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Costs and Benefits of Export Promotion Schemes

Explore the necessity of export incentives, their structure, and impact on competitiveness, analyzing key policy instruments for exports and FDI.

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Costs and Benefits of Export Promotion Schemes

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  1. Costs and Benefits of Export Promotion Schemes Comments on ICRIER Report by Sukumar Mukhopadhyay

  2. Export Incentives • Why we need them • How are they structured • What is their impact

  3. Why we need export Incentives? • Destination basis of taxation • Remove domestic taxes on inputs • Encourage domestic value-addition • Drawback of import duties on goods (parts, raw materials, and capital goods) used in export activities • Subsidize exports to improve competitiveness • Subsidies to offset cost disadvantages: • hidden costs of domestic user charges • Other costs? • Subsidies in excess of identified cost disadvantages

  4. Why we need export incentives? • Paper raises important issues about definition of subsidies • Definition of neutral benchmarks essential to delineate subsidy elements • Destination-basis of tax (zero-rating of exports) does not extend to user charges or duty drawbacks • Duty drawbacks could be viewed as an incentive or simply a means of limiting tariffs to imports for domestic production and consumption • Need for much greater clarity about the objectives of a policy

  5. How are the incentives structured? • Selective or general • No need for selectivity where the aim is to have destination-based taxation • Is selective application of incentives a source of economic distortion • Incremental? • Only subsidies need to be limited to incremental exports • Difficulty to define and measure incremental activity • Multiplicity of incentives • No comment on other incentives or disincentives, e.g., SFIS, Service Tax on export industries? • SEZs vs Other Incentives • Administration and compliance costs of incentives

  6. What is the impact? • Exports depend on so many variables: • Exchange rate • Domestic infrastructure and investment climate • Global economic conditions • A simple comparison of export growth before and after DEPB is too simplistic to draw any inferences about its impact • Comparisons limited to merchandize exports • Complete neglect of Service exports • Important distinction between policy instruments for: • exports vs competitiveness • Exports vs FDI

  7. Competitiveness • Labor laws and skill shortages • Infrastructure • Power • Transportation • Financial • Regulation and corruption • Customs facilitation • FDI approvals

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