India’s Foreign Trade Policy (FTP) 2015-20 sets an ambitious target of $900 billion in merchandise and services export by 2020. Which means, exports of goods and services must grow at CAGR of over 15 per cent in the next five years to double from its current levels of $ 450 billion.

The new FTP seems to be guided by the following considerations: keeping tabs on how much money goes out on account of export incentives given the fiscal constraints; WTO obligations to phase out export subsidies; linking the FTP to the Make in India initiative; and improving FTAs utilisation in trade.

Thus, the number of countries covered under the new merchandise export from India scheme (MEIS) that replaces five existing incentive schemes, including FPS and FMS, has been pruned to a keep a tab on fiscal outgo. The quantum of export subsidies is lower than earlier.

Reduction of export obligation by 25 per cent under the EPCG (export promotion capital goods) scheme is expected to boost indigenous production of capital goods.

The introduction of online filing of documents is to reduce trade transaction cost and help manufacturing exports by increasing their cost competitiveness. Merchandise falling under the categories of handloom products, books/periodicals, leather footwear, toys and customised fashion garments, with fob values of up to ?25,000/consignment and their sale finalised through e-commerce, would get the benefit of FTP.

The exports from SEZs suffering from high MAT would now be eligible for incentives. Another notable positive is the introduction of transferability of duty free scrips and allowing them for payment of customs, excise duties and service tax without any conditionality. However, it would be worth examining how effective the new FTP would be in pushing India’s merchandise exports.

It is very difficult to decode what forms the basis of categorising India’s export destinations into three groupings as well as allocation of MEIS rates for different commodities. What could explain the exclusion of countries such as Brazil, Bangladesh and China for export promotion with respect to top textile products?

Again, increasing exports to China should have been top priority, but there is no real incentive for China in the new FTP even though it is a top export destination for cotton fibre and yarn.

From a strict reading of the FTP, only direct export to Japan and the US should be eligible for MEIS. The problem is India mostly exports fabrics to Bangladesh, Indonesia, Myanmar and Vietnam for conversion into garments that are ultimately shipped to Japan and the US.

It is worth mentioning that some of India’s well intentioned trade policy actions (to help LDCs like Bangladesh), though outside the purview of the FTP, are hurting indigenous manufacturing.

For instance, allowing duty free, quota free import of garments from Bangladesh (or Myanmar) without imposing sourcing obligations promotes the backdoor entry of Chinese textile material into India, and hurts the whole textile value chain in the country from fibre to yarn, fabrics and apparel.

The FTP needs to follow up with other actions like making the use of fibres, yarns and fabrics of Indian origin mandatory for allowing duty free imports of apparel from Bangladesh and other LDCs seeking preferential market access on non-reciprocal basis.

It’s not that India would be the first country to impose sourcing restrictions for allowing duty free imports of apparels. The US imposes sourcing restrictions in all its existing and proposed trade pacts. Why can’t India?

Because of India’s FTAs and other trade deals such as Information Technology Agreement (ITA), India’s manufacturing sector has to suffer what is called inverted duty structure, that is, high import duties on inputs/ raw materials and lower duties on finished goods. Thus, one can import an apparel item duty free in India but its basic raw materials are subject to 5 to 10 per cent import duties. The last Union Budget did attempt to address some of the cases of inverted duties, but only partially.

Again, increasing the use of FTAs would require addressing non-tariff barriers in partner countries. For instance, Japan, as per the terms of the India-Japan CEPA, allows duty free import of apparels from India only if all the material used for the manufacture of apparels are either of Indian or Japanese origin.

Indian businesses should realise that the days of export subsidies are numbered because of WTO obligations. To deal with slowing demand and rising cost on a long-term basis, businesses must develop suitable global strategies for sourcing, production and trade.

Source:thehindubusinessline.com