EXECUTIVE SUMMARY OF THE REPORT ON DOMESTIC CONSTRAINTS ON EXPORTS FROM SELECTED SECTORS

BACKGROUND

The four major engines of the Indian economy — private investment, exports, private consumption and public investment — have suffered significantly in the recent past, leading to a downward revision of India’s economic growth and dampened economic sentiments. Among the four drivers merchandise exports fell -34.6% in March 2020 compared to March 2019. Total exports in April and May declined by -47.5% compared to the same period in 2019. While demand side factors, i.e. slowdown in the global economy is beyond the control of the Government of India (GOI), supply side constraints can be incrementally alleviated. Based on the feedback received from stakeholders, this report investigates supply side constraints due to domestic policy on the growth of exports in selected sectors viz. textiles and garments, gems and jewellery, automobiles and auto components, electronics (with a focus on mobile phones), and the pharmaceuticals sector. Three criteria were used in the selection of sectors: their importance in India’s exports, high potential exports reflected in GOI’s policy targets, and sectors embodying employment or technology related objectives.

METHODOLOGY

Beginning with a literature survey, the study first designed a questionnaire for interviews with industry associations, government officials and exporters. More than one discussion was held with the key stakeholders to clarify issues as required. The report distinguishes between short- and medium-term priority policy actions, together with some longer-term actions in certain sectors. There are two Reports: one on the domestic policy constraints on India’s exports in the selected sectors, and second on the development of export hubs. Based on the exporter feedback, a deeper analysis was done using Global Trade Analysis Program (GTAP) – a general equilibrium model – to estimate the effects of removing GST and input tariffs for all the selected sectors.

MAIN FINDINGS FROM GTAP ANALYSIS

The GTAP analysis examined the impact of two points emphasised by exporters, namely quick GST refund and tariff-free import of key inputs. The impact of an immediate GST refund would be overwhelmingly positive for exports from all sectors, with the highest effects in the gems and jewellery sector (Table 1). Sectoral exports would also increase significantly for automotive products and pharmaceuticals. The GTAP results should be seen as the lower limit of the impact. Addressing delays in getting refunds of GST reportedly costs about 1% to 3% of the GST amount for exporters. Quick GST refunds will therefore give an additional incentive for exporters over and above that estimated by GTAP analysis.

Table 1 Effects of immediate refund of GST in selected sectors

	Pharmaceuticals	Automotive Products	Textiles and Apparel	Gems and Jewellery	Mobile Phones
Sectoral Output	7.85	7.07	17.89	13.59	12.47
Sectoral Employment	16.24	19.22	3.75	22.34	2.46
Sectoral Exports	7.01	10.65	3.94	12.05	2.70

Table 2 shows that reducing tariffs on inputs to zero will have a very significant impact on exports across all sectors. For output and employment, however, the result is mixed, given the different operational conditions across sectors. The positive impact on exports arises because lower tariffs on inputs reduce costs and improve competitiveness. A large part of the inputs of the automotive products and textiles and apparel are produced domestically, and the long experience of these sectors have made the domestic products relatively cost-effective. The cheaper imported inputs improve cost-efficiency and have a positive impact on output, employment and exports for these sectors. For gems and jewellery, exports are large compared to domestic sales, and imported inputs provide a major part of its value chain. Reducing tariffs on these inputs to zero gives a boost to production in this employment-intensive sector, and also improves export competitiveness in a major way.

For mobile phones and pharmaceuticals, the import share is high and most of the production at present is aimed at the domestic market. Reduced costs of imported inputs increase competitiveness and boost exports. The lower cost of imported inputs results in larger use of these inputs in comparison to domestic inputs across the production base. Zero tariffs on imported inputs thus reduce the domestic output of these two sectors, but make exports more efficient. Thus, exports will increase, but domestic production and employment will decrease with zero tariffs on key inputs. A strategic approach has to be evolved so that any present emphasis on import substitution (which results in a focus on domestic sales and not exports) is adequately mitigated to increase exports through support and incentive policies. The Government has recently announced such policies for these sectors.

