92
Export Incentives in India- Impact Assessment
Dr. Javid Ahamd Bhat
Assistant Professor in Economics, Higher Education Department J&K, India ABSTRACT
Export incentives formed an integral part of India’s trade strategy since the beginning of Five-Year Plans. This paper is concerned with the analysis of the rationale of India’s export incentives, both direct as well as indirect, as an instrument of export promotion for economic development of the country in view of persistent deficit in its trade balance resulting form its mounting development expenditure. Apart from examining the impact of export incentives on the overall performance of the export sector of the economy, it also examines the case for an export promotion policy and the controversy between export promotion and import substitution. As regards the analysis of the export incentives and export policy assessment through the data on exports, the study has been divided into three phases. Phase I (Covering the period up to 1985– inward looking strategy), Phase II (Covering the period from 1985 up to 1991– partial reform era) and Phase III (Period after 1991– outward oriented strategy). The basic objective, however, of the policy of three phases appears to have been identical. This being to meet the problem of India’s Balance Of Payments (BOPs) which tended to deteriorate progressively.
Keywords: Deficit, incentives, inward looking, outward oriented trade strategy
INTRODUCTION
Export policy is one of the important constituents of India‟s economic policies. This policy has been claimed to be based on long-term objective of five year plans viz., stability, self-reliance and growth. Export promotion policy has been emphasized with a view to earn more and more foreign exchange, to overcome acute foreign exchange crisis, mounting debt service obligation and growing BOP crisis. The export incentive system is one of the basic ingredients formed within the overall export promotion policy and external environment.1 The regime of export incentive policy adopted since the beginning of planning process performed two basic roles. First it sought to provide compensation for disincentives implicit in domestic economic policies and second, it provided an incentive for product market development.2
Need For Incentives
A developing economy has the imperative necessity to adopt a dynamic trade policy to promote its economic development for various reasons. Such a country is inevitably confronted with a persistent deficit in its trade balance arising out of its mounting development expenditure which calls for increasing imports of capital goods, components, raw materials and technology, but such imports cannot be matched by increase in exports. The persistent deficit in its balance of trade has the potential to produce an adverse effect on its development. This is because a mounting trade deficit leads to a mounting foreign debt which has been found to produce an adverse effect on its rate of development. On the other hand, if the development expenditure is reduced to meet the problem of trade deficit, it will have an adverse effect on its economic development.3
The problem of trade deficit in the wake of increasing development expenditure has led the developing countries to adopt a trade policy to cope with this problem. But there has not been a uniform policy adopted by all the developing countries. But broadly two kinds of policies may be distinguished which these countries have adopted:
i.Some countries adopted the technique of import substitution combined with export promotion measures in the context of a comprehensive control of foreign trade, while
ii.Some countries went for an export and market-oriented approach combined with a positive role for the state.
1.
Paramjit Nanda and P.S. Raikhy, Performance of Indian Exports: Policies and Prospects, 1998, p. 173.
2. Martin Wolf, India’s Exports, 1982, p. 79 and Paramjit Nanda and P.S. Raikhy, op. cit., p. 174. 3. Pratima Dikshit, Dynamics of Indian Export Trade, 2002, p. 193.
93 Countries adopting the policy of comprehensive control of international trade like India up to recent times had a dismal performance as compared to the countries adopting an export and market-oriented approach like South East Asia.4
However, the promotion of exports, either primary or secondary, has long been considered a major ingredient in any viable long-run development strategy. These exports act as an engine of growth and as means for financing imports in diverse ways which include limitless world demand, technological advancement, competitive/efficient allocation of resources into units of economic sizes, etc., thereby earning lot of foreign exchange for a country.
The various export incentive measures─ both direct and indirect which are discussed in detail in the following paragraphs include: fiscal incentives, monetary incentives, import policy for exporters, production incentives, bullion specific incentives, organizational support, exchange rate changes and convertibility of rupee and export controls.
Fiscal Incentives: As is well known fiscal policy is an important component of economic policy which is being employed by the different countries throughout the world to attain various objectives depending upon the circumstances in a country.
In India fiscal policy has been operated as an aspect of the policy of planned economic development under a system of comprehensive control of foreign trade sector. It was geared to the promotion of such objectives as comprehensive tariff and non-tariff controls and restriction on imports, the protection of the import-substitute industries, provision of a number of fiscal incentives to the export industries in the context of a system of licensing and the imposition of high consumption taxes to reduce domestic consumption to facilitate the growth of exportable surplus.5
However, since 1991-92 this policy has undergone a fundamental change with many of the regulatory and control measures discontinued or drastically modified and as such the approach of fiscal policy towards the external sector has undergone a sea change. The tariffs tended to be reduced whereas export incentive schemes increased for the export industries. The various fiscal incentives provided by the government over the years for the promotion of exports include:
Duty Drawback Scheme (DDS): This scheme was introduced in 1954 with the objective to offset existing disincentives by reimbursing exporters for tariffs paid on imported raw materials and intermediates and central excise duty on domestically produced inputs which enter into export production. Efforts were made in 1975-76 to ensure speedy provision of assistance. For this purpose, Performa for the fixation of provisional rate of drawback was simplified. In 1980-81, efforts were made to streamline this scheme on the recommendation of „Duty Drawback Committee‟.6
The sums involved were not very large: about US$ 43 million in import duty drawbacks in 1975/76 and US$ 52 million in drawbacks of customs excise duties in the same year. For industrial products, which received the largest proportion of drawbacks, these were significant figures, however, the combined figure of US$ 75 million in 1974/75 amounting to almost 80 percent of the level of expenditures on the market development fund in that year. The duty drawbacks were granted exclusively on manufactured exports, largely to manufactures other than machinery and transport equipment and chemicals.7
Duty drawback was provided either on an all-industry basis or at a special brand rate computed for a particular firm‟s products. Eighty percent of drawback was paid on the former basis. All industry rates were supposed to be recomputed quarterly, especially when there were significant changes either in raw material prices or industry rates. The drawback was usually computed at a specific rupee value and not an ad valorem percentage rate to avoid a rise in the payment caused only by inflation in the value of exports. This procedure created problems when the duty itself was computed as an ad valorem percentage and when the prices of inputs are rapidly, as happened in the 1970s.8
4. Ibid., p. 197.
5. Pratima Dikshit, op. cit., pp. 212-13.
6. Martin Wolf, op. cit., p. 87 and Paramjit Nanda and P.S. Raikhy, op. cit., pp. 188-89. 7. Martin Wolf, op. cit., p. 87.
