Feb 9, 2018

Why DGFT should not be under Finance Ministry

(While this blog is usually about international trade and economic policies, this particular post would digress to cover more mundane bureaucratic concerns in trade policy making and implementation. This post is a reaction to coverage in media (here, here, here) triggered by a letter written by IRS association (and later tweeted) to finance ministry regarding bringing DGFT under Ministry of Finance (MoF). The letter appeared too one sided to me, so I am providing alternate viewpoints for more informed discussion.)

The current argument, as outlined in the letter from IRS officers association, that DGFT should be brought under finance ministry ends up taking a parochial view of the role and functions of DGFT. The letter seems to equate DGFT to few export promotion schemes where some 'duplication of work' happens leading to confusion to trade and revenue loss at times.

It is important to understand two things here, so that we may broaden the view and analyse the matter armed with more information. 

One, DGFT is not just about export promotion schemes. It has broader mandate, of industrial development, trade promotion, industry-government interface for trade matters, central-state link for commerce departments, field arm for data collection, and international trade dispute resolution, facts that the letter misses and which I shall elaborate later in the post.

Second, it is important to understand what this 'duplication of work' the letter refers to, as the crux of the letter lies in pushing for minimizing it by bringing DGFT under MoF.
Under duty nullification schemes of Foreign Trade Policy, mainly the Advance Authorisation scheme, the process entails issue of license for duty free import of inputs by DGFT and the registering of the same at Customs through furnishing of a Bond. After imports and exports, and forex realization, the trade submits the details to DGFT which issues an Export Obligation Discharge Certificate (EODC). Then the trade goes back to Customs for release of Bond completing the process. There are three or more departments (and not two as the letter says) - DGFT, Customs, Banks, and sometimes erstwhile Central excise -  involved to run this scheme. There is certainly scope for minimizing this running around. However, there is no duplicity of work. Someone has to issue a license, someone has to register and let the exports/imports be conducted, someone has to certify forex realization, and someone has to check and strike off the export obligation. Same goes for another scheme called Export promotion capital goods (EPCG) scheme.
Among the departments, there is a digital bridge (or multiple digital bridges to be precise) which does the work of information exchange, mainly the online transmission of details of licenses, eBRCs, and shipments. This digital bridge is prone to bugs for various legacy reasons beyond the scope of this post. Even this adds to lack of ease of doing business.
Merely subsuming DGFT under finance ministry would not solve the problem unless process restructuring, including digital revamp, is taken up. This process restructuring of the schemes themselves will determine how the organizations should be aligned, be it banks, licensing authorities, or the customs. It would be premature for any association to lobby one way or the other. The correct thing to do, for those with ease of doing business at heart, is to recommend a study on the topic. That the government did, with a Frost and Sullivan winning the contract for such a study during last two years, and the recommendations are still not public. As far as I understand, the study consulted wide range of stakeholders including Customs, Exporters, DGFT, specialists, and also did an international comparison of similar schemes and organizational structures.
There is another allegation in the same letter that DGFT issues IECs to firms with unknown identities and fake addresses leading to revenue loss to the Government, as these firms carry out fake exports, take drawback and other benefits. The letter blames DGFT officials in following words:

"This issue primarily stems from the fact that the officials of DGFT are not tuned and trained towards investigation and enforcement," the letter added.

The letter conveniently forgets that at each stage of the fraud, except for issue of IEC, Customs department is involved (registering IEC at ports, bank details taken by customs for drawback, letting under/overvaluation go undetected, issue of drawback amount and such). Therefore, what appears to be a systemic problem of non detection of fraud during commission cannot be attributed to lack of training of DGFT officials. If that logic holds, then we have to go back to IT department that issues PAN cards as DGFT issues IEC based on PAN and Bank certificates.

However, while alleging so, the letter brings the function of DGFT to fore. DGFT's agenda is export and trade promotion and not investigation and enforcement. When CCI&E was rechristened to DGFT in 1991, the entire outlook changed. It has been more than 26 years since that happened. That brings me to the current role and responsibilities of DGFT. A mere glance would tell that these functions do not belong to the domain of revenue collection or finance ministry from any stretch of imagination.

Functions of DGFT (for sake of brevity I shall not elabroate)

- Export promotion through FTP schemes (some of them discussed above)
- Niryat Bandhu - skill development and knowledge dissemination in the area of international trade
- Trade Data collection and dissemination - DGCIS is an arm of DGFT
- Trade policy making, quantitative restrictions, MEP/MIP, trade in sensitive items (SCOMET) etc.
- Cooperation and coordination with state governments, RBI, Banks and even Revenue department in matters of international trade
- Collaboration with Export promotion councils
- International trade dispute resolution through field offices
- Fixation and revision of SION, export facilitation, relaxation
- Link between trade and industry and the Government for trade matters
- Miscellaneous functions such as controlling pre-shipment inspection agencies, certifying agencies, trade bodies etc related to international trade and commerce
- Assisting and supporting WTO/RTA related activities at field level

The broader mandate for all the above lies with commerce ministry. This is so not only in our country, but internationally too. Most leading countries have an arm of commerce department which fulfills functions similar to DGFT. For those interested, one may refer my colleague's (Moin Afaque's) blog post here to see some examples.
International trade and its associated policy-making is an involved process, and it needs a certain legacy and experience to master and reach certain level of maturity for any institution. Therefore the allocation of business rules of Government of India has kept functions of DGFT integrated with commerce. DGFT is well knit into the commerce ministry's departments (WTO, TPD, RMTR, DGTR etc) and is an important arm. It is the only field presence of the ministry, devoid of which, commerce ministry loses its official listening posts in the field. How, then, does one make a case for moving DGFT to MoF? I wonder.

Finally, institutional restructuring is an involved process. It is worth taking up only if the benefit to the nation is more than the costs involved. The letter seems to fail to make a strong case regarding the benefits and has not touched upon costs. Blaming another agency for some revenue loss is not sound argument. It needs to do better than just that.

Edit1: Some comments on this post below make some very pertinent points too. 

(Let me state clearly here that these are my personal views, to be taken in the spirit of broadening the debate than any finger pointing)