Budget must guide the contours of the new FTP

By Mukesh Butani & Shankey Agrawal 
The past few years have witnessed structural changes in the contours of the Budget. Former finance minister Arun Jaitley merged the Railway Budget with the Union Budget in 2016. Since 2017, post GST, the Budget has been confined to customs tariffs and related amendments. Past Budgets, however, have been conspicuously silent on the direction of India’s Foreign Trade Policy (FTP).

Though the trade policy has been a work in progress, its need can’t be over-emphasised given recent geopolitical developments, the thrust on local manufacturing and a direction on bilateral trade conventions. Policy intervention has been reactive and needs recalibration.

Budget FY23 may outline a pathway particularly on policy aspects, such as Make-in-India, Production Liked Incentives (PLI) scheme, exports, response to bilateral and regional trade alliances, the balance of payments, etc, all of which are intrinsically linked. The government of India issues a five-year FTP, a legal document enforceable under the Foreign Trade Development and Regulation Act 1992.

The Act followed the opening up of the Indian market, signalling a directional shift in trade and economic policy. The focus of successive FTPs has been progressive and forward-looking, to promote and expand the foreign-trade profile of the country across sectors and provide impetus to exports. The government undertook the last comprehensive review of FTP in 2015, when the 2015-20 policy was announced.

However, due to the outbreak of Covid-19, the new FTP was postponed, and the old policy was continued. In the last policy, fundamental changes were made to the export incentive schemes, which proved to be a game-changer for exports. These include merging various export incentive schemes for goods into Merchandise Export from India Scheme (MEIS) and replacing the Served from India Scheme (SFIS) with a much-refined Service Exports from India Scheme (SEIS).

A similar overhaul may be expected in the new FTP. However, specific FTP-related dimensions require attention:

WTO ruling and the future of SEZs & export incentives: In 2019, a dispute resolution panel of WTO had held that the export incentives under the FTP are violative of India’s WTO Commitment. While the government has appealed against the ruling, the future of SEZs and other export incentive schemes such as MEIS and SEIS needs re-evaluation, considering the ruling and the impending outcome at the Appellate Forum. Further, the existing SEZ law requires a substantive revamp.

Framed in 2005, it has now become archaic as it has failed to keep pace with the changing macro-economic and international trade environments. SEZs suffer from excessive regulations, underutilised capacity, and regulatory hurdles in business expansion besides being subjected to multiple compliances at the state level. This has materially contributed to regular exits from SEZ. Though not a direct reaction to the WTO Ruling, India has also been experimenting in a limited manner with the alternative incentive schemes such as the Remission of Duties and Taxes on Export Products (RoDTEP).

The output of such experiments shall serve as fodder for a comprehensive export incentive programme that complies with WTO commitments.

Free Trade Agreements (FTAs): India is currently negotiating FTAs with countries like Australia, the UAE, the UK, Canada, and Israel, with a shade of difference between earlier FTAs, based on what it envisions as the future. The earlier FTAs were comprehensive in scope, though the successful implementation of these remained questionable.

The new approach focuses on low-hanging fruits and not prolonging negotiations on contentious issues. This will result in FTA conclusion in multiple phases. However, the first outcome of the talks based on a win-win proposition—also referred to as ‘Early Harvest Agreement’—fits well as it would be economically and politically palatable in the present environment. It is hoped that the early closure of some FTAs will reset India’s external trade ties, which has been craving for direction since it decided to stay out of the Regional Comprehensive Economic Partnership Agreement (RCEP).

Production Linked Incentives (PLI) schemes: The PLI programme has been a spectacular success, particularly in specified electronics and telecom manufacturing. It continues to stimulate investment in other areas of the domestic manufacturing industry. The scheme was introduced for 13 key sectors, including pharma, electronics, and automobiles, etc. There is a need for a comprehensive scheme for wholesale revival of domestic manufacturing, which shall retain the benefit of PLI and broad base it for larger industry coverage. 

Focus on MSMEs: At present, due to the minimum investment requirement under the PLI schemes, the focus has remained on large-scale manufacturing. Most other export incentives schemes for MSMEs such as EOUs, STPs and SEZs have outlived their utility. It is widely expected that the Budget shall introduce revamp measures, giving a boost to this sector in light of its potential for employment-generation and incentivising entrepreneurship.

 Regulatory relaxations: The pandemic has taught us that private enterprises can work with extended flexibility and there are many positive takeaways from ‘work from home’. This new culture needs to be formally recognised and introduced by way of appropriate regulations, which will enable organisations, especially MSMEs and gig platforms, to make better use of government programmes. 

GST export benefits: The export benefit under GST is currently outside the purview of FTP and is not aligned with the current FTP. This has resulted in the denial of export benefits to certain classes of exporters. Therefore, there is an urgent need to bridge the chasm between the two policies. Furthermore, a seamless disbursal of GST refunds, without administrative delays, carries paramount importance. Policymakers surely realise that export promotion can’t be the sole prerogative of the commerce ministry, and that the finance ministry is an equal stakeholder in this. There is no reason why the finance ministry can’t push significant milestones for the export sector, which is at the cusp of exponential growth. There are tailwinds in the manufacturing and export sector due to US and European companies looking to establish alternate supply-chains away from China. With the right policy mix, the upcoming Budget, coupled with the upcoming FTP, shall ensure that India’s message is clear and taken note of by its trade and investment partners. 

The authors are with the customs & trade practice of BMR LegalViews are personal