94 In 1986, this scheme was made more effective through introduction of quick payment procedure under which sanctions were to be given within 24 hours and actual payment effected within 15 days. The drawback rates were revised and higher rates were fixed for certain thrust sectors like leather and leather manufactures. Moreover, all industry rates have been fixed for the first time for number of new items like electronic items and for a number of identified products to boost their exports. At present, 450 items are covered under all industry rates. In June 1988, special provision in the schedule of drawback rate was made for exporters availing of advance licenses or passbook scheme benefits. A simplified brand rate fixation scheme for duty drawback was introduced in October 1988 for manufacturer-exporters of engineering goods, electronic goods and chemicals.9
On June 1, 1989, a new schedule for various export products was introduced as regards the DDS. Some of the basic features of the revised drawback schedule were: a) Cognizance was taken of the increased incidence of duties suffered by industries using imported inputs on account of variation in exchange rates and spurt in prices in the budget proposals. Besides where MODVAT benefit was not available, impact of increased incidence suffered by indigenous inputs due to rise in prices or duties was reassessed and the drawback rates were revised and improved for a wide range of products especially those where such rates were on a specific basis.10 During July 1992, the ambiguity in respect of the International Price Reimbursement Scheme (IPRS) and DDS were removed for the benefit of exporters.11
However, importance of duty drawback has declined since 1981 due to introduction of advance licensing system which enables exporters to import duty-free inputs. Duty drawback as percentage of total exports decreased from 2.1 percent in 1970-71 to 1.47 percent in 1987-88.12
Drawback was provided both for excise duties on domestically produced products and for customs duties on imports. In general, for the same input, the custom duties were higher than the excise duties alone, because of the addition of import duties. Thus, it made a great deal of difference whether the inputs were counted as domestically produced or imported. To obtain drawback of the customs duties on all his inputs, an exporter had to prove that some specific set of imported inputs were incorporated in the export product. In the absence of such proof the rate was calculated on a weighted average basis either for a product or for a manufacturer. The weights were the relative quantity of domestic and imported inputs used in the product for all production in India or used by the manufacturer. Consequently, those who wished to obtain the largest possible drawback had to keep separate books for domestic and imported inputs.13
In addition the complex procedures involved in agreeing on the initial rate of drawback, a process which used to take appreciably over a year, also created difficulties. This was particularly serious for firms with a frequently changing mix of inputs, which includes most multi-product firms. It was also frequently argued that drawbacks did not adequately allow for wastage, which raised the costs for inputs that go through a long production chain.14 Duty Exemption Scheme (DES): Duty Exemption Scheme (DDS) is in operation since February 1976. This scheme grants custom duty exemption to registered exporters for import of specified raw materials against an advance license for the manufactures of specified export products and imposes an export obligation in return. In 1980-81, efforts were made to decentralize duty exemption entitlement certificates which were to be issued by regional authorities. The scope has also been enlarged by addition of more items to the list.15 On April 30, 1990, under the DES, Blanket Advance Licensing was introduced for manufacturer exporters having a minimum net foreign exchange earnings of Rs.10 crore during the preceding 3 years.16
In 1992-97 policy, DES has been further strengthened. Under the scheme, import of duty free raw materials, components, intermediates, consumables, parts, spares including mandatory spares and packaging materials, required for the purpose of export production were permitted. This provided flexibility to exporter to import and export goods within the overall value limits and without any quantitative restrictions except in the case of sensitive
9. Paramjit Nanda and P.S. Raikhy, op. cit., pp. 189-90. 10. Pratima Dikshit, op. cit., pp. 214-15.
11
. PTI Economic Service, Press Trust of India, Vol. XVI, No.22, July 15, 1992, pp.7-13.
12. Paramjit Nanda and P.S. Raikhy, op. cit., p. 190. 13. Martin Wolf, op. cit., pp. 88-89.
14. Ibid, p. 89.
15. Paramjit Nanda and P.S. Raikhy, op. cit., p. 190.
95 goods.17 The exporters have been given a choice to opt for advance import licenses under DES either under quantity or value based norms. In 1994-95, third party exports were given benefit under the scheme.18 Under the DES the value limit for granting duty free licenses which are issued by Zonal Advance Licensing Committees was raised to Rs.2 crores where norm had not been fixed and from Rs.10 crores to Rs.25 crores where standard norms had been fixed w.e.f. 1994-95. The procedural difficulties faced by the value based license holders with reference to MODVAT were minimized and streamlined by enabling such license holders to claim MODVAT or drawbacks, as the case may be, in most cases w.e.f. 1994-95.19
Income Tax and Profit Tax Reliefs: These reliefs have been in operation since 1960. Government has provided tax relief to exporters whose export turnover for any year exceeds that of preceeding year by more than 10 percent. In 1988-89, concessions were granted to manufacturers exporting through Trading and Export Houses. Five year tax holiday was declared for 100 percent EOUs in order to provide them identical status of units in FTZs. In 1992-97 policy, EOUs/EPZs enjoy corporate tax holiday for period of any block of five years during first 8 years of operation and can import the requirements duty free.20 During 2004-05, the income tax benefits where extended on plant and machinery to Domestic Tariff Area (DTA) units by 2004-09 policy which convert to EOU/Electronic Hardware Technology Park (EHTP)/ Software Technology Park (STP)/Bio-technology Park (BTP) units.21
Tax Credit Certificates: The scheme was introduced on September 27, 1965. Accordingly tax credit certificates for an amount upto a maximum of 15 percent or the value of export proceeds realized in India would be granted to an exporter after February 28, 1965. The amount shown in certificate is adjustable against the existing liability of exporters on account of income tax but due to devaluation in 1966, this scheme was terminated.22
Changes in Export Duties: Adjustments in export duties are made in a flexible manner in keeping with the changing overseas market conditions and were mainly designed to increase competitive position of Indian commodities or to raise the unit value realization and to mop up windfall profits accruing to exporters.23 On the recommendation of Chelliah Committee, import duties were reduced from 110 percent to 85 percent in 1993-94 budget, to 65 percent in 1994-95, to 50 percent in 1995-96 and further to 40 percent in 1997-98 budget.24 The customs duties were successively reduced through trade policy measures and reached to 12.5 percent in 2006-07 and further to 10 percent during 2007-08.25
International Price Reimbursement Scheme (IPRS) or Subsidies on Domestic Raw Materials: In order to bridge the gap between the domestic and world price of Indian raw materials, IPRS was launched which provided for refunding to exporters. Initially in 1967, a fund known as „The Engineering Goods Export Assistance Fund‟ was constituted to reimburse the excess of domestic prices over international price of steel. Later on, the scheme was extended from basic steel products to plastic, oil, alloy steel and all types of raw materials which were used by exporters. In August 1989, Simplified Payment System was introduced under which simplified exporters were to be disbursed 75 percent of their claims within 7 working days.26 During July 1992, the ambiguity in respect of the IPRS and Duty Drawback Scheme where removed for the benefit of exporters.27
Export subsidy: Government provides subsides in one form or another to promote exports from the country. In September 1968, the Government gave „Re-plantation Subsidy‟ to assist tea industry. In 1987, 50 percent subsidy was introduced to promote project export. Subsidy is also given for establishing consultancy offices abroad for period of five years.28 During 2002-07 policy, Government provided transport subsidy for exports to units located in North East, Sikkim and J&K in order to boost exports from these states. In addition, this subsidy has been provided for the export of fruits, vegetables, floriculture, poultry and dairy products.29
17. PTI Economic Service, Vol. XVI, No.16, April 15, 1992, p. 8. 18. Paramjit Nanda and P.S. Raikhy, op. cit., p. 190.
19
. Pratima Dikshit, op. cit., p. 221.
