The last full Budget of NDA government's current tenure and the opener in the GST regime was an anticipated one. Now that the Budget is out, it is appropriate to declare that the government, in a bid to amuse one and all, did make an attempt to address all major aspects of the economy – from agriculture to rural development, employment to health, MSMEs to infrastructure. But the attempt was not appreciated by India's manufacturing and exports communities at large. So while the government believes its announcements will give catalyse our exports, exporters continue to doubt the efficacy of Modi-camp's Budget treatment.
By TDB Intelligence Unit | February 2018 Issue | The Dollar Business
It happens every year. Expectations and apprehensions around the Union Budget reach a crescendo just before the Indian Union Finance Minister takes guard and begins his proof of what 'freedom of speech' is. Then it all begins... It was no different this year on February 1, 2018. This year's Budget was special because it was the last full Budget of the present government before the country goes to polls in 2019. This Budget, the second Budget under the new scheme after merging the plan and non-plan aspects, is also the first since the implementation of new tax regime of Goods and Services Tax (GST). Would the government stick to what most governments do when faced with a election and announce a populist Budget, or would this government try and break the rule by announcing a truly developmental Budget, was the question on every lip. While the Finance Minister played to the gallery by announcing a host of populist (or to use the politically correct terminology, "inclusive") measures, he did allocate funds and announced schemes that could help ease pains that businesses have felt over the last couple of years.
The question that we seek to answer though, for readers of The Dollar Business, is whether the Union Budget was able to allay fears of India's foreign trade fraternity about losing competitiveness in the global market and easing deep-seated infrastructural and policy inadequacies. Some may say that for the EXIM community, the Budget might not be the best tool to provide a holistic guideline and the Foreign Trade Policy (FTP), the mid-term review of which was released in December, is a better instrument. But, the fact that the Union Budget spells out the thrust of the government's agenda, remains. Unquestionably, the foreign trade fraternity looks forward to the Budget to provide allocations and policies that can make or break their fortunes.
However before we get into what the Union Budget had in it for the foreign trade fraternity, let us look at headline messages that the Budget espoused. The Budget, according to the finance ministry, was guided by the government’s mission to strengthen agriculture, employment, rural development, health, education, MSME and infrastructure sectors. While presenting the Union Budget 2018-19 in the Parliament, Union Finance Minister Arun Jaitley said, “This year’s Budget will particularly focus on strengthening agriculture and rural economy, provision of good health care to the economically less privileged, taking care of senior citizens, infrastructure creation and working with the States to provide more resources for improving the quality of education in the country.”
With the major focus being on agriculture and MSMEs, Jaitley said that India’s agriculture exports potential is as high as $100 billion against the current exports of $30 billion and to realise this potential, export of agricultural commodities will be liberalised. The minimum support price (MSP) for all unannounced kharif crops will be one and half times of their production cost and allocation towards institutional farm credit will be Rs.11 lakh crore in FY2019. Other announcements that caught attention of the industry were: setting up of two new funds of Rs.10,000 crore for fisheries and animal husbandry sectors, Rs.1,290 crore for restructured National Bamboo Mission, proposal to extend the reduced tax rate of 25% to companies reporting a turnover of up to Rs.250 crore, etc. Of course, the other major announcement that grabbed headlines was the National Health Protection Scheme (NHPS), quickly nicknamed Modicare, which would provide health cover to about 50 crore of India's underprivileged citizens. The Finance Minister too proposed changes in customs duty, including an increase in duty on mobile phones, some electronics, etc., to promote creation of more jobs in the country as well as Make in India initiative. The Budget also increased the allocations made under the Special Package for the textile industry. In addition, he also proposed a tax on Long Term Capital Gains (LTCG) exceeding Rs.1 lakh at the rate of 10%, without allowing any indexation benefit and tax on distributed income by equity oriented mutual funds at the rate of 10%.
The Show Stoppers
While explicit announcements for the foreign trade community were not evident, many experts have seen a silver lining for the community in the headline messages the Union Budget has put forth. Reacting on the Budget, Ajay Sahai, CEO, Federation of Indian Export Organisations (FIEO), says, “The Budget puts focus on the rural economy as rural India will be the driver of the Indian economy in the years to come. The key concerns the Budget has tried to address have been rising unemployment and declining farmers’ income. Both of these issues can be addressed through a focus on exports. Luckily for us, global trade is on an upward trajectory, and since Indian exports have been ahead of the curve, we can look forward to robust growth in exports." Sahai also believes that the increased focus on logistics and infrastructure will help boost India's export competitiveness. “The Budget has also provided a boost to the logistics sector, which will help exports. Increasing allocation for railways, roads, shipping and coastal navigation, electronic payment facility at all toll gates, single logistics portal to meet all logistics requirement coupled with GST and E-way bill will go a long way in reducing the logistics cost of exports,” he explains.
Commenting on the emphasis placed on agriculture and food processing in the Budget, Milind Kothari, Managing Partner and Head – Tax and Regulatory Services, BDO India, states, “The Budget also announced measures to promote exports of agricultural commodities, in a bid to realise its true potential as well as insulate farmers from vagaries of market-driven pricing. The proposed set up of state-of-the-art testing facilities in mega food parks will enable farmers to get a premium price for their quality tested products. While minimum support price (MSP) would alleviate immediate challenge of sub-optimal pricing, what needs to be addressed is ensuring that the farmers are able to fetch market-driven pricing that keeps them solvent and profitable.”
