[Analytics] Solving the Indian export puzzle
Dalian Port’s earnings have fallen more than 30 per cent between 2013 and 2018, according to the group’s financial results. Photo: Xinhua. Sketched by the Pan Pacific Agency.
On 14 September 2019, Indian Finance Minister Nirmala Sitharaman announced a slew of measures to boost India’s faltering exports. In recent years, Indian exports have grown at an annual average of just 4 per cent. Growth of 8 per cent in 2018–19 indicated a recovery of sorts, but since April 2019 exports have declined by nearly 2 per cent on a year-on-year basis. With global economic prospects looking gloomy, Indian exporters may continue to face serious headwinds. Biswajit Dhar specially for the East Asia Forum.
Sitharaman’s announcement offers some hope to the struggling export business. The measures partly rework the export incentives regime, streamline export facilitation and provide a roadmap to address the issue of conformity of product and process standards in international markets.
India’s export incentives have been in focus since the Agreement on Subsidies and Countervailing Measures (ASCM) of the World Trade Organization (WTO) barred their usage after India’s per capita GNP exceeded US$1000. India continued to use subsides like the Merchandise Exports from India Scheme (MEIS), arguing that the ASCM normally allowed a transition period of eight years for developing countries to remove export subsidies. But the United States has challenged India’s arguments regarding the use of these export incentives before a WTO dispute settlement panel.
The announcement included the Remission of Duties or Taxes on Export Product (RoDTEP), a new export incentives scheme to replace MEIS. This scheme will ‘more than adequately incentivise exporters than existing schemes put together’. Sitharaman indicated that implementing RoDTEP would require foregoing Rs 500 billion (US$ 7 billion) of revenue.
Whether this new scheme will be consistent with the provisions of the ASCM is a moot point. This is because the definition of subsidies that WTO members are not allowed to use, the so-called ‘prohibited subsidies’, are ‘contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance’. According to the ACSM, ‘prohibitive subsidies’ impose indirect taxes in excess of those levied on like products when sold for domestic consumption. The provision comes into effect if a product receives incentives only when it is exported.
By this definition, RoDTEP can also be challenged in the dispute settlement body of the WTO. There are similar concerns about the Interest Equalisation Scheme (IES) on pre- and post-shipment ru0pee export credit which provides interest equalisation at 5 per cent to exporters on 416 products and for all micro, small and medium enterprise (MSME) exporters.
The good news for India is that the WTO will be unable to force India to comply with its commitments should the dispute settlement panel rule that India is in violation of the ASCM. The Appellate Body of WTO’s dispute settlement body that enforces the decisions on WTO members will become dysfunctional from 11 December 2019.
Yet, there remains a need for an in-depth assessment as to whether export promotion schemes are justified. Export incentives have been in place for a very long time but India’s export performance has remained an area of concern. While this could be due to over-valuation of the rupee in the past and the current international push-back against free trade, India should still re-consider its trade policies. Moreover, the revenues of the central government are under considerable stress and so the implications of foregoing revenue due to export incentives demands greater scrutiny.
Improving the performance of India’s ports in order to reduce transaction costs has been on the agenda of successive governments for at least two decades. The critical aspect here is investments for port modernisation, including the timely implementation of the Sagarmala project. This would give export businesses the necessary boost.
The finance minister’s announcement flagged the most critical area for exports — complying with international standards. Market access barriers have shifted from the conventional instrument of tariffs to standards compliance and this has hurt Indian exporters. The inability of domestic producers to meet exacting standards in international markets is a well-established fact. Sitharaman’s proposed roadmap for the adoption and enforcement of standards seems to be the way forward.
The issue of standards has been discussed by the Department of Commerce on several occasions in the past. The critical issue now is to examine the non-implementation of past recommendations and to identify bottlenecks, particularly at the institutional level.
Standards must be enforced in every sector and yet the finance minister has focussed solely on the engineering sector. This appears inadequate given that exports of agricultural and agro-processed products are among the worst-performing in terms of standards compliance. In 2018, the government announced the Agriculture Export Policy that noted India’s inability to export its horticultural products was partly due to a lack of uniformity in quality and standardisation.
India’s potential to improve its exports of agricultural products has long been recognised and with the prospect of a comprehensive regional trade agreement for the Asia Pacific on the horizon, it is at a critical juncture. Targeted and timely support from the government will help realise India’s export potential.
Biswajit Dhar is Professor at the Centre for Economic Studies and Planning in the School of Social Sciences, Jawaharlal Nehru University, Delhi.
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