20. Paramjit Nanda and P.S. Raikhy, op. cit., p. 190.
21. Economic Survey, Economic Division Ministry of Finance, Govt. of India, 2004-05, pp. 116-18. 22. Paramjit Nanda and P.S. Raikhy, op. cit., p. 191.
23. Martin Wolf, op. cit., p.109 and Paramjit Nanda and P.S. Raikhy, op. cit., pp. 190-91. 24
. Paramjit Nanda and P.S. Raikhy, op. cit., pp. 190-91.
25. Economic Survey, op. cit., 2007-08, p. 145.
26. Pratima Dikshit, op. cit., p. 215 and Paramjit Nanda and P.S. Raikhy, op. cit., p. 203. 27. PTI Economic Service, Vol. XVI, No.22, July 15, 1992, pp. 7-13.
28. Paramjit Nanda and P.S. Raikhy, op. cit., p. 197. 29. Economic Survey, op. cit., 2002-03, p. 111.
96 Stabilization of Prices: All the other aims of taxation can be achieved in a better way only when the domestic prices are stabilized to a maximum possible level. For this purpose, Government fixed minimum as well as maximum prices for commodities and brought changes in export duties.30
Monetary Incentives: Monetary policy like fiscal policy is essentially an instrument of economic policy and has the same objectives as those of economic policy. In a developing economy like India growth in the context of price stability is regarded as the basic objective of economic policy. It follows that in such an economy monetary policy has both developmental and regulatory roles characterized as controlled expansion. It should contribute to promote the growth of productive investment in the economy and to curtail the growth of unproductive investment and inessential demand. To be successful in this regard, it is necessary that there should be operation and co-ordination between fiscal and monetary policies.
Among the various instruments of economic policy, monetary policy is regarded as the best suited to achieve price stability and it is price stability which provides the appropriate environment in which growth can occur and social justice can be ensured. Thus, monetary policy has an important bearing on the behaviour of the external sector of the economy.31 Following are the various monetary incentive schemes being provided by the government from time to time for the export sector of the country:
Cash Assistance: The most important export incentive was cash assistance or Cash Compensatory Support (CCS), which was introduced in August 1966. Its rationale and the basis for the calculations were never made completely explicit. Sometimes it was said to be aimed at offsetting those many domestic taxes on inputs imported or domestically purchased (such as excise and octroi duties), which did not come within the range of the duty drawback system. At other times it was claimed that it offset the differences between domestic short-run marginal costs of production and the realized export price. If the later were indeed the basis and the high private marginal costs were a correct reflection of social costs in the subsidized activities, the incentive would have been concentrated on industries with the least comparative advantage. In practice, it was a variable and somewhat arbitrary incentive focused on a limited group of non-traditional exports. Furthermore, it was usually regarded as a temporary measure: a means of overcoming the short-term bottlenecks to exports, thus ignoring the deep-seated penalization of exports implicit in the trade policy regime.32 In other words, the assistance is provided to compensate exporters for indirect taxes, sales tax, etc., on inputs imported or domestically purchased which are not eligible for refund through duty drawback. The assistance is announced in terms of percentage of f.o.b. value of exports and generally ranges from 5 to 20 percent. The CCS involves single largest direct budgetary outlay in support of exports.33
The most important industry benefited by cash assistance is the engineering goods industry which realized between 35 and 50 percent of total expenditures. This sector, together with chemicals and cotton textiles, accounted for 17 percent of total exports but received as much as 70 percent of total disbursements in 1974-75. Apart from engineering goods and chemicals, plastic goods, sporting goods, carpets and rugs, processed foods, decorticated cotton seed cakes, prime iron and steel, and coir fiber benefited from consistently high rates of assistance in the first half of the 1970s. Broadly speaking, virtually all cash assistance went to manufactures in 1974-75: 32 percent to machinery and transport equipment, 20 percent to chemicals, and 47 percent to other manufactures.34
In October 1975 the government extended CCS to some new products within the categories of marine products, coir products, processed food, handicrafts, leather products, some chemicals and jute products. However, the cash assistance rates on these products were generally below those on engineering goods. The total sum expended on this incentive rose from US$ 61 million in 1974-75 to US$ 264 million in 1977-78 and further to US$ 378 million in 1978-79.35
A new scheme of CCS was introduced w.e.f. July 1986, through which the cascaded structure of taxation has been taken into account for fixing CCS rate of industrial products. Under the new CCS regime, multiplicity of rates has been reduced from 17 to 7 and the compensation for market/product development has been given in highly selective manner. For agricultural products, special compensation for high cost of transportation has been provided. For
30
. Martin Wolf, op. cit., p.109 and Paramjit Nanda and P.S. Raikhy, op. cit., p. 204.
