Foreign Trade Policy 2015-20: Panacea or Poison?

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govt policyElectronics manufacturing has been recognised under the Merchandise Export from India Scheme (MEIS) in the new Foreign Trade Policy 2015-20. But how effective will this policy be in reducing the export disability of this sector? Industry veterans are skeptical. 

The Central government has unveiled the long-awaited new Foreign Trade Policy for five years, from 2015 to 2020. It’s a novel attempt to boost India’s share in global exports to 3.5 per cent by 2020 from two per cent in 2013-14, and aims to make the country a larger player in international trade by doubling exports to US$ 900 billion by 2019-20.
It also aims to realise the country’s goal of increasing the share of the manufacturing sector from 16 per cent to 25 per cent of GDP in a decade. The policy focuses on promoting exports that have a strong domestic manufacturing base primarily in sectors such as engineering goods, electronics, drugs and pharmaceuticals. India’s industry must grow at a compound annual growth rate (CAGR) of over 13 per cent to achieve the export target of US$ 900 billion by 2020. To make this vision a reality, the entire ecosystem for the various manufacturing sectors needs to be established or improved at a quick speed.

What does the policy aim at?

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In the new Foreign Trade Policy (FTP) for 2015-20, the thrust will primarily be on exports of manufactured products and exports of services. For the export of manufactured products, the government has charted a strategy to promote a few key sectors such as engineering products, electronic goods and textile exports.
Through this policy, the government has consolidated five earlier schemes for promotion of merchandise goods (including electronics) into one single scheme—Merchandise Export from India Scheme (MEIS)—and reduced the rates of incentives on exports to 2-5 per cent from the earlier 2-7 per cent. The different schemes of export incentives that have been merged under the MEIS include the Focus Product Scheme, Market Linked Focus Product Scheme and Focus Market Scheme. Under MEIS, a matrix of product and country of export has been introduced to decide the eligibility criteria for an incentive. The categories into which the countries of export have been divided are:

  • Category A: Traditional markets (30)—European Union (28), USA, Canada
  • Category B: Emerging and focus markets (139), Africa (55), Latin America and Mexico (45), CIS countries (12), Turkey and West Asian countries (13), ASEAN countries (10), Japan, South Korea, China, Taiwan
  • Category C: Other markets (70)

The focus of the new foreign trade policy is to facilitate services and exports along with improving the ease of doing business. The policy aims to boost exports and create jobs while supporting Prime Minister Modi’s ‘Make in India’ and ‘Digital India’ programmes. It focuses on reducing transaction costs for exports, besides offering incentives to special economic zones (SEZs) and e-commerce.
Measures have also been taken to foster exports of defence and high-technology products. These measures would not only capitalise on India’s strength in these domains and augment exports, but also create employment opportunities.
The Indian government is pitching India as an amicable destination for manufacturing and exporting goods, and the brand new Foreign Trade Policy is being looked at as a paramount step towards realising this goal. The policy promises to transform Indian industry into an export powerhouse. The million dollar question, however, is: will the policy really be effective in reducing the Indian electronics industry’s export disability? The jury is still out on that.


Policy highlights

  • Five existing schemes to promote exports merged into a single Merchandise Exports from India Scheme (MEIS)
  • Incentives in the form of duty scrips as a per cent of realised FOB value of exports
  • Service Exports from India Scheme (SEIS) replaced by the Served from India Scheme (SEIS)
    – Benefits available to only service providers located in India
    – Incentives will be based on net foreign exchange earned
  • SEZ units will be entitled to the benefits of MEIS and SEIS
  • Duty scrips will be freely transferable and can be used for payment of customs duty and excise duty in India; reduced export obligation for capital goods purchased from Indian suppliers under the EPCG scheme
    – Higher level of rewards under MEIS export for products with high domestic content and value addition
  • Trade facilitation and ease of doing business; online filing of documents and applications, and paperless trade in a 24×7 environment
    – Online inter–ministerial consultations
    – Simplification of procedures/processes, digitisation and e-governance
  • Measures to facilitate and encourage export of defence goods
  • New initiatives for EOUs, EHTPs and STPs—they can share infrastructure and inter–unit transfer of goods will be allowed

 A few reactions to the new policy

Here is a collation of thoughts shared by veterans in the Indian electronics industry, who also represent important associations in this sector.

