Jun 8, 2012

Foreign Trade Policy Reloaded - The blogger's review

The FTP annual supplement is out. It's 3 days since and your blogger was going through the details. It took time as the entire policy document and procedure handbook was revised and updated, and the annual supplement was incorporated into it. The two manuals ran into more than 300 pages. It was a good move, as there were hundreds of notifications and couple of annual supplements that had come since the last time the policy and procedure manuals were released. So, the manuals were to be read along-with these notifications and supplements. The new manuals are now up to date, and include the current annual supplement. 

Now, the review about the latest annual supplement and views. You can read the official highlights here.

The good points:
  • You can read some good points from news sites here, here and here
  • Overall, the policy supplement was better than expected and is being welcomed by exporters and consultants.
  • Additional incentives were announced in focus market and focus products. Some markets and products are added. 
  • Added thrust to green technology in form of incentives.
  • North eastern industries to be incentivized under chapter 3 for export promotion.
  • Interest subvention scheme of 2% continued for another year. Some additional sectors added
  • The duty scrips earned through exports can be used for paying excise duty. This is to give a boost to local manufacturing. Till now, these scrips could only be used for paying customs duties while importing. 
  • 0% EPCG scheme reintroduced to help upgrade the technology. Post exports EPCG introduced.
  • Handlooms, handicrafts and Gems and Jewellery, leather and marine sectors to get additional focus.
  • Electronic and IT hardware will be incentivized under Focus Product scheme.
  • Procedural simplification at places like chapter 5 for EPCG. 
  • Chapter 4 procedural simplification for advance authorization. 
  • Couriers and e-commerce brought under exports benefits.
  • Introduction of e-Bank realization certificate, which will be made mandatory next month onwards. This is one additional step towards paperless office. 
  • Introduction of ITC HS based import policy search on DGFT website. Key in the HS code and you get the import policy for that item. 
The bad points:

There is nothing bad as such in the policy document or intent. However, it fails to get the big picture of trade and its promotion. As has been pointed out, it's not an incentive here and a procedure there that is holding up exports. Most of the exporters have a margin that is way above the additional percentage point of incentive that is provided. The review discusses it in detail below. 

The review:

Export performance cannot be seen as a standalone entity that responds to bare incentives. Other factors such as a vibrant industrial base, infrastructure base like ports and roads, the procedural simplifications, and policies that create a trade friendly environment etc, influence export performance in a big way. These enabling factors, in tandem with the human resource, create a competitive advantage in international markets. The human resources, in turn have their feeder enablers such as education, health and family welfare. An economy with slow growing industrial base, suffering from poor infrastructure problems, cannot be expected to deliver great export performance in tough global conditions. 
The trade policy making appears to have zeroed in on the incentives as the most important way of boosting the exports. This view needs some rethinking. Is export performance really a direct function of increasing incentives, in the way the trade policy makes us think? If yes, is there a way to find out as to where the marginal returns of such incentives start diminishing? And are we doing the required number crunching to arrive at the optimal allocation of incentive funds, to those sectors that have the maximum impact on exports, if that is the goal of incentives. The distribution of incentives for the cause, be it employment generation, capturing new markets, export product diversification, or capacity building should be supported by background research. In order to determine the effects of such incentives on exports, one needs to have good data at sectoral levels, on export performance, and link it to incentives. A good amount of research needs to be done to link incentives to export performance in order to justify them. There is a serious lack of such studies in India. In the absence of good data and studies, incentives just boil down to doles handed out to lobbies that bargain hard.
It is not the job of trade policy to address all the enabling factors such as infrastructure and industrial base. However, the trade policy should go hand in hand with other policies that are closely linked to its success. A few measures in the trade policy, in a standalone manner, to help manufacturing sector or infrastructure, are not going to change things. The incentives on export performance can only be the last measure that boosts the exports by giving them an additional edge in international markets. Even then, they need to be targeted towards the sectors that can maximize the results, based on back end research. Incentives cannot be the starting point for boosting export performance. This is not to say that the current policy is out of place. It is just that, the need of the hour is to look at the policy making in an integrated manner, given the challenges we face.