The Merchandise Export from India Scheme (MEIS), which was introduced in FTP 2015-2020, has undergone several changes. Recently again, while 2,901 tariff lines were added to the MEIS schedule, reward rates across 575 tariff lines were altered. While just the word ‘added’ may sound good to some exporters, for the most, frequent changes and ambiguities in notifications are confusing many.

Andres M. Molier | October 2016 Issue | The Dollar Business

The Merchandise Export from India Scheme (MEIS) was the most radical change introduced in the new FTP 2015-2020. Focus Product Scheme (FPS), Focus Market Scheme (FMS), Market Linked Focus Product Scheme (MLFPS), Agri-Infrastructure Incentive Scrip (AIIS), Incremental Exports Incentivisation Scheme (IEIS) and Vishesh Krishi Gramin Udyog Yojana (VKGUY) – all the five schemes that were meant to boost merchandise exports in the earlier policy were replaced by one scheme i.e. MEIS.

NEED FOR CHANGE

Although MEIS appeared rosy on paper (it replaced erstwhile Chapter 3 incentive schemes, promised to address complex procedures and boost India’s merchandise exports), it hasn’t been the panacea for exports that the government expected it to be. To make it more attractive, it has undergone alterations since its launch. And one of the most significant announcements that has been talked about in the trading community is the amendment announced on September 22, 2016, through which DGFT added 2,901 tariif lines to the MEIS Schedule. Well, the same ammendment also increased rates of incentive (from 2% to 3%) across 575 tariff lines that were already eligible for rewards under MEIS. So far, so good.

Interestingly, the incentive rates in this amendment were not categorised as per country groups. However, in an earlier amendment, in May 2016, while incentives were uniformly awarded (in all 5000-plus tariff lines) across category A, B & C countries, the DGFT had maintained the market categories in its notification. Should exporters now therefore assume that country groupings are being done away with?

There is no way to come to a concrete conclusion based on what can be understood keeping the two amendments side by side, and this has lead to much confusion amongst several members of India’s exports community.

When asked earlier about the logic of keeping the country groupings intact despite incentives being flat rated, D. K. Singh, Additional DGFT, in an exclusive interaction with The Dollar Business had explained, “We kept the groupings because we want exporters to know our market structure. Each set of market mentioned in the group offers different options. Thus, without the groups, our exporters won’t be able to identify the markets. That being said, we want our exporters to focus on emerging and lesser known markets because there is a potential there.” If that is the case then the new amendment should also have had the country groupings mentioned. Or for reasons best known to them, do policymakers now believe that Indian exporters have evolved in a matter of just a few months and they’ve discovered all virgin markets resulting in a diversification of India’s exports basket geographically as imagined a year-and-a-half back?

The Logic 

So, what was the justification for the government to bring about these changes? On the removal of the need to submit landing certificates Singh elaborated, “The office decided to eliminate the Landing Certificate and give every exporter the same benefit because, after several talks, the government finally granted us with an additional fund.” Sounds logical. But the question then is did the government finally realise that the present system was not working?
But then, why do we have rates being changed so frequently? Why are there so many amendments to the MEIS in the first place? Over the last month, there have been three amendments, just to MEIS. Was not the FTP 2015-2020 and the schemes under it supposed to bring a stable policy regime? Why can’t policymakers make up their mind and then stick to it?

Seems the policymakers do receive a lot of recommendations from various EPCs and other trade bodies to include tariff lines and increase incentives. And then, there are budgetary constrains too. Singh rightly points out, “The government is continuously monitoring the market trend. Last October, we decided to add a few products because we saw great potential in them. Also, we decided to give more incentives to milk products such as ghee and butter because we wanted to give a boost to our rural economy. With that said, we have received many requests and the government is examining them. The consultation process is on.”