BUDGET 2018-19: HIGHLIGHTS
Welcoming the announcements made in the Budget with regards to apparel industry, H. K. L. Magu, Chairman, Apparel Export Promotion Council (AEPC), says, “We are happy that the Special Package has been increased from Rs.6,000 crore to Rs.7,148 crore, especially the budgetary provision of Rs.2,163.85 crore towards Rebate of State Levies (RoSL).”
The increase in customs duty on footwear has also found appreciation in the leather industry. Mukhtarul Amin, Chairman, Council for Leather Export (CLE), states that the Budget has announced an increase in basic customs duty (BCD) on footwear from 10% to 20%. This move will help certainly enhance the competitiveness of domestic footwear industry and will promote the Make in India programme.
On the hike in customs duty on mobile phones to 20% in the Budget, Rajoo Goel, Secretary General, ELCINA, says that the Finance Minister has levied customs duties extensively on a number of finished goods with an eye on driving manufacturing growth and to realise the “Make in India” dream. However, whether this can improve the competitiveness of our electronics manufacturing sector in the global marketplace is questionable.
The cashew processing fraternity's response towards the reduction of customs duty on cashews has been lukewarm. Reacting to the Budget, S. Kannan, Executive Director & Secretary, Cashew Export Promotion Council of India (CEPCI), says, “CEPCI very much welcomes the decision of the government to reduce the import duty on raw cashew nuts from 5% to 2.5%. The cashew fraternity was in fact expecting the complete withdrawal of import duty and CEPCI had made it the first point on its strategic plan submitted to the government. Since it is a partial relief, we will request the government to withdraw the duty fully.”
The other big announcement that has been welcomed by all has been the reduction in corporate tax rate from 30% to 25% for companies with an annual turnover of Rs.250 crore. Rajeev Kapur, MD, Steelbird HiTech Ltd., commenting on the reduction in corporate tax rates says, “It is good that the government has reduced corporate tax by 5% for MSMEs. Most Indian companies fall under this category and are responsible for a large amount of employment generation. This reduction should allow these companies to expand and employ more people thereby raising the living standards of many. This will also have a trickle down effect on the economy as a whole.”
Although the foreign trade community has welcomed and applauded these measures, they believe that the government had the opportunity to do much more for the manufacturing sector as a whole and the exporting fraternity in specific. What has been particularly disappointing is that at a time when Indian manufacturers are trying to move up the value chain there has been no focus on research & development (R&D). Sahai from FIEO says, “I am disappointed with the lack of support given to R&D as our spending on R&D is much lower than our competitors. Innovation, product development and environmentally sustainable manufacturing are important factors for exporters and require huge investment in research, which should be encouraged through tax concessions.”
Apart from this, the Budget has not touched upon the concerns of some industries. While expecting a lot, the pharmaceutical industry, a significant contributor to the country’s foreign currency reserve, has not got any direct benefits in the Budget. “When it comes to the pharmaceutical industry, this year’s Budget has not been encouraging at all. No direct benefits have been announced for the industry. One could say that there is only one benefit – reduction of 5% in income tax for companies with less than Rs.250 crore turnover. But that is for all industries,” says Madan Mohan Reddy, Chairman, Pharmexcil.
“Going into the Budget, we had expected a lot, especially in the backdrop of the Make in India concept that the government has been promoting. But, they have not put in any consideration for the pharmaceutical industry,” adds Reddy.
Expressing dismay at the lack of mention of any concrete measure in the Budget to push SEZ/EOUs-led growth in the country, Vinay Sharma, Officiating Chairman, Export Promotion Council for EOUs and SEZs (EPCES), says that the Union Budget failed to excite the SEZ/EOUs this time around. “It’s really surprising that despite flagging the key issues affecting this beleaguered sector to the concerned ministry in our pre-budget memorandum, the Union Budget 2018-19 failed to suitably address sectoral issues such as those relating to MAT, DDT and the Sunset Clause,” he adds.
Goel from ELCINA, representing the electronics industry, while welcoming the enhanced protection to some products, says, “There is a need to take additional steps to promote manufacturing of ITA-1 items and their components. Manufacturing these products require huge investments and state-of-the-art technologies. The Budget has not allocated any funds for the Electronic System Design and Manufacturing (ESDM) sector and we can only hope that the National Policy on Electronics Version 2.0, which is under preparation, would be adequately funded so that its industry promotion schemes can be implemented successfully to attract investments.”
The Big Story
With all the hits and misses, the Budget has majorly focused on strengthening agriculture sector, in order to boost exports from the sector and to meet the target of doubling farmers’ income by FY2022. The Finance Minister in his Budget speech stated, “India’s agri exports potential is as high as $100 billion against the current export of $30 billion. To realise this potential, exports of agriculture commodities will be liberalised. The government will take steps to boost exports of agriculture commodities."
While most experts agree that promoting agri exports is the correct way to alleviate the pain of farmers and that there is a lot of untapped potential in this segment, the target of $100 billion will not be easy to achieve. Such a target requires a stable, supportive Agri Export Policy based on digitised current stock position, scientific forecasting of crop prospects, current demand coupled with fiscal support to bridge the gap between the minimum support price and international price. Since prices of most of agri-commodities are moving in the northward direction, the support required would be a moderate one.
