The long-awaited and much-delayed mid-term review of the Foreign Trade Policy (FTP) 2015-2020, was released by the Ministry of Commerce in December last. While the government enhanced rewards under its flagship export promotion schemes and addressed some issues that had come into play after the implementation of GST, there wasn't anything that exceeded expectations of India's EXIM community. In its zeal for ticking the right boxes, the review seems to have given radical structural reforms a miss. Will the revised FTP help deliver a 'sustained' export growth? The Dollar Business takes stock
By Aamir H. Kaki | January 2018 Issue | The Dollar Business
The year 2017 ended on a happy note for the Indian exim community as the much-awaited mid-term review of the Foreign Trade Policy (FTP) 2015-20 was released by Minister of Commerce and Industry, Suresh P. Prabhu on December 5, 2017. The review comes at a time when the Indian EXIM community has been struggling with internal issues such as the impact of demonetisation and structural problems post-GST as well as other (including external) factors like appreciating rupee, lack of dollars amongst LatAm and African nations, a sluggish global market, etc.
The mid-term review of FTP, which aims to promote and boost merchandise and services exports from the country was long overdue. In May 2017, the then Commerce Minister Nirmala Sitharaman had sown the seeds of hope when she announced that the review of the FTP would be released before the implementation of the Goods and Services Tax (GST). That wasn't to be. The review was delayed in order to include changes required post GST implementation.
The mid-term review at first sight looks to be one that the industry needs at this hour, but is it one the industry deserves? Will the announcements have a long-term impact on Indian exports? Will the measures announced be able to take Indian exporters up the value chain and increase the popularity of Indian products in the global market or are these just temporary fixes for the visible damages from GST implementation?
Ticking the boxes
FTP 2015-2020 had set an ambitious target of $900 billion in exports by FY2020. With the target looking extremely unrealistic half-way through the term, and the implementation of GST throwing a spanner into the works, the government had its work cut out. With the review, it has tried to tick most of the boxes to alleviate the concerns of exporters.
The focus of the mid-term review has been on labour-intensive sectors and micro, small and medium enterprises (MSMEs), which contribute 45% of India's manufacturing output, over 40% of total exports and 8% of GDP. The segment has faced the maximum brunt of the GST implementation and demonetisation drive. And, it was about time that their issues were addressed and alleviated.
The major benefits for MSMEs (and larger companies) came in the form of enhancement of duty credit scrips by 2% across all sectors, under the flagship schemes of Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS). Overall, the incentives under the two schemes have been increased by Rs.8,450 crore, which represent a 33.8% annual rise from the prevailing Rs.25,000 crore.
The biggest beneficiary of this increase in incentives seems to be the ready-made garments and made-ups sector. The potential additional annual cost to the government because of the increased rewards on exports of ready-made garments and made-ups is expected to be Rs.2,743 crore. Similarly, the increased benefits for exports by MSMEs and labour-incentive industries such as agriculture, carpets, leather, marine products, hand tools, rubber products, sports goods, ceramics, scientific and medical products and electronic and telecom components will cost the exchequer Rs.4,567 crore, annually. Under SEIS, higher incentives for services such as software services, architecture, legal accounting, hospital, engineering, education, hotels and restaurants will cost the government around Rs.1,140 crore a year.
Leather and footwear industry is of the opinion that the increase in MEIS scrip value will help
in promoting innovation and improving price competitiveness of Indian exports.
In addition, based on feedback from the foreign trade community, the government has increased the validity of the duty credit scrips from 18 months to 24 months in order to augment their utility in the GST regime. The GST rate for the transfer and sale of scrips has also been cut down to zero from the earlier 12%.
While the increase in the rate of rewards is expected to directly add to the bottomline of exporters or at least defray the monetary impact of GST implementation, the revision has also taken measures towards improving existing policies by easing re-export of goods that are freely importable. In the same vein, procedures have been simplified under the Export Promotion Capital Goods (EPCG) Scheme for extension of export obligation (EO) period and shifting of capital goods.
Similarly, the government has allowed the import of second-hand goods for repairing or refurbishing purpose, in order to facilitate employment generation in repair services sector. In addition, benefits have been restored under the export promotion schemes of duty free imports under Advanced Authorisation (AA), Export Promotion Capital Goods (EPCG) and 100% Export Oriented Units (EOUs) schemes, thus resolving the problem of blocked working capital for exporters following the roll-out of GST. To address the liquidity problem faced by exporters after GST rollout, an ‘e-wallet’ system is likely to be operational from April 1, 2018.
Taking cognizance of the fact that one of the major factors that impact the competitiveness of Indian products is our high cost of logistics, a new Logistics Division will be set up in the Department of Commerce for promoting the integrated development of logistics sector.
The other long-awaited announcement has been that an advanced trade analytics division will be created in the Directorate General of Foreign Trade (DGFT) to help them take data-based policy actions. Together with this, the [email protected] service has been launched on the DGFT website as a single window contact point for exporters and importers. The service is expected to be a touch point that exporters can access to resolve their issues as well as give suggestions to the DGFT.
The Commerce Ministry is also in the process of drafting a new agricultural export policy in order to boost exports of value-added agri products. A new services division too will be created in DGFT to assess EXIM policies and procedures to drive services exports. With regards to policy direction, a major emphasis will be put on exploring new markets and products in addition to increasing share in traditional markets and products.
As we said earlier, the government has managed to tick most boxes. Naturally exporters, especially those from the MSME sector, have welcomed the policy changes, specifically the increase in incentives under MEIS and SEIS. Ajay Sahai, Director General & CEO, Federation of Indian Export Organisations (FIEO), says, “The review has taken a two-pronged approach and focusses on sunrise sectors of exports as well as on the employment-intensive traditional sectors. In line with that, the review provides additional incentives to sectors such as electronics, pharmaceuticals, medical and diagnostic equipment and high-technology sectors as well as leather, marine, food processing, sports goods, textiles, carpets and handicrafts. The policy statement to a large extent has identified the issues affecting exports.”
