Budget Expectations: Exports Segment

21 Jan 2022 , 12:43 PM

The Federation of Export Organizations has been insisting on a multi-pronged approach to exports in the budget. At various points, India became export champions in pharma, gems & jewellery and IT. In the last 20 years, we are still waiting for the next big export story. What is it that Union Budget 2022-23 can do to boost exports.

Let us look at the numbers. In FY22, India is expected to get closes to the $1 trillion total trade mark. However, the trade deficit at around $200  billion is quite intimidating. In addition, India is likely to close the year with total imports of over $600 billion. That means, the current forex reserves are just sufficient to cover 12 months of imports. The urgent need for Budget 2022-23 is to boost to exports.

1. Targeting export markets more aggressively

In the last couple of years, Indian manufacturers of specialty chemicals saw a major export boost as China clamped down on environmental infringements. That probably sums up the problem with Indian exports. It is still too pull-driven than being push-driven. According to the FIEO, the reason Indian exports are not push-driven is that they don’t have adequate marketing budgets.

The current market access scheme has a meagre ceiling of $0.50 million. There are 2 things the budget can do. The first is the creation of an Export Development Fund to boost exports. The second is for the budget to offer 200% weighted deduction for overseas marketing expenses for exporters. This incentive scheme can be extended for exporter R&D too.

2. Providing level playing field on income tax for MSMEs

Let us spend a moment on why MSMEs are important for the export push. The Medium, Small and Micro Enterprises (MSME) account for 45% of the total exports going out of India. Unfortunately, MSMEs have been hit on 2 counts. Firstly, most businesses are shifting to the organized segment and MSMEs are losing the game.

Secondly, the government reduced the corporate tax rates to 25% for existing investors and to 15% for new investors. However, MSMEs structured as proprietorships, partnerships or as non-corporate LLPs are still paying 35% tax. To boost exports, it is essential for the Budget to bring parity in taxation between MSMEs and the organized corporate sector

3. Have a sector championing time table for exports

In most sectors where India once had an edge, it has lost out to other emerging markets. For example textiles have largely shifted to Bangladesh and Vietnam. We compete with Philippines for call centres and with Vietnam for white goods. The PLI scheme is too generic and not focused on real inherent strengths. India produced world class textiles, diamonds and pharma generics. India also created world class IT products. It is perhaps the only segment that still holds sway.

Most of the other sectors are too crowded. The Budget needs to create 2-3 product focus points. For example, if we talk of APIs or specialty chemicals or batteries or green hydrogen; the challenge for the budget is to create a 10-year plan that will support the sector in the form of incentives, market support, technology transfers etc. In the absence of the big story, exports are likely to struggle. That is the gap that this budget can fill.

4. How about deemed export status for global tendering?

This demand was made by FIEO consistently over the years. Here is what this demand is all about. For example, Indian companies that secure contracts under global tenders are not classified as exporters. However, the Budget can accord them deemed exporter status. How will that help? It can be done on an opportunity cost basis. For example, if the foreign supplier had won the contract, this would have resulted in direct import. Now that is substituted and such bid winners can be given deemed exporter status with the tax incentives to enhance competitiveness. Budget 2022-23 can make a start.

5.   Settlement of customs disputes to disengage funds

Today, crores of rupees are locked up in legal disputes over customs and the disputes with the DGFT. This is a loss for the government in terms of revenues and also for the exporter. One way to unfreeze the situation is to introduce a mini-amnesty scheme to resolve all disputes pertaining to global trade. These include disputes pertaining to classification, duty drawback scheme, export obligation etc. The Budget can offer a resolution mechanism on the lines of the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 which can help to resolve disputes relating to Customs and DGFT. For most beleaguered export outfits, waiver of interest can come as a big boost to the exporters.

6. Finally, time to give a boost to services trade

India has not fully realized the potential in offering world class healthcare to international patients at economical prices. For that, the budget has to focus largely on the requisite capacity building. A consistent flow of such patients also boosts the tourism sector that is struggling. To begin with, the refund of GST to foreign tourists at the airport under IGST rules can be implemented with immediate effect.

On services, India needs to plug the $70 billion that we annually pay in foreign currency for transport. It is time to provide incentives for large shipping companies in India so that these outflows can be plugged, or at least reduced. Budget 2022-23 can make a start.