If, there is one single area that has given jitters to Modi – government during its 2 years stint, it is exports. Beginning December 2014, exports decreased for 17th consecutive month in April, 2016. This would have taken a serious toll on India’s balance of payments [BoP] but for the oil bonanza [due to slump in crude oil] which led to steep reduction in oil imports more than offsetting its negative impact.
To a considerable extent, the slide can be attributed to global economic slow down even as China’s has crash landed from double digits [until 2 years back] to around 6.5-7%; developed countries [other than USA] struggling to sustain their already low growth of well below 3%, US growth not as robust as it should be and most of the emerging market economies [EMEs] registering declines.
Clearly, the sluggish global economic environment is here to stay even as the International Monetary Fund [IMF] has further lowered its world economy growth forecast for 2016 and 2017 to 3.1% and 3.4% respectively from 3.2% and 3.5% projected earlier.
In this backdrop and commerce minister, Nirmala Sitharaman burning mid-night oil to reverse the declining trend in exports, a Special Investigation Team (SIT) appointed by present dispensation in May, 2014 [the erstwhile UPA – regime merrily sat on the orders of the Supreme Court given in 2011] – to monitor cases of money laundering – has come out with revelations that point towards flagrant misuse of the Duty Drawback Scheme [DDS]. This in turn, raises a question mark over the credibility of India’s export figures.
What is DDS? What is its connection with export? Where is the misuse? How does it lead to export numbers come under cloud?
Under DDS, exporters can claim reimbursement of taxes paid on inputs used in the manufacture of exportable. The logic behind this facility is to offset a huge cost disadvantage Indian industries suffer in the international market due to the cascading effect of taxes and duties levied within India. The intent behind the scheme is also consistent with free trade principle “taxes must not be exported”.
However, before considering the claims submitted by companies for reimbursement, the revenue department must ensure that the concerned companies have ‘actually’ manufactured the products, paid duties and undertaken exports. Along with all requisite documents in support of these activities/transactions, they also need to give proof that the export proceeds have been repatriated to India.
As per RBI regulations, all exporters have to bring foreign exchange into the country as export proceeds within one year of the date of exports. The data on whether a particular exporter has brought export proceeds into the country is maintained by RBI. Not bringing export proceeds is a violation of Foreign Exchange Management Act (FEMA) as it amounts to illicitly parking funds abroad.
Suspecting fraudulent deals, SIT had asked RBI to give details of exports made where exports proceeds were yet to be utilized even after a period of more than one year. RBI provided data on export outstanding for shipping bills prior to March 1, 2014 pending for more than one year as well as data on export outstanding for shipping bills on or after March 1, 2014 pending for more than one year.
The data was reviewed at the SIT meeting held on July 12-13, 2016 and it emerged that huge amount of export proceeds have not been realized. Accordingly, it has asked the Enforcement Directorate [ED] to take action under FEMA with respect to 216 companies for the period before March 1, 2016 and 572 companies for the period after March 1, 2016, for which each such company had export proceeds pending for realization for more than Rs 100 crore.
The SIT also directed Directorate of Revenue Intelligence (DRI) to check from its database on how many companies have claimed duty drawback but have failed to bring export proceeds.
For the future, it has asked RBI to immediately develop an institutional mechanism and IT [information technology] system to not only immediately red flag those cases where exports have been outstanding for more than an year [from date of export] in violation of FEMA guidelines but share the complete data with ED and DRI on a ‘monthly basis’ to enable them initiate timely action under the law.
As investigations proceed, only time will tell about violations and the extent to which the exchequer has been defrauded. But, it is very clear that exports against which the companies claimed reimbursements for alleged taxes paid simply did not happen; that export numbers were fudged with the sole intent of perpetrating a fraud [a scenario of sheer delay in bringing back proceeds say due to ‘technical reasons’ in this age of instant e-transfer of money is ruled out].
Considering the number of companies involved and value of transactions under each, it will turn out that not only the exchequer has lost huge revenue [affecting government’s fiscal consolidation drive] but India’s exports too got inflated by tens of thousands of crores. Making a correction for this, our actual export performance would be even worse than what is indicated by reported numbers.
All concerned agencies viz., ED/DRI/RBI et al should expeditiously complete investigations leading to prosecution of offenders. While, this might provide some deterrence to misuse in the future, India will remain vulnerable as long as incentives schemes such as DDS exist. Instead of continuing with them, the government should bring about a paradigm shift in its strategy to boost exports by dealing with factors that lead to increase in cost of exportable.
First and foremost, there is an urgent need to eliminate the cascading effect of taxes and duties on cost of manufactured items. Under extant dispensation of duties – at central and state level – despite much bravado, this has not happened. The Goods and Services Tax [GST] now pending in Rajya Sabha [RS] promises to put an end to this. Hopefully, this will be passed in the current session of parliament. But, we have to keep our fingers crossed till it actually happens.
Second, government should make efforts to bring down cost of power. We have a pathetic situation whereby, industries shell out as high as Rs 10-15 per unit. This is mainly because most states give power to farmers and households either free or at heavily subsidized rates. Besides, there is large-scale theft. The resultant loss is recovered by charging exorbitant rate from industries [besides tax payer chipping in to pay for un-covered losses of SEBs]. The fledgling power sector needs to be reformed at a fast pace.
Third, high cost of interest on borrowings hits industries hard. The lending rates are high because public sector banks [PSBs] have to meet cost of social obligations [e.g. loan waivers, subsidized lending to farmers etc] on one hand and high non-performing assets [NPAs] on the other. Both these areas require major surgical action so that lending rate can be reduced to better align with cost of deposit.
Finally, there is urgent need for frontal attack on high cost of logistics [handling, storage, transport etc] and transaction cost [mostly related to documentation/paperwork, registration, stamp duty etc]. Modi – government has taken major initiatives in both these areas. However, given the legacy of inaction in the past, the pace has to be hastened to deliver results in smaller time frames.
In short, the approach to boosting exports has to be ‘holistic’ requiring concurrent fast-forward reforms in all key areas such as taxes & duties, interest rate, power tariff and infrastructure. The extant ‘incentive’ oriented ad hoc measures should be dumped for ever.