India's merchandise exports fell by a little more than a quarter in September this year, marking the 10th consecutive monthly decline and raising serious questions about the government's plans to revive economic growth through a boost to manufacturing. Imports too fell by a similar margin over those in the same month last year - confirming that industrial demand at home continues to remain weak. Although the trade deficit decreased - down to $85 billion in the first half of 2015-16 compared to $97 billion in the same period last year, the government's policy makers are obviously not happy about these numbers. Last week's decision to offer a host of incentives for exporters is a reflection of that concern. Instead of acceding to the exporters' demand for announcing an interest subvention scheme, the government has focused on such export incentives that help exporting firms reduce their import costs and improve manufacturing competitiveness through lower duties.
The instrument used by the government to offer these incentives is the Merchandise Exports from India Scheme or MEIS that was announced early this year as part of the new five-year trade policy. The scheme already enables exporters of around 4,900 items to claim duty credit scrips determined at a rate of two to five per cent of their export earnings which they can use for paying a wide range of duties like customs and excise including service tax. The scrips' popularity among exporters is on the rise as these are transferable and units located in special economic zones are also eligible. The latest decision extends the coverage of MEIS to include 110 more items with export potential. The new export sectors to be covered under MEIS include sports goods, medical equipment, processed products of natural rubber, chemicals and plastics. In some items, the rate at which the duty credit scrips are valued has been raised. As a result, over 2,200 export products would get either higher MEIS rates or these incentives would now be available for exports to more countries. According to one estimate, the revised MEIS would now cover over 55 per cent of India's total exports.
The government will incur an additional cost of Rs 3,000 crore by way of foregone revenues, raising the total annual financial burden of MEIS on the exchequer to Rs 21,000 crore. The effectiveness of MEIS and its extension to new sectors, therefore, need to be properly evaluated. It has to be conceded that schemes such as MEIS will have a limited impact on growing exports or making that growth sustainable. At best, such measures are palliatives by nature and do not address the more fundamental weaknesses in India's exports sector. Sustainable export growth in a global environment where economic activity is slowing is a challenge that cannot be met by only such incentives. The government's policy makers must review the Indian manufacturing sector's competitiveness from the twin perspectives of the rupee's exchange rate and the current level of market access for Indian goods so that adequate policy responses can be framed. The Indian currency continues to be overvalued against the dollar even as India's competitors in the exports market do not enjoy a similar disadvantage. Adding to these constraints are recent developments, where international trade agreements by countries like the one concluded recently by 12 countries under the Trans-Pacific Partnership, accounting for 40 per cent of global income, will deny Indian exporters easy access to these markets. Both these factors are significant hurdles to India's exports and merely providing MEIS incentives can only make a marginal impact.
