Friday, June 12, 2009

Exporters still need incentives

Subsidies and level playing field are considered as two sides of the same coin but having different implication. Export sops are either exporters legitimate claims or aimed to provide internationally competitive environment rather than offering subsidy contrary to public perception. The exporters never asked for subsidy to survive in the field of exports but do not want to be saddled with the burden of domestic disabilities.

Exports are facing its biggest challenge since independence in wake of global slowdown. World trade which grew by 6.5% in 2005, 8.5% in 2006 and 6% in 2007, decelerated to 2% in 2008 and is slated to contract by 9% in 2009. The forecast for 2010 is equally gloomy.

Few will argue that India is not a major player in global trade and therefore such slowdown should not impact exports. While partly agreeing to such contention, one should not forget that lifestyle goods account for a sizeable share of India’s exports and when the job scenario is scary and businesses are closing down, demand for such goods will decline affecting overall exports. In those regions of the world where demand is unaffected, the huge stimulus provided by India’s competitors coupled with floor-level credit rates are out-pricing Indian products.

While government or exporters cannot generate demands overseas, both can initiate measures to increase competitiveness. Exporters are looking at every opportunity to cut cost and increase productivity. Machineries have been modernised and upgraded to reduce wastages. Technical manpower has been employed to constantly monitor production for possible savings. Industry is deploying IT at every stage of production to enhance productivity.

Forward contracts have been taken to cover currency risk and insurance cover is being bought to safeguard against non-payment by the buyer. However, this is an on-going process and cost cutting should be part of our strategy to increase competitiveness. Rupee depreciation, hitherto, provided much cushion but recent appreciation of the rupee by over 7% is neutralising the advantage on exchange front.

While global demand will pick up slowly, we will have to find ways to raise our competitiveness through fiscal and non-fiscal measures. Exporters do not require subsidies but the domestic disabilities cannot be carried overseas. Exporters require effective zero rating of taxes, internationally competitive interest rate and power at best benchmarked tariff rather than any direct fiscal support.

The foremost issue to be addressed by the government is the goods and service tax (GST). GST should provide full rebate of all indirect taxes, including those at state and local levels. At present, there is no scheme to rebate state and local taxes/levies which itself for few products works out to be 5-6% of the fob value in certain states. Unless GST is introduced to neutralise it, government should factor such levies through some other instruments.

Secondly, to neutralise fiscal stimulus packages of competitors, drawback and DEPB rates may be increased by 5%. Fringe Benefit Tax (FBT) discourages exporters from aggressively seeking new markets, therefore, government should exempt exporters from FBT. A major component of manufacturing costs in India is the cost of capital, which is 5-7% higher than elsewhere. Considering the high credit rate in India, exports credit should be given at 7% across the board without linking it with the PLR.

To give fillip to investment, exporting units may be given 200% deduction on investment made in plant and machinery for expansion and modernisation. Power cost in India is about three times the international benchmark. The government should provide fuel at international prices to exporting units that have captive power plant or use their own generators.

A conscious effort is required to provide marketing exposure to MSME units so as to increase their share in direct exports. An export development fund (EDF) should be created for MSME exporters with a minimum corpus of Rs 5,000 crore for diversification of exports. Considering the marketing support given by developing and developed countries to their SME sector, the figure is most modest.

All refund due to exporters are marred by procedural inefficiencies at the implementation level. At times drawbacks are held up, excise rebate are not cleared for months and there is huge delay in getting service tax refund. The cost of getting refund including manpower, paper work and related charges works out to be 3-4% of fob value. Exemption rather than tedious refund process and effective EDI amongst agencies can cut transaction time and cost to a great extent. The need of the hour is to treat exports as a national priority.

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