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Nachiket Kelkar
Nachiket Kelkar

FOREIGN TRADE POLICY

Can incentives revive India's export growth?

INDIA-TRADE [File] Representative image | REUTERS

India's trade deficit, which has been widening over the past several months, can get a boost by addressing the issues exporters have faced related to Goods and Services Tax and the incentives announced this week by the government, particularly for labour-intensive sectors, could also go a long way in helping export growth pickup, according to experts.

Recent data released by the government for the month of October, showed that the trade deficit hit a 35-month high as merchandise exports declined for the first time in 14-months.

Commerce ministry data shows that exports in October declined 1.1 per cent to $23.1 billion from $23.4 billion. At the same time, our imports during the month rose 7.6 per cent to $37.1 billion from $34.49 billion.

In October, the trade deficit stood at around $14 billion. In the first seven months of the current financial year, the trade deficit has widened by over $31 billion to $86.15 billion, as exports have risen at a slower pace than the rise in imports. This is putting pressure on the country's current account deficit.

The decline in exports in October was not surprising as exporters faced liquidity issues since refunds under the goods and services tax regime were delayed, say experts.

“Micro, small and medium enterprises were facing liquidity problem to pay GST for four months in a row without getting any refund,” Ganesh Kumar Gupta, president, Federation of Indian Export Organisation (FIEO), noted as the reasons for the decline in exports.

While India's exports did grow for 13-consecutive months prior to October, it has consistently lagged those of its Asian peers. For instance, a report by ratings agency CRISIL shows India's average export growth over April-October at 9.5 per cent, compared with 23.8 per cent for Vietnam, 18.4 per cent for South Korea and 17.8 per cent for Indonesia.

Dharmakirti Joshi, chief economist at CRISIL, also attributes domestic factors for the exports slowdown, since he points out that the rupee has been largely stable since March and therefore is unlikely to have had an adverse impact.

“The implementation of GST and associated glitches have had an impact, particularly on the small and medium enterprises, evident in low export growth in gems and jewellery, textiles and leather sectors,” Joshi said in a recent report.

But, he also added that while disruptions from GST were “transitory” the competitiveness of the labour intensive industries had already been on the decline.

To provide a boost for exporters across sectors, in its mid-term review of the Foreign Trade Policy (FTP) 2015-2020 this week, the government announced additional incentives of over Rs 8,000 crore.

Hasmukh Adhia, finance secretary, said that issues faced by exporters on account of GST return filing and receiving refunds for IGST leading to working capital blockage had been suitably addressed in the financial package.

How will the incentives benefit?

“The 2 per cent increase in the MEIS (merchandise exports incentive scheme) rates for labour intensive sectors such as leather, carpets, handicrafts, tools, marine, medical and scientific products and services such as accountancy, architecture, legal, education, hotel and restaurant will provide much needed respite to these sectors which are facing huge competitiveness from other countries,” said Gupta of FIEO.

The creation of new logistics division in the Department of Commerce and decision to develop National Logistics Information Portal for online logistics market player will go a long way to reduce the logistics cost in India, he added.

Shrikant Kamat, partner, indirect tax, BDO India also welcomed the mid-term FTP review, saying they would increase competitiveness of exports and help put India's exports back on track.

“The much awaited changes to the FTP, post the introduction of GST are primarily focused on providing an impetus to the Make in India initiative by way of employment generation, incentivising exports and simplifying import procedures through schemes such as self ratification to in turn reduce the turnaround time of exports,” said Kamat.

The 2 per cent increase in the SEIS (service exports incentive scheme) incentive for services would provide impetus for boosting India’s service exports in non-IT areas, said Sanjaya Baru, secretary general of FICCI.

Baru further added that effective exchange rate management would be critical to achieve a significant increase in exports from India.

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Topics : #trade | #Export

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