The MSME sector believes that the increase in MEIS rewards will definitely have a positive impact on exports. Representing the handicrafts exporters, and a sector that mostly comprises MSMEs, Rakesh Kumar, Executive Director, Export Promotion Council for Handicrafts (EPCH), puts in, “Increase in MEIS rates will certainly result in increasing exports from MSMEs and labour-intensive industries including the handicrafts sector.”
Mukhtarul Amin, Chairman, Council for Leather Exports (CLE), believes that this increase in rewards will also significantly benefit leather and footwear exports, a sector which has seen a decline in exports over the last few months. The increase, according to Amin, will play an important role in promoting innovation in the sector which will ultimately help improve its position on the global stage. “As the leather and footwear sectors are fashion and consumer-oriented, there is a need for continuous innovation leading to the creation of new products. For this, the industry is required to procure many critical inputs and components, for which the MEIS scrip is very useful. Hence, increase of MEIS scrip value will help in increasing price competitiveness of the sector,” explains Amin.
H. K. L. Magu, Chairman of Apparel Export Promotion Council (AEPC), too believes that the FTP review has addressed several concerns of the sector. “I believe the mid-term review of FTP has covered many issues like enhancement of MEIS, increase in validity of scrips, zero duty on scrips, 24X7 facility to more seaports, etc. The enhancement in MEIS rates is a positive step. Besides this, the other critical area that FTP review has dealt with is trade facilitation and easing our capital blockage,” says Magu.
Exporters from sectors like electronics manufacturing also believe that the increase in MEIS rates will be helpful for the industry. “It is noteworthy that several components and products, which are of interest to electronics manufacturers, are covered under the revised MEIS rates,” says Rajoo Goel, Secretary General, ELCINA, an industry association of electronics hardware manufacturers.
Further, it's not only the increase in MEIS rates that the exporters are excited about. Other policy changes are also a source of optimism for the community. D. K. Sareen, Executive Director, Electronics & Computer Software Export Promotion Council (ESC), says, “The recently announced review contains many policy incentives, particularly those that boost exports of electronics and services like healthcare, legal outsourcing, etc. The focus on finding new markets and new products as well as increasing India’s share in the traditional markets and products is also noteworthy.”
According to Sareen, steps such as increase in MEIS and SEIS incentive rates, focus on ‘ease of trading’ across borders, and additional annual incentive of Rs. 369 crore for telecom, electronic components, will definitely help in boosting exports from the country.
The renewed focus of the government on agriculture-based products has also recieved acclaim. Former Indian Oilseeds and Produce Export Promotion Council (IOPEPC) Chairman Sanjiv Sawla states, “We are happy to see that the government is now specifically focussing on exports of agri products. We are facing many challenges such as non-tariff barriers. Therefore, a strong agricultural trade policy will be of great benefit.”
And the brickbats
Even with all the positives steps in the FTP mid-term review, in the wake of the subdued export market, many feel that the review fell short on the expectations of the industry. Many believe that while short-term issues may have been addressed, painting all sectors with the same brush by enhancing rewards by 2% could mean that the government did not analyse sectoral problems.
Being a representative of a sector which comprises mostly MSMEs, Magu says that the AEPC was expecting much more emphasis on their sector. “The sector was expecting enhanced duty drawback and rebate of state levies (RoSL) on account of many embedded and blocked taxes. The sector was also hoping for a phased-out approach towards policy support rationalisation, post-GST. But that didn't happen,” he adds.
Amin from CLE also says that the leather industry was expecting a little more. “The enhanced scrip will be available for exports made from November 1, 2017 to June 30, 2018. This enhanced scrip should be made available for the entire policy period, i.e. till 2020, as this is extremely important to reverse the current downtrend in exports and achieve the envisaged 10% growth in exports.”
As far as textiles are concerned, Ujwal R. Lahoti, Chairman, TEXPROCIL, is of the opinion that while the review has increased incentives under the MEIS for some sectors, other sectors in need of attention have been overlooked.
“The sectors that have been excluded are cotton yarn and cotton fabrics. MEIS and interest equalisation schemes have not been extended to cotton yarn. This industry is struggling with issues like international prices not being in line with Indian prices, problems associated with price instability, etc. Therefore, there is a need to extend some kind of benefit to this sector,” says Lahoti. However, he is hopeful that the government will reconsider these sectors in the coming days.
While Goel from ELCINA welcomes the policy initiatives, he is not happy with the fact that many sector-specific challenges remain unattended. “While we welcome the additional 2% incentive under MEIS, the disabilities faced by Indian electronics manufacturers range from 8-10%, based on the level of value addition. To restore our export competitiveness, MEIS should be in the range of 5-9%, with 5% for finished products and PCB assemblies and 7-9% for components and semiconductors,” says Goel.
Having that said, Goel believes that incentive is just one way of supporting exports. The government needs to work on creating a conducive ecosystem for exporters. There are bottlenecks, in terms of infrastructure, shipping delays, erratic power supply, archaic labour laws, etc, which act as a drag on Indian exports. "These are the areas that require more government attention,” adds Goel.
Ecohing similar sentiments, Sareen of ESC India says, “Regarding services exports, such as software and solutions, the facilities extended are skewed. For instance, only units located in SEZs can avail the zero-rating of GST for supplies. This should be extended to all units, irrespective of their location, since setting up units in SEZs is costlier in terms of rentals and other costs.”
