DSIJ Mindshare

FTP 2015-20: QUEST TO PUT INDIA ON GLOBAL TRADING MAP

After launching the much hyped ‘Make in India’ initiative during September 2014, Prime Minister Narendra Modi has taken up a crucial challenge to make India a better place to do business and somehow improve upon the index of ease of doing business – something in which the country has till now fared pathetically. Since then the government has taken various steps and flagged off schemes that can bring about a sea change in the situation at the ground level. This had also, in a mirror effect, created a lot of hype around the Union Budget presented by Finance Minister Arun Jaitley. Undoubtedly first big initiative in improving the work culture and ushering in lots of synergy into the business environment came in the form of the New Foreign Trade Policy (FTP) 2015-20 unveiled on April 1, 2015 by Minister of State (IC) for Commerce and Industry Nirmala Sitaraman.

Mooted as one of the best policy initiatives of recent times, the new FTP basically mandated to make India a better place for conducting business both in the manufacturing as well as the service sector and aimed to touch an export target of USD 900 billion by 2020. In this quest the government wants to increase India’s share in global trade to 3.5 per cent from the current level of 2 per cent. Actually this policy has been conceived to integrate both ‘Make in India’ and ‘Digital India’ so that comprehensive progress could take place in terms of both the above mentioned sectors along with trade. In this sense it is quite in line with the GST thought process in the domestic market and hopes to infuse synergy in the international market in terms of goods and services.

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Boost for Manufacturing and Capital Goods

The prime focus of FTP is on giving a boost to the ‘Make In India’ initiative. In this direction the new policy critically tries to simplify and merge various schemes that were hitherto present in relation to merchandise exports. This is long overdue as it creates lot of confusion and hardship to the manufacturers involved in international trade. Presently there are five schemes related to merchandise exports viz. Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri Infrastructure Incentive Scrip and Vishesh Krishi & Gram Udyog Yojana (VKGUY).

Now, under the new FTP all these schemes are merged together to form the Merchandise Exports from India Scheme (MEIS) and scrips that are being issued for basic custom duty under this would be freely transferrable for any kind of use, even for payment and adjustment of duty drawback, custom duty, excise duty and service tax. What is important to note is that till now only the additional duty of customs, excise duty or even service tax was allowed adjustment as CENVAT credit or drawback.

In another crucial move the export obligation for domestic procurement has also been reduced under EPCG (Export Promotion Capital Goods) Scheme from 90 per cent to 75 per cent for capital goods, if it is procured from indigenous manufacturers. Experts feel that this move would be vital to promote domestic capital goods’ manufacturers. Also, FTP gives higher reward under MEIS for those exports where high domestic content and more value addition is available.

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The government has also made a serious attempt to reward the real heroes of foreign trade. For this a term called ‘Status Holders’ has been coined in the FTP and crucial incentives would be provided to facilitate their trade transaction, both in terms of cost and time. Further, the criteria for export performance for recognition of status holder have been changed from rupees to US dollar earnings, which was a long-drawn demand of the traders. Importantly, status holders can self-certify their manufactured goods as originating from India with a view to qualify for preferential treatment under different Preferential Trading Agreements (PTAs), Free Trade Agreements (FTAs), Comprehensive Economic Cooperation Agreements (CECAs) and Comprehensive Economic Partnerships Agreements (CEPAs).

Good for Services Too

In line with manufacturing, there is also a dramatic change in the approach for service exports from India under the FTP. Previously only service providers of Indian origin were given the benefit of services’ exports but now the definition of service export has been replaced with Service Export from Indian Scheme (SEIS) in place of Served From Indian Scheme (SFIS). “By doing so we have included all the service providers that are present in India, irrespective of their origin. This is a real booster for those providers who are basically from abroad but providing notified services from India soil,” informs an official of the commerce ministry.

In addition to this and quite in line with merchandise exports, the rate of reward under SEIS would be based on net foreign exchange earned and duty credit scrip issued regarding that would be freely transferable and usable for all types of goods and service tax debits as well as for CENVAT credit and drawback. The FTP also allows companies located in SEZs to avail MEIS and SEIS benefits. This allowance will increase the attractiveness of SEZ incentive schemes for investors.

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Focus on Defence and E-commerce Exports

Though the FTP is quite comprehensive for both goods and services’ exports, it has also provided special impetus to the defence and e-commerce sectors. For the defence sector a change has been carried out regarding the normal export obligation period. This has been extended from the present 18 months to 24 months from the date of issue of authorization or co-terminus with contracted duration of the export order, whichever is later. This extension in the normal export obligation period will be allowed in defence, military store, aerospace, and nuclear energy. This will certainly lead to boost the export potential of the country as defence and high-technology items usually take a longer duration to take shape and the 18-month period was quite a dampener. Now producers won’t have to worry about the period within which they have to mandatorily export their produce to avail the export incentive.

