Some consider India’s new Foreign Trade Policy an inspiring manoeuvre. Others classify it as just incremental. Whatever popular opinion be, Pravir Kumar, feels that minus some miracles, the new policy has what it takes to make India an unsinkable titanic on the high, trading seas. And that nothing’s perfect.

Steven Philip Warner & Neha Dewan | May 2015 Issue | The Dollar Business

Pravir Kumar, Director General, Directorate General of Foreign Trade (DGFT), Ministry of Commerce & Industry, GoI

TDB: What stands out most distinctively about MEIS is the fact that it is a simplified combination of a few Chapter 3 schemes that offered unique duty credit scrips with varying conditions that existed in the earlier policy. Is it just as they say, “a simplified combination of schemes”?
DGFT: Most importantly, we have removed all the confusion and overlapping that existed in the previous Foreign Trade Policy. For example, in the previous FTP, there were common products under Focus Product Scheme (FPS) and Vishesh Krishi and Gram Udyog Yojana (VKGUY). So there was a lot of overlapping. But the most fundamental change that has occurred in the new FTP is the change in usability of the scrips. Earlier, scrips were not usable across-the-board. For example, in the case of Agri-Infrastructure Incentive scrip, actual user condition existed and it was to be used for a very narrow list of items. Similarly, there were scrips which were transferable. Like SHIS. The scheme has ended but the scrips continue. In the earlier version of SHIS, the scrips were subject to actual user condition with transferability permitted only amongst status holders. So it was again not freely transferable. What was happening was that in terms of revenues, if it was a Rs.100 scrip issued by the government, the government would definitely lose Rs.100. But the exporter who has actually worked hard and contributed to the exports and forex earnings of the country, he would only get a part, discounted value of the scrips given. Because if he has little use of the scrip, and sells it in the market, then he will not get the full value. Now, it is fully transferable and usable against customs duty, excise duty, as well as service tax. So the scrips can be used against any of the three. Earlier people used to complainingly question that if they didn’t have any import requirement, what were they supposed to do with the scrips? So if a particular exporter has exported and earned a reward, and he has no import requirement then how does he use it. Now he can use it for excise duty and service tax payment. And if nothing, he can simply transfer and encash it. So the reward would fully go to the exporter. Moreover, now, not only the scrips are transferable, the goods procured using the scrips are also transferable. Earlier that was also a constraint. We have cases like that and there are litigations going on in some cases regarding companies that desired to transfer goods after two years. The products imported were no longer usable after some time for some reason or the other – either there was change in corporate strategy or some other factor like re-engineering or change in assembly line, etc. So they wanted to dispose of the imported product. Earlier, the condition was that if goods were procured using a particular scrip, they couldn’t be sold off to others, and so necessary permissions were to be sought. Now the goods procured using scrips are fully transferable. Apart from the simplification or the so-called merger of schemes, an alteration like this one is a fundamental change. Yes, simplification has obviously been introduced. Now we have one scheme for merchandise exports and another for services. But, the scrips that are earned now are usable against customs duty, excise duty and service tax. And these duties and tax debited under duty credit scrip would be eligible for CENVAT Credit or Duty Drawback. If we want to reward our exporters for their good work, for earning dollars and precious foreign exchange for the country and help them in overcoming infrastructural bottlenecks – because the very objective of these schemes is to compensate somehow for the infrastructural deficiencies and lack of delivery mechanism in our country – we need the rewards to be real.  

TDB: Are we talking about a step of improvement over what existed in the form of Chapter 3 incentives in the previous FTP?
DGFT: I’d say it’s a vast improvement. Post the FTP release, I have attended conferences organised by two big industry bodies, and this was the point in the new FTP that was appreciated the most. That we’ve made lives of exporters simpler, that they don’t have to run around now, and that the rewards will truly travel across to persons who have earned them.