Dr. Vinay Sharma, Officiating Chairman, Export Promotion Council for EOUs & SEZs (EPCES), believes that the changes in the review are cosmetic. “In many ways, the changes introduced this time are good for our sector – that’s my honest opinion. However, I must add, structural loopholes continue to plague the sector. We need to do more than just fix a few issues here and there. Definitely, the sector was expecting more,” he says.
Talking about disappointments, the most striking part about the mid-term review of the FTP is the silence on the export target. The FTP 2015-20, when released on April 1, 2015, had set an ambitious target of doubling the country’s exports of goods and services from $465 billion to $900 billion by 2020, and also talked about enhancing India’s exports share in global trade to 3.5% from 2%.
However, things did not go as planned due to a combination of factors such as global slowdown and commodity price fluctuations that ensured India was nowhere close to meeting that ambitious target. Taking in consideration the trends since then, it seems India may not even retain its 2% share in the global trade.
No doubt, since CY2012 world trade has grown at an annual rate of just 3.1%. But then, India’s continuous under-performance cannot be attributed only to the global slowdown. While India's share in global merchandise exports declined in CY2015 and CY2016, exports from competing countries like China, Bangladesh and Vietnam edged up. And that's not a good sign at all!
India’s merchandise exports had recorded an anaemic y-o-y growth of 4.7% in FY2017. According to Reserve Bank of India (RBI), India’s merchandise exports having reached a record 17% of the GDP in FY2014 fell to nearly 12% in FY2017, the lowest share since FY2006.
The FTP 2015-2020, when released on April 1, 2015, had set an ambitious target of doubling
the country’s exports of goods and services from $465 billion to $900 billion by 2020.
Even within sectors, which are dominated by MSMEs, the numbers do not bode well. India has less than 5% share in global textile exports, and a mere 2% in apparel as compared to China, which has 33% and 38% share, respectively. In fact, India’s total of around $13 billion in the global $450-billion garments exports is lower that even Vietnam and Bangladesh, let alone China.
Looking at the ongoing trends, it seems impossible for India to reach the goal of $900 billion in exports by FY2020. So, is there any new target the government is looking for? The purpose of any review exercise should be to set new goals, but the recently released FTP review document is silent on that. Clarifying the absence, Commerce Minister Suresh Prabhu indicated in his speech that the government is not working towards any target. “This is a strategy paper, not necessarily spelling out the quantity of foreign trade we will achieve because strategy would result in quantity,” he said.
However, Sahai is optimistic about the target. “The target of $900 billion was fixed assuming a certain growth rate in global trade. Unfortunately, global trade has been subdued since FY2012. This has adversely impacted our exports as well. I have always maintained that Indian exports are more tuned to the growth in global trade than any other factor. However, the forecast for FY2018 is much better. We should look at doubling our exports by 2022 so as to take it to about $900-1,000 billion,” he says.
The WTO factor
While exporters may be optimistic about growth in the shorter term, sustainable growth cannot happen if we keep riding on the coattails of incentives and subsidies. And the sooner we understand that the better, because export subsidies will need to be phased out. According to the WTO Subsidies and Countervailing Measures (SCM) Agreement, a member is no longer eligible to give export subsidies if its per capita gross national income (GNI) crosses the threshold of $1,000 consecutively for three years. The WTO Secretariat’s most recent calculations revealed that India’s per capita GNP has been above $1,000 for the three consecutive years – CY2013, CY2014 and CY2015. This means that India will technically not be eligible for any more flexibilities and be prohibited from giving export subsidies.
However, the agreement also provides that the prohibition on export subsidies was not to apply to advanced developing countries “for a period of eight years from the date of entry into force of the WTO Agreement.” In this regard, some members, including India, have argued (and have submitted a corresponding negotiating proposal) that graduating members be given an additional eight-year transition period, and then the right to seek further extensions pursuant to SCM Agreement. If India has to discontinue the export promotion schemes such as MEIS, SEIS, Advance Authorisation and EPCG, it should look at phasing them out eventually while simultaneously replacing them with WTO compatible, aternative schemes.
Clarifying WTO's rules, Sahai says, “The special and differential treatment available under Annex-VII will no longer be available to us. However, this is something which we should not regret as we are on our course to become a developed economy. Moreover, even after graduating out of the threshold limit so as to continue with a subsidy, WTO does allow countries to give subsidies for R&D, adhering to the environmental norms and promoting backward areas.”
Let us keep in mind that most subsidies have been provided to do away with the cost disability factor. The high cost of credit, high logistics cost, increasing transaction cost, infrastructure inadequacies, adversely affects India's exporters. The subsidy given by the government to some extent offset these losses. "If the government is in a position to address these challenges in medium-term, Indian exports may not require any subsidy,” adds Sahai. He believes that it will work in everyone's favour if the government starts distancing exporters from rewards and work towards structural reforms to create a conducive business environment.
An ongoing effort
The FTP 2015-2020 review was refreshing to the extent that it has acknowledged that the major hurdles to India’s competitiveness were domestic, like infrastructure bottlenecks, complex procedures, high logistics costs, etc. The government has said that it will adopt a ‘whole of government’ approach to deal with these issues. In fact, measures that have been taken by the government to address these issues, like setting up of a logistics division, a National Trade Facilitation Committee under the Cabinet Secretary, formulating a National Trade Facilitation Action Plan, and launch of a Trade Infrastructure for Export Scheme (TIES) are welcome steps too. However, all these initiatives need to be implemented at a faster pace than they are presently being actualised. It is probably time for the 'whole of government' to look at the 'whole of exports'.
