New Foreign Trade Policy to Back-end Export Targets

By Adam Pitman
International Business Advisory Manager, Dezan Shira & Associates 

Make in India. Digital India. Skill India. The list of slogans for the government’s economic initiatives is ever expanding. This public relations effort remains critical for the government, which needs to reshape how foreign businesspeople perceive India to increase foreign investment. However, many local businesspeople are concerned that the government has not implemented more measures to support its bold sloganeering.

The Modi administration’s first Foreign Trade Policy, unveiled on April 1, represents a pragmatic step forward in this regard. Much like the admiration’s first budget, unveiled on February 28, the policy targets critical industries with useful reforms and incentives. Perhaps more importantly, however, the trade policy has sought to back-end the government’s ambitious goals.

What’s in the new Foreign Trade Policy?

Government spokespeople have emphasized that the Foreign Trade Policy 2015-2020 is designed to support Make in India and Digital India. The former is a campaign to encourage manufacturing in India, while the latter is a campaign to develop digital infrastructure in India. In this view, the new Foreign Trade Policy serves as an important policy link for the government’s goals. Below, we detail highlights from the new Foreign Trade Policy:

• Single Merchandise Exports from India Scheme (MEIS)

The MEIS merges five existing export promotion schemes –  the Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agriculture Infrastructure Incentive Scrip and Vishesh Krishi And Gram Udyog Yojana (VKGUY) Scheme – into one program. While the previous five programs were tailored to specific sectors and users, there are no similar conditions for the MEIS. The government has incentivized the MEIS with duty scrips and adjustments on duty drawbacks. 

• Service Exports from India Scheme (SEIS)

The SEIS replaces the Served From India Scheme (SFIS). The SFIS was designed specifically for Indian services providers; however, the new SEIS provides incentives for service providers located in India, regardless of their origin. The SEIS provides freely transferable duty scrips, which can be used for goods and service tax, based on the net foreign exchange earned by a company.

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• MEIS and SEIS available in Special Economic Zones (SEZs)

Companies located in SEZs are now able to avail MEIS and SEIS benefits. This allowance will increase the attractiveness of SEZ incentive schemes for investors.

• Duty scrips freely transferable

The new foreign trade policy has made duty scrips freely transferable, which will allow companies to use the scrips to pay custom and excise duties as well as service tax.

• Special Status Holders

Business leaders that have made a special contribution to India’s foreign trade will be eligible to become a Status Holder, which allows the holder to obtain special consideration for privileges designed to reduce transaction time and cost.

• Reduced Export Obligation (EO) for domestic procurement under the Export Promotion Capital Goods (EPCG) scheme

The government has described this scheme as a “boost to Make in India”. It allows EPCG participants to reduce the amount of capital goods they buy from domestic manufacturers from 90 to 75 percent. This scheme also increases MEIS rewards for participants with high levels of domestic content and value addition.  

• E-Governance Initiatives

To support the Digital India initiative, the government will begin allowing companies to submit a number of documents and applications online. The documents and applications that can now be submitted online include certificates issued by Chartered Accountants, Company Secretaries and Cost Accountants as well as landing documents for export consignments.

The new policy also provides a framework for online 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 authorization. The overall digital effort complements the government’s plans to improve the ease of doing business in India.

• Economic Oriented Units (EOUs), Electronic Hardware Technology Parks (EHTPs) and Software Technology Parks (STPs) Initiative

The new policy has set in motion a number of initiatives designed to make EOUs, EHTPs and STPs more attractive for investors. This includes new rules that allow EOUs, EHTPs and STPs to share infrastructural facilities and transfer goods and services between units as well as a number of specific schemes for EOUs, EHTPs and STPs, respectively.

• E-commerce Exports Initiative

This initiative makes a number of e-commerce goods eligible for Foreign Trade Policy benefits. The list of goods includes handloom products, books and periodicals, leather footwear, toys and customized fashion garments that have a Free-On-Board (FOB) value that does not exceed INR 25,000 (USD 400) per consignment. 

• New Ports for Importing and Exporting

The new policy recognizes two new ports for importing and exporting:  Calicut Airport in Kerala state and the Arakkonam Inland Container Depot (ICD) in Tamil Nadu state.

• New Mechanism for Quality Complaints and Trade Disputes

The policy has established a mechanism for the resolution of quality complaints and trade disputes between exporters and importers. Exporters and  importers may now bring quality complaints and trade disputes to Committee on Quality Complaints and Trade Disputes (CQCTD) offices, which will be established at 22 locations across India.

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“Not Unachievable” Export Growth

Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) government are playing a long game. This is partly because of political considerations: the government understands that it cannot alienate potential collaborators with drastic reform agendas, and appears content to demonstrate what effective governance looks like in India.

This careful approach is not reflected in the foreign trade policy’s ambitious goal: reaching USD 900 billion in exports by 2020. According to a local media interview with Commerce Secretary Rajeev Kher, India’s exports will need a compound annual growth rate (CAGR) of 14 per cent to hit the USD 900 billion target; India’s exports had a 13.5 percent CAGR between 2004 and 2014. Although this may appear realistic for pen and paper purposes, many local observers contend it remains overly dependent on external factors.

In the interview, Kher submitted that achieving a 14 percent growth rate depends on the global economy improving, a continued rise in domestic consumption and the competitiveness of Indian industry, as well as India’s position in relation to regional trading partners, such as China. He maintains, however, that this growth target is “not unachievable”.

Observers may be justified in giving Kher the benefit of the doubt: it is often said that India grows despite its government. The trade policy, as well as the recent budget, begins to meet foreign investors part way – India’s rapidly expanding market will have to pick up any slack.

The most successful businesses in India understand that it is a long-term market; foreign investors should take courage in this government’s steady and focused agenda. If the government continues down this path, the cumulative effect of its direction will bear fruit over the next several years.

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