Dr. Biswajit Dhar, Professor, Centre for Economic Studies & Planning, Jawaharlal Nehru University, too agrees that agri-exports have enormous potential. However, he adds, “Without appropriate investments aimed at improving the quality of agri-commodities and processed items, there is little chance for Indian producers to augment their presence in highly-competitive overseas markets."
What makes the target even more challenging is the fact that agricultural exports have declined in recent years. And while exports declined to $33.87 billion in FY2017 from $43.23 billion in FY2014, farm imports have risen from $15.03 billion in FY2014 to $25.09 billion in FY2017. In fact, as recently as in December last year, out of 13 agriculture commodities that are being tracked by the Ministry of Commerce, five including cashew, oil seeds, oil meals, fruits & vegetables and other cereals recorded negative export growths. What's more? The share of agriculture in India’s total exports has steadily declined over the years – from 13.79% in FY2014 to 12.26% in FY2017.
With India punching way below its weight in agriculture exports, it is less than likely that the target of $100 billion can be achieved unless major investments are made in cold chains and warehouses, and policies are drafted to support the farming community.
The gap in policy and the budgetary announcement remains a sore point for agricultural commodity exporters. India has often put caps on exports of agriculture items, citing concerns regarding food security. Over the years, the government has also imposed minimum export price (MEP) on commodities such as onion, potato, rice, wheat and edible oils to discourage exports and enhance domestic availability and regulate prices. How the government plans to balance the need to keep domestic prices under control while promoting agri exports is a question that remains unanswered.
As a part of this strategy for improving agri exports, the Finance Minister proposed the opening of 42 mega food parks all across the country; a network of processing and collection centres intended to create a link from farm to consumer market. However, the scheme for creation of mega food parks has been in place for a number of years, but most of these parks are yet to see the light of day.
Nevertheless, Sahai believes that the proposed mega food parks have the potential to provide an impetus to the agri sector. “Backward and forward linkages in agriculture through logistics and supply chain is necessary to meet the ambitious target. The 42 mega food parks will provide world-class common services required by the agri-sector,” he adds.
Apart from the agriculture sector, the other major focus of the Budget was on MSMEs and employment generation. MSMEs, an important pillar of the Indian economy and a major employment generator, contribute about 45% to manufacturing output and around 40% to exports, directly and indirectly. In the Budget, the Finance Minister proposed a reduced tax rate of 25% for companies that have an annual turnover of up to Rs.250 crore. “This will benefit the entire class of micro, small and medium enterprises which accounts for almost 99% of companies filing tax returns,” the Finance Minister said while presenting the Budget. However, he accepted that this may lead to a revenue loss of Rs.7,000 crore during the financial year 2018-19.
This measure was positively taken by most of the industries where MSMEs are a dominant force. Magu from AEPC says, “Reduction in corporate tax for MSMEs is indeed an extremely positive step and will benefit the apparel industry as it's comprised mainly of MSMEs.”
An equally welcome move in this relation has been the change in criteria for classifying MSMEs – from investment in plant and machinery to annual turnover. "This not only makes the assessment of the eligibility of MSMEs easier, more transparent, but simpler too,” adds Magu.
Kothari, from BDO India, also welcomed the announcement of reducing tax for MSMEs. “The proposal has taken care of about 99% of companies, irrespective of the industry they belong to. This will improve the competitiveness of Indian companies. The lower tax outflow will leave more funds at their disposal, which in turn will promote investments and expansion in businesses,” he says.
Sahai, from FIEO, looks at this announcement from exports perspective. “The reduction in corporate tax rate to 25% would indirectly help our exports, as many Indian subsidiaries of US companies and Indian companies with major markets in US were weighing the option to move to US in view of the sharp cut in corporate rates and announcement of tax deduction on expenditure on equipment and machinery in US,” says Sahai.
The reduction in tax rate has no doubt come as a relief to the already struggling MSME sector after the twin shock of demonetisation and GST. But then, the major problem faced by the sector is availability of credit and the government has taken no concrete step to address this issue. As per latest Economic Survey, the MSME sector faces a major problem in terms of getting adequate credit for expansion of business activities. Latest data on credit disbursed by banks shows that out of a total outstanding credit of Rs.26,041 billion, as in November 2017, 82.6% of the amount was lent to large enterprises. The MSME sector received only 17.4% of the total credit outstanding.
Experts believe that more needs to be done to address these concerns of MSME sector. According to Prof. Dhar, “The most serious bottlenecks faced by the MSME sector are non-availability of credit and lack of proper infrastructure. A coordinated policy that addresses these issues in a comprehensive manner is what is required. But instead, each year the Budget takes grossly inadequate steps.”
Duties & WTO
Another key Budget announcement that has a direct bearing on EXIM community is the change in customs duty of several items in a bid to further help domestic manufacturers, discourage imports, specifically from China, and promote the Make in India programme.
The Budget has proposed higher customs duty on several goods including mobile phones, electronics, completely or semi-knocked down automobile parts, capital goods, edible oils, footwear, imitation jewellery and juices, whose imports in the first seven months of this fiscal was valued at more than $38.30 billion.
The customs duty on auto components such as engine and transmission parts, suspensions, brakes, airbags and gear boxes has been raised to 15% from 7.5% in the case of some items and from 10% for some others. These products make up for over 50% of the $43.5 billion-Indian auto component industry and more than 30% of the industry’s $11 billion exports. In the context of electronics items, India imported products worth $4.6 billion in the month of December 2017 alone, recording a 20% increase year-on-year.
