Illogical move hits exports, revenue

By : T N C Rajagopalan
Last Updated: Sun, Jan 06, 2013 20:10 hrs

The commerce ministry has issued notifications for giving more duty credits to exporters. Whether the latest move will help boost exports is somewhat doubtful; it might help increase imports. Customs/excise will certainly lose more revenue.

The notification for benefits on incremental exports says two per cent of the incremental growth in the January-March quarter of 2012-13 over that of 2011-12 will be granted as duty credit, if there is incremental growth in the year 2012-13 over exports in the year 2011-12. Those by export-oriented units and those in Special Economic Zones are ineligible. Apparently, the benefits are available to the party which exports and earns foreign exchange but third-party exports are ineligible. The benefits are available against realisation of export proceeds. Proof of landing will be required for making the claims. Exports to America, the European Union and Asia, except Hong Kong, Singapore and UAE, are entitled for the benefits.

Under the Vishesh Krishi Gram Udyog Yojana, exporters get transferable duty credit of five per cent of the FOB value of exports. The government deleted three and added three items in the list. Under the Focus Product scheme, exporters get transferable duty credits of two per cent (some items get more) of the FOB value of exports. The government added 102 items to this list and enhanced the entitlement for 17 more, besides adding 62 items for benefits under the Market Linked Focus Product Scheme. Under the Focus Market scheme that gives three per cent or four per cent of FOB value of exports as duty credits, the government added six more destinations. The new scheme gives two per cent of FOB value as transferable scrip for incremental exports on those made to Europe, the US and Asia. These incentives are in addition to the Status Holder Incentive scrip scheme, which gives one per cent, and the Served From India scheme that gives 10 per cent as duty credits that have limited flexibility for transfer.

The duty credits can be utilised for payment of customs duties on imported goods and excise duties on locally procured goods. So, the customs/excise do not collect revenue when the duties are debited to the duty credit scrip. Importers get the scrip in the markets at a 60-70 per cent discount. That is, if a duty credit scrip can save duties of Rs 100, the scrip can be bought between Rs 30 and Rs 40. So, their import costs go down to that extent. The compensation for exporters is significantly lesser than what the face value of the scrip indicates. If the exporter earns Rs 2 as duty credit against export of Rs 100, the price at which he can sell is only Rs 0.60 or a little more. As the government increases the supply of duty credits, the exporters’ earnings go down, the importers get the scrip even cheaper and the customs/excise end up losing revenue, anyway.

So, the Pavlovian response of the commerce ministry to the slowdown in exports — of increasing the supply of duty credits — might appear to be helping exporters but actually helps importers. This worsens the widening current account deficit, now at a record 5.4 per cent of GDP. Nor does the policy generate more jobs, as more and more domestic units struggle against cheaper imports. And, lower customs/excise revenues do not help bring down the fiscal deficit.


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