Niti Aayog's estimate of the outlay of the RoDTEP scheme, submitted with the PMO, is only a fifth of the annual benefits of Rs. 50,000 crore that the government had envisaged, and only a fraction of the incentives under the current scheme.

In a proposal that raises fears of a drastic cut in benefits to exporters and could cast a shadow over recovery following the Covid-19 outbreak, a Niti Aayog analysis has pegged the potential outgo under a proposed scheme to reimburse all embedded levies paid on inputs consumed in exports at just about Rs. 10,000 crore a year. This is only a fraction of the annual benefits of Rs. 50,000 crore that the government had envisaged when finance minister Nirmala Sitharaman announced the so-called Remission of Duties and Taxes on Exported Products (RoDTEP) scheme in September last year to make exports zero-rated, in sync with global best practices.

In fact, Niti's estimated RoDTEP outlay is also close to a fifth of the incentives in FY20 under the Merchandise Export from India Scheme (MEIS) that the RoDTEP is proposed to replace from January 2021. Niti's estimate can potentially deal another blow to exporters, coming as it is after the resource-strapped revenue department's capping of the MEIS allocation at just Rs. 9,000 crore for the April-December period of FY21. 

In a presentation at a video conference meeting, chaired by PK Mishra, Principal secretary to Prime Minister Narendra Modi, on August 6, Niti Aayog chief executive Amitabh Kant is learnt to have proposed that once the RoDTEP scheme replaces the MEIS, the annual "savings" of Rs 40,000 crore be utilized to roll out production-linked incentive (PLI) schemes in "sectors of strength to create global champions".

While it's unclear how Niti has arrived at such a low estimate (a committee headed by GK Pillai was formed only on July 30 to suggest RoDTEP rates), its proposed outlay has raised fears of a massive reduction in either the coverage of sectors or the reimbursement rates under the RoDTEP scheme. To be sure, any such proposal by Niti Aayog is still being deliberated upon and yet to be endorsed by the government.

Federation of Indian Export Organisations (FIEO) president Sharad Kumar Saraf said it's "impossible" to offset the blow of all the embedded taxes within an annual outlay of just Rs. 10,000 crore (about $1.3 billion) when exports are typically above $300 billion a year. "Many exporters are, as such, forced to focus more on the domestic market now, as margins in exports have shrunk. Lack of adequate legitimate incentives will further discourage them from exports. Cash flow, as such, is already badly hit by the pandemic," he said. An export-led economic recovery in the coming years is out of the question now, unless the incentive is suitably restructured, some exporters warn.

Merchandise exports have been contracting since March, thanks to the pandemic. They witnessed a record 60% crash, year-on-year, in April, although the contraction narrowed to 37% in May, 12% in June and 9% in July, as lock-down curbs were lifted in June. However, some exporters say once some of the orders booked earlier are dispatched, exports could falter again, thanks to a combination of subdued demand overseas and inadequate benefits.

Interestingly, exporters have often complained that even the MEIS benefits remain too inadequate to offset the damaging impact of structural bottlenecks in India, including embedded levies, elevated logistics costs, poor infrastructure and "over-valued" currency.

The RoDTEP scheme is proposed to cover levies that are not subsumed by the GST (petroleum and electricity are still outside the GST ambit, while other imposts like mandi tax, stamp duty, embedded central GST and compensation cess, etc, remain unrebated).

Niti has favored the launch of PLI in sectors, including Textiles, Food processing, Battery cell making, Electronic/Tech products, Telecom & Networking, Auto and Components, White goods, Capital goods and specialty Chemicals. Funds for PLI schemes, which must be operational for a maximum of 5 years, can be hiked at 10% a year, it suggested. Recently, the government launched the PLI schemes for three sectors - Electronics, Pharma and Medical devices. It has also favored a phased manufacturing programme for low-value and other products that have high domestic demand. Similarly, it wants a review of India's various free trade agreements to "contain round tripping of imports".

Niti argues that the MEIS is a "highly-fragmented" scheme that doesn't incentivise high-volume and high-value production, nor does it boost exports significantly. This is despite the fact that as much as 27% of customs duty collection was utilized to service the scheme. While MEIS liabilities grew as much as 32.2% year on year in FY19, exports of the MEIS-covered items rose by only 10.4%. In FY18, the MEIS covered 47.8% of Indian exports but 85.6% of total exporters, mainly because the scheme encompasses many labour-intensive sectors filled with small and medium businesses.