TDB: Traditional markets like USA, Canada, EU nations that were more often than not excluded from sops offered under Chapter 3 incentive schemes previously, have now been generously treated under the new FTP; actually, in many cases more generously than even countries under Groups B & C. Why this sudden move towards developed countries? And is this move more because our external merchandise trade isn’t growing as fast as desired?
DGFT: I can say this with great confidence that the thought that went behind the policy this time was extremely logical and scientific. We tried to go about the making of the policy and the various appendices in a very systematic manner, with some carefully conducted, broad analyses. Earlier, the list of countries and even products finalised were randomly chosen, based on views expressed by exporters. One exporter would request that “I am exporting to these three countries, kindly add these countries to the list.” Another would appeal, “I am exporting this item, kindly add my item.” The process then wasn’t uniform – so new products and countries would keep on getting added over time and in annual supplements. During the framing of the new policy and deciding upon the lists, we agreed on certain broad principles – in the case of both lists of countries and products. In the case of list of countries, the committee which was set up, took into account various factors. We have limited resources, so we’d like to get the maximum bang for the buck. We have limited funds and naturally we’d like to use them in a judicious manner, so as to maximize our export growth. For us, traditional markets are as important. If we suddenly stop worrying about these markets, then even if we have gains in emerging markets, our decline in exports to traditional markets may more than offset the positive gains in new markets. The reason being that traditional markets work on a much higher base. So consider that on one hand, we gain a very high 20% on a base of Rs.20 from an emerging market in Africa, and we lose a lower 5% on a base of Rs.100 from a developed market in US or Europe. On a net basis, we end up losing Rs.1. We cannot afford to overlook the significance of traditional, developed markets because all said and done, these markets are the ones that can boast of high purchasing power. That answers the first part of your question. It is also important that we don’t put all our eggs in one basket. We have to pay attention to new, emerging and fast-growth markets also. This ensures a good geographical diversification of our risks. If the Eurozone runs into trouble, it would be a bad idea to rely completely on markets in EU. So there is a conscious effort to give due importance to emerging markets like Africa, West Asia, Latin America, CIS countries, ASEAN countries, etc. That’s where Group B comes into the picture. Group B comprises three categories – emerging markets like Africa and Latin America, FTA countries because we would like our exporters to take full advantage of FTAs, and high trade deficit countries like China. So Group B is the most favoured. So in some cases you will find exports to Group A and C nations being given a 0% incentive, while those to Group B being given 2%. Group C consists of other markets that account for less than 10% of our total exports – like Australia, New Zealand, Switzerland, Scandinavian countries and island countries. We are focusing mainly on both traditional and emerging markets, with some science behind the choice of nations included in the two Groups.

TDB: Did you have the target of ‘$900 billion in exports by 2020’ on your mind when the list of countries was being compiled, approved and finalised?
DGFT: We did have a target. And our FTP is expected to contribute towards achieving that target. But you have to appreciate that there are multiple factors at work – both internal and external. And external factors, we cannot control. If there is a war in Yemen, or some crisis in Eurozone, or if the rupee appreciates against the euro by double digit percentage points, we cannot help it. Thus, the main thrust of the FTP is to make life easier for exporters in India. Because we cannot do much about externalities, we can try and take control of internal factors that are restricting or limiting our exports or the capabilities of our exporters. So wherever possible, we have introduced simplification, digitization, e-governance, merger of schemes, reduction of forms, self-certification, etc., to facilitate our exports and take our export competitiveness to the next level. In my earlier discussions with the industry and across various forums, I have said that sops in any case will not last forever. You cannot run a marathon on crutches; it has to be on your own legs. So we are facilitating that competitiveness of our industry. State governments also have to play a big role. Their involvement in international trade is extremely crucial. All the states should be sensitized and brought on board to meet export targets.

TDB: Because you mentioned states, in recent months there have been discussions to implement a five year export policy in the case of states as well. In fact Gujarat has already planned one. Are you looking to give the responsibility of achieving foreign trade targets to the states too?
DGFT: The Ministry of Commerce has written to all the state governments and Chief Secretaries to appoint export commissioners, have their respective export strategies, identify products with bright export potential, etc. India’s overall exports is a direct function of the export performance of the states. The whole is a sum of parts in this case. If you read the FTP statement, where the macro-vision and macro-picture are given, you will realise that we have made clear our intentions to involve the states, besides many other plans. The FTP document is only an instrument to facilitate exports and lay down regulations and procedures to conduct foreign trade.

