rs.10 lakh in duties. This means that the exporter has to achieve an export target of Rs.2.15 crore (since an exporter from Northeast has to meet just 25% of the EO) by the end of the six-year period. Now let us also assume that there are a total of 30 manufacturer exporters in the eight states of the Northeast who have availed the EPCG option and procured machinery since the inception of the concession, then five years down the line, the region should be witnessing a growth by five times on the duty saved i.e., Rs.4.5 crore which cumulatively including the average exports should have added up to Rs.65 crore or around $10.2 million – a pittance by any standards considering the resources and potential of the region. Add to this other exports from those who have not availed EPCG scheme, then the value should have been bigger. Interestingly, the Northeast has struggled to cross even the $10 million in exports, which indicates that the option has hardly found any resonance in this region.

A Deeper Malaise

The rather low exports can be attributed to the preference for marketing raw material rather than finished products. Whatever little of the products that are reaching the export markets are either in raw form or through secondary markets or both. There is not much of value addition due to a dearth of direct market accessibility for finished products. This also explains why the export obligation is getting a poor response. Granite boulders are being exported from Meghalaya, stone chips are not; 90% of the bamboo produced in Mizoram is sent as raw material – a major chunk of it to Hindusthan paper mills. The bamboo industry, in particular, contends that since it is in its infancy, it is difficult for them to fulfill the EO in the initial years and has demanded a moratorium of 10 years before EOs kick in. Tripura, the second biggest rubber producing state after Kerala, markets the raw material to tyre manufacturing companies outside the northeast region. Though the Northeast churns out a major share of handicrafts in India, its’ share in the country’s total exports is in a mere single digit.

It all boils down to the fact that the Northeast regions proximity to Bangladesh and Myanmar have yet to be capitalised on in terms of sprucing up bilateral trade with these countries. Moreover, accessibility to South East Asian Nations, which would open up the floodgates of opportunities for the Northeast, is yet to fructify. The highly centralised control over exports have had an impact on export growth rate in the Northeast. M. L. Debnath, President of Tripura Chamber of Commerce and Industry, points out the bitter truth that has been the bane for exports from the Northeast. “We are not exposed to international trade and one of the reasons is the lack of infrastructure and connectivity. The other reason is that we do not have access to EXIM licenses and other required certifications and facilities, since neither any export promotion council nor other related agencies are located here,” he tells The Dollar Business while adding that “the state does have a DGFT office, and the official comes only once or twice a week. We have made representations to both India and Bangladesh governments to route commodities through the recently opened Bangladesh-Kolkata road corridor or use the seaport or river port which is near to Tripura. Nothing has materialised so far. But we hope for the best. Since there is no passport office, for every requirement we are now forced to go to Kolkata. How do you expect us to get involved in international trade with so many obstacles?”

Potential in Plenty

Let us enumerate the possible positives of the reduced EO scheme, if accessibility to ASEAN markets coupled with infrastructure are provided. With international markets at proximity and on their doorsteps, there would be more focus on value-added and finished products. Most of the products exported to East and Southeast Asia would be routed through the India’s northeastern corridor. Even a 1-2% share – and going by its potential, it could be more – in India’s total exports of handicrafts, bamboo products, processed food, cement coal and granite, could mean crossing the billion dollar mark for the Northeast in terms of industrial growth. 

The region would also witness a spurt in export oriented manufacturing industries apart from inflow of investments, since ASEAN accounts for a significant share of imports from India, and most of the products imported are available in the Northeast. Procurement of machinery – though most of it could be imported as a result of opening up of the channels to the ASEAN – would increase complemented by reduced EO. Perhaps, the thinking in the policymakers is that it is too good to be true or a distant dream, but a change in mindset complemented by a long-term vision should bear fruits.

A Bountiful Valley

Jammu & Kashmir (J&K) is another state which has not really lived up to its potential in terms of exports. Though the Northeast and J&K have some problems like connectivity and turmoil in common, the latter has had it better – though not the best – in terms of exports. The state has established an indelible brand for handicraft products and handlooms, apart from horticulture products like apple and saffron. Though it was late in coming, the 25% EO was extended to the State in the new Foreign Trade Policy 2015-2020, and is likely to boost exports. The state had recorded exports valued at Rs.1,204 crore during FY2014-15 and the present fiscal is witnessing a 16.8% increase over that of the previous, which reflects the popularity of these products. But a cause for concern is that handloom and handicrafts are being produced on traditional and outdated machines. Looking at the demand for brand Kashmir, latest technology is the need of the hour to rev up productivity and enable exporters to catch up with fast changing market demands. According to industry experts, handloom and handicraft manufacturer-exporters would be saving duties ranging from Rs.30,000-60,000 by procuring the latest handloom and powerlooms. The export obligation after six years works out to only about Rs.45,000 to 90,000 over the average output.

There is not much of value addition in Northeast due to a dearth of direct market accessibility for finished products.

India meets only 5% of the global demand for silk, and barely meets 1% of the demand for processed foods. The state’s export potential is very high, but lack of adequate infrastructure has led to laggard industrial growth in the state. There are focused initiatives on the part of the government to provide impetus to overall economic growth of the Northeastern states as well as J&K and the 25% EO scheme has all the makings of enabling this objective.