31. Pratima Dikshit, op. cit., pp. 215-16. 32. Martin Wolf, op. cit., pp. 80-81.
33. Paramjit Nanda and P.S. Raikhy, op. cit., pp. 186-88. 34. Martin Wolf, op. cit., p. 81.
97 handicrafts, the value added by labor was taken into account for fixing CCS rates. Compensation for incidence of higher export credit rates no longer enters the computation of CCS rates.36
The proportion of total exports eligible for CCS has risen from a level of about 20 percent in early 1970s to little more than 40 percent in 1990. The product group composition of CCS has changed in keeping with changing commodity composition of exports but has remained concentrated largely on manufactured or processed goods. By 1990-91 approximately 283 items were given grants through CCS in above 8 product groups. The expenditure on CCS amounted to Rs.1774 crore in 1990-91. However, in the light of the substantial liberalization of the trade regime and also due to devaluation of rupee in 1991, this scheme was abolished from July 3, 1991.37
One of the significant disadvantages of the cash assistance programme was that it concentrated on only a few categories, which were not the only products with high potential as exports. Indeed, in certain cases the long-run potential of assisted products must be doubted. Meanwhile the handicrafts, leather goods other than footwear, garments, and most agricultural products received little help. A different problem was that the assistance was traditionally announced quarterly, which made it difficult for firms to plan investments oriented towards exports, when cash assistance was critical to profitability. In any case, since cash assistance was not designed to cover long-run costs, it provided no incentive for such investment. A third disadvantage was the delays in disbursements.38 Liberalization of Export Credit and Finance: The export sector has been treated as a priority sector and the availability of adequate export credit and finance at competitive rates has played an important role in promoting exports of the country. The facilities available to exporters in the form of export credit can be broadly divided into: credit facilities viz., loans and advances─ both short-term as well as long-term and quasi-credit facilities such as guarantees etc., and miscellaneous facilities. The credit facilities, both short-term and long-term, can be provided in two stages viz., a) Pre-shipment credit and b) Post-shipment credit. While pre-shipment credit is required for production, processing and packaging, post-shipment credit is required to extend credit to foreign buyers. The main agencies involved in providing credit are Reserve Bank of India, Export Credit and Guarantee Corporation of India (ECGCI) and Export-Import (EXIM) Bank.39
Short-term export credit is provided by commercial banks, which are authorized dealers in foreign exchange, while medium and long-term export credits are provided mainly by Industrial Development Bank of India and commercial banks refinanced by IDBI. Apart from the commercial banks, the Export-Import Bank of India (EXIM Bank) is also financing different stages of exports. RBI has reduced rate of interest, liberalized credit and adopted interest subsidy scheme and selective approach in providing credit to certain thrust export items. IDBI introduced in 1973 a „Buyer Credit Scheme‟ to grant credit to foreign buyer for value of Rs.1 crore to promote exports of capital goods. Moreover, RBI took steps towards simplifying the procedures relating to exports of capital and engineering goods in 1974-75. The exporters were required to give their applications through IDBI only, rather than through other agencies.40
For providing finance to export sector at concessional rate of interest, duration of credit was increased from 90 to 180 days at 11.5 percent rate of interest while ceiling rate was fixed at 13.5 percent for a period of 90 days with regard to pre-shipment credit. Further rate of interest was reduced from 11.5 percent to 11 percent and for extended period it was reduced from 13.5 percent to 13 percent. The export refinance rate was reduced from 10.5 percent to 10 percent. RBI instructed all banks on 11th November 1992 that at least 10 percent of net outstanding credit be allocated for exports by July 1993. Exporters were therefore provided liberal refinance facilities at 11percent.41 Following the introduction of the new Export-Import Policy for 1992-97 a number of measures have been adopted for the liberalization of export credit. During 1994-95 such measures included: a) Export credit facilities for sub-suppliers, (b) provision of export credit refinance to the extent of 100 percent of the increase in export credit over the monthly average level of 1992-93, and (c) post-shipment export credit to be denominated in U.S. dollars.42
36. Paramjit Nanda and P.S. Raikhy, op. cit., p. 188.
37. Bibek Debroy, Trade Policy Reforms in India and the Import Regime”, Foreign Trade Review, Vol. XXVII, No.3, October- December,
1992, p. 246 and Paramjit Nanda and P.S. Raikhy, op. cit., p. 188.
38. Martin Wolf, op. cit., p. 81.
39. Pratima Dikshit, op. cit., p. 220 and Paramjit Nanda and P.S. Raikhy, op. cit., pp. 192-93. 40. Economic Survey, op. cit., 2007-08, p. 88 and Paramjit Nanda and P.S. Raikhy, op. cit., p. 93. 41. Paramjit Nanda and P.S. Raikhy, op. cit., p. 93.
98 During 1996 further steps have been taken for the liberalization of export credit; with effect from April 1996 export credit refinance at 11 percent was made available for 45 percent of the outstanding export credit as on February 16, 1996 plus 100 percent of the increase in such credit over that level. With effect from November 1996 scheduled commercial banks were provided export credit refinance to the extent of 20 percent of the outstanding export credit eligible for refinance instead of prevailing 45 percent up to the level of such credit on February 16, 1996 plus 100 percent of the increase in export credit eligible for refinance over the level on February 16, 1996.43
The 2004-09 policy proposed provision to deserving exporters, on the recommendation of the Export Promotion Councils, of financial assistance for meeting the costs of legal expenses connected with trade related matters. Besides, to accelerate growth in export of services so as to create a powerful and unique „Served from India‟ brand instantly recognized and respected the world over, the earlier Duty Free Export Credit (DFEC) scheme for services has been revamped and re-cast into the „Served from India‟ scheme by the same policy. Under the scheme, individual service providers who earn foreign exchange of at least Rs.5 lakhs, and other service providers who earn foreign exchange of at least Rs.10 lakhs are eligible for a duty-credit entitlement of 10 percent of total foreign exchange earned by them. In the case of stand-alone restaurants, the entitlement is 20 percent, whereas in the case of hotels, it is 5 percent. Hotels and restaurants can use their duty credit entitlement for import of food items and alcoholic beverages.44 During April 2005, government also decided to set up a „National Export Insurance Account‟ to provide export credit risk cover to large value export transactions and project exports.45
As a consequence of these measures, export credit during 1994-95 increased very substantially by Rs.8296 crores, 4.5 times higher than the expansion of Rs.1730 crores in 1993-94.46 Export credit continued to record higher levels when it reached Rs.65914 crore during 2004-05 and further to Rs.117719 crore during December 21, 2007. Export credit as proportion of exports reached a high of 29.5 percent during the same year.47
Export Credit Rate of Interest Subsidy Scheme: This scheme was launched in 1968. Under this scheme, RBI disbursed rate of interest subsidy at 1.5 percent per annum from „Market Development Assistance‟ of Government of India, Ministry of Commerce to commercial banks and certain eligible co-operative banks on the export credit extended by banks. But on August 1, 1986 the subsidy rate was increased to 3 percent and on October 1989 to 5 percent in respect of pre-shipment and 3.85 percent in respect of post-shipment credit relating to cash exports on payment terms of period not exceeding 180 days. RBI provided special subsidy on behalf of Ministry of External Affairs to EXIM Bank. However, this scheme was abolished on August 1991.48
Rate of Interest Rebates: A scheme known as the „Rate of Interest Rebates‟ was introduced by Government on December 1, 1986 to provide rebate of 20 percent in rupee payment on all new rupee loans granted by financial institutions like IDBI, IFCI and ICICI. The scheme continued upto March 31, 1990.49
Duty Drawback Credit Scheme: This scheme was introduced on February 1, 1976. Under the scheme, banks granted advances to exporters against their entitlements for duty drawback. Such advances were interest free upto 90 days against shipping bills provisionally, certified by custom authorities, towards refund of duty. In the year 1981-82, Rs.17.76 crore were sanctioned to 32 banks while in 1988-89, Rs.35.3 crore were sanctioned to 26 banks.50 Export Credit and Guarantee Corporation of India (ECGCI): ECGCI was originally set up in 1957 as Export Risk Insurance Corporation. Later on, on January 15, 1964, it was transformed into Export Credit and Export Guarantee Corporation (ECGC). In 1983-84, its name was again changed to Export Credit and Guarantee Corporation of India (ECGCI). The primary objective of corporation is to provide insurance to Indian exporters and to extend guarantees to banks covering possible losses arising due to advances made by them to exporters, thus enabling greater flow of finance from banks to exporters. In 1964-65, ECGCI introduced two schemes viz., a) the Post-Shipment Export Credit Guarantee Scheme and b) Export Finance Credit Guarantee Scheme.
43. Ibid., pp. 220-21.
44. Economic Survey, op. cit., 2004-05, p. 117. 45
. Economic Survey, op. cit., 2005-06, p. 118.
46. Economic Survey, op. cit., 1995-96, p. 56. 47. Economic Survey, op. cit., 2007-08, pp. 88-89. 48. Paramjit Nanda and P.S. Raikhy, op. cit., pp. 193-94. 49. Ibid., p. 194.