As emphasised in the review document, identifying new markets and products is vital for the growth of exports but with sharp competition in the global market, the emphasis should be on improving competitiveness and that will take long and sustained effort on part of both exporters and the government. Even the Commerce Minister in his statement said, “It is not a one-time exercise but an ongoing effort. We will continuously revisit issues, identify challenges and address them on a real-time basis.”
No doubt, policy review is an ongoing process and the industry too is of the opinion that the government needs to take continuous measures and introduce new initiatives without waiting for a year or mid-term correction in order to bring about long-term impactful change.
One question that however remains is, will the tweaks in policy and enhancement in rewards be able to boost India's exports? The answer is: Perhaps yes. If nothing, the mid-term review has come at a time when prospects for world trade are starting to brighten.
In September 2017, the WTO upgraded its trade growth projection to 3.6% from the earlier estimate of 2.4%. Though the estimate for 2018 has been pegged a little lower at 3.2%, it is still higher when compared to the stagnant growth of the last few years. In this scenario, India is in a better position to take benefit of the measures announced in the mid-term review than it was in 2015, when the FTP was released.
Reality suggests that India has not utilised the breathing space (in the form of lowered trade activity) the global slowdown provided to set the framework right. Perhaps we as a nation are at our best when the heat is on. At least we hope that's the case.
TDB: What is your take on the FTP mid-term review? Has the government rightly identified policy gaps that have been affecting the growth of the EoUs and SEZs this time around?
Dr. Vinay Sharma (VS): In many ways, the changes are welcome. However, structural loopholes that continue to plague our sector need to be urgently addressed. There are many areas where despite repeated reminders to concerned policymakers, things have not moved at the desired pace. Isn’t it a fact that we are responsible for 38-40% of country’s outward shipments? And does that not show we must be doing something right for the country’s economy? The government needs to play a more proactive role for our cause. Policy unpredictability, the return of cumbersome procedures and delays in decision-making have marred the image of SEZs as investor-friendly hotspots.
TDB: Will the additional 2% incentives provided under MEIS effectively help Indian exporters become more competitive in the international market?
VS: This is undoubtedly a positive development. We believe that such measures will help Indian exporters become more competitive. Equally laudable is the extension of validity of scrips from 18 months to 24 months along with the provision of zero GST on the sale of scrips. Sectors such as textiles and garments have been demanding the increase in rates of MEIS reward along with RoSL and duty drawback for a long time. Now, since the DGFT has enhanced the rates for garments and made-ups to 4% of the value of exports under MEIS, many other sectors will ask for similar incentives.
With regards to whether these additional incentives serve the need, I think, the benefits are in the acceptable range. As a practice, dishing out too many doles is not a good idea. The ultimate intention should be to make exports self-sustaining.
TDB: GST refunds have been a cause for concern amongst traders and exporters. Your comments.
VS: Ever since the GST has been enforced, yet-to-be-disbursed GST refunds is an issue that has been the Achilles heel of the SEZs and EOUs community. Look at one paradox here. For tax purposes, SEZ supplies are now treated as zero-rated. So, say, if you bring material inside conclave, there is no GST applicable. But then, operating out of an SEZ, if you offer a service, you need to pay GST on it. Activities such as services exported from SEZs paid in foreign currency to the foreign party are not considered tax free. This paradox affects the gems and jewellery segment which is certainly a big segment for us. There are many players within SEZs who are entitled to input credits (IC) if they get an order, say for diamond polishing. But then the moment this 18% service tax is brought to the notice of the foreign client, he starts looking for options (other cost-effective destinations) – and we lose business. Likewise, the warehouse industry is also being impacted by such an anomaly.
I would also like to add that the majority of Indian businessmen are not averse to paying taxes, but it’s the inbuilt compliance cost in the tax mechanism that scares them. For instance, while supplying goods, a supplier needs to have letter of undertaking (LuT), which is system based. For this, one needs to go to GST website and request an LuT and wait for its approval. That eventually leaves him with two options: Either he should pay tax and claim refunds himself or the other party applies for input credit. Now being zero-rated, I cannot avail input credits and the mentality of a regular supplier is such that unless they have a volume business, they don’t bother about LuT as it not only increases paperwork but ends up multiplying their tax compliance cost. Such anomalies need to be fixed soon.
TDB: Can initiatives such as a trust-based, self-rectification scheme for duty-free imports and creation of a new logistic division prove to be a gamechanger for the sector?
VS: Yes, I think, the trust-based, self-rectification scheme for duty-free imports and initiatives like the doing away with testing of samples for drawback purpose as well as the introduction of e-sealing facility for exporters will help accelerate cargo movement and lead to quick clearances of consignments.
With regards to self-certification, I would like to add that the SEZ industry has already been following this norm all along. Operating within a designated, regulated premise with a specified inlet and outlet gate, I believe that the majority of business owners within SEZs are law-abiding people.
The creation of a logistics division is a good step as logistics costs certainly take the sheen off our cost competitiveness in many world markets. It’s too high at the moment and in fact, it is higher than what the government agencies tell us. The current on-the-road consignment movement is a serious nightmare. Our ports such as JNPT are no better. The facilities there are extremely overstretched. We need to emulate the best of industry practices in this regard. We can learn a lot from China here. They have manged to create a great mechanism for last mile connectivity. In countries, smaller than ours, they have no shortage of ports. Some big factories have their own ports there. I do not understand why Indian law stipulates that a port should be at least 50 km away from another. What if one of them is inefficient to cater to our requirements?
Ajay Sahai, Director General & CEO – Federation of Indian Exports Organisation (FIEO)
TDB: Are you satisfied with the FTP mid-term review?
