Minster of State for Commerce, Nirmala Sitharaman recently announced that the review of foreign trade policy will be completed prior to July 1 when GST will be rolled out. This review is especially important since it is being done in an environment where India is under some pressure to move away from post-export incentives that are increasingly not compatible with WTO rules.
Besides incompatibility with WTO, giving incentive to a firm that is already exporting somewhat counter-intuitive as it is essentially rewarding a successful and therefore competitive exporter. Logically, investment in developing firm or sector level competitiveness requires support at the pre-export stage. Pre export production related subsidies and government support measures are more compatible with WTO rules and extensively used across the world.
However, production level support or incentives are expensive since benefits cannot be limited to just successful exporters like in the current schemes, but are potentially open to all manufacturers and service providers. Thus, the burden on the exchequer due to either tax foregone or direct financial support can be substantive.
An export development programme reliant on production-based subsidies therefore require targeting of specific sectors in a manner that helps develop competitiveness, but with some discrimination criteria that ensures that the scheme is not open to all. Designing such programmes would require institutional capacity to develop the right criteria, transparent administration of such criteria in the distribution of benefits, and close cooperation with industry associations and sectoral export promotion councils. The current administrative machinery is insufficiently prepared for such an exercise.
But radical overhaul is necessary not just to make our incentives more compatible with WTO rules, but also to address the serious challenge posed to Indian industry by industrialisation 4.0 and automation. India will not be able to replicate the low-wage-middle-skill manufacturing boom that worked for China and other SE Asian countries, given the current shifts in technology and consumer preferences. McKinsey analysis shows that over 235 million jobs in India are at risk from such changing dynamics