Overall, basic customs duty has been raised on around 40 product categories. The incidence of hike in duty is between 30% and 100% on most items. If experts are to be believed, nearly 25% of the country’s total imports could be affected by this increase in basic customs duties. It's worth noting that in FY2017, imports in these 40 product categories totalled about $85 billion, accounting for 22% of the overall imports of $384 billion.
Having said that, there are doubts as to whether the increase in customs duties on these products can help the government achieve its goals of promoting domestic value addition under the ‘Make in India’ mission and in creating more jobs in the country as the duties may significantly impact the downstream industries that use these products.
The other problem with the decision to increase import duty on certain products like mobile phones is that it can land India in a trade dispute at WTO because under the WTO Information Technology Agreement (ITA), countries which are signatories to the Agreement cannot impose import duties on several IT products including mobile phones.
Agreeing to this, Prof. Dhar from JNU, says, “The proposed increase in customs duty on mobile phones violates the commitments India has taken under WTO’s Information Technology Agreement. I have no doubt that India will be dragged to the Dispute Settlement Body.”
This time around, Jaitley had the unenviable job of righting the ship after the twin shocks of demonetisation and GST to the Indian economy. These two events have hurt economic growth, impacted employment in unorganised sectors and adversely affected the agricultural sector. Though the Budget has tried to address these issues, it has not been able to do so without hurting the government’s revenues. The 2017-18 fiscal deficit target of 3.2% has been surpassed and is now at 3.5% of the GDP. More importantly, for the foreign trade community, despite a better global economic climate, exports have failed to show robust growth.
No doubt, through this year's Budget, the government has made an honest effort to address issues including unemployment and capital outflows in the wake of cuts in US corporate tax rate, among others that cropped up last year.
Even the thrust on agri exports, MSMEs and logistics seems to bode well with India's exporting community. But then, sceptics warn that it is not intent but implementation that decides a policy's fate. Hence, only time will tell if the Finance Minister's balancing act pays off – to the economy, the foreign trade community, and of course, to his very own NDA government!
TDB: Farmers are the core of Indian society. Do you think the Union Budget 2018-19 has done a fair job to help them access the food processing industry?
Dr. Subodh Jindal (SJ): The Union Budget 2018-19 has provided for the improvement of agricultural production in the country. In my view, the Union Budget clearly outlines the government’s intent to strengthen agriculture as much as possible through various hand holding mechanisms for farmers including support for obtaining seeds, soil testing, fertilisers, pesticides, irrigation, procurement, electricity, infrastructure and technology. There is a focus on food processing, specifically the inclusion of farmers in post-harvest activities like handling, storage, processing of produce. The government hopes to kill two birds with one stone with this move. They hope that this move will both increase farmers' incomes and also save agri-produce from wastage.
The key problem faced by farmers is that most crops are seasonal and there is a glut phenomenon when the produce is in excess. Farmers are forced to make distress sales during a season or even to simply throw away their produce. They suffer huge losses owing to lack of post-harvest mechanisms. The government has realised that this issue requires urgent attention and that saving the glut produce will also save the farmers. Doubling the income of farmers is a laudable cause, and we should focus all energies to achieve this objective. To do this, the Union Budget proposes that farmers be involved in post-harvest handling, i.e. cleaning, sorting, grading, cutting and packing of the produce. If provided with ambient control storage, refrigerated cold storage and other processing facilities, farmers could reduce the wastage of agricultural produce by a significant amount. The idea is to save perishable agri-produce and protect farmers from being exploited in the glut season by providing them with more options. The Union Budget proposes to mobilise Farmer Producer Organisations (FPOs) under a scheme named ‘Operation Greens’ taking inspiration from the milk revolution under the project ‘Operation Flood’. The government has provided Rs.500 crore to support FPOs. It had earlier initiated Pradhan Mantri Kisan Sampada Yojana for Mega Food Parks which also endeavours to mobilise farmers for the same cause. The main aim of this operation is to help farmers extend the shelf life of their agri-produce. Implementing proper storage mechanisms and processing methods is the way to do this. For example, cut fruits and vegetables can be stored in a salt solution or as pulps, purees or pastes, that can be used throughout the year by secondary or tertiary level units to manufacture consumer products.
TDB: In recent times, many food processing firms have raised concerns with respect to issues arising out of Goods and Services Tax (GST) compliance. Has the Union Budget been able to ease some of the pressure?
SJ: Most of GST's teething problems are related to operational issues and fixation of tax rates. The government has been quite active in interacting with trade and industry throughout the country to understand and address the issues involved. It can be said that most of the operational and teething issues have been resolved, but there are still some concerns regarding tax rates. I believe low GST rates on food products will benefit both farmers and consumers.
TDB: What has the government done to address the issues faced by food processing industry specifically and also the agricultural sector in general?
SJ: On the policy front, the provisions made under the National Mission on Food Processing in the Union budget are very encouraging. The scheme for developing Food Parks will be helpful in setting up new processing units. However, there are some operational challenges which need to be addressed. To make a significant impact, it is important to simplify the regulatory requirements of different central and state government departments. Prime Minister Narendra Modi's famed Ease-of-Doing-Business spirit must play a role here. India has the potential to play an important global role in this sector, provided that an integrated approach is followed.