Ajay Sahai (AS): The mid-term review reassured the exports sector that intervention in the dynamic sector of international trade would be initiated as and when required without waiting for an annual or end-term correction. The review has taken a two-pronged approach – it focusses both on sunrise sectors of exports as well as on the employment-intensive traditional sectors. In line with that, the review provides additional incentives to sectors such as electronics, pharmaceuticals, medical and diagnostic equipment and high-technology sectors as well as leather, marine, food processing, sports goods, textiles, carpets and handicrafts. The policy statement to a large extent has identified the issues affecting exports and I am sure that corrective actions will be taken in the short, medium and long-term, depending on the nature of the issue.
TDB: Do you think the additional 2% reward provided under MEIS and SEIS will help exports grow?
AS: One of the challenges faced by the Indian export sector is price sensitivity. The volatility in the exchange rate affects Indian exports. The additional incentive will return some of the competitive edge which was lost as the rupee strengthened against foreign currencies while our competitors’ currencies weakened against the US dollar and other major currencies.
TDB: Is the government's decision to focus on labour-intensive industries and MSMEs in the right direction when the world is moving up the value chain?
AS: The biggest challenge facing the economy is job creation. The focus of the government therefore rightly is on MSMEs as employment to capital ratio in the sector is extremely high. MSMEs have the capability and flexibility to create jobs in the short to medium-term. Labour-intensive sectors also assume significance as they provide seasonal employment to the large workforce traditionally engaged in agriculture. ‘Make in India’ may be led by large companies, but this initiative will create huge opportunities for ancillaries in the MSME sector. Therefore, I feel, government is right in adopting a strategy which is a mix of focus on large companies and MSMEs. Moreover, large industries are quite capable and already have their own proactive ecosystem, while MSMEs may require some fiscal support.
TDB: What is your view on the new trust-based, self-rectification scheme and the creation of a new logistics division? Can these prove to be game-changers for the sector?
AS: We have to gradually move away from physical control to a trust-based system. The FTP has encouraged this by introducing such a system for categories of exporters who have been recognised as Authorised Economic Operators (AEO). Such a recognition will also encourage exporters to opt for the AEO Scheme which unfortunately has not received an enthusiastic response. However, this is not enough, and the government should aggressively market its new schemes and address procedural constraints, if any.
The creation of a Logistics Division, for the first time, will provide a holistic view of the state of affairs of logistics. Unfortunately, logistics comes within the purview of different ministries and each pursues its own policies and goals without looking into the initiatives undertaken by the other ministries. The Logistics Division will help in reducing the cost of logistics in the country. This has been supplemented by giving infrastructure status to logistics and implementation of GST which entails e-way bills. All these initiatives will help the exports and manufacturing sector. The creation of a single platform for all logistics service providers will also provide competitive logistics rates, transparency and predictability.
TDB: How has the implementation of GST affected the exports fraternity? What are the challenges that you are facing? How satisfied are you with the solutions proposed?
AS: Most of the challenges faced by the exporters in the GST regime are procedural in nature. The technical glitches in the GSTN, lack of awareness of the tax authorities towards export refund, grey areas in the filing of regular returns have compounded the problems of exporters. However, these are the teething challenges. We are hopeful that these issues will be addressed by March 2018. We also expect that the government will continue to provide an exemption from IGST on inputs required for exports production and introduce a comprehensive drawback scheme which provides a refund of both basic customs duty and GST. Once the GST regime stabilises, the sector will surely gain from this tax reform.
TDB: In terms of a pro-trade FTP policy, what policy changes would help improve India’s export competitiveness?
AS: A more focussed approach to international marketing is required. The fund available, under Market Access Initiative (MAI) Scheme, is insufficient. Moreover, no tax advantage has been given for marketing to exporters. This is a benefit that exporters from some developed countries get. There is also a need to create an Export Development Fund with a corpus of at least 0.5% of our exports.
TDB: What is your take on the mid-term review of the FTP?
Rakesh Kumar (RK): The mid-term review happened after the implementation of GST and the sector was expecting a relief from the government to offset the reduced duty drawback rates, increased GST rates and the blocking of working capital. The government has tried to compensate by enhancing the rate of duty credit scrip under MEIS by 2% but that is not quite enough. Other gains of the review are that the conditions of the pre-payment of IGST in Advance Authorisation Scheme and EPCG Scheme have been waived till March 31, 2018. Also, the GST rate for transfer/sale of scrips has been reduced to zero from the earlier 12%.
TDB: How will the increase in MEIS and other incentives affect exports from your industry? Are they sufficient?
RK: Increase in reward rates under MEIS will result in increasing exports from MSMEs and labour-intensive industries including handicrafts which can be categorised as both MSME and labour-intensive. MEIS rates of 121 handicraft items have been increased. But we expected more than what has been offered to the handicrafts sector which is a major foreign exchange earning sector of the economy.
TDB: The exports of handicrafts from India has declined over the last few months. Will exports from the sector achieve the desired growth in coming months?
RK: As far as the exports of handicrafts during the April-November FY2018 period is concerned, exports has declined by over 9% y-o-y and stand at Rs.15,277 crore. We expect that with the complete transition of exporters into the GST regime and the addressal of concerns of exporters by the government, the handicrafts sector will be able to achieve some growth by the end of this financial year.
TDB: What challenges are the Indian handicrafts exporters facing after the GST implementation? Is the GST Council actively trying to address these issues?
RK: GST has been the biggest taxation reform undertaken in the country since Independence. EPCH has made representations to the GST Council on various issues which affect the sector. The issues include the GST rate concessions on various handicrafts items, blockage of working capital funds, issues pertaining to stock in hand, utilisation of duty credit scrips, GST on trade fair participation, GST on foreign agency commission and freight charges paid by exporters, etc. The GST rates on handicrafts sector are being rationalised and are being given due consideration by the GST Council in its meetings. The other issues are also being addressed on a regular basis.
