After missing out on global trade opportunities in the past, there is now a renewed focus by the Commerce Ministry to evolve an enabling policy framework which can foster an ecosystem of innovation and research, mobilise foreign investment, synthesise the export and logistics ecosystem and bring synergies among different sectors.
All these efforts are aimed at achieving the much required global competitiveness in India’s manufacturing and services.
In the Budget 2022-23, the Finance Minister had proposed the replacement of the SEZ law with a new legislation — Development of Enterprise and Service Hubs (DESH). The primary objective of DESH is to create an export promotion ecosystem, aligning trade policy framework with the WTO rules, inculcating the spirit and enthusiasm among entrepreneurs, ensuring greater transparency in business ecosystem and mobilising international investments especially under the ‘China plus One’ strategy and Supply Chain Resilience Initiative (SCRI).
Missed global opportunity
Due to inherent weaknesses in the manufacturing sector, India has not benefited from the contemporary global environment. India’s exports have not witnessed a major gain in the midst of the US-China trade war, realigning of global value chains, and even during the supply-chain disruptions in the Covid-19.
Accordingly, to scale-up domestic manufacturing, the Centre brought a series of measures such as PLI scheme, import restrictions, tariff escalation, non-tariff measures and even picking and choosing foreign investments in areas of interests with the sole objective of “Self-Reliant India”.
To take this journey forward, the proposed DESH Bill will incorporate the concerns of industry, entrepreneurs, exports units, small enterprises, and service sector firms. The draft provisions of the DESH Bill are indeed futuristic and are expected to give a leg-up to the export sector.
The timing, both external and internal, is opportune, as India can benefit from the shifting of industry from China given the fact the India’s domestic economic growth and prevailing business environment are conducive for such an endeavour from the Centre.
The DESH Bill is aimed at addressing many of the shortcomings of the hitherto SEZ Act. A few sectors such as IT & IT enabled services, gem and jewellery, pharma have benefited under the SEZ Act but they failed in facilitating a large scale economic transformation vital for a country like India.
It is widely believed that the SEZs have significantly contributed to the growth story of exports but industries located in SEZs are heavily dependent on imports especially in sectors such as gem and jewellery and pharma. Hence, the true gains of such engines of exports are debatable especially in the context of contribution of economic growth, employment generation and foreign exchange earnings.
Further, the scope of measurement of success of SEZs is defined as net positive foreign exchange which is too narrow a definition to comprehend the actual gains made from the existing SEZs. Moreover, the SEZs used to function in silos for export purposes only and were unable to capture the nuances of manufacturing operations outside.
In this context, the proposed DESH Bill is significant as it allows domestic tariff area (DTA) sales also but subject to duty payments to ensure order and parity with the DTA units. The DESH draft is historic as it brings in scale, scope, system, and synergy in India’s manufacturing operations achieving the twin objectives of import-substitution as well as achieving export excellence.
It also underlines the importance of addressing the existing tug of war on revenue matters (Minimum Alternate Tax, Dividend Distribution Tax among others). The proposed DESH draft Bill presents a forward looking agenda and underpins the importance research and innovation system which is critical in the industrial revolution 4.0.
Most importantly, it is aimed at addressing the skewed profile of India’s existing SEZs, offer stable, predictable and transparent fiscal regime, attract large scale foreign investments, generate employment and leverage foreign trade as a catalyst for India’s industrial transformation.
The missing dots
Even with these incorporations, the DESH draft Bill is aimed at looking at one side of an export function, that is strengthening India’s business and export eco-system. Export is a function of demand. Under India’s cluttered manufacturing landscape under Domestic Tariff Area/ Export Oriented Unites/ Manufacture and Other Operations in Customs Warehouse (MOOWR) scheme, the DESH Bill should not become another policy document but a means to make India among the five top exporters of the world.
It is important to remember that in exports, what can be sold is not marketable, what is marketable cannot be sold . Considering this, the DESH Bill must identify the sectors of opportunities for global trade which are engineering, electronic and electrical automobiles pharmaceuticals and plastics.
Moreover, they are already identified sectors under the PLI scheme. Additionally, since DTA sales are allowed, there is no harm encouraging the metal and metallurgy upstream industries which will create a vibrant ecosystem for other downstream industries with export and import-substitution opportunities (defence products, ship building, medical devices etc.).
The DESH Bill should work on twin-objectives of substituting imports and stimulating exports. Further, the draft Bill does not provide transitory provisions, if the existing SEZ and units intend to convert themselves as DESH units.
A predictable and transparent provision especially on taxation and benefits will bring in more clarity to the industry partners. The DESH Bill must be in sync with the existing scheme MOOWR/ EOUs/DTA to reduce policy induced distortions.
It should also offer a better enabling environment (ease in entry and exit, single window, fiscal and non-fiscal incentives). India’s policymakers can offer more than the bench-marks of similar incentives in ASEAN countries where many units are relocating under China-plus-One strategy.
Ram Singh is a Professor at IIFT New Delhi and Surendar Singh is Associate Professor at FORE School of Management, New Delhi. Views expressed are personal
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