Table 2. Effect of Removing tariffs on Inputs from Selected Sectors, (%)

	Pharmaceuticals	Automotive Products	Textiles and Apparel	Gems and Jewellery	Mobile Phones
Sectoral Output	-0.8	5.2	7.51	5.7	-5.16
Sectoral Employment	-0.07	28.4	39.32	28.7	-24.5
Sectoral Exports	20	34.3	32.3	27.05	30.5

Source : GTAP Analysis

COMMON PRIORITY CONCERNS ACROSS SECTORS

1. High Vessel Handling Charges and Port charges
Indian ports levy heavy vessel handling charges (VHC), which gets passed on to the shipper/consignee on a pro-rata basis for single containers. Some Indian ports charge VHC at USD 55,000 to USD 80,000 per vessel. VH Charges for Colombo, Singapore and Shanghai are in the range of USD 7,000 to USD 12,000 only.

Indian ports charge for several services even though most of these services are subsumed in the Terminal Handling Charges (THC) levied by the ports on the shipping lines for handling containers. For instance, while THC include charges for offloading/putting on board a container from a container yard or railway flatbed wagon to a ship or vice versa, some ports charge for Inter Terminal Rail Handling Operations (ITRHO) on containers moved by rail. Extra charges are levied by some ports for the Direct Port Delivery (DPD) of inbound containers even though the DPD service was meant to reduce costs and time for importers.

Normally, a free dwell time of four hours is allowed between the anchorage and berthing of a ship. If a container ship spends extra time at anchorage (e.g., on account of congestion at a port) or if there is delay in offloading/loading containers after berthing, the demurrage has to be paid by the shipper/consignee. If there is a delay in customs inspection after a container has been offloaded at a port, demurrage is again charged to the consignee even though the latter is not at fault. These additional costs are imposed on the exporter/importer while the reason for the delays and increased cost are attributable to the practices of those who charge the exporter/importer. For this reason, there is no incentive to be efficient and reduce the costs involved. Direct Government intervention to address this is therefore necessary to reduce such costs and improve competitiveness of India’s exports. This requires (a) increased transparency for the practices of ports, shipping lines and intermediaries for all the services rendered and the charges thereof; and, (b) a comparison of the costs imposed on Indian international trade and the analogous costs in other countries.

2. Policies that could be implemented within one year (low hanging fruits)

1. Export incentives, particularly the Merchandise Exports from India Scheme (MEIS) scheme would be phased out. The scheme that replaces the incentive should have similar impact. In some cases, the replacement scheme, RODTEP will not fill the gap created by phasing out MEIS.
2. Delays in approvals and refunds from the Government. A focused effort is required to monitor priority areas to ensure timely implementation. A co-ordinated interactive monitoring mechanism needs to be established for this purpose.
3. Difficulties and delays due to customs clearance. Specific areas of concern identified must be addressed both through a monitoring mechanism and in a generic way by improving the practices and policy approach of Customs. The Report provides certain priority areas for focus.
4. Logistics related difficulties. Some key ones have been identified for certain sectors.
5. Regulatory issues: Dealing with multiple agencies particularly affects the pharmaceuticals, automotive and the gems and jewellery sectors. Single window interface needs to be established on a priority basis.
6. Lack of effective implementation of policies. This could be improved relatively quickly and includes issues such as quick GST refunds, ROSCTL disbursements and even duty drawback refunds.
7. Identification of policy gaps across all the sectors.
8. Lack of Monitoring and backstopping to ensure that the gains from policies flow to the sectors. The Report provides a framework for this purpose.

SECTOR SPECIFIC CONCERNS

(a)Textiles and apparel sector
India’s textiles sector is one of the oldest industries in the Indian economy, dating back several centuries. India’s overall textile and clothing exports during FY 2018-19 stood at USD 36.6 billion. Production of Textiles and Clothing is currently estimated at around USD 200 billion, and expected to reach USD 250 billion by 2023. The textiles industry has seen a dramatic decline due to COVID 19 and exports from March to May 2020 are estimated to have declined by -40%.

In terms of domestic policy, first of all a uniform GST should be levied across the entire textile value chain i.e. fibres to made-ups/clothing, including for manmade textiles. For GST, especially state GST, it takes time to verify the Export General Manifest (EGM) details and requires continuous follow-up. GST2A and GSTR3B screens are yet to be developed. Though improvements in IGST refund processes have now been made, exporters contended that IGST credits were difficult to obtain. Many also claimed that there were delays in getting ROSL (refund of state levies) and duty drawback refunds. Small firms complained that most shipping bills do not get uploaded to the DGFT server on time. In addition, the electronic Bank Realization Certificates (EBRCs) for exporters were often not reflected on the DGFT server.