TDB: What has been done to promote Indian handicrafts export and deepen engagements with new markets?
RK: The concept of new markets and new products is of great importance to EPCH. Working in this direction, the markets of Latin America and CIS member states have been explored by organising various export promotion activities in these markets. Numerous common facility centres have been setup by EPCH at major craft clusters wherein technological and design development support is given to the exporters so as to develop handicraft items as per the designs, patterns and colours sought by overseas buyers.
TDB: The mid-term review focusses on exports of agri products and the Council must be happy about that. Are there any areas of concern that need to be addressed?
Sanjiv Sawla (SS): We are happy to see that the government wants to have a specific focus on exports of agri products. We are facing many challenges in the form of non-tariff barriers. Therefore, a strong agricultural trade policy will be of great benefit. The point is that what is being discussed should be implemented. We all need to work together to ensure that the policy implementation takes place. It needs to be done in the right spirit because the policy is made at the Centre but is implemented at the state level. Sometimes, the Centre and state are not in sync because of political motivations or other reasons.
TDB: Outdated infrastructure and logistical issues affect every sector. Is the government doing enough in this respect?
SS: When you talk about infrastructure, there are a lot of factors. Infrastructure cannot be developed overnight. That is something that the government is working on. For example, many times we see that at ports like Nhava Sheva, shipments take 3-4 days to enter the port because of logistics issues.
Today, it costs much more to transport goods from New Delhi to Mumbai than to move cargo from Mumbai to New York or anywhere else in the world. It is a big challenge.
Secondly, shipping companies tend to levy very high charges. This needs to be streamlined. Even though you are in India, they tend to quote you in dollars. You have to pay in rupees with an exchange rate that is even higher than the prevailing rate. However, the government is trying to streamline things with measures like e-sealing of containers, etc.
TDB: The FTP review talks about the importance of entering new markets. What needs to be done to promote exports and deepen engagements with new markets?
SS: When you say new markets you have to remember that we are talking about Africa and large parts of Latin America. Going into markets that already have sufficient production is difficult. What we have to do is go into those markets where they have American and European suppliers, who are supplying high-end products.
The challenge is that you have to take over their market share by being extremely competitive on price but at the same time offering the same quality that an American supplier is offering. This would give an incentive for buyers to shift to an Indian supplier. For that we need to have proper infrastructure in place where people are incentivised to produce absolutely top-notch products that can compete with products from any other country in the world.
What happens though is that our products are sometimes not completely homogeneous. Also, we have problems of rejection when shipping to EU, which has ripple effects. The government should listen to the word of the exporter. Whenever we try to enter a new market and there is a problem, we are penalised. There is a huge disincentive to ship to countries in the EU. The mindset of the government needs to change with time regarding this. Because, if we are talking about agri policy, when it comes to the product there is going to be an occasional variation which should be accepted not only by our government but also by the overseas buyer. However, that does not give exporters the right to ship sub-par products. First impressions matter when entering a new market.
TDB: The mid-term review was delayed to include solutions to post-GST grievances. How far have they been provided?
Rahul Shukla (RS): In the review, they have tried to address GST issues by raising MEIS and SEIS rates. They have tried to address the drawback loss as people were concerned that the drop in drawback benefit after the implementation of GST was impacting exports. Further, drop in exports in October due to cash flow challenges and delayed refunds was an issue as well. Hopefully, with the incremental rates, benefit will now accrue to exporters including service exporters. It is expected to offset the challenges in refunds of GST and lower drawback rate.
While EOUs have been given some procedural relief, we expected additional incentives for EOUs which have been contributing to exports significantly and have been on par with SEZs. Extension of SEIS benefit to STP units, as allowed to SEZ units, could have been looked into. Further, to address the cash flow issue, option of E-wallet for imports should be considered.
However, in the short-term, retaining status quo for scrips under MEIS/SEIS, as was done in case of Advance Authorisation and EPCG, would have been helpful, especially for exporters who rely on post-export benefits.
TDB: The review introduced a new logistics policy. What are the areas that need to be focused on to reduce logistics cost?
RS: There are many issues at play with regards to logistics. The Customs Act is being rewritten. There are also deliberations happening at the ministry level with the stakeholders and CBEC. A great idea is the concept of authorised economic operators (AEO) and our logistics operators can also given a similar status. However, the current benefits to AEOs like ease of obtaining warehouse licensing, bond waiver or reduction in transit bond norms, etc., are minimal. There are no significant advantages. Additional incentives must be looked into for this scheme to succeed. For example, facility of E-wallet, lower or priority examination norms, faster transit clearances, priority amendment in Import General Manifest (IGM) and provisional release of goods, etc., can help. Increasing connectivity with infrastructure development, usage of IT tools and data analytics, and establishment of a single window logistics hub for users will also be a step in the right direction.
TDB: Do you believe that the measures introduced in the FTP review will be successful in achieving the goals? Is the thinking of the government in sync with that of traders?
RS: The revisions in Foreign Trade Policy 2015-2020 have recognised the need to go beyond taxes and incentives and look at trade facilitation and promotion as a whole in terms of processes, documentation, and support from state governments. We are hopeful that a positive trade partnership outlook is being adopted by the government.
However, change takes time and requires continuous efforts. Significant procedural changes have been brought about since 2015 by the government and the shift is towards data analytics and smart tools. The government is committed to keep on working at improving ease of doing business and trade facilitation parameters within the country.
Effects of the efforts are already visible in the “whole government” approach. Hopefully, the issues, as they arise, will be looked into constantly and resolved in partnership with trade and industry in a positive manner. There are bound to be challenges of mindset and practices which with commitment can always be overcome.
