• Budget 2020: 'Rationalise duties to encourage exporters to sell high-value goods'

    Budget 2020: 'Rationalise duties to encourage exporters to sell high-value goods'

    For the past few years, much has been said about the diminishing importance of the Union Budget. This is largely because the Budget is seen as a macroeconomic policy statement rather than a practical resource-allocation exercise. The positive side is that it shows that the industry is maturing and can stand on its own without government assistance. Also, steps like the goods and services tax (GST) have meant that there is no annual announcement of tax tweaks for the corporate sector.

    However, at times like now, when the economy is floundering, the Budget assumes greater importance. It shows the government's path out of the gloom. At this point, all eyes are on the government to resolve at least some of these issues and create some optimism in industry sectors, especially among small and medium enterprises (SMEs).

    SME exporters are looking for steps that will help them in a tough global environment. So, what can the Budget do to boost SME exports?

    Rationalise duty structure

    One of the key instruments to promote exports while ensuring that the imports are restricted is the duty drawback scheme.

    Successive governments have used the scheme to ensure that exporters do not lose out when buying input components. The duty drawback scheme offers a rebate on duties and tax on the materials used in manufacturing export goods.

    The idea is to ensure that exporters are able to offer competitive rates in the global market. However, while the duty drawback is a percentage of the export price of the product, it comes with a cap.

    So, for instance, the duty drawback on ballpoint pens and fountain pens is 4.2 percent, subject to a cap of Rs 270.7 per 1,000 pieces. What this means is that regardless of the value of the raw materials used in pens made for export, the exporter will only get Rs 270.7 as duty drawback. This acts as a disincentive to the exporter using high-quality input materials that will fetch a higher price.

    The other scheme intended to help exporters is the EPCG (Export Promotion Capital Goods), which allows duty-free import of capital goods on the condition that the importer ensures a certain quantum of exports in a specified time period.

    The EPCG scheme seems to be running out of steam, judging by the numbers. While the revenue foregone due to the EPCG scheme was at Rs 11,218 crore in FY2013, provisional figures suggest it dropped to Rs 3,220 crore in FY2019.

    What this means is that manufacturers are spending less on procuring capital goods to manufacture export products. To encourage exporters to look at more high value-added exports, the government will need to look at rationalising the duty structure.

    WTO-compliant export policies

    For the export-driven SME sector, the big event to look forward to in 2020 is the introduction of the new Foreign Trade Policy (FTP). The existing FTP is likely to end on March 31, 2020, and a new policy is expected soon after.

    Before the new FTP is announced, exporters believe that the government will allocate resources and make appropriate provisions for spending in the Budget.

    The World Trade Organization (WTO) frowns upon heavy government subsidies to exporters. So, while a certain degree of tax benefits can be offered to exporters, this may not be sufficient. The government needs to find a way around this and support exporters.

    Here are some ways to do that:

    Access to credit:

    It is important for small exporters to have access to credit. While there are some government schemes in place for this, the Budget could spell out what large banks and financial institutions can do to encourage small and medium exporters. Making credit access easy could be a big step in boosting exports. Plus, over the past few years, the Budget has dwelt upon the importance of fintech in making credit easily available. This year too, the industry hopes that fintech will receive a

    Raise awareness:

    The government can expand its existing schemes to educate exporters on international laws and standards, so that they know where they can sell their goods and services.

    A focus on market assistance and trade intelligence will help exporters identify and tap potential markets. When MSME exporters become part of the global value chain, they grow stronger, which, in turn, is good news for the country.

    ###Skills development: India has long had a manufacturing advantage over other countries through the easy availability of labour. However, this has largely been unskilled labour.

    To boost productivity and improve quality, it is essential to train the labour force. The government has recognised this need, and the Skill India mission is intended to provide industry with a large pool of skilled workers. This mission needs a further impetus.

    Export promotion councils sporadically offer upskilling and reskilling programmes. With greater budgetary allocation, these programmes can be beefed up to reach a larger number of workers.

    Technology upgrade:

    This has been a focus area for successive governments. MSME exporters need to be able to compete in digitally driven markets. They also need to be able to keep up with the rapidly changing dynamics of the world trade. But getting access to cutting-edge technology or even upgrading their existing technology requires funds. This is where the government can step in. There are technology upgradation funds already available for specific sectors such as textiles; these now need to be replicated in other sectors like plastics, marine, etc. The Budget is expected to increase funding to aid technology infusion that will help MSMEs modernise operations.

    ##Improve infrastructure: Industrial corridors, the Sagarmala network of water transport systems, the Bharatmala network of roads, dedicated freight corridors, and other projects were spoken about last year. However, budgetary allocation was far lower than expected, as the government pushed for public-private partnerships in infrastructure development.

    Towards the end of 2019, the government announced it would invest $1.4 trillion in infrastructure projects over the next five years. Such spending is imperative to boost the economy. While the government is likely to identify employment-creating infrastructure projects, it is also important that it looks at boosting trade-specific infrastructure such as warehousing and cold chain networks.

    Focus on intellectual property:

    Indian exporters have long been aware of the importance of intellectual property, thanks to the WTO’s agreement on trade-related aspects of intellectual property rights (TRIPS).

    The National Intellectual Property Rights (IPR) Policy lays out the government’s framework to bring all aspects of intellectual property rights under one umbrella. An important section of IPR is Geographical Indication (GI) tag.

    The GI tag is used on goods having a specific geographical origin and possessing qualities that can be attributed only to that geography; classic examples are Kolhapuri chappals and Tirupati laddus.

    GI has been given the status of intellectual property since the product gets more value commercially by its association with a place.

    When it comes to exports, the GI tag assumes greater value than generic goods. The government has been actively encouraging GI tagging, and a greater budgetary support will help exporters.

    The Budget is not a silver bullet that can kill negative sentiment and magically change economic fortunes overnight. However, it is a key indicator of the government's spending intentions, and industry hopes that it will show some positive steps in the coming year.

    By allocating resources towards education and skills development, the government can show that it is serious about sustainable, long-term economic growth, and boost India’s outbound trade in the process.

    (The article was first publised on moneycontrol.com)

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    Pushkar Mukewar
    Pushkar Mukewar
    Co-founder and Co-CEO, Drip Capital
    7 min read