Wednesday, December 9, 2015


The new import export policy

In his latest import-export policy, Kamal Nath made an important announcement. He declared that his ministry will introduce from 1 May a new import replenishment scheme for exporters called Duty-free Import Authorisation Scheme (DIAS). It will introduce duty-free import advance licences which can be sold after the export obligation is fulfilled. It thus combines the duty saving of duty that is characteristic of replenishment licences and marketability that was characteristic of the short-lived eximscrips of 1991. The idea is so simple that people will wonder why it did not occur to anyone in the finance ministry in its 67 years’ existence. The problem has been that duty exemption is conditional upon exports. An exporter may import inputs without paying duty, but he earns the duty exemption only when he has sent the export consignment. Till then, duty exemption is just a contingent concession, and not valuable property. In fact, the Commerce Ministry and the Customs expend considerable resources in pursuing those who obtained advance licences on promise of exporting and then reneged on the promise. Until then, duty exemption is a liability owed by the exporter to the government.
Letting an exporter sell a duty-free import licence would be one way of compensating him. A less cumbersome way would be to pay him cash for the licence. This is the oldest policy; it has been in place for five decades. It has also been the least popular because of the delays involved in getting money out of the government are formidable, and delays are invariably accompanied by corruption which greatly reduces the value of the compensation. That is why exporters prefer not to pay duty at all; that accounts for the popularity of advance licences.
However, making advance licences saleable after export is one way of compensating exporters. Another would be to give them credit whenever they export and let them use it to pay duty whenever they import inputs. This is the idea behind the Duty Exemption Pass Book (DEPB). It has been the most popular duty exemption scheme ever since it was introduced in the early 1990s. Unfortunately it has been under fire from governments of other countries on the grounds that there is no nexus in it between exports and the imports required for them. Under pressure, the government promised to abolish it in the course of the Uruguay Round. It should have been abolished by last year, but was extended for a year. Now it seems that DIAS has been designed to replace it.
If so, it is misconceived. For if a scheme is well designed, an exporter will have imported inputs duty-free and consumed them for making an export consignment before it is dispatched; he will have used up his advance licence and will have none to sell. It may happen sometimes that he might have used domestically produced inputs or may have paid duty on imported inputs and may thus have an unused advance licence left after exporting. But such cases will be rare, and the market for advance licences will be correspondingly thin. Hence DIAS is a trivial scheme, and not much of an improvement on a simple advance licence arrangement.
It will therefore leave DEPB without a worthy successor – and DEPB is such a good scheme that it calls for a good successor arrangement. Kamal Nath has been very active traveling to international fora and putting India’s point of view on the contemplated new round of WTO negotiations. He is capable of defending a DEPB-substitute equally stridently. He should therefore bring back a variant of DEPB with some additional provisions to ensure a nexus between exports and imported inputs, and then defend it all over the world with his usual eloquence.
Kamal Nath has been pushing Special Economic Zones (SEZs) rather energetically; suddenly he has become aware that he has been neglecting the old Export-oriented Units (EOUs). EOUs are really exporters who export without all the embellishments of an SEZ; if an SEZ deserves all the concessions showered upon it by the government, EOUs deserve it all the more. But Customs dislike EOUs because they require policing or have to be trusted not to cheat. They prefer large territories where the same customs officials serve a large number of undertakings. But the convenience of the Customs is hardly a factor that should govern export policy. EOUs were a good option, and they should not be discriminated again.

But none of these things – advance licences, DEPB, EOUs, SEZs – would be required if India were a free-trade country; if there were no import duties, no duty exemptions would be necessary. The most effective policy to promote exports is low import duty, especially on industrial inputs and equipment. The strongest instrument is in the hands of the finance minister; he should give some thought to reducing imposts on imports – including FBT and service tax – or helping exempt exports from them.