Misplaced focus: Surging export aids fail to boost shipments

Even as India’s export promotion schemes have been under attack for several years in multilateral forums for their subsidy content, these have also been a disincentive for firms to grow. Consider the latest variant, the Merchandise Exports From India Scheme (MEIS), which is already on its way out. Between FY17 and FY19, while exports covered under the MEIS grew just 14.2% in rupee term, non-MEIS shipments rose at a much faster pace of 31.6%, according to an FE analysis.

The below-par performance of the scheme can also be gauged from the fact that while MEIS beneficiaries comprised a vast majority of the exporter community (86% in FY18), their exports stagnated at just about half of the overall outbound merchandise shipments. The overwhelming number of MEIS beneficiaries has obviously been on account of the scheme’s misplaced focus on small and marginal ones in ‘job-sensitive sectors”.

It is worth noting that MEIS benefits (export scrips) more than doubled to Rs 39,298 crore in FY19 from Rs 18,117 crore in FY17.

Not for nothing that the government is shifting away from the long-standing MSME bias in its export strategy; its new product-linked incentives (PLI) – which are estimated to be worth Rs 2 lakh crore over a five-year period – are targeted mainly at large corporations in 13 critical sectors with massive export potential.

Exports from seven key labour-intensive sectors, ranging from textiles & garments to agriculture and gem & jewellery, barely grew — from $120.6 billion in FY17 to $124.6 billion in FY19. In FY20, these exports, in fact, dropped to just $114.1 billion.

The Niti Aayog has argued that the MEIS is a “highly-fragmented” scheme that doesn’t incentivise high-volume and high-value production, nor does it boost exports significantly. Finance ministry officials, too, have endorsed such a view.

The lacklustre performance of the MEIS has warranted a change in the way the compensation structure for boosting exports is designed. The government has already announced that it will roll out the so-called Remission of Duties and Taxes on Exported Products (RoDTEP) scheme from January 2021 to replace the MEIS and make the outbound shipments zero-rated. The scheme is essentially aimed at reimbursing even embedded taxes (that are not subsumed by the GST) paid on inputs consumed in exports.

The production-linked incentives are aimed at promoting manufacturing and exports in 13 sectors, including electronics/mobile phones, auto, battery cell, pharma, telecom networking, food and textiles. Through the PLI schemes, the government also marks a renewed focus on Make in India and a shift away from a long-standing MSME bias; while local manufacturing is the ostensible objective, there will be implicit impetus for large-scale exports.

The Niti Aayog, which has mooted the PLI concept, has been pitching for boosting exports through the creation of champion sectors under the PLI schemes.

The broader export community, meanwhile, feels that while a focussed approach may be desirable, the government must not leave out a vast number of exporters in the lurch by scrapping incentives to them once MEIS is phased out. Therefore, the RoDTEP must not just be launched once the MEIS is scrapped but its coverage must not be narrowed. After all, exports must be zero-rated, in sync with global best practices and the incentives, be it under the MEIS and the RoDTEP, aren’t strictly subsidies, they argue.

A Niti Aayog proposal in August had pegged the potential outgo under the proposed RoDTEP scheme to just about Rs 10,000 crore a year. Niti had suggested that once the RoDTEP scheme replaced the MEIS, the annual “savings” of Rs 40,000 crore be utilised to roll out PLI schemes in “sectors of strength to create global champions”.

But Niti’s estimate of the RoDTEP outlay is only a fraction of the annual benefits of Rs 50,000 crore that the government had envisaged when the government had announced this scheme in September last year.

Of course, a committee set up under former commerce secretary GK Pillai to suggest RoDTEP benefit rates is yet to finalise its report. However, exporters say any massive reduction in either the coverage of sectors or the reimbursement rates under this scheme may dent export recovery, especially at a time when external demand remains fragile in the wake of the Covid-19 pandemic.