The government as well as traders realise the need to be competitive in global trade, hence, a continuous partnership with proactive addressal of issues will help in achieving the goals that have been set.
TDB: What is your take on the recently released FTP mid-term review? Are the incentives provided in the FTP review in line with the industry’s expectations?
Ujwal R. Lahoti (URL): As far as the textile industry is concerned, the government has increased incentives under MEIS for most sectors which will no doubt be useful in increasing exports, but some sectors have been overlooked and they require immediate attention. We are expecting reconsideration of benefits for some sectors.
The overlooked sectors are cotton yarn and cotton fabrics. MEIS and interest equalisation schemes have not been extended to cotton yarn. This sector is plagued by several issues such as international prices not being in line with Indian prices, problems associated with instability, etc. Therefore, there is a need to extend some kind of benefit to this sector. Similarly, the cotton fabrics sector also deserves some benefits in line with those enjoyed by the home textiles and the garment industry.
These sectors should be given the benefit of refund of state levies the way it's provided to the garments sector and should be incentivised under MEIS at the same rate. This will help the industry get on track and increase exports. We have already flagged this issue and are hopeful that the government will reconsider this in the coming days.
Of course, whatever benefits are given, they are welcome and we expect them to definitely boost exports. But some of the issues which were not addressed, if they are looked into, then the cotton industry will definitely benefit.
TDB: Has the FTP review been able to tackle problems that are procedural in nature like those arising out of GST?
URL: GST is definitely beneficial in the long-run. However, there have been many operational problems and financial obstacles for exporters since its implementation. The FTP review has not really solved any of the issues. Overall, we understand that the government has started looking into solving issues but we need faster resolution. Many exporters have still not gotten refunds of GST paid in the month of July.
TDB: In the review, the focus is on exploring new markets. What needs to be done to promote textile exports in new and untapped markets?
URL: The textile sector is trying to increase efforts to reach new markets such as Africa and Latin America. Exporters are working very hard to get more orders from these countries, but the competitiveness of Indian products is lacking in terms of price stability, quality, etc., when it comes to making inroads into these markets.
The Textile Upgradation Fund Scheme (TUFS) has been introduced by the government. Many exporters have put in investments under TUFS, but due to technological issues many of them are not getting the benefits which were promised in the policy. This issue requires immediate attention.
When it comes to raw material, we would like a policy change such that the Indian cotton prices can be brought in line with the international cotton prices. As our prices are volatile, it is hard for exporters to be competitive.
TDB: The policy review also talks about increased focus on digitisation. According to you, how important is digitisation and what is the Council doing in this regard?
URL: The increase in digitisation is definitely in favour of exporters. This helps in increasing awareness and helps all exporters get the same and correct benefits. Of course, there are many people who are not aware of the skill development schemes being offered by the government towards digitisation, but the Council is helping in creating awareness.
TDB: Has the review met your industry’s expectations?
Mukhtarul Amin (MA): CLE has been requesting the government to enhance the rate of reward under MEIS, in order to increase price competitiveness and boost exports from the sector which, at the moment, is facing intense global competition. As far as the review is concerned, a major announcement made for the leather sector was an across-the-board increase of 2% in MEIS reward rates. However, this enhanced scrip will be available for exports made from November 1, 2017 to June 30, 2018. It is our request that this enhanced rate should be made available for the entire policy period, i.e. till 2020, as this is extremely important to reduce the current downtrend in exports and achieve the envisaged 10% growth in exports.
As the leather and footwear sectors are fashion and consumer-oriented, there is a need for continuous innovation leading to the creation of new products. For this, the industry is required to procure many critical inputs and components, for which the MEIS scrip is very useful. Increase of MEIS scrip value will help in increasing price competitiveness of the sector. But here again, procurement under MEIS should be exempted from Goods and Services Tax (GST).
Additionally, the new trust-based, self-ratification scheme introduced to allow duty-free inputs for export production under duty exemption schemes with a self-declaration will also reduce the transaction costs for exporters. The mid-term review document also mentions an increase in the validity period of duty scrips (including MEIS) to 24 months and implementation of the E-wallet scheme from April 1, 2018, which will eliminate upfront payment of GST. These are welcome steps.
TDB: Has the FTP review been able to effectively resolve the issues rising out of the implementation of the GST such as the blockage of working capital?
MA: Prior to GST, the leather and footwear industry was able to avail benefits like Central Excise exemption for production units with up to Rs.1.5 crore in turnover, Service Tax exemption for CETPs (Combined Effluent Treatment Plants), job work units, etc., which are now not available under GST. Further, CETPs and job work for procuring leather products and footwear are now subject to 18% GST. CLE has submitted representations to the government to reduce this to 5%.
The leather industry is grateful that the government recently reduced GST rates of several leather items. The rate cut on finished leather and composition leather from 12% to 5%, and on leather goods, leather garments and leather chemicals from 28% to 18% will benefit exporters tremendously.
Working capital blockage on account of requirement of payment of GST and delays in refunds are still major concerns. More than 80% of the industry is concentrated in the MSME segment and hence are unable to generate the huge requirement of funds for GST payment.
An announcement has been made in the mid-term review of FTP about the implementation of the E-wallet scheme, which I hope will eliminate upfront payment of GST.
TDB: What policy measures will help promote and increase the scope of MSMEs?