At the time of clearance of goods an importer pays duty on CIF value of material, which also includes ocean freight. Thereafter, the importer again pays GST under Reverse Charge Mechanism (RCM) on ocean freight and deposits the tax with the Government. Thus, there is double taxation on Ocean Freight, which may be exempted from payment of GST under RCM. Taxes should be reduced and documentation should be made simpler.

All the industry segments, especially weaving and processing, need to be modernized on an urgent basis. Even cotton spinning, which is considered to be world class, needs to be upgraded otherwise it risks becoming uncompetitive in a few years’ time. The Amended Technology Upgradation Fund Scheme (ATUFS), and its predecessor schemes have provided significant benefits to the industry to modernize. ATUFS should be continued and the allocation under it should be increased. Spinning should also be included in the ATUFS dispensation. However, in order to provide full benefits to the industry, ATUFS needs to be modified to: (a) raise the limits of Capital Investment Subsidy (CIS) for a single unit, (b) raise the percentage of CIS per unit, and (c) expedite the scrutiny of applications and inspection of installed machinery, which currently takes an inordinately long time.

The EPCG scheme is likely to be phased out shortly because of an adverse ruling by a WTO dispute settlement panel. Most of the spinning, weaving, processing and sewing machines needed by the industry are not manufactured in India. In order to facilitate modernization of the industry in the absence of the EPCG scheme, the import tariffs of those machines, which are eligible for CIS under ATUFS, should be brought down to zero.

The Merchandise Exports from India Scheme (MEIS) is also likely to be completely phased out by 2019-20 in view of an adverse ruling by the same WTO dispute settlement panel. It is to be replaced by RODTEP. Cotton yarn was not eligible for benefits under MEIS earlier. Also, fabric exports were eligible for 2% MEIS (unlike 4% available to made-ups and garment exporters) under MEIS. ROSCTL, which was introduced w.e.f. 7 March 2019, ostensibly as a replacement for MEIS, did not include either yarn or fabrics in its purview. The industry felt that RODTEP benefits should be available for both yarn and fabric exports to compensate for the unrebated state and central duties and taxes that these products suffer.

Barring spinning, all the other downstream segments of the industry in India suffer from a serious lack of scale. In order to encourage the production units to achieve global scales, artificial distinctions between SMEs and large units need to be done away with, especially in terms of power tariff subsidies, labour laws, inspections etc. Also, special incentives need to be provided for consolidation of existing weaving, processing, made-ups and garment units for the achievement of scale.

In order to reduce transportation costs for raw materials/intermediate products and facilitate cluster development, a few mega textile parks or large Export Hubs need to be set up by states, where units from yarn to garments can be located.

(b) Gems and Jewellery
This sector is one of the largest in the world contributing 29% to global Jewellery consumption. The market size of the sector is about USD 75 billion as of 2018 and is estimated to reach USD 100 billion by 2025. There are more than 300,000 producers, contributing about 7% to India’s GDP and employing over 4.64 million employees. Data compiled by the Gems and Jewellery Export Promotion Council (GJEPC) showed gross exports from India stood at USD39.68 billion in 2018-19, compared to USD40.96 billion the previous year.

Overall exports in this sector declined by 10.6% in the financial year 2019-2020 compared to 2018-19, on the back of US-China trade war, protests in Hong Kong, the implementation of VAT in the Middle East, and COVID 19. This sector’s exports in March 2020 alone declined by 43% in USD terms.

India is the world’s largest centre for cut and polished diamonds in the world and exports 75% of the world’s polished diamonds. Today, 14 out of 15 diamonds sold in the world are either polished or cut in India. However in financial year 2019-2020 diamonds exports declined by 22%, and in March alone exports went down by 48%. India is also the largest consumer of gold in the world. A rising middle class population and increasing income levels are the key drivers of the demand for gold and other jewellery in India. In financial year 2019-2020 gold exports increased by 2%, but in March 2020, its exports decreased by 44% due to COVID 19.