TDB: After the World Food India 2017 Summit, Food Processing Minister Harsimrat Kaur Badal had said that the sector would attract an investment of $14 billion over the next 2-3 years. Do you think the Summit was fruitful?
SJ: The government is making serious efforts to turnaround the status of the food processing sector by boosting processing levels in each segment. In this context, domestic and foreign investors were mobilised during the World Food India 2017 Summit. The expected investment figure mentioned by the Hon’ble Minister was on the basis of investors’ response during the Summit. Companies from various countries participated in the Summit. Officials from central and state governments, industry members and investors, both foreign and domestic, took part in detailed discussions about India's potential in this sector. The Summit was very encouraging. We look forward to good results emerging from this meet.
TDB: What are the key focusses of this year's Union Budget with regards to the exports sector?
Ajay Sahai (AS): The Budget puts focus on the rural economy as rural India will be the driver of the Indian economy in the years to come. The key concerns the Budget has tried to address have been rising unemployment and declining farmers’ income. Both of these issues can be addressed through a focus on exports. Luckily for us, global trade is on an upward trajectory, and since Indian exports have been ahead of the curve, we can look forward to robust growth in exports. Exports create massive employment opportunities, particularly in labour-intensive sectors. The fixed term employment facility for all sectors will benefit exports the most, particularly where demand is seasonal in nature or augmented at Christmas or New Year. The focus on skilling, coupled with the gigantic target under National Skill Development Mission, will add to the productivity of manufacturing sector exports. The Budget has also provided a boost to the logistics sector. Increasing allocation for railways, roads, shipping and coastal navigation, electronic payment facility at all toll gates, single logistics portal to meet logistics requirement coupled with GST and E-way bill will go a long way in reducing the logistics cost of exports.
The reduction in corporate tax rate would also indirectly help our exports as many US-based Indian subsidiaries and Indian companies with major markets in US were considering moving to US in view of the sharp cut in American corporate tax rates and tax deductions on expenditure on equipment and machinery there. We hope the cut in corporate tax would help them revisit the issue and push exports with greater zeal. I am, however, disappointed with the lack of support to R&D. Innovation, product development and environmentally sustainable manufacturing require huge investments.
TDB: The government hopes to increase agri-exports from $30 billion to $100 billion. How should the government go about realising this target?
AS: The government has fixed an ambitious agri-export target of $100 billion. Such a target requires a stable, supportive export policy if it is to be achieved. The sector will require some fiscal support to bridge the gap between the minimum support price and international price of products. Since prices of most of agri-commodities are moving northward, the support required will be moderate. Proper logistics and supply chain management will play a crucial role in meeting the set target. The 42 Mega Food Parks will provide the world-class services required by the sector. To promote horticulture crops, which have huge export potential, the Budget proposed a cluster-based approach. Different clusters will be developed for specific crops in districts known for them. Organic exports have not been explored to their fullest extent. Like Sikkim, many North Eastern and some other states could get themselves certified as organic states by internationally certified agencies to get a price advantage of over 50% on organic products. The policies are well thought out, but it is the implementation that is the real test.
TDB: Some feel that the hike in customs duties may spark trade disputes at WTO. Please comment.
AS: I agree that Union budget has given some ammunition for trade disputes due to the proposed hikes in customs duties on mobile phones and other IT products. However, we have always maintained that IT and telecom have evolved. We now employ new applications and equipment which not only did not exist but were not even conceived of at the time of signing of the ITA-I in December 1996, at the WTO’s trade ministerial meeting in Singapore. Therefore, the new IT products including the latest iPhones and other smart products do not strictly fall under the scope of the ITA-I agreement. Moreover, we have not agreed to any fresh commitments under ITA-II.
TDB: To what extent are you satisfied with the measures introduced to address concerns regarding embedded taxes and products with inverted duty structures? The government has been provided with many solutions to these problems, when will we see these changes?
AS: The rebating of embedded tax on products, which are outside the GST net or which are subject to nil GST rate, was expected to impart competitiveness to exports. Unfortunately, this has not had the desired effect. The increased allocation of Rebate on State Levies (RoSL) for textile sector will help the apparel and garments sector get some relief from embedded taxes. However, other sectors have received minimal benefit. We are following this up with the government. We hope to reach an agreement soon. The incidence of embedded taxes may be factored into duty drawbacks or other export promotion schemes. I was a member of the group on GST Law which recommended a host of measures for simplification of GST Act for the benefit of trade and industry. For example, a comprehensive drawback to cover GST and customs duty could provide one stage refund for all indirect taxes at the time of shipment thus benefitting MSMEs. These changes will require the approval of GST Council before the amending the GST Act. So, it may be a while before they are implemented.
TDB: Did the Union Budget meet your expectations? Is the $20-billion garment exports target achievable?
H. K. L. Magu (HKLM): We believe that the Union Budget has only partially addressed the industry’s need for financial stability. Still, there are some reasons to be happy. We are glad that the special package for the textile and apparel sector has been increased from Rs.6,000 crore to Rs.7,148 crore, the budgetary provision of Rs.2,163.85 crore towards Rebate of State Levies (RoSL) will be extremely helpful. But the industry was expecting a higher allocation on account of RoSL backlogs. We were expecting increased drawback and RoSL rates to fully compensate for the embedded and blocked taxes that account for around 5% of free-on-board (FOB) prices presently. The industry is happy about the policy support received in the last few months like the exemption of GST on air and sea freight till September 30, 2018, higher rates under MEIS and for interest subvention, but we expected more.
