The forthcoming Lok Sabha and State assembly elections may come in handy for the Narendra Modi Government to buy more time to consider shifting the date of start of the phase-out of several export promotion schemes which are perceived to offer subsidies and hence “noncompliant” with the World Trade Organisation `(WTO) Rules. The date of withdrawing these schemes is to begin on December 31, 2018. But it may be delayed with US President Donald Trump administration’s resistance to name judges to the panel under WTO that is to resolve the New Delhi – Washington row over subsidies. As a result, the number of judges in the panel has shrunk from seven to four and if the deadlock continues, the number will fall further and the trade body will be reduced to a position where it could be short of quorum.
Any export promotion scheme that has an element of subsidy is considered incompatible with the provisions of the WTO Agreement on Subsidies and Countervailing Measures (ASCM) and, therefore, has to be withdrawn in a reasonable period. In the case of Third World Countries, including India, the phase-out has to be implemented within a “transitional” period of eight years. Our textile sector comes under the ASCM ambit as it had a share of 3.25 per cent of global trade for two consecutive years, achieving “export competitiveness” in 2010. Assistance in the form of incentives to this sector will, therefore, have to be discontinued from 2018- end, as said before.
But the government also can think of effecting some changes in the existing schemes if these are decided to continue for some more time. For instance, in the case of the Export Promotion Capital Goods (EPCG) Scheme, the period of export obligation could be increased to eight years, instead of the present norm of six times the duty saved on imported capital goods to be fulfilled in six years.
Again, the three per cent Interest Equalisation Scheme (IES) could be extended to merchantexporters as in the case of manufacturerexporters, since their financial requirement at the pre-shipment stage and post-shipment stage is the same. It is felt that any financial support to merchant exporters will lead to increase in exports which in turn could benefit weavers.
Procedures under Advance Licence Scheme – in vogue for a number of years now – also need to be fine-tuned. For instance, the license is issued by the office of Director General of Foreign Trade (DGFT). But the bond for the duty saved is given to customs. Exporters after completion of their obligation have to collect the Export Obligation Discharge Certificate from DGFT and submit the same to customs for release of the bond. Multiple points of interface could be avoided. The duty drawback amounts due to exporters need to be released without delays that often take place in major ports. This leads to blockage of funds for exporters.
Next concerns the Hundred cent Export-Oriented Units (EOU) Scheme. EOUs are not permitted to undertake any trading activity. It is explained that buyers require a range of products to be supplied from a single source. Since EOUs can source some items not produced by them from other parties and meet customer requirements, some relaxation can be considered with the condition similar to the permission for sales in the Domestic Tariff Area (DTA) (50 per cent of FOB export value) subject to payment of duties may be introduced. This will help EOUs which have lost their charm of late due to withdrawal of IT benefits and also the entry special economic zones (SEZs). The DTA sales with payment of duties are allowed as if goods are imported into India. However, when such goods are imported under Free Trade Agreements / Regional Trade Agreements (FTAs/ RTAs), they are entitled to the reduced basic customs duty (BCD), including zero duty. This makes DTA sales of products by EOUs uncompetitive. This also leads to an inverted duty situation with some finished products imports under FTAs having low or zero duties, while raw materials/semi-finished goods imported under non-FTA route having high duties. This issue needs to be resolved.
At present, 24×7 clearance is extended to 19 sea ports and 17 air cargo complexes. However, at the ground-level, it is not working properly. This issue needs to be addressed by the government. Port charges in India are quite high even though the infrastructure and services are qualitatively inferior compared to many developed and developing countries. For example, the terminal handling charges at Cochin port are high compared to other ports. This issue needs to be resolved.
Latin America and Africa present a vast market that has remained largely untapped for the Indian companies. FTAs with these two regions are needed as our competitors like Chile, Japan and Korea have already started the process of FTA engagement and are enjoying preferential access in these markets. In the case of Latin America, India has signed a Preferential Trade Agreement (PTA) with Chile in 2006 and another PTA with Mercosur in 2009. Negotiations are on with Chile and Mercosur to broaden and deepen these PTAs.
It is known that pressure from developed countries had the Duty Exemption Pass Book Scheme (DEPB), most popular among the exporting community, scrapped from October 2011. This was because there was an element of “notional” rather than “actual” imports involved in the scheme.
There are many other schemes, such as the SEZs, EOUs, replenishment of Import-Entitlements through EPCG, Interest Subvention on export credit, which stipulate export as a condition for eligibility may be interpreted as “prohibitive” subsidies. Duty drawback may not be held as export subsidy specifically meant for exporters to the extent that it refunds duties borne by exported goods. Schemes like Technology Upgradation Fund Scheme, which are not linked to exports, also will not come within the definition of export subsidy.
As per the ASCM provisions, non-actionable subsidies are those which are generally applied across-the board to all industries and not limited to a specific industry. Again, non-actionable subsidies include assistance to research activities, assistance to disadvantageous regions within a country, assistance to promote adaptation of existing facilities to environmental requirements (now this provision has however technically lapsed).
ASCM further says that prohibited subsidies are those which are contingent upon export performance, currency retention schemes involving bonus on export, exemption of direct taxes related to exports, reduced internal transport charges on foods for export and subsidies contingent upon use of domestic products over imported goods.