The Government has also permitted 100% Foreign Direct Investment (FDI) in the sector under the automatic route. The USD 35.77 billion household jewellery industry will probably receive a major boost through the Government’s decision for FDI in retail. As of January 2018, the Reserve Bank of India (RBI) has increased the scope of the gold-monetisation scheme by allowing charitable institutions and government entities to deposit gold, expected to boost deposits. However the Gold Monetisation scheme has not taken off as expected.

In addition, silver jewellery, semi-precious stones and artificial jewellery are the growth sectors in international markets. While silver jewellery exports doubled in financial year 2019-2020, that of semi-precious stones went down by about 20% in USD terms. India should promote the growth of this segment of its gems and jewellery base because in the global market value of this market stands at USD 7 billion.

The major reasons for the fall in exports in this sector over the last few years was reported to be credit crunch, high cost of obtaining working capital, delays in GST refunds, customs-related issues, and high import duties on polished diamonds as well as gold. The COVID 19 crisis is of a different order altogether and has added labour problems to the list of issues.

Lab-grown diamond (LGD) has affected the Indian diamond industry adversely, not only because it has displaced natural diamonds, but also because LGDs are often passed off as natural diamonds. Government should back industry certificates of authenticity for natural diamonds so that price premiums can be obtained. Natural diamonds are also more employment intensive.

Banks do not give a guarantee for import of rough diamonds in India, thus exporters rely on supplier’s credit. Government should assist Industry association in creating a fund to enable the purchase of raw materials. Exporters also feel the absence of any professional organization or government counter which would allow them to purchase raw materials.

It is comparatively easier to do business in Dubai than in India. The Congo sells all its consignments to Indian exporters through Dubai. As a result, it is getting difficult for the Indian government to tax rough diamonds in India because they arrive directly through Dubai. In India, the carat tax is 125%, which is being avoided. It would be convenient if rough diamonds directly come to India by easing the bank loan conditions. Tariffs on products coming from Dubai are low as India has a free trade agreement with the countries of the Gulf Cooperation Council including the UAE.

Transportation is the nerve- knot of this industry in India. Exporters are unable to fulfil the export demand of products due to transport problems. Trade logistics, especially transport costs need to be reduced. Ease of doing business is another problem. The clearance of parcels from customs and other formalities takes a lot of time, and after dispatch, the parcel reaches the foreign country within 5-6 days. To overcome this problem, exporters dispatch their parcels by air or DHL from Delhi and the parcel reaches the country concerned within one day. However, parcels of such high value items are not safe. Hence, both transport and customs clearance formalities should be eased. Parcels below USD 800 should be exempted from customs clearance and only random checking should be done.

(c) Automobiles and auto components
The Indian automotive industry is the fourth largest globally, with an annual turnover of around US$ 120 billion. It contributes to 8% of India’s total exports and 27% to industrial GDP. The auto component industry registered a turnover of US$ 57 billion in 2018-19 and exports were at US$ 15.16 billion with an over 17% growth compared to the previous year. Europe with 33% and USA with 29% share of India’s component exports continued to be the predominant overseas markets.

Making India a Hub for small cars: Making India a hub for small cars was first envisioned in the Automotive Policy of 2006-2016. The vision and the subsequent push by the industry helped the automotive industry in India capture over 30% of the global market for small cars. It is not just small cars, but India has also emerged as a leading global supplier of diesel and petrol engines of small capacity, commuter two and three- wheelers, low-powered tractors, engine and transmission-related auto components and many other lower-end auto components. Importantly, the whole value chain across the auto sector has helped India become a significant player in the small car market. This has made it easy for the sector as a whole to tap the export market as the manufactured product meets global standards.

Local Content requirement: India understood the need to build local content requirements for cars in the country along with ensuring high emission norms that are at par with the best in the world. This has ensured that the levels of technology for engines and other critical components has remained high and is in line with the push towards “Make in India”.

Standards – A game changer: Besides the government push, an important reason, in the recent past, for India to become a big exporter of automobile and auto parts to countries across the globe has been primarily because of high levels of standards that exist in India that are harmonized with the best in the world. Indian products do not face any barriers due to lack of emission norms. Indian auto sector has been a very strong participant in all global dialogues on auto industry, including in the discussions under the United Nations Economic Commission for Europe at Geneva (Switzerland). This ensures a robust presence of the Indian voice on global auto standards.

