Discuss freebies and also the subsidies to industries

Of late, there are lots of discussions about the merits of subsidies for the poor through free food, free electricity, free education, free health care, and so on. However, there is hardly any discussion about the subsidies for the industries and exporters.

Imports of capital goods are allowed duty free under Export Promotion Capital Goods (EPCG), Export Oriented Units, and Special Economic Zones schemes. A panel at the World Trade Organization ruled these schemes as incompatible with the disciplines under the multilateral agreement on subsidies and countervailing measures. Yet the schemes continue, and under a new scheme of Manufacture and Other Operations in Warehouse (No.2) Regulations, 2019, capital goods can be imported without any export obligation. Strangely, at the same time, the import duties on some capital goods have been increased with a view to protect the local producers.

Under the advance authorisation scheme, duty-free imports are allowed for export production based on Standard Input Output Norms notified decades back when the technology levels involved high wastages and low yields. These have not been revised although improved technologies now give much higher yields and lower wastages. So, the exporters get more duty-free inputs than actually required for export production. There is a mechanism to curb such undue benefits but it is quite ineffective. Under the Merchandise Exports from India Scheme and Services from India Scheme (SEIS), duty credits were being granted quite liberally. Few questions were asked when the exp­orts stagnated during the 2014-21 period despite these subsidies. 

Now, of course, the MEIS scheme is replaced with the scheme for Refund of Duties and Taxes on Export Products and the SEIS benefits are somewhat restricted. However, no serious questions were asked when the SEIS benefits were arbitrarily raised on several services by 2 per cent in December 2017, with no justification whatsoever.

Under the Production Linked Incentive (PLI) Scheme, sub­sidies will be available for pro­ducers in select sectors upon achieving prescribed levels of production and exports. Many large manufacturers have opted for the scheme.  The question is why these producers need money from the taxpayers when they can very well go to the markers, where plenty of capital is available for good ideas. Also, is the government a better judge than the markets on which sectors and which companies within those sectors will do well in the future? Of course, the PLI subsidies are based on performance but that is something the producers can manage, not necessarily through greater efficiencies. 

Protectionism is another form of benefits to domestic producers. Higher import duties help many inefficient producers charge higher prices to the consumers and downstream user industries, especially the smaller ones. Inverted duty rates structure is a major problem for the small industries. In the past few years, import duty rates have gone up on over 4,500 tariff entries.

The politicians announce what subsidies they want to give or actually give to the poor. But, the subsidies to the industries creep in without much fanfare and when they do, industry leaders and associations hail the visionary action of the government. Detailed discussions do not take place on their merits.

No doubt, the so-called freebies to the poor must be discussed but the subsidies to the industries must also be discussed in depth.

email: tncrajagopalan@gmail.com