Do we need an exim policy?

M Rafeeque Ahmed (left), & R K Dhawan

M Rafeeque Ahmed
President, Federation of Indian Export Organisations

The National Foreign Trade Policy (NFTP) is likely to be announced on August 31. It has again generated a debate as to whether the country requires a foreign trade policy that has so far been confined to duty neutralisation schemes, removal of quantitative restrictions and a few fiscal sops for exporters.

In a recent article, noted economist Jayant Roy argued that the practice of announcing the exim policy needs to be scrapped. Much of the controversy has been generated due to the misconception that the ritual of announcing an exim policy belongs to the era of quantitative restrictions.

If that had been the case, all the developed and developing countries that have hardly any restriction on imports or exports should not have a trade policy. But, often, one overlooks that the trade policies of these countries cover a wide range of subjects, bringing within the policy ambit, production, supply and marketing of export goods.

The commerce minister is making a long overdue move by bringing within the fold of the exim policy other issues relevant to exports, and rightly naming it as the National Foreign Trade Policy.

An NFTP should address the factors affecting the supply of exports as well as those affecting the demand for exports. The supply constraints could include the following:

Infrastructure bottlenecks: India's export potential remains considerably unfulfilled because of infrastructure bottlenecks such as power shortage, port handling facilities, delay in transportation and poor communication facilities.

The extent to which the commerce minister can remove these constraints in the forthcoming policy will largely determine the supply side of exports.

Inflow of foreign direct investment (FDI) in exports: In Malaysia and Indonesia, 70 per cent of the projects involving FDI have been export-oriented. In contrast, the share of multinationals in India's exports is at best between 5 and 7 per cent.

India's ability to attract export-oriented FDI will determine the magnitude of exports in the long term. The NFTP should provide a conducive environment for attracting export-oriented FDI in the country.

Technological upgradation: Indian exports have been dominated by undifferentiated products, where the main competitive advantage lies in cheap labour and simple technologies (pharmaceuticals and software being exceptions).

Our competitiveness has also been adversely affected by the failure to diversify the composition of our exports. The NFTP should, therefore, encourage R&D activity that will help both in productivity improvement and product innovation.

When the International Trade (Development and Regulation) Act came into being in 1992, it was felt that matters needed to be simplified and with the passage of time there would be no written policy as such. What the country today requires is the International Trade Policy. Unfortunately, we have lost at the World Trade Organisation (WTO), although the minister of commerce feels that he has achieved the desired results.

To ensure that developing countries will reduce the customs duty so that agricultural products from developed nations are freely sold to underdeveloped countries, the commerce minister was offered a sop "" developed countries would gradually reduce the subsidies on agri products when end-products were not spelt out.

If we go by the track record of the WTO, what was achieved at Doha meet was nullified at Singapore and the talks virtually failed at Cancun. Then Commerce Minister Arun Jaitley forcefully presented the case on behalf of all the developing countries but somehow, with the change of guards with the elections, developed countries have prevailed upon us to accept their diktat, once again.

Various schemes that were formulated long ago have become redundant. In fact, the DEPB (duty entitlement passbook benefit) scheme and the advance licensing scheme needs to be dispensed with. Nearly 30 to 40 per cent of the exporters today are defaulters under the advance licence scheme and export promotion capital goods (EPCG) scheme on account of reasons beyond their control.

The money that the government is spending on advance licensing by foregoing customs duty should be spent on strengthening the country's infrastructure. We need to identify sectors that are labour-oriented, 100 per cent export-oriented and allow import of capital goods and raw material by drastically reducing the customs duty. Handicrafts, handlooms, textiles, garments, and gems and jewellery are some such sectors.

Exporters today need a hassle-free regime, without having to knock at the doors of government departments. Therefore, the government should strengthen the harmonised code book that indicates the trade policy "" whether the material can be freely imported or cannot be exported.

This book should also indicate the customs duty chargeable. Apart from this, no other book is required. Whatever incentives are given through duty-free licences/EPCG licences should be refunded through DEPB/drawback.

There is a need to re-introduce 80 HHC benefits so that all exports get income-tax exemption. Goods that are shipped from places more than 1,000 km away from the sea ports should get 10 per cent extra on DEPB/drawback.

All exports through export promotion zones/special export zones and export-oriented units should be treated as 100 per cent export and should get the same benefits as are available to other exporters.

All import decisions that the government wants to take should be notified through a simple notification rather than published in volumes of books. Today, we have a trade policy, a handbook of procedures, an input-output norms book and a harmonised code book.

The government needs to concentrate on more and more foreign direct investment (FDI), including special export zones (SEZs). Dumping is another area that hurts our industry. We should simplify the anti-dumping regime and ensure that quick remedial action is taken.

It is necessary that exporters work under full guidance of the government. The government should ensure trade agreements, most favoured nation status, identification of the products required by other countries and timely delivery by providing quick shipping services.

Today, foreign ships refuse to come to India because the turnaround time is nearly eight days, whereas in other countries it is eight hours. The government should also arrange for cheaper finance for exporters. With the importer-exporter code (IEC) becoming compulsory for every exporter, there is hardly any need to obtain a registration-cum-membership certificate from various export promotion councils.

The present government came to power by giving an assurance to farmers and unemployed youth. Therefore, it has to draw up a plan and provide opportunities to these two categories for employment and also to export agricultural products. We have to ensure cheaper raw material and components, good infrastructure to ensure that today's youth becomes self-employed rather than depending on jobs. Unfortunately, the components today carry customs duty than the finished products.

The government has to do a lot in other areas connected with exports rather than waste its time on formulating a new exim policy. What it needs is an international trade policy that will attract more and more FDI, non-resident Indian investment and so on. We should learn from China where most of the money spent on trade zones belongs to either non-resident Chinese or Americans.