The export target of $20 billion is achievable if GST transition issues like delays in refunds and procedural challenges are smoothed out.
TDB: GST hit the apparel industry hard. Have the government's allocation of funds lived up to the expectations of the industry?
HKLM: It may be noted that the apparel industry was one of the worst hit after demonetisation and GST rollout, as a huge part of the supply chain was outside the tax regime before GST. The industry is presently grappling with a severe financial crunch due to non-receipt of GST and RoSL refunds, besides other procedural issues regarding GST. Thus, the industry was certainly hoping for some support to mitigate the effects of this financial crunch, especially when there is a severe reduction in drawback and RoSL benefits.
As per industry estimates, the allocation of Rs.2,163.85 crore in this year's Union Budget may not be enough to clear the backlog of RoSL refunds. AEPC estimates that at least Rs.2,900 crore is required to clear the backlog up to March 2018. We have already requested the Ministry for an immediate release of all pending RoSL and GST refunds as the industry is facing acute financial constraints.
TDB: What are some of the policy changes introduced in the Union Budget that you are happy to see?
HKLM: Around 70% of the workforce in the apparel sector are women, and the government’s decision to reduce women's contribution to their provident fund from 12% to 8% is an extremely positive step and will encourage higher participation of women in the apparel sector. However, the amendment needed to make this effective should be introduced at the earliest. Also, in my view, an increased allotment for skill development augurs well for the entire sector and it will also help further employment generation. Moreover, worth highlighting here is the issue of high interest rate in India compared to our neighbouring countries which poses a challenge for our firms while establishing new units. The proposed increase in interest subvention can help mitigate this to an extent.
Further, AEPC feels if the free trade agreements with US and EU get ratified, they will help significantly boost apparel exports from the country.
TDB: How has the Union Budget 2018-19 treated the pharmaceutical industry?
Madan Mohan Reddy (MMR): When it comes to the Indian pharmaceutical industry, this year’s Budget has not been encouraging at all. No direct benefits have been announced for the industry. One could say that there is only one benefit – reduction of 5% in income tax for companies with less than Rs.250 crore turnover, but that is for all industries. Going into the Budget 2018-19, our industry had expected a lot more when it came to manufacturing, especially in the backdrop of the 'Make in India' concept that the government has been promoting. But, they have not put in any consideration for the pharmaceutical industry.
TDB: Which area were you expecting an announcement in?
MMR: One area in which we were expecting a big announcement from Mr. Jaitley during the Union Budget speech was the manufacturing of import substitutes. We were hoping that the government could provide some kind of benefit to start-ups and companies involved in import substitutes production. A proposal on this matter would be a huge step towards developing the domestic pharma industry .
TDB: How do you see the growth of Indian pharmaceutical industry? Is the industry facing any constraints with regards to imports and exports?
MMR: There is a strong possibility that growth will improve in the pharmaceutical industry. But first, there are some gaps that we must take care of. We have recently observed increasing import prices, especially from places like China. But this is a kind of risk mitigation. It is difficult to say if the increase in import prices is going to have an impact on our exports. We don’t know if this is short-term or long-term but until there is a substitute, there is always going to be a risk. This is why we need a robust import substitute segment within the pharma industry.
Definitely, in the present situation, there are a lot of opportunities for an increase in business from India as many approvals are now coming through for the industry in the export market. Many new companies are coming up that are employing new technologies to make the domestic industry more competitive.
The government has to take a more structured and efficient route while dealing with the industry's issues. There must be a committee to look into this. Only then will there be some sustainability. Once this happens, there is going to be huge opportunity for pharma industry. Out of the total $1200 billion market, we have captured on $26 billion which is a tiny piece of the pie. It is only around 2-3%. There is huge opportunity if the government proactively works on this.
TDB: While the Budget fails to include any aspects directly related to the pharmaceutical industry, the government has stressed a lot on improving access to healthcare. Do you expect this to impact the industry?
MMR: The government has mentioned that there are going to be some kind of insurance benefits when it comes to healthcare, but I don’t think there will be a huge change because of this. The government is only going to take care of certain aspects of an individual's health. The consumption of the people may increase as spending power increases, but not much is expected to change.
TDB: What are your thoughts on the Union Budget? Will the policy changes help exports from your sector?
Rajoo Goel (RG): The Budget proposals this year have not addressed the concern about export competitiveness directly. In fact, the increase in customs duty on a number of items as well as the introduction of social welfare surcharge is likely to impact imports. Exports from high-tech sector like electronics can be promoted through financial incentives such as MEIS, which was increased by 2% just two months before the Budget was announced. This scheme is likely to have immediate impact but it has no link with the Budget. Secondly, export competitiveness is enhanced by improving the overall eco-system in the country and increasing efficiency of manufacturing and trade. Several steps announced in the Budget for improving infrastructure and logistics, promoting better fiscal management through GST and easing access to finance for small and medium enterprises (SMEs), should help make our industry more competitive in export markets.
TDB: What impact will the increase in customs duty on mobile phones, electronic equipment and components etc., have on your industry?
RG: Increase in customs duty will encourage domestic assembly of these products. There may be some shift from import of completely built units (CBUs) to semi knocked down (SKD) and completely knocked down (CKD) kits and assembly will take place in India. This will result in some reduction in imports to the extent that value addition happens locally.
