The Hindu Business Line : Study highlights room for pruning procedural maze

EVEN as transaction costs to trade and industry have come down over the years due to procedural simplifications, the maximum transaction costs in terms of extant export revenue, in the textile and garments sector and pharmaceuticals, highlight the room for further pruning of procedural maze.

This is the broad conclusion of a recent study on "transaction costs and other impediments on India's foreign trade" made by the Export-Import (Exim) Bank of India, when it carried out its third review (first in 1998, second in 2003), in July-August 2005, to identify transaction costs and other obstacles impacting exporters in four specific sectors such as textiles, pharmaceuticals, engineering goods and leather products.

In the textile sector, the major transaction costs centre around high costs of raw materials and power, burden of taxes and duties and inordinate cost of transportation, and underdeveloped infrastructural facilities.

On raw materials, the textile industry perceives the present Duty Entitlement Passbook (DEPB) rate inadequate to address the high import duty applicable for man-made fibre spinning industry due to the presence of additional costs in the form of freight, clearing and forwarding.

Consequently, the manufacturers in the man-made fire spinning industry are required to pay to local fibre producers around 25 per cent higher at the landed cost plus Re 1 formulae on the f.o.b. (free on board) price of raw materials.

That is why the industry feels the high price of local manufacturers as a major cause of synthetic textiles being globally uncompetitive.

In contrast, though the import duty is 10 per cent, on account of good local cotton crop, the domestic cotton raw material price is about seven per cent lower compared to the c.i.f. (cost, insurance, freight) prices of other countries. At a time when the man-made fibre or synthetic items hog the global textile market accounting for around 60 per cent of the world market, the present duty structure in India only facilitates export of cotton items and not synthetic, the study noted.

Some units expressed that as the domestic supplier of raw materials is a monopoly, manufacturers/exporters often have to agree to their pricing formulae of landed cost basis.

Hence, the industry is of the view that manufacturers of raw materials, such as polyester fibre manufacturers, should supply raw materials for exports at f.o.b. prices of fibre prevalent in the world market for allowing competitive exports, the study said.

The study citing a Texprocil-commissioned report said that high power cost blunts the competitiveness of Indian cotton textiles. The power costs might be estimated at 11 cents/units compared to the global average of 7-8 cents per unit.

Therefore, the Indian power costs are more than at least 25 per cent compared to global standards.

Textile exporters are also required to pay multiple taxes and duties, which include octroi duties, electricity duties, fringe benefit taxes, entry tax and sales tax, which are not refunded through any mechanism. Overall, these account for around seven to eight per cent in the cost of production. Other impediments include delays in settlement of DEPB entitlements, delays in issue of advance licence/EPCG (export promotion capital goods) licence, delays in the customs/ports both for import and export consignments, delays in sanction of loans and working capital loans by banks/financial institutions.

Delays in credit of power generated through wind generators, power outages, low frequency and unscheduled power cuts also adversely hit exporters.

In the case of pharmaceuticals, the industry is upset with the recent initiative of the Government to increase the number of pharmaceutical products under the Drug Price Control Order (DPCO) from 74 to 400.

This could be growth limiting in nature and as such the industry favours market determined price levels rather than DPCO fixed prices for efficient production and exports, the study said.

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