IES, Lower Duties on Raw Materials Will Plug Tariff Gap

Chennai: As the reciprocal tariffs imposed by the US government come into effect from August 7, the Indian government can take a few steps, including reintroducing Interest Equalization Scheme, increasing interest subvention rate, partly refunding logistics cost for goods products inland, lowering import duties on key inputs and providing market development fund to plug the tariff gap between Indian exporters and their Asian peers.

The much-debated reciprocal tariffs become effective by August 7 US time. India with a 25 per cent reciprocal tariff is at a disadvantage compared to its peers like Bangladesh, Malaysia, Indonesia, Vietnam, Pakistan, Sri Lanka and Philippines in the 15-20 per cent bracket.

Several labour-intensive, low-margin sectors face tough competition with a 5-6 per cent tariff differential with other Asian countries. However, industry believes that additional support from the government can make the products competitive.

Currently, the government assists exporters with duty drawback scheme and RoDTEP or ROSCTL schemes. The duty drawback scheme refunds the duties paid by the exporters for raw material imported or sourced domestically. This drawback ranges between 0.5 per cent to 6.5 per cent depending on the products. For those exporters, who import raw materials entirely for exports need not pay the duties under the Advance Authorization Scheme.

The hidden taxes and levies paid by the exporters and charges for power and water and local body taxes are refunded under the RoDTEP and ROSCTL schemes.

The Interest Equalization Scheme which provides rebate on the interest paid for the credit availed by exporters was discontinued last year.

"Relaunch the scheme with a Rs 15,000 crore annual budget and a five-year commitment to provide subsidised credit for exporters, especially MSMEs. This would lower borrowing costs, improve competitiveness, and provide immediate relief," said Ajay Srivastava, founder, GTRI.

Under the discontinued scheme, the government was providing a 3 per cent rebate on interest rates to MSMEs which vary between 8.5 per cent and 14 per cent and 2 per cent for non-MSMEs. “A few years back, the government was providing a 5 per cent rebate for MSMEs and 3.5 per cent for non-MSMEs. This can be revived to equalize our credit rates with some of the competitors,” said K Unnikrishnan, deputy director general of FIEO.

Though the government had promised to extend the scheme, it is yet to be restored. In the current Budget, the government has earmarked Rs 2,250 crore for export promotion schemes, down 17 per cent from Rs 2,718.73 crore allocated in the revised Budget estimates for FY25.

Moreover, the government should bring down the import duties and ease Quality Control Order norms on several raw materials that increase the cost of the end-product. A re-look at the Minimum Support Price on inputs like cotton will also make textiles competitive.

Further, several products manufactured inland bear high logistics costs. The government can partly refund the logistics cost for such exporters as well manufacturers in land-locked states. The logistics cost of agricultural produce too is high in India. “A 2.5 to 3 per cent refund on logistics charges can bring down the cost of the products,” he added.

The government can partly refund travel undertaken for marketing purposes under the Market Development Fund.