He goes on to add, “There is a guideline that determines whether a product is eligible for MEIS incentive or not. For industrial products, we have kept the threshold at $1 million and $10,000 for agricultural products. If a tariff line cannot meet the margin, that means it isn’t contributing to our foreign exchange and there could be various reasons for that. That is the reason that these products have remained in the exclusion list. If they qualify the minimum eligibility criterion they may be included in the MEIS Schedule.”

Are these thresholds justifiable? Is it too difficult to imagine that with a 5% incentive, a competitive commodity may be able to cross the threshold exports values many times over? For speaking out loud, when the global market is down on its knees, shouldn’t the government promote exporters across tariff lines? “The objective of MEIS is to offset infrastructural inefficiencies and associated costs involved in the export of products. Also, other factors being considered, while extending the benefits of MEIS to a particular product, are high export intensity and employment potential which differs from product to product. Therefore, the product coverage and the reward rates varies from product to product under the MEIS,” explains Executive Director Siddhartha Rajagopal of Cotton Textiles Export Promotion Council (TEXPROCIL), speaking to The Dollar Business. Reasonable we must say from the government’s perspective.

Still Deficient?

As far as the question of sufficiency is concerned, what can the government do to encourage the exports in this sluggish business environment? Trade definitely is falling. In fact, in CY2015, the total world merchandise trade was the lowest in five years. Juggling with country groupings and erasing complications did ease exports – exporters have been unanimous in hailing the amendment! And the new amendment that added 2,901 tariff lines and increased incentives has been the icing on the cake. But is that enough or must the government provide a thicker cushion to exporters?

“The infrastructural inadequacies and un-rebated state levies are adding costs to our export products. Besides, there are differential import duties levied for textiles by major importing countries with high duties on Indian textiles products and exemption to products from competing countries. Therefore, in our view, the entitlement under MEIS should be increased from 2% to 3% for textiles,” Rajagopal tells The Dollar Business.

Sanjiv Sawla, Chairman of Indian Oilseeds and Produce Export Promotion Council while speaking to The Dollar Business shares, “We get MEIS incentives. However, instead of earlier benefits of 3% and 5%, the government has cut them to 1% and 2%, depending on the product. Interestingly, incentive rates were high for agriculture products when the world economy was doing good, but as it started to weaken, the rewards under MEIS have gone down. Ideally, the lowest rate, in my opinion, for agriculture products should be 3%.”

True to his words, exports of agriculture and allied products have nosedived from Rs.1,68,918.94 crore in FY2015 to Rs.1,43,802.55 crore in FY2016.

Reactive Not Active

Amendments that were made to the new FTP are mostly positive. But that doesn’t stop us from introspecting – can not the government make amendments in one go and let the system stabilise before issuing another slew of amendments. Despite being called the fastest growing economy in the world, India it seems is clinging on a slippery pole. For example exports of milk and its products dropped drastically between FY2014 and FY2016 – from $482.99 million to $48.79 million. So besides giving a boost to our rural sector, as Singh quoted, perhaps it’s the severity of the situation that made the government step in.
Echoing similar views, Sawla says, “I agree that some items must be given a larger share of incentives. While some have high infrastructure costs, others are highly labour intensive sectors. So if these sectors have to be encouraged, the government must step in for them.”

And there is Basant Puri, Business Manager of India Dairy, who claims, “It is important for the government to protect some export items by giving lower incentives because of shortage in production. But there are some who need motivation because there is potential but the price in the global market isn’t competitive.” The amendment may be the answer to Puri’s prayers, but fails to answer the more relevant question. Should the foreign trade policy not be proactive rather than reactive?

Making it Work

The question of uncertainty regarding a roll back to different rewards for different country groups will keep nagging us! But that doesn’t stop us from accepting that MEIS is, after all, a good scheme. Most of the exporters whom The Dollar Business spoke to in the early part of September, just before the amendment to MEIS, were expecting another modification in the policy, and increased incentives. That surely has happened. But is it right for the policymakers to keep exporters in state of sustained suspense. Will it not be better to just have a policy regime that is stable, for good or bad, less or more? Yes, is the answer.