Trade policy holds few surprises

Though in the five-year (2009-14) stable foreign trade policy (FTP) framework nothing dramatic could be expected once the broad contours were announced in the very first year, the penultimate annual policy supplement unveiled by the Union Commerce and Industry Minister, Mr Anand Sharma, for 2012-13 on Tuesday is on predictable lines.

This is so when India's major markets – the US and the European Union (EU) with the latter battling its worst economic crisis – are not yet out of the woods to warrant optimism on any rebound in overseas demand.

As India's economic growth appears to be stuttering with GDP in 2011-12 at 6.5 per cent due to the dismal performance by the manufacturing sector, the need to bolster domestic manufacturing which has also an element of export, has become an imperative.

Sticking to sops

So Mr Sharma has stuck to sops by extending interest subsidy scheme to labour-intensive exports that was terminated in end-March 2012. Besides handlooms, handicrafts, carpets and small and medium enterprises, the interest subvention qualifiers now include toys, sports goods, processed agricultural products and readymade garments.

The two per cent interest subvention on pre- and post-shipment rupee export credit, introduced in 2009-10, absorbed a huge Rs 996 crore in 2011-12.

In the last three years this has cost Rs 1,850 crore to the exchequer.

With 13 successive hikes in policy rates prior to its recent moderation, export credit has ranged from 7 per cent to about 12 per cent. But the authorities seldom weighed the demands of the exporting community seriously to make available dollar credit, given the inordinate rupee finance cost and when the central bank had close to $300 billion as forex reserves.

The policy pitch to encourage manufacturing sector in domestic market to use scrips under different export promotion schemes for payment of excise duty for domestic procurement is touted to be import substitution. But it is ill-timed in the sense that domestic manufacturing activity scarcely shows any sign of revival.

The sheer failure to move forward in removing entrepreneurial hurdles by procedural simplification and forward moving reform measures in labour laws and resolving the growing conflict on the use of land for industrial purposes have all combined to take a heavy toll on industrial growth.

EPCG extension

This is only compounded by policy paralysis that further aggravated the high cost economy to dent the entrepreneurial spirit.

The extension of zero-duty export promotion of capital goods (EPCG) scheme by a year and enlarging it to units that are benefitting under the Technology Upgradation Fund Scheme and to Status Holder Incentive Scrips (SHIS) (if they surrender or refund with applicable interest for import of capital goods under the respective schemes) would only encourage import of idle overseas machines, besides loss of revenue such a zero duty regime results in.

This policy also contradicts the one to encourage domestic procurement of capital goods through use of scrips gained by exports without excise duty, involving substantial loss to the exchequer. Additionally, the policy gives further fillip of exemption from average level of exports to carpet, coir and jute industry availing of the EPCG scheme. Investing them with a flexible export obligation would help others piggyback on the beneficiary industry as there is latitude for policy misuse.

This is akin to the misuse of the Target Plus scheme and its earlier avatar the Duty Free Credit Entitlement (DFCE) scheme which enabled the country's largest manufacturer-exporter, based in Mumbai, to resort to creative accounting by deciding that a part of its manufactured products should not be exported by itself but by its group company.

This way the parent company acted as the supporting manufacturer of its group firm and realised the export money in the latter's name. The chances of such ruses by exporters when served a slew of schemes for export promotion should sober the authority not to lay out more avenues for misuse in the name of policy, when the need of the hour is to tone up basic export infrastructure and reduce the huge transaction cost by putting in place the electronic data interchange (EDI).

With 13 community partners in EDI ranging from Customs Houses, DGFT, Export Promotion Councils, AAI, Airlines, CHA/Importer/Exporter, Port Authority, Shipping Lines/Agents, ICDs/CFS Concor/CWC, Banks, RBI, DGCI&S involved in exports and imports, the progress of EDI over the last five years remains glacial.

For all its IT superiority, India is yet to find an adequate answer to help solve exporters' myriad problems that drive them from pillar to post, leaving little scope for diversification or innovation.

With services exports crossing $100 billion in 2011-12, the policy has not even talked about its growing clout even as services sector contributes about 55 per cent of GDP.

As western companies' spend on outsourcing service on Indian software companies dwindle, the future of this segment is none too pleasant. The policy is tall on minor tinkering here and there but short on enduring gains to export industry, policy analysts say.

>geeyes@thehindu.co.in

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