Suggestions for developing the industry further:

1. Reduce GST as the automotive industry in the country has been kept among the highest taxpayers. Both SIAM and ACMA would want the government to bring the GST rates to levels that will spur the industry forward.
2. Push R&D: Auto component players are of the view that frequent regulatory and technological changes require enhanced spend on R&D in the following key areas: a) Emission; b) Safety; c) Industry 4.0; d) Electric Mobility e) Increasing electronics in vehicles. Therefore, the auto component industry is of the view that there is a need for incentives to upgrade technology.
3. Technology Upgradation: ACMA is of the view that to meet the challenges in the coming years there is a need for the government to consider setting up specific technology upgradation fund targeting upcoming technological changes (like electrification of power trains). These funds can be in the form of soft loans, tax incentives etc. Such incentives are provided in other countries like China, Malaysia, Brazil and Indonesia.
4. Reducing duties: The automotive component industry is of the view that the cost of raw materials is very high in India. The industry uses a wide variety of raw materials: This includes HR/CR steel as well as alloy steels. The cost of raw material constitutes approximately 60% of the cost of an auto component. Therefore, any fluctuation in raw material price has a major impact on the component industry.

Identifying FTA markets of interest: The vehicle industry in India is of the view that the free trade agreements that have been negotiated or are being negotiated by India do not reflect the interests of the sector. Instead, the automobile industry has a set of markets where it is keen for India to build trade agreements where reciprocal tariff reductions and other discussions will help boost the market for Indian automobiles.

(d) Electronics with a focus on Mobiles
With relevant policy support, major global firms present in India provide an important base to achieve a large increase in exports. Most of the priority areas for policy support are common for major global and Indian firms. The latter however require some additional support policies specifically relevant for them. The common areas emphasised by both include: financial support/incentives (similar to those provided by prominent competing economies); stop changes in customs notifications with retrospective effects; remove ambiguity in taxation (i.e. remove ad hoc, arbitrary or inconsistent interpretation); address delay in refunds/payments (GST, duty drawback, and financial incentives promised by the Government); examine items on which GST is not refunded even though the activities are important for exports (e.g. certain services, including payment to sales agents located abroad); a real single window for the multiple approvals required; assess the practicality of implementing the notified requirements, e.g. for meeting the environmental conditions.

In addition to the above, the major domestic firms emphasised easier access to loans, credit guarantee and interest subvention, creation of a national design ecosystem for the mobile firms, and revamping the electronics manufacturing clusters scheme.

Some of these “asks” have been met by the Government through recent policy announcements. However, there is a highly relevant in this regard. Exporters stated that though support policies are announced they are not effectively implemented. Therefore, to ensure benefits of the policies to the producers/exporters, a targeted monitoring framework has to be applied to identify and address area that have not been effectively addressed. The Chapter provides a framework and a suggested form that could be used for this process.

The Chapter also identifies a large number of specific areas (such as Customs and GST-related practices) that could be addressed within the short-term. Examples include improving the cost and quality of power supply, an objective evaluation of the impact of the Phased Manufacturing (PMP) Scheme on exports, improving ease of selling from SEZ to DTA, simplified processes for policies such as Advance Authorisation and the Services Exports from India Scheme (SEIS), reducing the time period for approvals (including for setting up manufacturing units, or for fixing “brand rate” of duty drawback), and establishing a process of consultation with exporters when policies are changed or new policies are announced.

Certain policies with a wide-ranging impact on exports were also identified. An important feature of GVCs is the need for quick turnaround and the significance of inventories (working capital). Thus, a special focus must be given to avoid policies or actions that raise the cost of working capital.

GVCs include many goods and services, and are affected by policies impacting them. This implies a need for co-ordination amongst Ministries/Departments. A high-level co-ordination committee is required for this purpose. This process would also create a high-level national priority for exports. In this context, it would be useful to develop an index for Ease of Doing Exports.