99 Under the first scheme, corporation‟s responsibility was 66 percent of loss incurred. Under second scheme, corporation provided discounting facilities upto 125 percent of value of exports in case of those commodities where export prices were lower than domestic prices. In 1967, the corporation introduced „Export Performance Guarantee‟. In 1969, corporation increased percentage of risk covered under its insurance policy from 80 percent to 85 percent for commercial risk and for political risk percentage was increased to 90. Moreover, ECGCI introduced „Service Policy‟ to cover (90 percent) risks involved in rendering services to overseas parties. On August 1, 1970, „Packaging Credit Guarantee‟ was introduced for benefit of Indian parties. „Construction Work Policy‟ was introduced to cover risk (85 percent) of loss involved in undertaking civil engineering construction work abroad. In 1971-72, ECGCI introduced „Transfer Guarantee‟ to Indian banks against letters of credit by foreign banks. ECGCI liberalized „Export Production Finance Guarantee‟. Apart from above mentioned guarantees, the corporation has special policies and special schemes (Lines of Credit Insurance, Overseas Investment Insurance) with total guarantees reaching to 9.51
Export Development Fund (EDF): EDF was established with grant of Rs.10 crore in EXIM Bank on March 31, 1986 to undertake techno-economic research surveys and for providing technical, administrative and financial assistance to exporters especially of new products and new markets.52
Monetary incentives given by RBI in the form of period of credit (180 days) and cost of credit are inadequate and there is need to reduce rate of interest and to increase the period of loan (minimum one year) for further growth of exports.
Import Policy For Exporters: In order to provide export sector of the economy with access to importable inputs at international prices, import policy allows special facilities for registered exporters. For this purpose, government has introduced various types of import licenses subject to certain export obligations. Government has been extending import licensing facilities to Export Houses, 100 percent Export Oriented Units (EOUs), Foreign Trade Zones (FTZs) and manufacturer exporters.
Introduction of Import Licenses: The Government introduced Import Entitlement Scheme (IES) in 1957, to enable exporters to get imported raw materials. In 1965, change was introduced in this scheme and exporters where allowed IES licenses on the production of bank certificates evidencing the actual realization of export proceeds. IES was withdrawn due to devaluation of Indian rupee in 1966 but soon reintroduced in revised form in August 1966 under the name of Import Replenishment Licenses (REPs).53 In practice, they were given to exporters, both as an incentive, since the inputs commanded a scarcity premium (especially as replenishment licenses were in free foreign exchange when other licenses were not), and as a necessary condition for increased export activity, since additional imported inputs were thus made available to exporters although the after high rates of duty still had to be paid. REPs could be transferred under limited conditions, initially to suppliers of inputs to the exporter, and then to firms in the same industry group. The degree of transferability steadily increased. Thus, the possibility that REPs might exceed the needs of the firms was implicitly admitted. In theory, however, the REP was supposed to supply only necessary inputs for the exporter himself.54
A serious limitation with the REP was the positive relation between the incentive to export and the share of imports in production costs. This was particularly significant because of the highly variable REP rates. In the ICICI sample, for example, rates varied from 5 percent for black steel tubes to 50 percent for auto tyres. Restrictions on transferability, on the import of items produced domestically, and on the proportion of the license to be used for specific items severely reduced both their value and the flexibility provided to exporters.
Another serious drawback of REPs was that their value, which depended on the premium, was highly unstable and tended to fluctuate directly with the business cycle and with foreign exchange scarcity. The ICICI study indicated that the average premium for its sample fell from 40 percent of face value in 1972-73 to 27 percent in 1974-75. Premiums also depended on the value of the particular goods that a specific replenishment license permitted a firm to import.
51. Ibid., pp. 194-96. 52. Ibid., p. 204. 53. Ibid., p. 197.
100 Except for the special class of gems and jewellery, which were dominant because of the need to import diamonds for polishing, the largest shares went to engineering goods (23 percent in 1974-75) and to chemicals (11 percent), as was the pattern with cash assistance. In fact, excluding the import of diamonds, these two industries received 52 percent of all licenses in that year. Assuming an average premium of 25 percent and an excess of REPs in relation to import requirements for export, the value of the REP as an export incentive in 1974-75 (excluding gems and jewellery) was only about US$ 35 million.55
In 1968, system of Advance License (AL) was introduced under which exporters could import specified materials duty free on the basis of letters of credit and/or export orders. In 1969-70, system of „On Account‟ and „Import License‟ was introduced with a view to grant AL. In 1975-76, new system of „Automatic Licensing‟ was introduced under which manufacturer-exporter or an eligible Export House who obtained import-replenishment license on exports during 1974-75 was allowed to get „Import License‟ for 1975-76.
In 1980-81, the scheme of AL was made more comprehensive and number of procedural simplifications were introduced in this scheme so as to make it more responsive to export production. In 1981-82, facility of importing goods (not included in shopping list) against REP licenses was extended to all manufacturers (along with manufacturer-exporter). Further, AL scheme was simplified permitting exporters to apply for licenses on the basis of predetermined input-output norms. Established manufacturer-exporters who had been exporting for at least three years were permitted to bulk of AL with single duty exemption entitlement certificate. In 1983-84, the facility of „Repeat Operation‟ of Automatic License was extended to Export Oriented Units (EOUs).56
In 1986-87, the scheme was liberalized to include all imported inputs as against imports of only about 145 items. In 1990-91, REP system was enlarged and restructured to make it the principle instrument for all categories of export. It was since then called Exim Scrips and were made freely tradable.57 A uniform REP rate of 30 percent of f.o.b. was made applicable to all exports with some exceptions (previously rate ranged between 5 and 20 percent). However, the system of Exim Scrips was abolished on March 1, 1992 and replaced by LERMS. During March 1992, system of Value Based Advance License (VABAL) was introduced. Physical quantities and norms were not laid down for individual inputs. Self-certification AL was available for Export/Trading/Star Trading Houses.
A new scheme of „Transferable Advance License‟ has been introduced. During July 1992, drastic reduction in value addition norms for VABAL of several items was announced to boost exports and allow flexibility. The items include raw cashew (from 59 percent to 33 percent), carpets (from 500 percent to 35 percent), galvanized sheets (from 40 percent to 25 percent), steel (from 60 percent to 25 percent), ophthalmic lenses (from 100 percent to 75 percent), transformers (from 300 percent to 100 percent) and adhesives (from 200 percent to 100 percent).58
During October 1992, Special Import License (SIL) scheme was introduced in order to import specified items which were in the restricted list. The scope of items importable under SIL was enlarged during 1994-95. Besides, bank guarantees and legal undertaking for AL was rationalized and simplified during the same year. In 1995-96, AL was made transferable after the export obligation fulfilled and bank guarantees redeemed.59 During April 1995, the three sensitive lists for VABAL had been compressed virtually into one list and the number of items had also been considerably reduced.60 However, during March 1997 the contentious VABAL scheme has been abolished and 542 items have been transferred from the restricted list to the special Import License and freely importable list whereas the Quantity Based Advance License (QABAL) has been retained.61 Export obligation under AL was enhanced from 12 months to 18 months by the 1999-2000 policy.62 During 2000-01, payments of all kinds of duties on AL were exempted.
