If India’s foreign trade in goods and services have in recent quarters been a continuous drag on the gross domestic product (GDP), the pull-down effect could be far stronger in the current fiscal. By capping the outlay for the Merchandise Exports from India Scheme (MEIS) at Rs 9,000 crore for the April-December period, the revenue department has deprived exporters of over two-thirds of the duty remission benefits they are entitled to. The move could also have wider implications for exporters of assorted goods as the denial of the benefit will suffice to blunt the already-narrow edge they enjoy in key markets over competitors, trade source say.
Fearing a shortage of funds following the revenue department’s decision, the commerce ministry has, for the time being, blocked the online module for claiming MEIS benefits since July 23.
Federation of Indian Export Organisations (FIEO) president Sharad Kumar Saraf cautioned that many liquidity-starved exporters, especially MSMEs, could go out of business. “Cash flow is badly hit and export recovery is in jeopardy now,” he said.
Merchandise exports have been contracting since March. They witnessed a record 60% crash, year-on-year, in April, although the contraction narrowed to 37% in May and 12% in June, as lockdown curbs were lifted last month. However, the latest decision of the revenue department may dash hopes for a steady recovery anytime soon, exporters warn.
Industry sources said the government’s FY21 budgetary allocation for benefits under the MEIS (or a new scheme that is now expected to replace the MEIS from January 2021) was about Rs 27,000-30,000 crore, although there is no official word on it. In FY19, the MEIS outgo was to the tune of Rs 40,000 crore, according to an official source.
Exporters typically firm up deals after factoring in the MEIS scrips, which range from 2% to 5% of the export turnover, depending on the products or shipment destinations. Any abrupt or premature withdrawal of or reduction in benefits by the government will, therefore, erode exporters’ margins proportionately, at a time when they are already bruised by a Covid-induced cancellation of orders, said Mahesh Desai, chairman of the engineering exporters’ body EEPC India. “The decision will also stoke further uncertainties on the export front,” he added.
Hard-pressed for resources following the Covid-19 outbreak, the revenue department has asked its commerce counterpart to review the MEIS rates and coverage so that the allocation doesn’t exceed Rs 9,000 crore.
In a letter to finance minister Nirmala Sitharaman on July 21, commerce and industry minister Piyush Goyal sought a review of the revenue department’s decision.
Of course, the MEIS rates have been reduced for several commodities since FY19. Also, given the export contraction so far, the outgo was expected to drop in FY21. Nevertheless, the magnitude of MEIS fund reduction surprised exporters. In fact, with two of the key markets – the US and the EU – battered by the pandemic, exporters were hoping for a some kind of succour to beat the pandemic blues.
The MEIS would remain valid until December this year and is to be replaced with a more WTO-compatible scheme, RoDTEP, which reimburses all levies (that are not subsumed by GST) paid on inputs consumed in exports.
Deputy director general of foreign trade Praveen Kumar told Nitish Kumar Sinha, joint secretary at the revenue department, that MEIS scrips worth Rs 422.4 crore have already been issued to exporters for shipping bills with the so-called “let export order” (LEO) since April 1. “Since allocated funds at this stage for MEIS for FY2020-21 (up to December) stand at Rs 9,000 crore and any additional allocation has not been conveyed by the DoR (department of revenue), the online MEIS module has been blocked on July 23, from accepting new application for shipping bills with LEO dated April 1 onwards to limit the issuance of any more scrips.”
“DoR/CBIC (Central Board of Indirect Taxes and Customs) may take steps in such a situation and ask customs ports/field formations to stop registration of MEIS scrips with shipping bills with LEO date of April 1 and beyond,” the deputy DGFT said in the memorandum.
Even before the pandemic started to spread its tentacles far and wide and forced a nation-wide lockdwon from March 25, India’s merchandise exports had contracted by just over 1%, year on year, until February last fiscal. With a 35% fall in March, the contraction widened to 5% in FY20.