(e) Pharmaceuticals
The pharmaceutical sector is the crown jewel of India’s export basket. India has earned for itself the sobriquet of the ‘Pharmacy of the World’. India accounts for around 10% 0f the world’s production by volume ranking it the 3rd and around 1.5% in value placing it the 13th in the world. The sector in India has grown through the combination of India’s entrepreneurship, government’s policy interventions and global demand for healthcare products.

The sector faces challenges on several fronts, principal amongst them are regulatory issues such as environmental and sectoral regulations, acute capital scarcity due to typical needs of the sector particularly the segments of biopharmaceuticals and active pharmaceutical ingredients and threatening dependence on imports of the key starting materials and active pharmaceutical ingredients including fermentation products. The low margin operations of the sector do not leave entities with enough investible surpluses. The sector is highly technology and innovation driven. Indian industry has the capacity to absorb state of the art technology, best practices and innovations of its own but needs regulatory facilitation and encouragement to be able to enter the next trajectory of growth. It needs to invest increasingly in Research and Development, therefore requires corresponding supportive policies for ease of doing business, trade facilitation, human resource development, institutional linkages, and taxation policies. The Bio-Pharmaceutical sub-sector holds promise for the future and India has the capacity to outshine many of its competitors. Therefore, the study also recommends a National Plan for Bio-Pharmaceuticals.

On the governance side the sector is severely impacted by the presence of multiple agencies and departments making its forward movement complex and slow. Regulatory facilitation through inter-ministerial mechanisms has been recommended. Price control though may have a rationale in a limited context has proved to be inhibitive in the sector’s growth and requires a review. Since the sector has peculiar financing needs and manufacturing entities have exposure to common demands of regulations, infrastructure and logistics, cluster-based development is seen as a major method supporting competitive manufacturing.

The sector has done remarkably well in external markets but to improve and maintain the export growth trajectory India must deal with entry barriers in major markets through institutional mechanisms such as FTAs and elevate its product standards to the highest levels besides pursing regulatory coherence/harmonisation at the global level. The Brand India Pharma has held its head high but needs support of policies, regulations and practices to continue to do so.

Export hubs
The value chain for investment/exports by lead firms managing an export hub includes factors additional to those conventionally considered as part of the GVC. A discussion with these firms is an essential part of developing strategy and policies. In this context, it is important to consider certain leading questions/ issues to develop the appropriate policy response.

• Identify the sector/ product that is a priority area for creating an export hub;
• Is there an existing export hub within the country for that sector, or is a new export hub with large export capacity to be established?
• Which firms are the likely lead firms – domestic or foreign; whether present in India or not?
• Lessons from the support/ incentive policies implemented by the major competing countries?
• Is it possible to combine the new policies with the ongoing initiatives in India, such as those addressed by the National Committee on Trade Facilitation?
• Does the product or selected sector have product differentiation within the sector? Does such product differentiation imply different support combinations of policies for a given sector?
• What are the main export markets for a selected sector? If significant exports take place to more than one type of export market (e.g. developed country/ developing country), can a common support strategy work?
• Are the domestic requirements for standards, labelling and marking inconsistent with those required for the major export for the lead firm?
• Which inputs are locally sourced and which are to be imported?
• How can the domestic ecosystem be developed to support the export hub initiative and the transfer of technology?
• Does the lead firm need time to locally develop the inputs that are acceptable in the export markets? What are the implications for competitiveness and value chains?
• Is there a major constraint which cannot be addressed without direct intervention by the government, including public investment?

GOVERNMENT HAS IMPLEMENTED/IS IMPLEMENTING SEVERAL POLICIES TO IMPROVE EFFICIENCY

The Government has implemented many policies to improve and facilitate export performance. However, major concerns still remain. A common point made by all sectors is that though a number of supportive or facilitating policies have been announced, their implementation is very poor.

Some sector specific suggestions with a common significance across sectors include the following. A need to co-ordinate policy effectively across different Ministries/Departments, through high-level Committee(s) to give importance to effectively implement policies that address priority concerns faced by exporters, especially in connecting with GVCs.

Such emphasis on co-ordination and effective implementation would make exports a national level priority. This should be combined with creating an index of ease of doing exports, and a focus on avoiding policies that add to working capital costs (e.g. through delays). These two are important mechanisms to increase the potential for competitively connecting with GVCs.