SIL was abolished from 01-04-2001.63 During 2001-02 policy, AL scheme was liberalized and the facility was extended to deemed exports and intermediate supplies. Modifications in the scheme included: increased entitlement of the license, additional facility beyond this entitlement as well against execution of bank guarantee, etc. Duty Free
55. Ibid., pp. 81-87.
56. Paramjit Nanda and P.S. Raikhy, op. cit., pp. 197-98. 57. Bibek Debroy, op. cit., p. 246.
58
. Economic Survey, op. cit., 2002-03, p. 107 and PTI Economic Service, Vol. XVI, No.22, July 15, 1992, pp. 7-13.
59. Paramjit Nanda and P.S. Raikhy, op. cit., pp. 198-99.
60. Rakesh Hari Pathak, EXIM Policy: Easing Controls”, PTI Economic Service, Vol. XIX, No. 16, April 15, pp. 52-58. 61. Pratima Dikshit, op. cit., p. 230.
62. Datt and Sundharam, op. cit., pp. 723-24. 63. Economic Survey, op. cit., 2000-01, pp. 114-16.
101 Replenishment Certificate (DFRC) scheme was simplified. Important simplifications were extension of validity of DFRC from 12 months to 18 months, automatic calculation of CIF value under the scheme without reference to international price on individual inputs, etc.64 The Medium Term Export Strategy (MTES) for 2002-07 has operationalised the procedure for duty free import of fuel under the AL scheme, provided the license holder has a captive power plant.65
The 2004-09 policy has allowed transfer of the import entitlement under DFRC scheme in respect of fuel to the marketing agencies authorized by the Ministry of Petroleum and Natural Gas to facilitate sourcing of such imports by individual exporters. In addition, the other important modification made in the scheme was the permission to import gold of 18 carat and above under the REP scheme.66 In April 2005, different categories of AL‟s were merged into a single category for procedural facilitation and easy monitoring.67 To promote development and export of auto sector, import of new vehicles by auto manufacturers has been allowed for R&D purposes without homologation during April 2006.68
Import Licenses Linked with Exports: Another important incentive scheme for the promotion of exports is the import licenses which are issued on the basis of export performance of Registered Exporters/Export Houses/Trading Houses. Export Houses could get import license if they exported non-traditional goods worth Rs.25 lakh during 1970 of which Rs.5 lakh exports were to be produced by other manufacturers of non-traditional items. Supplementary initial licenses were issued to those Export Houses which increased their exports by more than 10 percent over exports in preceding year. In 1977-78, Export House could get license on the basis of 5 percent of their exports of specified products manufactured by large units plus 33.5 percent of products manufactured by small scale units (limit decreased to 15 percent in 1981-82). Trading Houses were made eligible for additional licenses at 20 percent of value of exports of select products manufactured by small scale units and 7.5 percent of other exports of select products in 1980-81. Special provision was made for import of machinery subject to export obligation. In 1982-83, manufacturer-exporter who exported at least 10 percent of their production of selected products subject to minimum of Rs.5 lakh or who exported selected products of minimum of Rs.1 crore (f.o.b.) in value during any of two previous financial years could import machinery upto Rs.20 lakh. These exporters could utilize licenses on repeat basis.69
However, in 1990-91, scheme of additional licenses was abolished and in lieu of such additional licenses these houses are eligible for REP licenses at lower rate. Trading Houses could import restricted items upto Rs.20 lakh, banned items upto 5 percent of license (not exceeding Rs.5 lakh).70
Export Promotion Capital Goods Scheme (EPCGS): This scheme was introduced in 1991 under which import of capital goods was permitted at concessional import duty of 15 percent subject to export obligation. In 1992-93 third party exports were also given benefits under EPCGS scheme.71 During 1994-95, EPCGS scheme was extended to service sector in order to tap the potential of the sector for exports. Under the scheme capital equipment at a concessional rate of duty of 15% were allowed to those who render professional services, such as architects, artists, chartered accountants, consultants, doctors, economists, engineers, journalists, lawyers and scientists.72
To give boost to the domestic manufacturing sector, the scope of the Export Promotion Capital Goods Scheme was widened on March 31, 1995 by providing for zero duty import of capital goods of a value of at least Rs.20 crores subject to an export obligation to be fulfilled over time either on F.O.B. or C.I.F. basis. The export obligation was fixed at six times the C.I.F. value of the capital goods in the case of F.O.B. option and four times the C.I.F. value of the capital goods in the case of N.F.E. option within a period of 8 years from the date of issue of the import license. The customs duties were reduced successively over the period of time to harmonize the needs of the Indian industry with the requirements of the capital goods sector.73
64
. Economic Survey, op. cit., 2001-02, pp. 146-50.
65. Ibid., p. 111.
66. Economic Survey, op. cit., 2004-05, pp. 116-18. 67. Economic Survey, op. cit., 2005-06, p. 118. 68. Economic Survey, op. cit., 2006-07, p. 122. 69
. Paramjit Nanda and P.S. Raikhy, op. cit., pp. 199-201.
70. Ibid., p. 201.
71. Pradeep Kumar Mehta, “The EXIM Policy 2003-04: Tools for Promoting Exports”, in Foreign Trade Review, Vol. XXXVII, Nos. 3&4,
Oct-March 2002-03, pp. 60-61 and Paramjit Nanda and P.S. Raikhy, op. cit., p. 199.
72. Economic Survey, op. cit., 1994-95, pp. 76-78 and PTI Economic Service, Vol. XVII, No.16, April 15, 1993, pp. 14-20. 73. Pratima Dikshit, op. cit., pp. 221-22.
