Opaque policies breed lobbying, corruption

In a surprising move, the government has doubled the rewards for dairy products under the Merchandise Exports from India Scheme (MEIS). The rates for items such as cheese, skimmed milk, milk food, whole milk, condensed milk, yogurt, etc, go up from 10 per cent to 20 per cent. 

It is a moot point whether export should be promoted through such heavy subsidy. The stated objective of the schemes in Chapter 3 of the Foreign Trade Policy is to reward exporters, to help offset infrastructural inefficiency and associated costs. One such is MEIS and the other is the Services Exports from India Scheme (SEIS). Under both, duty credit scrips are granted as reward. Such scrips and the goods imported or domestically procured against these are freely transferable. The scrips may be used for payment of basic and additional customs duty on imported goods and excise duty on domestically procured ones. 

As an instance, if cheese is exported for Rs 100, the exporter will get duty credit scrips for Rs 20. These may be used to  pay Rs 20 of excise or customs duties.  Excise duty is levied on few items; hence, most duty credit scrips get used for payment of import duty. That makes import more attractive vis-à-vis domestically produced items that attract Goods and Services Tax (GST).

Whenever such subsidies are given, foreign buyers get to know and ask for reduction in prices. So, the subsidy is, at least partly, passed on to foreign buyers. Put another way, money is taken from taxpayers in India and given to consumers in other countries. Yes, the exporter gets the order and, to that extent, domestic economic activity goes up. But, should not such subsidies be restricted to cases where the exporter loses the order by a small margin? Is it worth promoting export of any item by giving a subsidy of 20 per cent?

Quite obviously, if an item requires 20 per cent subsidy to be priced competitively in world markets, it is not one where we have competitive or comparative advantage. Such a huge subsidy does not only offset infrastructural inefficiency or associated cost. It goes towards export of an item whose production cost is much higher than international prices. Should subsidies be pumped into such items?

When highly subsidised articles are exported, importing countries have the option to protect domestic producers by imposing anti-subsidy countervailing duties, in conformity with the disciplines of the World Trade Organization. If that happens, the purpose of the export subsidy will get defeated. 

  

Direct export subsidy to promote export is also a lazy option, and one that the government has been increasingly resorting to for some years. The policy has diverted attention from the fundamental problem of erosion of competitiveness and, so, has not helped to boost export. Nor is it only the export of goods that are being subsidised. Under SEIS, so is the export of many services. For example, the exporters of accounting and auditing services earn duty credit of seven per cent on their net foreign exchange earning. What infrastructural inefficiency or other associated cost do such exporters suffer? 

The policy of throwing money in the name of export promotion through an opaque process encourages lobbying and corruption. The benefits are doubtful; the harm is assured. 

E-mail: tncrajagopalan@gmail.com