Rajoo Goel ELCINA

“Slashing of export benefits under FTP 2015-20 will hurt ESDM industry

Rajoo Goel , Secretary General, ELCINA

We welcome the long awaited Foreign Trade Policy 2015-2020, which offers export incentives under the Merchandise Export from India Scheme (MEIS) for the benefit of exporters under Chapter 3 of the Foreign Trade Policy. The scheme is designed to promote export of products with high export intensity potential, so as to offset disabilities of conducting business in India caused by infrastructure and ecosystem inefficiencies.
The new MEIS scheme now provides an incentive rate of only two per cent, and that too for export to countries in Category B (mostly developing countries). Countries in Category A and Category C defined in this scheme have been omitted for incentives on exports of all electronic products and components.
As compared to the earlier Chapter 3 incentive schemes, for most of the electronics industry, the rate of incentives has been reduced by at least 2-3 per cent. In the earlier FPS scheme, a two per cent incentive was available on products exported to any country in the world. This has been withdrawn for all electronics products, except for exports to Category B countries. Exports to major markets such as USA and the EU are no longer eligible for incentives. The earlier FMS (Focus Market Scheme) provided an incentive of three per cent on exports to most developing markets including Latin America, Africa, Southeast Asia, eastern part of Europe (outside the EU) and the Middle East. This has been reduced to two per cent in the new policy. In a highly competitive export market, a disability of 2-3 per cent is bound to severely impact business and export earnings, which we apprehend will suffer a great deal.
We appreciate the government’s initiative to help the industry with this consolidation exercise, but the drastic reduction and elimination of developed and high potential markets such as the EU, the UK and USA as well as China, Korea and Japan is a big setback to the industry and its ability to compete globally.
It is important to mention here that the electronics industry has been operating under highly adverse conditions and facing various disabilities like cost of finance, logistics, etc, making it difficult to compete with its international counterparts like China, Taiwan and most ASEAN countries.
We would like to reiterate that manufacturers in India have been exporting extensively to Category A countries, and the export share of these countries is estimated at 45 per cent. With the introduction of the MEIS, the existing incentives have been slashed, which will make it harder to compete and retain global market share. The earlier incentive under the Incremental Export Benefits Scheme in FTP 2009-14 has also been eliminated.
ELCINA has approached the Directorate General of Foreign Trade (DGFT) and Nirmala Sitharaman, minister of state (independent charge) for commerce & industry, with a strong plea that incentives offered in the earlier FPS and FMS may be continued under MEIS. Our recommendation is that the incentives must be revised for Category A and Category C countries. This is not the right time to withdraw benefits which are required to provide the much needed impetus to the ‘Make in India’ campaign, and create long-term capability and strength in the Indian ESDM industry.

Mr. Vinay Shenoy, Chairman, IESA“More initiatives are required to overcome the inverted tax and duty structure, limited scale amongst domestic companies, strong competition from Southeast Asian countries, capital intensity of the electronics industry, existing disabilities of setting up and running businesses and infrastructure bottlenecks

Vinay Shenoy, chairman, IESA & managing director, Infineon Technologies

I am glad to see that electronics manufacturing is covered under the ‘Merchandise Exports from India Scheme (MEIS)’. This, coupled with the planned restoration of the three per cent interest subsidy scheme, freely transferable duty credit scrips and extending the export benefits to units in SEZs/EOUs, should partially reduce the well-acknowledged disability of electronics manufacturing in India. However, more initiatives are required to overcome the present inverted tax and duty structure, limited scale amongst domestic companies, strong competition from Southeast Asian countries, capital intensity of the electronics industry, existing disabilities of setting up and running businesses, and infrastructure bottlenecks.
The steps taken for promoting exports from the electronics sector should include action for improving product standards, creating compliance conformity mechanisms, discouraging non-essential imports and offering trade promotion opportunities for the sector. Promoting manufacturing and exports of products.

Vinod Sharma5“In my opinion, the policy does not really recognise the need for support required by the electronics manufacturing industry

Vinod Sharma, chairman, CII National Committee on ICTE Manufacturing & managing director, Deki Electronics     

The Foreign Trade Policy 2015-2020 manifests mutually conflicting visions of the government towards reduction of export disability in the electronics manufacturing sector. On Page 40 of the policy document, this sector has been recognised for suffering on account of the relatively high cost of energy, finance and logistics. In addition, there is no tariff protection in this sector due to the non-existence of a formal duty structure. Therefore, this sector needs to be compensated well enough to be globally competitive. The present allocation towards the sector is not at par with the previous incentive schemes, like the Focus Product Scheme and the Focus Market Scheme.
It is felt that the categorisation of countries in the eligibility matrix of MEIS has been done on the basis of the overall trade deficit of our country. Category A refers to countries with lower trade deficit whereas Category B and Category C include countries with higher trade deficit. The government feels that incentivising trade at two per cent for Category B and Category C will help to reduce the trade deficit. However, I do not agree with that. The same categorisation of countries for all product lines is inappropriate, as each product has specific target countries for doing business. Even in a sector like electronics manufacturing, components and finished products have different target markets.
Moreover, 45 per cent of the electronics export business is being done with Category A countries. Earlier, companies were availing a 2-7 per cent incentive on such trade. The incentive has now been reduced to zero, even though there is an 8-10 per cent deficit even in trade with Category A countries. The message being conveyed is “to not expect additional incentives from the government for reducing export disability beyond a point.”
In my opinion, the policy does not really recognise the need for support required by the electronics manufacturing industry. The sector is not looking merely at freeloading incentives or continuous subsidies from the government; its real need is the mitigation of potential bureaucratic and infrastructural hurdles that eventually add to the cost of the final product. What the government should realise is that an expensive product will only serve to enhance export disability—in reality, exports in the electronics manufacturing sector have fallen sharply in the past two to three months after the implementation of the new policy.
There are many multinational electronics manufacturing companies like Dell, Jabil and Flextronics in India. As a consequence of this policy, they are likely to shift export-oriented manufacturing to their facilities in countries like China or Vietnam, which enjoy higher incentives. These companies will not lose out on their global business, but India as a country, will surely do so.

By Sudeshna Das

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