102 On 31 March, 1997 duty on capital goods was brought down to 10 percent. Under the zero duty EPCG scheme, the threshold limit for zero duty imports has been reduced from Rs.20 crore to Rs.5 crore for agricultural and allied sectors.74 During 1999-2000, under the EPCG scheme the threshold limit for zero duty capital goods was reduced from Rs.20 crore to Rs.1 crore for chemicals, plastic and textiles.75 During 2000-01, EPCG scheme was extended uniformly to all sectors and capital goods without any threshold limit and on payment of 5 percent duty.76 The 2001-02 policy has further strengthened the EPCG scheme by permitting imports of jigs, fixtures, dies, moulds for the full c.i.f. value of the license, extension of the facilities to the license holders to submit either a consolidated statement signed by the banks or separate statements signed by the individual banks, extension in export obligation for licenses issued during 1990-96 up to 31-03-2002 and for a period of 2 years for licenses issued in 1997 and 2002, etc.77 The 2002-07 policy, under EPCG scheme, exempted small-scale, cottage and handicrafts sector from maintaining the average export obligation in order to improve their productivity and export competitiveness.78 In 2004-09 policy, EPCG scheme has been further improved upon by providing additional flexibility for fulfillment of export obligation, facilitating and providing incentives for technological up-gradation, permitting transfer of capital goods to group companies and managed hotels, doing away with the requirement of certificate from Central Excise (in the case of movable capital goods in the service sector) and improving the viability of specified projects by calculating their export obligation based on concessional duty permitted to them. Import of second hand capital goods without any restriction on age has been permitted and the minimum depreciated value for plant and machinery to be re-located into India has been reduced from Rs.50 crore to Rs.25 crore. In addition, duty free import of capital goods for agriculture sector were allowed under the EPCG scheme.79
During 2007, EPCG scheme has been rationalized and the tiny and cottage sector has been provided extended export obligation facility. Provision has also been made for waver of export obligation because of force majeure or other unforeseen circumstances/reasons leading to the inability of exporters to fulfill export obligations. Issue of EPCG for import of spares, tools and refractory was also allowed for existing imported plant and machinery (whether earlier imported under EPCG scheme or not).80
Setting up of Import-Export Stabilization Fund: In 1963, revolving fund called „Import-Export Stabilization Fund‟ was introduced to finance imports of additional raw materials.81
Import-Export Pass Book Scheme: On the recommendation of Abid Hussain committee report, Import-Export Pass Book Scheme was introduced from October 1,1985 for registered exporters, Export Houses, Trading Houses and deemed exporters. Under this scheme, exporters exporting for at least three years could get duty-free imports for export production and pass book would serve as single all purpose duty-free import license. The scheme intended to eliminate possible delays in acquiring license under duty exemption scheme.82 Later on this scheme has been replaced by a new scheme known as Duty Entitlement Pass Book (DEPB) scheme by 1997-2002 policy on 31 March, 1997 which entitles exporters to import goods duty free for export production. Greater converge and transparency is involved in the scheme.83 The 2000-01 policy removed threshold limit for fixing new DEPB rates.84 During 2007, the validity of DEPB scheme was extended up to March 31, 2008. The scheme has been modified to allow reimbursement of the cost of duty on fuel and special additional duty by way of notifying brand rate of DEPB for such products.85
Post-Export Duty Replenishment License: A scheme know as Post-Export Duty Replenishment License was introduced during 1999-2000 for enabling imports of inputs on the basis of input-output norms and uniform value
74. V. Ramakrishnan, “EXIM Policy: A Faint Hearted Attempt”, in PTI Economic Service, Vol. XXI, No.16, April 15, 1997, pp. 15-19 and
Paramjit Nanda and P.S. Raikhy, op. cit., p. 199.
75. Datt and Sundharam, op. cit., pp. 723-24. 76
. Economic Survey, op. cit., 2000-01, pp. 114-16.
77. Economic Survey, op. cit., 2001-02, pp. 146-50. 78. Economic Survey, op. cit., 2002-03, p. 111. 79. Economic Survey, op. cit., 2004-05, pp. 116-18. 80. Economic Survey, op. cit., 2007-08, p. 145. 81
. Paramjit Nanda and P.S. Raikhy, op. cit., p. 202.
82. Pradeep Kumar Mehta, “The Exim Policy 2003-04: Tools for promoting Exports”, in Foreign Trade Review, Vol. XXXVII, Nos. 3&4,
Oct-March 2002-03, pp. 60-61 and Paramjit Nanda and P.S. Raikhy, op. cit., p. 202.
83. V. Ramakrishnan, op. cit., pp. 15-19. 84. Economic Survey, op. cit., 2000-01, pp. 114-15. 85. Economic Survey, op. cit., 2007-08, p. 145.
103 addition of 33 percent.86 During April 2006, a window has been introduced to offer the facility to import required inputs for export production with the facility of transferability of inputs or the scrip.87
There were various problems regarding export linked import policy which had adverse economic effects. These include delay, administrative and other expenses, inflexibility, lack of co-ordination among different agencies, absence of competition and bias towards creation of capacity despite underutilization. Imported raw materials were not duty-free as State Government charged heavy taxes for imported raw materials. In addition, there are some administrative expenses involved in advance licenses, thus reducing their importance. Further, transferability of licenses was not permissible even within the units of the same industry.88
PRODUCTION INCENTIVES
A significant aspect of export policy is related to stepping up of production for exports. For this purpose, several measures including financial assistance, transport facilities, institutional arrangements, and easy access to domestic and imported raw material were taken. A special form known as „Green Form‟ was devised for easy access to raw materials. Crash programme for exports was formulated in December 1969 to provide for speedy removal of obstacles to production of exportable goods through adequate supply of raw materials. Department of Export Production was established in Ministry of Commerce in 1973 to pay greater attention to problems of production, generation of surplus and development of markets for exportable surplus. Industrial units in the priority sector exporting 10 percent or more of their production were granted preferred sources of supply. Greater preference was accorded in the matter of source of supply to units which reported 25 percent or more of their production. Industrial units were supplied crucial inputs like steel, diesel oil at international prices.89
In addition to providing inputs, Government also took some other measures in the field of quality control, packaging and introduced various funds and schemes which include:
Quality Control and Pre-shipment Inspection: The Government enforced quality control and pre-shipment inspection through provision of Export Quality Control and Inspection Act, 1963. Since then the inspection is taking place on routine basis to maintain and improve quality of the exportable products. Large number of items of exports is covered by the quality control and pre-shipment inspection.90
Packaging: In order to promote research in developing cheap, sound and attractive packaging, the Government set up Indian Institute of Packaging.91
Special Facilities for Up-gradation and Modernization of Technology: Government provided foreign exchange to industrial units from „Technical Development Fund‟ to the extent of U.S. dollar 5 Lakh for up-gradation of technology.92
Establishment of Export Marketing and Export Productivity Fund: Credit from World Bank to the extent $ 250 million was to be utilized for marketing activities and to promote exports of engineering and electronic products. Financial assistance from these funds was to be managed by EXIM Bank and ICICI.93
BULLION SPECIFIC INCENTIVES
For the promotion of exports from gems and jewellery sector having high export potential, several schemes were introduced by the government from time to time. Among these the following were noteworthy:
Gold Jewellery Export Replenishment Scheme: In order to promote exports from gems and jewellery sector, Gold Jewellery Export Replenishment Scheme was introduced on August 17, 1978 but was suspended on August 17, 1980. However, this scheme was reintroduced in 1984. It provided for exports of gold ornaments and articles
86. Economic Survey, op. cit., 2000-01, p. 114. 87. Economic Survey, op. cit., 2006-07, p. 122. 88
. Martin Wolf, op. cit., pp. 113-21.