For increase in basic customs duty to have a significant impact on imports and boost ‘Make in India’, the Phased Manufacturing Programme (PMP) announced for mobile phones needs to be taken to the next level. PMPs must be introduced for more products of mass consumption such as LED lighting, set-top boxes, security products, etc. This will boost PCB assembly and components manufacturing, incentivised through PMP. This then will result in investment to increase manufacturing capacities of these inputs.
TDB: Experts say that the hike in duty on mobile phones could land India in trouble with the WTO. Please comment.
RG: This is a highly technical and legal issue. However, the opinion of the industry and legal experts from the government is that mobile phones are not part of the ITA-1 agreement of WTO because they did not exist when the ITA-1 was signed around 1996-97. There is a possibility that some countries may take the issue to the WTO Arbitration Panel, but India has a strong case in its favour.
TDB: How will the reduction of corporate income tax for MSMEs impact the entire value chain?
RG: It was announced two years ago that the government intended to reduce corporate tax by 1% every year and take it down to 25%. The reduction in corporate tax from 30% to 25% for MSMEs with annual turnover up to Rs.250 crore is a step in that direction. It is hoped that this will incentivise manufacturing and strengthen the viability of MSMEs.
TDB: How will the leather industry be affected by the Union Budget 2018-19? Have government policies been friendly towards the industry?
Mukhtarul Amin (MA): The government had already announced reduction of GST for several leather industry-related items prior to the Budget. Besides that, the Union Cabinet approved a Rs.2,600 crore special package for leather and footwear sector in December 2017. The package encompasses support measures covering all core areas namely modernisation and technological upgradation of production units (IDLS sub-scheme), skill development and employment generation (HRD sub-scheme), environment management (Leather Technology, Innovation and Environmental Issues sub-scheme), brand promotion, creation of integrated production clusters [Mega Leather, Footwear and Accessories Cluster (MLFAC) sub-scheme], additional incentive for employment generation and also flexibility in labour laws. The substantial increase in government funding laid out under the special package will be a major catalyst to the industry in expanding its share in the fiercely-competitive global market and in promoting domestic production under the Make in India programme.
Thus, the government has taken up several measures for overall development of the leather sector, for which we are grateful. The leather industry would also have liked it if the Rebate of State Levies (RoSL) Scheme was extended to us too. This would have helped the industry in offsetting state levies which are not subsumed under the GST.
The leather industry had earlier requested the government to consider extending the additional 30% Income Tax deduction for eligible new employees in the leather and footwear sector, by relaxing the minimum period of employment from 240 days to 150 days. This request was also favourably considered in the special package announced for leather and footwear industry.
Besides this, extending the 12% government contribution on Employee Provident Fund (EPF) for new employees for all sectors for the first three years and reducing EPF employee contribution for women from existing 12%/10% to 8% for the first three years of employment will result in generation of substantial employment opportunities.
TDB: The government has also announced an increase in customs duty across the board. How will this impact the leather and footwear industry?
MA: The Union Budget 2018-19 has announced enhancement of basic customs duty (BCD) on footwear from 10% to 20%. This move is welcomed by industry participants as it will enhance competitiveness of the domestic footwear industry.
TDB: The Budget announced a reduction in corporate tax rate for micro, small and medium enterprises (MSMEs). Is this a good move?
MA: Yes, of course. The extension of 25% reduced corporate tax to all MSME units having turnover of up to Rs.250 crore will be immensely be beneficial for the leather and footwear industry as about 90% of the industry is concentrated in the MSME segment.
TDB: Has the government been able to cover all its bases with the Union Budget? Where has it fallen short?
Milind Kothari (MK): If one were to go by the challenges enumerated in the Economic Survey, then the Budget has addressed all the key challenges. However, there are many things not mentioned within the Survey that might prove to be roadblocks to growth. For instance, the slow pace of disinvestment with no over-arching strategy is a large missing piece in the policy framework. The Budget has been conceived in light of the impending elections and therefore it hasn’t been aggressive on reforms. The other large disappointment was not aligning headline corporate tax rates with the rest of the world, this could have significant long-term implications for the economy as businesses may relocate outside India to minimise tax payments. This does not bode well for employment. The reintroduction of long-term capital gains tax is another dampener. Too frequent changes in the tax regime for gains from investment is a deterrent to investors.
TDB: The Budget is often focused on manufacturing and the service sector has been traditionally ignored. Has this been the case this time as well?
MK: One of the startling successes post-independence has been growth of the service sector, largely due to private enterprises where government intervention has been the least. The service sector continues to be the largest contributor to India’s GDP and employs millions of Indians. It is also the largest foreign exchange earner for the country. We did not expect much from the Budget this year. The government is playing a silent but important role in the growth of the service sector.
TDB: The Budget includes a reduction in corporate tax rate to 25%. What impact will this have on businesses?
MK: The proposal has taken care of about 99% of companies, irrespective of the industry they belong to. This will improve the competitiveness of Indian companies. The lower tax outflow will leave more funds at their disposal, this in turn will promote investments and expansion in businesses. This announcement was expected, keeping in mind the worldwide trends. The move was necessary to ensure foreign inflows into the country and promote businesses to invest locally. Leaving out 1% of corporates, that exceed the turnover ceiling, also ensures the government a large tax contribution. Unfortunately, it is this set of taxpayers that make largest investment in the economy to propel growth. The tax cut though well-intentioned might not work out as expected.
