Millennium Post

GST rollout: Big push to exports

With the rollout of Goods and Services Tax now more or less certain from July 1, 2017, it is entirely possible that the government will defer the post-Budget Export-Import (Exim) Policy to take note of the implications of this game-changing indirect tax reform. Already a committee constituted by Director General of Foreign Trade is working to align rates with GST.

Nevertheless, efforts are on to accelerate India's exports, which did not do well in the past couple of years, particularly due to the global slowdown. Now that the world economy is picking up and the Chinese economy is slowing down, new exports opportunities have come India's way. Fortunately, demonetisation has not impacted India's exports significantly so far.

There are certainly major concerns about India's exports, and economic managers should now come out with a revival plan. In light of the global situation, particularly with the growth in world trade volumes slowing down to 1.9 per cent in 2016, the lowest since the 2009 financial crisis, and rising non-tariff measures by various countries, a strategy is surely needed. Also, exports contribute significantly to job creation as 45 per cent of India's exports are from the Micro, Small and Medium Enterprises (MSME) sector. Besides, farm exports have picked up in recent years at around $50 billion annually with tremendous potential for further growth, thereby helping Indian farmers.

Though India is among the fastest growing economies despite the challenging global economic environment, its exports are not immune to global shocks. The growth in the dollar value of merchandise exports over 2015-16 was a negative 15.6 per cent. However, there are some green shoots, and growth in Indian exports is expected to be positive in the coming months. Many export items had moved to positive growth zone this financial year from a negative zone last year.

India's exports have hovered around $300-320 billion in the last couple of years after an average 20 per cent growth in the previous ten years barring a few hiccups. India's share in global exports is still tiny at 1.6 per cent in 2015 compared to China's 13.8 per cent. In the medium term, India should aim at raising its share in global exports to at least a modest 5 per cent.

For this, India's merchandise exports should reach around $882 billion by 2020, which means India's export growth rate needs to be around 27 per cent annually in the next five years, according to a finance ministry working paper. This is not difficult as India's exports grew by 31 per cent in 2004-05 and 40 per cent in 2010-11. In fact, our export potential has not been tapped fully. India had chalked out a plan to achieve $500 billion annual exports by 2014 and double it to $1 trillion by 2020. But it is nowhere near that in the face of global slowdown and policy impediments. It is high time that a clear cut strategy is now evolved to push exports growth on a war-footing.

According to H A C Prasad, senior economist and Additional Secretary in the Finance Ministry, rationalising import tariffs is critical as the inverted pyramid import duty structure is coming in the way of India's exports. Some imported raw materials are more expensive than finished imports resulting in domestic industries growth being hampered and exports of value added products retarded.

Prasad argues in the working paper that it was high time tariffs are rationalised as realised tariffs are very low at 2.8 per cent in 2015-16, which was less than one-fourth of the average applied tariffs. This is because of various exemptions provided by the government. If refunds and customs duty drawbacks are deducted from gross customs revenue, then the net realised tariffs would still be less. This clearly showed there is enough scope for reducing applied tariffs as well as WTO bound tariffs.

He also emphasised the need to streamline Export Promotion Schemes as many duties will be subsumed with the rollout of GST. With the lowering of some tariffs, some Export Promotion Schemes can be phased out, and duty drawback rates revised downwards. Duty Drawback is paying back of a duty previously paid on exporting excisable articles or on re-exporting foreign goods. This is scheme is popular with the exporters.

There is also need to develop export infrastructure expeditiously in India so as to make India's exports competitive. The turnaround of ships at Indian ports has improved considerably in recent years. But it needed to improve further to match global standards. It takes only six hours for a ship to turn around at Singapore ports. In India, it still takes a few days though it may not be as high as six days in the past.

The time needed for transportation of goods from the place of production to the seaports and airports is still very high. There is a need to monitor the movement of trucks through GPS system to ascertain the actual time taken in transporting goods. With the rollout of GST, a unified market will be created thereby reducing the long time taken for clearance of trucks at check posts during inter-state movement of goods. There is also need for reforming and improving digital infrastructure.

Apart from rationalising export promotion schemes, Prasad said there is also demand based export basket diversification. In most of the top world imports with major trading partners, the presence of India's exports is very small. In 2015, in the top 100 World import items, only in five items, India's exports accounted for more than five per cent share of the global imports of that item. This is despite the fact that India exported at least 85 of the top 100 world import items.

In value terms, these exports from India accounted only 1.6 per cent of the total imports of these 100 items in the World. This required some clear cut strategy. So far India has been exporting on supply-based approach. It should now become demand based--export those items for which there is a demand by explicitly setting up modern units that compete globally on those products.

With the rollout of GST, a whole lot of duties will be replaced, which will result in lower total duties. So it is time to rationalise several export promotion schemes. One could consider the abolition of popular Export Promotion Capital Goods scheme. The scheme is increasingly losing relevance with lowering of duties and with lower taxes after GST, abolition of the scheme will encourage Make in India campaign by encouraging domestic manufacture of these capital goods. This will also result in more jobs.
IPA (The views expressed are strictly personal.)

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