89. Paramjit Nanda and P.S. Raikhy, op. cit., p. 202. 90. Ibid., p.203.
91. Ibid.
92. Paramjit Nanda and P.S. Raikhy, op. cit., p. 203. 93. Ibid., 204.
104 against gold supplied free of charge in advance by foreign buyers.94 During July 1992, bulk licenses for import of rough diamonds were allowed to any exporter for the promotion of exports of gems and Jewellery whose annual average of cut and polished diamond in the preceding 3 licensing years were not less than Rs.10 crore.95 In April 1997, the number of nominated agencies permitted to stock gold has been increased.96 During 1999-2000 imports of consumables required for gems and Jewellery were allowed to the extent of 1 percent of f.o.b. value of the exports of the preceding year. Also a new concept of Diamond Imprest License for import of cut and polished diamonds and their exports with 10 percent value addition was introduced during the same year.97
For encouraging and boosting exports of gems and jewellery, a new scheme known as „Diamond Dollar Account Scheme (DDAS) was introduced during 2000-01.98 During 2001-02, DDAS for diamond studded Jewellery exporters was extended for the gems and Jewellery sector. Export and return of cut and polished diamonds (Weighing 0.5 carat and above) to facilitate certification/grading by international laboratories/agencies was also permitted. Also gold loan scheme for exporters was enhanced during the year.99 During March 2002, some modifications were made in the gems and jewellery scheme which include: abolition of the licensing regime for the import of rough diamonds, reduction in the value addition norms for export of Jewellery and permitting personal carriage of Jewellery.100 The 2004-09 policy introduced some important incentives for gems and jewellery sector which included: permission for duty free import of consumables for metals other than gold and platinum upto 2 percent of f.o.b. value of exports; duty free re-import entitlement for rejected Jewellery allowed upto 2 percent of f.o.b. value of exports; increase in duty free import of commercial samples of jewellery to Rs.1 lakh, and permission to import of gold of 18 carat and above under the replenishment scheme.101
To achieve the objective of making India a gems an jewellery hub of the world a number of measures were announced during April 2006 which include: a) allowing import of precious metal scrap and used jewellery for melting, refining and re-export, b) permission for export of jewellery on consignment basis, c) permission to export polished precious and semi-precious stone for treatment abroad and re-import in order to enhance the quality and afford higher value in the international market and d) value addition norms have been reduced due to the increase in prices of gold and silver in international market.102 During 2007, import of tools, machinery and equipment for gems and jewellery sector were allowed duty free and the limit of duty free import of samples has been enhances to Rs.75, 000 per annum.103
Silver Export Replenishment Scheme: In December 1986, Sliver Export Replenishment Scheme was introduced under which replenishment of silver was to be arranged by State Bank of India at a price at which SBI purchases silver from the international market on behalf of concerned exporter plus some service charges, provided that silver is used for export.104
EXPORT INCENTIVES AND EXPORT PERFORMANCE
Export incentive system is a very important tool which is being extensively used by both developed as well as developing countries by one way or the other, through the export promotion policy, to protect their domestic industries against foreign competition on the one hand and improve the competitiveness of the exports in the international market on the other. In this direction the Government of India has undertaken wide ranging measures under the umbrella of export incentives since the beginning of Five Year Plans to promote exports which vary from fiscal incentives to monetary incentives, liberal imports for exporting units, production incentives, bullion specific incentives, organizational support, exchange rate changes and export controls. Thus export policy of the country could be termed as exhaustive and wide ranging. However, despite these measures to promote exports it is true that the country lacked a long-term export strategy particularly before the reform process.
94
. Ibid., pp. 203-04.
95. PTI Economic Service,Vol. XVI, No. 22, July 15, 1992, pp. 7-13. 96. Paramjit Nanda and P.S. Raikhy, op. cit., p. 204.
97. Datt and Sundharam, op. cit., pp. 723-24. 98. Economic Survey, op. cit., 2000-01, p. 114. 99
. Economic Survey, op. cit., 2001-02, pp. 146-50.
100. Economic Survey, op. cit., 2002-03, p. 111. 101. Economic Survey, op. cit., 2004-05, pp. 116-18. 102. Economic Survey, op. cit., 2006-07, pp. 121-22. 103. Economic Survey, op. cit., 2007-08, p. 145. 104. Paramjit Nanda and P.S. Raikhy, op. cit., p. 204.
105 One of the serious limitations of export incentives was the uncertainty about their future value and the consequent impossibility of making long-range plans. Profitability in the domestic market was ensured by import quotas and bans before economic reforms. In that market, therefore, a firm faced a limited number of competitors, all of whom shared the same basic economic environment. In the export market the Indian producer faced a wide range of overseas competitors, most of whom could operate on the basis of international prices of inputs and outputs. Because of the nature of domestic economic policy, however, the Indian producer faced a different set of prices from those of his competitors, and in general his input prices (including protection) were higher in relation to export realizations (excluding incentives) than those of his overseas competitors. Thus, he depended on the incentives for competitiveness. The exporter could not base long-run plans on the incentives, however, since cash assistance was announced quarterly, REP premiums were highly variable, and duty drawbacks were inadequate in periods of inflation. Consequently, there was a tendency to adopt the rather short-run view that exports were a means of exploiting existing, and often temporary, excess capacity. These disadvantages of the system were compounded by bureaucratic delays in making payment, grating licenses, and agreeing on duty drawback rates.105
In addition, there were also a number of major efficiency problems. First, the REP license system tended to increase the incentive to export the most import intensive Products. Combined with the cash assistance program, exports that depended heavily on actually imported (rather than just importable) inputs tended to have very high rates of effective subsidization, since such inputs could be obtained with duty drawbacks and free of the scarcity premiums created by general import restrictions. Second, the system was a standing invitation to over-invoicing of exports, since the combined incentive rate frequently exceeded the premium on illegally acquired foreign exchange. Third, the possibility of inefficient resource allocation was increased by the concentration of all the incentives on a relatively few export categories.106
It is because of the above mentioned drawbacks of the export incentive system plus the policy of inward oriented trade strategy followed by the Government that the exports of the country had not shown a promising growth during this period i.e., upto the first half of the 1980s (Phase I). When we look at the performance of the exports, in rupee terms, the total value of exports increased from Rs.4036 crore during 1975-76 to Rs.11744 crore during 1984-85 (Table 1) and remained, on an average, Rs.7156.5 crores during the same period (Table 1.1). However, exports have shown a dismal performance in terms of growth rates when they grew at just, on an average, 13.66 percent between 1975-76 and 1984-85.
Table 1: Exports from India (Average)
1975-76 To 1984-85 1985-86 To 1990-91 1991-92 To 2006-07 Exports (Rs Crore) 7156.5 19910.7 204335.4
Growth Rate of Exports (%)
13.66 19.40 19.63
Source: Table 1
Thus the incentive system during this period was largely a marginal addition to the basic policy system, designed not so much to permit efficient specialization, as to facilitate the export of surplus commodities, or at least of those commodities whose original production were motivated by quite other considerations. Generally, those goods which were produced entirely for export (certain kinds of garments, leather goods, and gems, for example) had little assistance, and only became a part of the export promotion system in the second half of the 1970s. Hence this first phase of Indian Trade policy was considered as a phase of export pessimism essentially characterized by passive export policy particularly upto 1966. This phase was also characterized by comprehensive regulation and control over exports and imports. However at the later stage during this phase number of committees and task force were set up and many incentives were provided to the exporters for the promotion of exports of the country.
105. Martin Wolf, op. cit., pp. 91-92. 106. Ibid., p. 92.
