The Hindu Business Line : Don't stop the elephant

Two events, logic defying in their timing and manner, point to the failure of Indian policy-making in understanding the nuances and needs of an export promoting country.

The first of these was the Finance Ministry cutting the performance incentive under the Target Plus Scheme for the auto industry. Till 2005-06, differential duty credit rates were given to reward auto exporters achieving high growth rates. Auto companies with export growth of more than 100 per cent were allowed duty drawback of 15 per cent, those clocking 25-100 per cent 10 per cent, and less than 25 per cent export growth fetched 5 per cent. If the duty drawback was availed of through the DEPB (duty entitlement passbook) scheme, it was also freely transferable.

This implies that a company `X' which exports auto components without importing any raw materials could still claim credit under the duty drawback scheme. It would then sell this benefit to another company `Y' which was importing goods but not exporting its product. The sale of the DEPB inclusive of 4 per cent CST and 2 per cent margin by X would still be profitable for `Y', considering the duty benefits it would get.

Now all this will change because the Finance Ministry feels that exporters take undue advantage of the policy by over-claiming export sales and not revealing the export and domestic sales percentage correctly. This differential duty scheme leads to the Central Exchequer losing around Rs 4,000 crore annually and is also WTO-incompatible.

Both points are valid and need to be addressed but the manner and timing is completely wrong. The Ministry has notified that all auto exporting units will face uniform duty credit rates of 5 per cent for 2005-06. The timing appears absurd because the books of almost all companies are closed by now. The Ministry's move would require companies to re-examine their accounts.

WTO-compatibility

Second, the Agreement on Subsidies and Countervailing Measures (SCM) clearly indicates whether an incentive is WTO compatible or not. The agreement on SCM states that incentives that lead to a loss for the exchequer and favour specific sectors are not allowable and can be countervailed. This clause has been part of the agreement for long and while all export schemes must be WTO compliant, was there a need to seek compliance retrospectively?

The second bad news for exporters is the Finance Minister's clarification that export benefits of Export-Oriented Units, Software Technology Parks, and Electronic and Hardware Technology Parks will be phased out in 2009. While Special Economic Zone-driven export growth should be promoted, why should EoUs be discriminated against? The EoUs also export and earn valuable foreign exchange despite all the odds and poor infrastructure.

Dilemma for EOUs

Units with heavy capital investments, say, over Rs 20 crore, find it difficult and costly to relocate their operations in SEZs. The performing EoUs are caught in a dilemma over their expansion plans. Further, potential investors ready with market surveys, project reports and sanctioned loans cannot wait indefinitely for an SEZ to be notified at the place of their choice. However, were they to register as an EoU, they would be required to enter into at least a five-year rental contract under the EoU Act which is again problematic. If not enough SEZs become operational, India will suffer from lack of export related investment by domestic and foreign companies over the next three years.

In a country that is grabbing attention worldwide for its globalising moves, such wrong moves on the export front are no less than a tragedy. The Finance Ministry needs to re-think the direction it is giving to exporters. The elephant has only just started to run, let us not stop it in its tracks.

(The author is Economic Advisor, Mahratta Chamber of Commerce, Industries and Agriculture. E-mail: manasip@mcciapune.com)

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