In addition, brand promotion needs to be given encouragement. It is unfortunate that the brand promotion scheme that provided exemption from value cap to those exporting branded products under DEPB (duty entitlement passbook benefit) has been withdrawn.

Such a scheme, if properly administered, can encourage the companies to market a product under their own brand name resulting in higher per unit realisation. The India Brand Equity Fund announced with much fanfare needs to be revived.

A separate Market Development Assistance Scheme needs to be framed to promote brands; assistance under the scheme may be made available to such brands that are already well-established in the domestic market.

The competitiveness of Indian exports is also likely to be affected by wide fluctuations in the exchange rates. It is rather unfortunate that we think of intervention only when the rupee is depreciated, whereas no such move was made despite protests from the exporting community when the rupee was appreciating. The NFTP should introduce a system in which intervention can be made whenever the rupee fluctuates plus or minus 2 per cent from Rs 46.

Apart from India's trade relations, growth prospects in some specific regions may also affect the demand for India's exports. We have to be aggressive in the regions important for our exports, such as North America, European Union, west Asia, south-east Asia, Latin America and CIS countries.

The Focus Area policy (focusing on Latin American, African and CIS countries) announced by the Department of Commerce in the past needs to be merged into the NFTP. Special emphasis needs to be given to the Asean countries. And with more than two-thirds of world trade occurring between Free Trade Area (FTA) countries, it makes sense to bring FTA under the NFTP.

There is an immediate need for a foreign trade policy encompassing all aspects of foreign trade within its fold so that the exporter can go through a single policy document rather than through multiple documents "" namely, exim policy, customs rules and regulations, income-tax provisions relating to exports, Reserve Bank of India regulations, and a host of other regulatory requirements.

Once an NFTP covering all aspects of foreign trade is notified, we may take a step forward by providing all the facilities required by exporters from a single agency "" a practice that is being followed by many of our competitors.

R K Dhawan
Former Additional Director General of Foreign Trade

When the International Trade (Development and Regulation) Act came into being in 1992, it was felt that matters needed to be simplified and with the passage of time there would be no written policy as such. What the country today requires is the International Trade Policy. Unfortunately, we have lost at the World Trade Organisation (WTO), although the minister of commerce feels that he has achieved the desired results.

To ensure that developing countries will reduce the customs duty so that agricultural products from developed nations are freely sold to underdeveloped countries, the commerce minister was offered a sop "" developed countries would gradually reduce the subsidies on agri products when end-products were not spelt out.

If we go by the track record of the WTO, what was achieved at Doha meet was nullified at Singapore and the talks virtually failed at Cancun. Then Commerce Minister Arun Jaitley forcefully presented the case on behalf of all the developing countries but somehow, with the change of guards with the elections, developed countries have prevailed upon us to accept their diktat, once again.

Various schemes that were formulated long ago have become redundant. In fact, the DEPB (duty entitlement passbook benefit) scheme and the advance licensing scheme needs to be dispensed with. Nearly 30 to 40 per cent of the exporters today are defaulters under the advance licence scheme and export promotion capital goods (EPCG) scheme on account of reasons beyond their control.

The money that the government is spending on advance licensing by foregoing customs duty should be spent on strengthening the country's infrastructure. We need to identify sectors that are labour-oriented, 100 per cent export-oriented and allow import of capital goods and raw material by drastically reducing the customs duty. Handicrafts, handlooms, textiles, garments, and gems and jewellery are some such sectors.

Exporters today need a hassle-free regime, without having to knock at the doors of government departments. Therefore, the government should strengthen the harmonised code book that indicates the trade policy "" whether the material can be freely imported or cannot be exported. This book should also indicate the customs duty chargeable.

Apart from this, no other book is required. Whatever incentives are given through duty-free licences/EPCG licences should be refunded through DEPB/drawback. There is a need to re-introduce 80 HHC benefits so that all exports get income-tax exemption. Goods that are shipped from places more than 1,000 km away from the sea ports should get 10 per cent extra on DEPB/drawback.

All exports through export promotion zones/special export zones and export-oriented units should be treated as 100 per cent export and should get the same benefits as are available to other exporters.

All import decisions that the government wants to take should be notified through a simple notification rather than published in volumes of books. Today, we have a trade policy, a handbook of procedures, an input-output norms book and a harmonised code book.

The government needs to concentrate on more and more foreign direct investment (FDI), including special export zones (SEZs). Dumping is another area that hurts our industry. We should simplify the anti-dumping regime and ensure that quick remedial action is taken.

It is necessary that exporters work under full guidance of the government. The government should ensure trade agreements, most favoured nation status, identification of the products required by other countries and timely delivery by providing quick shipping services.

Today, foreign ships refuse to come to India because the turnaround time is nearly eight days, whereas in other countries it is eight hours. The government should also arrange for cheaper finance for exporters. With the importer-exporter code (IEC) becoming compulsory for every exporter, there is hardly any need to obtain a registration-cum-membership certificate from various export promotion councils.

The present government came to power by giving an assurance to farmers and unemployed youth. Therefore, it has to draw up a plan and provide opportunities to these two categories for employment and also to export agricultural products. We have to ensure cheaper raw material and components, good infrastructure to ensure that today's youth becomes self-employed rather than depending on jobs.

Unfortunately, the components today carry customs duty than the finished products. The government has to do a lot in other areas connected with exports rather than waste its time on formulating a new exim policy.

What it needs is an international trade policy that will attract more and more FDI, non-resident Indian investment and so on. We should learn from China where most of the money spent on trade zones belongs to either non-resident Chinese or Americans.