TDB: SEIS is another popular, ambitious and promising announcement of this policy. But despite moves like change of classification of eligible service exporters from “Indian Service Providers” to “Service Providers…located in India” and the change in nature of scrips to “freely transferable” being considered positive, there is an opinion that the unplanned, excessively abundant supply of credit scrips that result from SEIS will lead to (a) incentivisation of imports, and (b) loss of customs revenues. What’s your view?
DGFT: Any scrip issued – be it under MEIS or SEIS – is revenue forgone by the government. And the same applies to any other scheme prevalent in the past. One way or the other, the name of the scheme may change, but the fact is that the government is foregoing its revenue for facilitating and boosting exports so that the nation’s Current Account Deficit (CAD) position is improved upon. So in order to earn precious foreign exchange for the country, the government is foregoing revenues. And definitely we have limitations. Based on the total kitty of sacrifice that the government is willing to make, we back-calculate. If you noticed, in SEIS, we have stated in the very first note that the scheme will be reviewed after six months. Because we would like to see the trend that prevails – which includes the list of sectors that benefit the most from SEIS – before we expand the list or contain it, or increase or reduce benefits, or take any further call on the scheme. We are cautious about SEIS particularly because as compared to it, in MEIS exact information of all exports taking place (consignment-wise), is available through Electronic Data Interchange (EDI) database. We therefore have a strong statistical base for that measurement. But in the case of SEIS, our [data]base isn’t that strong. That is why we are cautious about SEIS and in the notification itself, we have said that the scheme is subject to review after October 1, 2015. We want to watch the trend so that the revenue loss does not shoot beyond a certain manageable level. We are in touch with RBI because the reward will be given to only IEC holders. For MEIS, merchandise export data is with The Directorate General of Commercial Intelligence and Statistics (DGCI&S), so that we can access any time. But services export data is with RBI. We are in touch with RBI for real time access of services exports information. So even if the claims are filed under SEIS a year later, we will get to know the trend of outflow under SEIS, sector-wise. To conclude, revenue foregone is a given fact, but that is a conscious decision on the part of the government for the welfare of exporters. This is also in tune with what I said earlier – that we have to ensure that revenue forgone is utilised in the most effective and efficient manner for achieving the overall objective of India’s foreign trade.

TDB: Are you also implying here that imports will be incentivised under SEIS?
DGFT: No. Why just imports? The scrips can be used for excise duty payment, or for payment of service tax. That criticism was there when the scrips could only be used for payment of customs duties for import of inputs or goods. Like I said, the scrips now under both MEIS and SEIS can be used for a wider purpose and carry real value. So if service exporters are availing services from others in India for final delivery of their own services, they can pay service tax using SEIS scrips or they can simply encash it. They will anyway get good value from the scrips. Earlier, we were issuing scrips under SFIS, but exporters who had earned it were not able to make full use of it. Last year, we issued scrips worth Rs.1,425 crores under SFIS, but the actual usage was much less, about 55-60% of that value. So even if the scrips are being issued, the person who has earned it was unable to use them. That is the argument we had. We should not give with one hand and take away with the other. So we should give an exporter the liberty to use the scrip as and how he deems fit. We should not impose too many conditions on the exporter. We should not tell the service exporter that only if you fulfil these 17 conditions will you be given the due incentive!

TDB: Manufacturers who are status holders (3-star and above) are empowered by the new policy to self-certify the origin of their manufactured goods. But can the exporters be assured that our trading partners – under PTAs, FTAs – will agree to this? Are adequate steps being taken to alter the preferential Rules of Origin accordingly?
DGFT: In fact all Status Holders who are manufacturers are eligible but the implementation of this provision will be a part of our negotiations with FTA partners. When the FTAs are being negotiated, it will be on a reciprocal basis. It’s an ongoing process and we have not yet given details of the same in the Appendix to FTP. We have only made an enabling mechanism and provision in the new FTP; remember, it’s a five year long policy. For new and existing FTAs, the clause has to be built into the agreements.  

TDB: Allowing duty credit scrips for SEZs in turn incentivises growth of export-manufacturing units in SEZs. That’s a positive move. But why are SEZ manufactured products exported from Domestic Tariff Area (DTA) units made ineligible from incentives under MEIS, when SEZs are themselves allowed to take benefit under MEIS?
DGFT: Why would an SEZ manufacturer want to export his products through a DTA. He should export it directly. We do have reservations – the Department of Revenue had reservations on that issue, so the condition. Ultimately, the physical exports has to take place from the country. So if DTA exports products manufactured by itself, fine. But why unnecessarily route SEZ exports through DTAs? SEZs supplying to DTA units is an import for the DTA unit, so why give benefits for an import that is exported without value addition?