MA: The Union Cabinet recently approved a special package for leather and footwear sectors. The package involves implementation of Central Sector Scheme – Indian Footwear, Leather and Accessories Development Programme (ILDP) – with an approved expenditure of Rs.2,600 crore between FY2018 and FY2020. The major objective of ILDP is to augment raw material base, enhance capacity, modernisation and up-gradation of leather units, address environmental concerns, human resource development, support to traditional leather artisans, address infrastructure constraints and establish institutional facilities. ILDP consists of six sub-schemes namely: Human Resource Development (HRD); Mega Leather Cluster; Integrated Development of Leather Sector (IDLS); Leather Technology, Innovation & Environmental Issues; Establishment of Institutional Facilities; Support to Artisan. The scheme will play a crucial role in achieving sustainable growth in the leather and footwear sector and will immensely benefit the MSMEs.
TDB: Logistics sector has received a special focus in this review. What, according to you, are areas that the government needs to focus on to achieve logistics operational excellence?
MA: A major initiative by the government has been the development of International North South Transport Corridor (INSTC), which provides an alternate and shorter route for shipments to Russia and other CIS countries. This is a project which will help in increasing our exports to these regions. There is currently a need to further develop the port and airport infrastructure and road connectivity in India in order to enable faster transport of export/import cargo. Buyers now expect delivery at short notice and hence for India, developing logistics is very important. We also need to have direct shipment facilities to the Far-East in order to help reduce the time taken for product delivery and to help lower the shipment charges to Europe as the charges from China are lower when compared to
TDB: What are your initial thoughts on the FTP mid-term review document?
H. K. L. Magu (HKLM): The increase in the MEIS rates has been a positive step. Besides this, the other critical areas that the FTP review has dealt with is trade facilitation and easing capital blockage. However, exporters presently need a level playing field while competing with other countries. The post-GST dilution of duty drawbacks and FTP benefits needs to be looked into urgently.
TDB: Would you say that the mid-term review has addressed most concerns raised by exporters ?
HKLM: I believe that the mid-term review of FTP has covered many issues like enhancement of MEIS, increased validity of scrips, zero duty on scrips, 24x7 facility to more seaports, no norms fixation, etc. These steps will positively impact the industry. However, enhanced duty drawback, RoSL and wider usage of MEIS scrips are the need of the hour to boost exports and increase India’s competitiveness in international markets. The trust-based certification is a big step forward and I hope this is the start of a new era in ease of doing business.
TDB: India is nearing the WTO threshold which would require it to end direct subsidies on exports. Subsequently, schemes such as the MEIS, EPCG and interest equalisation scheme, as envisioned under the FTP, are likely to get impacted. How do you plan to safeguard your sector’s interests?
HKLM: We have already submitted a proposal to the government regarding alternative schemes that can be implemented after the phase-out of subsidies. Both Drawback and RoSL are WTO compatible schemes. Therefore, enhanced drawback and RoSL will surely help the industry to retain the positive growth.
TDB: While the government’s focus is on MSMEs and assisting the Make in India campaign, it however, did not accept garments exporters’ demand for measures to improve market access and cost competitiveness. Your comments.
HKLM: The garment industry was expecting enhanced duty drawback and RoSL. It was hoping for a phased-out approach towards policy support rationalisation, post-GST. The sudden reduction in drawback and other support has detrimentally impacted business planning and order book positions.
TDB: In a recent meeting with the Chief Economic Advisor Dr. Arvind Subramanian, AEPC had expressed concerns over decline in apparel exports due to capital blockage and a sharp reduction in drawback rates post GST. Has any solution been proposed in the review?
HKLM: Yes, the Council has been proposing various alternatives for easing the problems being faced due to capital blockage and sudden reduction in drawback rates. We are hopeful of a positive response in this matter.
TDB: What is your take on the recently released review?
Rajoo Goel (RG): It is noteworthy that most components and products which are of interest to electronics manufacturers are covered under the revised MEIS rates. ELCINA believes that this is an overdue and positive step as it will largely reverse the damage caused by the reduction of MEIS rates across the board. Another positive is the focus on MSMEs and manufacturing. This is important as benefits should accrue to value-added manufacturers. The industry is also enthused by measures which will release blocked working capital and reduce costs. India’s FTP is geared towards promoting exports very aggressively with a target of $900 billion by 2020 and there was a need to support manufacturing with a focus on MSME and labour-intensive sectors. The FTP review has also taken several measures to simplify procedures for exporters.
Some other industry-friendly changes include zero rating under GST of supplies of goods and services to SEZs, import of second-hand goods for repair/refurbishing/re-conditioning/re-engineering being made free, making the transfer and sale of duty scrips effectively GST exempt, round-the-clock customs clearance facility being extended to 19 seaports and 17 air cargo complexes and self-declaration of duty free inputs for export production under duty free exemption scheme.
TDB: Is an increase of 2% in rewards under MEIS enough to make our electronics manufacturing industry competitive in the global markets?
RG: While we welcome the increase of 2% incentive under the Merchandise Exports from India Scheme (MEIS), the disabilities faced by Indian electronics manufacturers range from 8-10%, based on the level of value addition. Thus, to restore our export competitiveness, the MEIS should be in the range of 5-9% with 5% for finished products and PCB assemblies and 7-9% for components and semiconductors.
TDB: Exports of electronics would need to grow significantly to realise the overall growth targets. What needs to be done to improve the sector's export competitiveness?
RG: In response to the increase in BCD on eight electronic items of mass consumption, the industry must rise to the occasion by not succumbing to the temptation of raising domestic prices of these products and instead invest in additional manufacturing capacities to increase local value addition and become globally competitive. In the process, even as we engage more deeply with global electronics supply chains, the caveat is that we need to guard against the existing FTAs from being misused to evade the increased BCD and import these product lines as finished products. This challenge exists especially in case of set top boxes, which are included in the ASEAN FTA. Due to this threat from FTAs, the electronics industry has made a strong plea to exclude electronics from the Regional Comprehensive Economic Partnership (RCEP).