Intensive care for exports

India has to meet several challenges, at the structural and policy level, to boost exports

The current government started its tenure with a manifest agenda of nursing economic growth, infrastructure development, and augmenting job creation. These economic objectives are intricately connected, co-dependent, and were imperative to bring the economy back on track from a dismal state. The government has relentlessly strived to live up to its electoral promises and has tasted success despite gambling with two controversial yet crucial economic decisions, the goods and services tax (GST) and demonetisation, which had a ripple effect on almost every economic decision taken by the government afterwards. All major policy decisions gravitated around the core ideologies of Make in India and “served from India”. It is imperative to pause at this juncture and retrospect on these decisions to evaluate how they have fared.

India’s Foreign Trade Policy was aligned to meet an ambitious target of $900 billion through exports by 2019-20. However, empirical data released by the commerce ministry suggests the gap between exports and imports widened 28.5 per cent from a year ago to $13.7 billion in March 2018, taking the annual deficit to $87.2 billion. Manufacturing trade balance had hit a four-year low in 2017-18, indicating sluggish progress in manufacturing competitiveness. The government was naturally perturbed to note that despite the persistent efforts to enhance global competitiveness and incentivise exports, incremental services export growth percentage has remained closed to zero in the past four years. However, the current fiscal year (2018-19) has seen an upward trend.

While policies might have checked all the right boxes, delegated legislations and administrative actions for operationalising these policies have been either ineffective or counterproductive. Besides, there are several structural factors attributing to decline in exports. These include, among other things, the conspicuous absence or failure of technology to intensive foreign investment, undervalued currency policy to compete with other manufacturing countries such as China, procedural complexities and technological challenges brought about by the GST and incremental infrastructure and logistic costs. Besides, trade wars with economic giants such as the US and China dampened economic growth. Significant steps will have to be taken by the government to address these issues.

In a bid to promote the labour-intensive micro, small and medium enterprises (MSME) sector, the government has increased export incentives by two per cent. Considering the potential of these sectors in aiding employment growth, the 2018-19 Budget has placed MSMEs, including the textiles and leather sectors, on a distinct pedestal by providing tax sops and additional incentives. For the manufacturing sector, the Budget unveiled reduction in the income tax rate to 25 per cent for all companies having a turnover of up to Rs 2.5 billion. The Cabinet approved the Modified Incentive Package Scheme (M-SIPS), which will accept proposals till December this year or up to an incentive commitment limit of Rs 100 billion. The government also is in talks with stakeholders to ease foreign direct investment (FDI) in defence under the automatic route to 51 per cent from the current 49 per cent to boost this sector. India is positioning itself as not only a defence super power but also a manufacturing hub through its Make in India campaign.

Mobile manufacturing units in India have gone up from two in 2014 to 120 now. The latest is the inauguration by Prime Minister Narendra Modi of the world’s largest mobile phone factory in Noida by Samsung who will, by 2020, manufacture 120 million mobiles a year and plans to export 30 per cent of units manufactured in India

The government is anxiously working towards developing a robust export-oriented policy for electronic products. The idea behind the policy is to stimulate exports, drive larger investments by setting up port-based electronic manufacturing clusters and industry specific groups. For instance, mobile manufacturing has seen a huge jump in India over the last few years, with the number of units going up from two in 2014 to 120 now. The latest is the inauguration by Prime Minister Narendra Modi of the world’s largest mobile phone factory in Noida by a big South Korean manufacturer who will, by 2020, manufacture 120 million mobiles a year and plans to export 30 per cent of units manufactured in India. To get the export dream going, there is a need for robust export incentives for mobile phones manufacturers, a segment that can generate significant jobs in the country. India today imports a large quantity of mobile phone components with minimal exports in this sector. Export incentives for this sector will correct this imbalance, thereby bringing in FDI into the country through component manufacturers who will find value in setting up shops in India, just like it happened in the case of the automobile industry in the 1990s. This has the potential to help the government fulfil its Make in India goal.

Allocation of special funds for the electronics sector can help manufacturers in branding and distribution. Minimising human interface and promoting procedures in export-related activities would help in reducing the cost of doing business. Further, government must support computer and ITES companies in setting up site offices and tackle adverse impact of visa restrictions in certain countries such as the US. Creating new export outlets, providing fiscal incentives for targeted products, and taking country specific software export promotion measures will incentivise this sector to a large extent.

Exporters were initially suffering from working capital issues because of blocked GST refunds. The government may have multiple explanations to justify the blockage but in case system failures are not addressed at inception, exports are bound to suffer from collateral damages. To make things worse, the government has started issuing notices on exporters for denying GST benefits for past imports and exports based on retrospective application of “pre-import” condition under advance authorisation. These practices are unfair and heavily prejudiced against business. Besides, the government’s image is tarnished by not extending wholehearted support to units located in exempted zones.

The fact that government has been unremittingly toiling to augment economic growth is praiseworthy. However, for India to realise its optimum export potential it will have to rout multiple challenges effectively at a policy and structural level. With 68 Bills pending before the Lok Sabha and 40 Bills in the Rajya Sabha, the government has a limited window of opportunity in the monsoon session of the Parliament to leave its final impressions on the common man before 2019 elections.

Abhishek A Rastogi is partner and Pratyushprava Saha is senior associate at Khaitan & Co. Views expressed are personal