TDB: Under para 3.06 of FTP that 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 in Appendix 3B, there are products mentioned that violate the very provision of para 3.06. What’s the justification? [For example, (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) Malted Milk (Including Powder; 19011010), Butter (04051000), and Melted Butter (Ghee; 04059020); and (c) Fish products (03031900, 03049900, 03073910, 16041210, etc., are given in App. 3B.]
DGFT: I understand that some corrections are to be made. Some corrigendum will be issued that will bring clarity into this matter. We have realised some mistakes here and there, but no substantive change in policy will happen because of the corrections.

TDB: Which is the single most popular change that has been introduced with this policy?
DGFT: The new FTP is a composite document with several features. So each and every component has its own importance, and each of them try to take into account our nation’s priorities. We are facilitating Make in India, Skill India, exports from India, capital goods industry in the country, etc. – so all these are elements of the new policy. And most importantly, we are facilitating trade by simplifying trade procedures.

TDB: Various products under ITC HS Code chapter headings 06, 08, 12, 13, 14, 15, 20, 23, 30, etc., that were offered a 5% credit scrip under VKGUY have now been excluded under MEIS. What’s the rationale?
DGFT: VKGUY scheme doesn’t exist any longer. Yes, some associations are pointing out specific products that were being given VKGUY scheme benefits earlier and have now been excluded in MEIS, but the exclusion was a committee decision and we went by certain broad principles. So principles like encouraging value addition in the country, support labour-intensive industries and domestically produced products, etc., were followed in deciding inclusion and exclusion of products under MEIS. For example, in the case of tea, earlier a 5% incentive was granted under VKGUY. Now, if it is exported in kgs., i.e. 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. So a great deal of logic has been applied to arrive at the new rates and lists. Having said that, yes, some aberrations are being pointed out in the new policy which would be corrected in due course. But nothing is perfect, is it?

TDB: So when do we see the 24x7 Customs clearance system that the FTP outlines becoming reality?
DGFT: That’s an ongoing process. There are infrastructural, manpower, legal and technical constraints. The customs department is looking into the issue so that at least at the major air and sea ports, this facility is made available. But then again, customs is only one department. You may need something from plant quarantine, food safety [FSSAI], etc., so as part of improving ease of doing business, the work to achieve 24x7 customs clearance facility is going on. How to simplify rules? Is it possible for the customs officials to only take samples? Is it possible to clear the goods subject to some bond? All these questions are being dealt with side-by-side. It’s an ongoing process and the customs is also working on a single window clearance process. So once the single window clearance is fully implemented, which could take another one to two years because that’s a huge task and will definitely take time, we would have achieved much on the ease of doing business. We are a developing country and we do have a lot of constraints. We are focusing on the big issues first.

TDB: How influential were representations from various industry groups in the making of the new policy?
DGFT: I must thank the industry associations and councils for their detailed suggestions. The DGFT had detailed consultations with trade representatives, regional and industry trade bodies. Based on all suggestions received from trade bodies, we compiled a list of about 100 suggestions and placed them before our counterpart – the Department of Revenue (DoR). I am glad that on almost 85-90 percent of those issues, we were able to convince them.

TDB: Reduction of EO to 4.5 times in the case of domestic procurement of inputs in the case of EPCG scheme provides the desired impetus to Make in India. This is a good move to promote Make in India. Can the industry expect similar moves in the future?
DGFT: I am hoping the EO reduction move will help the domestic capital goods industry. It was a deliberate move on our part to push forward Make in India. It’s a conscious effort to encourage EPCG license holders to procure from domestic sources. About similar moves being thought of for the future, we can never say that nothing new or similar will be announced and that everything has been done. We are still getting suggestions and look forward to making progressive changes in future for the benefit of India’s foreign trade. We are currently working on e-initiatives also, and very soon, we plan to have a paperless environment, which should naturally lead to minimum corruption and quick action on the part of governmental agencies to facilitate foreign trade.

TDB: Final question – the wait of one long year for the new policy. Was it worth it going by how FTP 2015-2020 has finally taken shape?
DGFT: The feedback I have received is that it was well worth the wait. It’s not that there was ever any vacuum of policy. The previous policy was always there. And it’s a good thing that the new policy has come with so many positives. Having said that, it’s obvious that it’s difficult to satisfy and please everyone.  

Industry: Foreign Trade