A Nudge for a Boost

The reduced EO for the Northeast and J&K on the face of it seem to be a step in the right direction. But the need here is for a comprehensive framework that addresses issues related to infrastructure and access, access to both ports and modes of transportation as well as to the government support system that is available to the rest of the country. A nudge does not work where the need is for a turbo boost.

“We need a focussed approach” - R. S. Joshi Chairman, Federation of Industry & Commerce of North Eastern Region (FINER)

R. S. Joshi CHAIRMAN, FEDERATION OF INDUSTRY & COMMERCE OF NORTH EASTERN REGION (FINER)

TDB: Could you give us an idea of the the export potential of the Northeast region? What is the current status?

R. S. Joshi (RSJ): 98% of Northeast’s boundary is an international boundary. We’ve been doing business with Bangladesh and Myanmar for centuries. But there are border problems – trade is off the record and the barter system continues. Giving numbers for export is difficult due to this. Under North East Industrial and Investment Promotion Policy (NEIIPP) 2007, many incentives were given to Northeast, including 30% capital subsidy. It was a good policy. By virtue of that, we could attract handsome investments. We have state-of-the-art cement plants, rolling mills, food parks, etc. There was lots of monetary investment. But December 2014 onwards, the Central Government suspended it for no reason – abruptly and without consultation. There has been no new investment in this region since the suspension of the policy. An investor would like clarity about investments, but after this suspension that was not possible. Federation of industries & Commerce of North Eastern region (FINER) has taken this matter up strongly, and we are hopeful that the outcome will be good. If NEIIPP hadn’t been suspended, we would have been comfortable. By 2017, connectivity should be in place with Myanmar. If an additional connectivity with Bangladesh sees the light of the day, we have the potential for economic development for the region. The Export Obligation reduction is good, but we would like more incentives. Bottlenecks in infrastructure, banking facilities, and communication systems also need to be fixed.

TDB: Rubber, bamboo and some horticulture products are marketed in their raw form with not much of value addition being done in the Northeast. Why is it so? Is it because of lack of access to technology and machinery?

RSJ: You are right; value addition needs to happen in the Northeast. The NEIIPP would have taken care of it. The potential for rubber products is high in Tripura, but the lack of connectivity is a major issue. People had realised the potential of international trade through Bangladesh and Myanmar. FINER suggested to the Government of India that since they are making industrial corridors for rest of country, the government should also develop the international boundary between Bangladesh and Myanmar as an economic corridor.

TDB: What reasons do you attribute to the Northeast not performing to potential in terms of exports despite its repertoire of both mineral and other natural resources? Is it because of lack of connectivity, infrastructure, non-availability of technologies and machinery to capitalise on the existing potential, or a lack of all these components?

RSJ: People here are apprehensive of government policies. Investors want policies to be stable, which is not the case. They say the Norteastern states are isolated, but look at it the other way, we are strategically placed – 98% of our boundary is shared with other countries, and no other part of India has this boon. We have suggested that there should be a separate Five Year Plan for the Northeast; which must run alongside the national plan. We must be on par with the rest of the country.

The authorities must also note that there is a lot of potential in our youngsters. They have repeatedly proved themselves. They just need an environment where they can nurture their talent. Additionally, the service sector has a lot of potential. At the time of independence, our GDP was higher than the rest of the nation. A Five Year Plan must be made exclusively for development of infrastructure and connectivity. Once that is in place, we can deliver.

TDB: Last year, India barely met 1% of the global coal demand and 7% of the limestone demand. Despite the Northeast being so rich in these minerals, why do you think there isn’t an emphasis on increasing the exports?

RSJ: State and Central governments need to focus on this. Minerals are state owned. Coal mining has been banned in Meghalaya for the last two years. This is a setback for Northeast, because coal is a big part of our revenue. To exploit the full potential, we need to address environmental issues, we need technology in place, and we must look into scientific mining.

TDB: The Northeast has immense bamboo reserves, and is famous for its bamboo products. But we are not meeting the world demand – not even 0.1% of it. Why do you think this is so?

RSJ: There has been a lack of a focused approach. For example, in case of Manipur, they are very good at handloom products. But, we are trying everything everywhere. We must focus on specific products from specific areas. Lots of people say we have high quality pineapples or oranges, but the fact is that it is not available in desired quantity. We must look at quality, quantity and economic viability. We must revisit our thought process. Every product should have a priority state and it should be economically viable. Wherever the possibility is more, we must focus on that area.

TDB: What countries are major markets for products from the Northeast?

RSJ: Bangladesh, Myanmar and South East Asia are potential markets.

TDB: From an overall perspective what are your views about EO? Has it facilitated export growth or do you feel more needs to be done, apart from EO, to achieve this objective?

RSJ: More needs to be done. We need focused measures and a long-term vision to bring Northeast to a level playing field so that we can be at par with rest of the country. We need more liberal policies in the Northeast to attract investors.

TDB: Any other thoughts that you would want to share?

RSJ: We want to see action on the ground, not just on paper. We need serious action from the centre, and we need to let the states to be in sync. We need to assure investors that there will be no instability in policies.