Similarly, e-commerce activities would be given special focus in the FTP. First of all, various goods that come under the category of handloom products, books or periodicals, leather footwear, toys and customised fashion garments shall be eligible for benefits under the FTP. But for this the FOB value per consignment should be up to Rs 25,000 and they should be finalised using the e-commerce platform. This is very interesting for small and individual exporters operating through the e-commerce platform as they can avail the same benefits as exporters and these goods can be exported via the manual mode through foreign post offices at New Delhi, Mumbai and Chennai. Under the new FTP such exports under courier regulations will be allowed manually on a pilot basis through airports at Delhi, Mumbai and Chennai. “For this te Department of Revenue is making appropriate amendments in regulations and will fast track the implementation of EDI mode at courier terminals,” informs a ministry official.

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Impetus for IT and ITES Industry

The new FTP has aggressively pushed for a complete overhaul of foreign trade activities in the country. For this the concerned ministry as well as the DGFT has conceived a comprehensive plan for introducing e-governance initiative at every level, which will result in easing the process of foreign trade by allowing exporters to submit documents and applications online, including certificates issued by chartered accountants, company secretaries and cost accountants as well as landing documents for export consignments. “The thrust of the Foreign Trade Policy statement was on simplification of processes and procedures so as to make business transactions simpler. It reflects the department’s effort to bring in procedural reforms. Henceforth, online applications of exporters and importers will receive feedback which will reflect the views of all the relevant ministries in the digital mode. Consultations with the departments and interactions will also be in the digital mode,” says Pravir Kumar, Director General of Foreign Trade.

Due to this procedural change, IT and ITES companies that are involved in e-governance activities would clearly find a new growth trigger. All processes like inter-ministerial consultations, which are designed to reduce approval times for special chemicals, organisms, materials, equipment and technologies (SCOMET) item exports, norms fixation, as well as import and export authorisation would henceforth be done online, thereby enhancing the strength of the digital movement in the country.

Along with the digital push, the new FTP allows the sharing of infrastructural facilities and transfer of goods and services between units as well as a number of specific schemes for Economic Oriented Units (EOUs), Electronic Hardware Technology Parks (EHTPs) and Software Technology Parks (STPs). As inter-unit transfer of goods and services have been allowed among EOUs, EHTPs, STPs, and BTPs, this will facilitate grouping of units which source inputs centrally in order to obtain bulk discounts. This will reduce the cost of transportation and other logistics and result in maintaining an effective supply chain. Along with this many other incentives have been opened up for EHTPS, STPs and EOUs to make them more attractive for exporters.

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Five-Pronged Approach Lead to Dynamic FTP 2015-20

It is quite interesting to note that this trade policy came after much delay and took over 10 months to take final shape as policy makers at the government were involved in making a policy that must have consistency and should be sustainable in its very nature. While unveiling the new policy, Minister of State (IC) for Commerce and Industry Nirmala Sitaraman said, “To ensure stability and consistency, the government gives its commitment that the five-year policy will not be altered annually as has been the practice. It will be evaluated through a mid-course review after two and a half years.”

It is clear that the new government has put in real efforts in creating its first trade policy and contemplated deeply on the various factors that affect the trade of the country. “We basically focused on five important factors while conceiving this policy; first of all, it is an effort to synchronize the trade policy with the domestic policy and secondly the policy has been aligned with the thrust required for the manufacturing and services sectors. Also, the policy has been framed in a manner that it should be in tune with the ecosystem that are sought to be created for the country. It is also to be able to make an institutional framework that is inclusive in nature and most importantly enables the involvement of various states governments as stakeholders in foreign trade so that the country’s competitiveness can be improved,” informs Commerce Secretary Rajeev Kher.

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FTP is a Dampener for Tea and Textile Sector

Though many exporters are lauding the new FTP on the ground of ease of doing business, some sectors may feel the heat of this change in policies and rate of benefits. One such sector is that of tea production which till now was included in VKGUY and enjoyed a benefit of 5 per cent for non-organic tea and 7 per cent for organic tea. Now, with MEIS replacing all the other schemes only 3 per cent benefit will be available to tea producers. Tea producers are already experiencing stiff competition from low-cost tea producers and adverse forex movement, particularly in terms of the euro.

At the same time, textile manufacturers too have been kept out of the benefit loop. Specifically, the textile sector has placed a demand for benefits available under Chapter 3 to cotton yarn for the last so many years to continue under the MEIS. The FTP would also have a negative impact on man-made yarn and knitted fabrics as these would not be eligible for any reward under MEIS in the markets of China, Bangladesh, Sri Lanka, Turkey, Vietnam, South Korea, etc. Significantly, these are some of the major hub for these products.

At the same time tariff cuts have been announced for some raw materials and intermediary products, sending negative signals to the Indian industry. Officials of the commerce ministry are of the view that though some of these tariff cuts seem negative for Indian manufacturers, they are essential for intermediate goods to boost manufacturing. Also, the message in the new FTP that is loud and clear is subsidies are passé and that in the coming 2-3 years the whole global trading space will change wherein competition would be the key parameter. In such a scenario, mega regional associations would be of prime importance. “The new FTP will help synchronize Indian trade with the new global scenario,” says a commerce ministry official.

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