TDB: Goods and Services Tax (GST) has been one of the major topics of discussion over the last few months, but very little in the Budget actually addresses the issues that arose after the implementation of GST. Comments.
MK: It is in line with the overall expectations. GST being a concurrent dual tax levied by the Union and State governments, framework changes as well as GST rate change can be implemented only on the basis of the recommendations of the GST Council, which has representatives from both central and state governments. Based on the recommendations of the Council, the government at the centre and states have already rolled-out many changes in the past 6-7 months. Further changes are expected in the coming days. The Budget 2018-19 has ceased to be of importance to navigate changes in the GST as key decisions can be made without legislative changes which is the mandate of the Budget.
TDB: Agriculture was a major focus area for this Budget. How would you rate the agriculture-related initiatives included in the Budget, such as MSP?
MK: Adequate remuneration for the produce, strengthening of markets, logistics support, irrigation facilities form part of various agricultural reforms put forth. It intends to reduce the distress in the agriculture sector, the backbone of our country. The Budget also announced measures to promote export of agricultural commodities in a bid to realise the sector's full potential as well as insulate farmers from the vagaries of market-driven pricing. The proposed set up of state-of-the-art testing facilities in mega food parks will enable farmers to get premium prices for their quality tested products. While minimum support price (MSP) would alleviate the immediate challenge of sub-optimal pricing, what needs to be ensured is that farmers are able to fetch market-driven pricing.
TDB: How important is the increase in customs duty when it comes to encouraging more domestic production? Is a significant price rise on the horizon?
MK: This move is in line with the government policy to encourage domestic manufacturing. The increase in import duty could have been a double whammy for cellphone and electronic companies that are already reeling under low consumer sentiment. But since a large portion of the cellphones and other consumer goods which are subjected to the duty are already manufactured in India, the change is not likely to hit every brand but only a few international brands. We estimate that the price increase would range from 1.50% to 7%
TDB: What is your take on the Union Budget 2018-19? Has the government been able to address the issues plaguing the economy?
Dr. Biswajit Dhar (BD): I am disappointed with the Union Budget 2018-19 as it does little to address the deep-seated problems affecting the Indian economy. Data from the recent quarters have shown that domestic investment rate is slowing down to unacceptable levels, but this issue has not been addressed. It is surprising that the government is expecting a 7% plus GDP growth rate on a sustained basis when it is doing little to uplift investor sentiment in the country.
TDB: There remains huge untapped potential when it comes to agricultural exports, as pointed out by Finance Minister. How can this potential be realised at a time when the sector is witnessing the lowest growth in the last few years?
BD: Agri-exports do have a huge potential, but again without the appropriate investments aimed at improving the quality of agricultural commodities and processed products, there is little chance for Indian producers to increase their presence in international markets. Further, investments in rural infrastructure and logistics are urgently required to reduce wastage, especially of perishable horticultural products from which farmers and processors can earn high profit margins.
TDB: What should be done to facilitate the growth of the MSME sector? Is the government moving in the right direction with regard to this sector?
BD: The most serious bottlenecks faced by the MSME sector are the availability of credit and infrastructure. A coordinated policy that addresses the needs of the MSMEs in a comprehensive manner is what is required. But instead, each year the Budget takes grossly inadequate steps.
TDB: Experts say that a hike in customs duty on mobile phones, etc, could land India in trouble with the WTO. Are the import duties in line with WTO rules?
BD: The proposed increase in customs duty on mobile phones that has been announced in the Budget violates the commitments India has made under WTO’s Information Technology Agreement. I have no doubt that India will be dragged to the Dispute Settlement Body.
TDB: What is your take on the Union Budget 2018-19? Are the announcements made in line with the handicraft industry’s expectations?
Rakesh Kumar (RK): EPCH had submitted a pre-Budget memorandum to the Ministry of Finance which included allocation of funds for opening warehouses, funds for introduction of new technology in the handicrafts sector, enhancement of the list of items under duty free import certification, inclusion of merchant exporters in interest equalisation scheme, etc. None of the proposals specific to the handicrafts sector have been considered in the Union Budget. However, we understand that the package granted to the textiles sector would also include assistance for the handicrafts sector.
TDB: In the Budget, MSMEs have been provided with Rs.3,794 crore for credit support and innovation. Are these funds enough to provide relief to them?
RK: The number of MSMEs in the country is very large and as such whether the provision of Rs.3,794 crore in the Budget for credit support and innovation is enough or not can only be ascertained with the passage of time. It is difficult to comment on the same at this stage. The modus operandi of the utilisation of this amount is also not clear at present.
TDB: How will the reduction of corporate tax for MSMEs affect the handicrafts industry?
RK: The concessional rate of 25% is for companies. The concession is not applicable to firms that are sole proprietorships and partnerships. The proportion of incorporated bodies engaged in exports of handicrafts is small as compared to the units which are considered SMEs. Therefore, only a fraction of handicrafts exporters will be benefitted.
TDB: You seem to be a little disappointing with the Budget. What more could the government have done?
RK: Yes, we are a little disappointed because the Budget does not contain any direct or specific proposals for growth of the handicrafts sector. However, the provisions made in the Budget for MSMEs and some other provisions will naturally help the handicrafts sector too. But we would have been in a better position to grow our exports if the government had made some concessions for our sector.