The 2021-22 fiscal ended on a cheerful note for India’s international trade. Indian exporters did not just demonstrate Covid resilience but also posted robust growth with record revenues of $419.65 billion, which is being seen as a sign of exports bouncing back strongly.
But how significant is this landmark? The Free Trade Agreements (FTA) with Australia and UAE are also being touted by policymakers as a gateway for extensive opportunities for Indian entrepreneurs.
Besides FTAs, a new Foreign Trade Policy (FTP) is also long awaited. Revisited and notified every five years since the 1991 economic reforms, the FTP has been the guiding beacon for all stakeholders. It has been delayed since April 2020 and further extended by six months up to September 30, 2022. The last FTP was notified in 2015, since then it has been periodically extended.
A FTP sets out the regulations for cross-border trade and reveals the government's position on a host of concomitant yet crucial policy variables such as technology flow, intangibles, and so on. This is essential to clarify the country’s position and alignment with flagship programmes like ‘Local for Global’ and PLI (Production linked incentive) schemes, WTO’s ruling against India’s export incentive schemes, an overdue review of the SEZ scheme, changing geographical profiles of India’s export basket, and implications of the FTAs.
Thus, one cannot over-emphasise the need for an urgent intervention to formulate and notify a comprehensive FTP at the earliest.
Another reason for overhauling the FTP is some export-oriented businesses have been adversely impacted by certain ad hoc, mistimed, and contradictory changes to the 2015 FTP. The 2015 FTP incentivised exports by issuing duty-credit scrips directly in proportion to exports.
However, in 2020 the government limited the maximum export incentives for goods to ₹20 million, and in 2021, limited them to ₹20 million for services without reason. To add to exporters’ woes, the changes for service incentives were retrospectively notified in September 2021 to be applied from April 2019.
The annual export incentives — the Merchandise Exports from India Scheme (MEIS)and Services Exports from India Scheme (SEIS) of ₹51,012 crore replaced with Remission of Duties and Taxes on Exported Products (RoDTEP) scheme incentive of ₹12,454 crore and the rest ₹38,558 crore has been diverted into PLI to give benefit to a few sectors.
Earlier there was a three per cent export incentive on agriculture implements like tractors, which has been reduced to 0.7 per cent. Apart from being a discriminatory policy, it may not also serve the purpose and may even be constitutionally void. It’s an empirical truism that, since incentives have an outsized impact on shaping economic behaviour, they must be designed carefully.
The prime objective of a foreign trade policy is to facilitate trade by reducing transaction and transit costs and time. Due to inadequate upgraded export infrastructure such as ports, warehouses and supply chains, the average turnaround time for ships in India is about three days while the world average is 24 hours.
Moreover, the current foreign trade policy had certain limitations, which cropped up from time to time. Given the economic hardship caused by the pandemic, exporters are hoping that the new FTP will work in a phased manner to address export constraints, review the regulatory and operational framework to reduce the transit costs and create a low-cost operating environment through developed logistics and utility infrastructure.
Impact on MSMEs
At the heart of the issue are India’s 6.4 crore micro, small and medium enterprises (MSMEs). The sector, the second largest employer of around 12 crore workers after the agriculture sector, forms the backbone of the Indian economy and contributes about 29 per cent of the GDP and 40 per cent of international trade, making them key players in achieving the ambitious export targets.
The surge in input and fuel costs are hitting the bottomlines of MSMEs. There’s a rise in prices of raw materials such as steel, and plastics along with a shortage of shipping containers and labour, making matters worse. MSMEs are finding it difficult to take full advantage of the increase in demand and hope the new FTP will ease their woes.
Under the Strengthening Services Exports from India Scheme (SEIS), an incentive of 3-7 per cent of net foreign exchange earnings is provided to services exporters of notified services in India. A modification in the minimum cap for the net foreign exchange earnings eligible to claim under the scheme and faster GST refunds to global services are much needed with the new FTP. An extension in the rollout of the FTP would only make it difficult for MSMEs to leverage the new opportunities ahead of them.
The new FTP could benefit exporters if the incentives granted to retail and wholesale traders under the ambit of the MSME category are extended to them as well.
The new FTP must enable exporters to leverage technology in the field of foreign trade. This will be particularly beneficial for MSMEs to compete with their global peers.
Need for infra upgrade
India needs to invest in upgrading export infrastructure such as ports, warehouses, quality testing and certification centres to stay ahead of technology-advanced countries such as China, which plans to spend $1.4 trillion on infrastructure between 2019 and 2023.
Similarly, India also needs to adopt modern trade practices that can be implemented through the digitisation of export processes. This will save both time and cost.
The government must help MSMEs planning to tap the export potential in existing tariff lines and provide policy support to raise the number of exporting MSMEs and increase MSME exports by 50 per cent in 2022-23.
The writer is Vice-Chairman Sonalika Group; Former Vice-Chairman Punjab Planning Board; Chairman ASSOCHAM Northern Region Development Council