Foreign Trade Policy – Mid Term Review : Must for waning Fiscal Burden

The much-awaited review of the Foreign Trade Policy (FTP) was announced earlier this
month by the Commerce Minister extending support to exporters, especially those from leather-
intensive sectors, to help deal with implementation burden of the new Goods & Services Tax
(GST) regime. This is a crucial signal for reviving Indian exports, which has not been more or
less stagnant for couple of months now. Exporters have been looking forward to additional
incentives under the Merchandise Export from India Scheme (MEIS), longer time-frame for
meeting export obligations under various schemes and self-certification of documents wherever
required. This wish of the exporters has been met through this Mid Term Review. Most of the
labour intensive sectors including leather, sports goods, marine products and textiles will be
getting additional incentive under the Merchandise Export from India Scheme (MEIS)
The Commerce & Industry Ministry recently enhanced the rates of incentives under the
Merchandise Export from India Scheme (MEIS) for garments and made-ups to 4 per cent from 2
per cent till June 2018 to help exporters struggling under the implementation burden of the new
Goods & Services Tax (GST) regime. Overall Government is pushing labour intensive
sectors to address two purposes, one to increase foreign reserve earnings through exports
and second to generate employment at a continuous pace.
Most of the incentives for goods under the on-going five-year FTP are extended through
the MEIS scheme. So in the review of the FTP, the additional sops have been given through this
particular scheme. The initial target set by the FTP of increasing exports of goods and services to
$900 billion by 2020 is already out of the picture as external developments including unfavorable
movement of commodity prices and fluctuating foreign exchange have hit performance. With
exports of goods lower than $300 billion in the last two years, a target of $500 billion, too, would
need substantial efforts, both from the exporting community and the Government.
Analyzing the current fiscal burden on Government, it is quite clear that Indian
government is highly unlikely to meet the target of maintaining the fiscal deficit at 3.2% of the
GDP. Recapitalization worth of Rs 2.11 lakh crores has further aggravated the situation.

Lower revenue realization and the rise in expenditure attributed India's fiscal deficit of Rs
5.25 trillion for April-October, which is equal to 96.1 per cent of the budget estimate for the
fiscal year
During the same period a year ago, the fiscal deficit was reported to be around 79.3 per
cent. For 2017-18, the government aims to bring down the fiscal deficit to 3.2 per cent of GDP.
Last fiscal, it had met the 3.5 per cent target. Net tax receipts in the first seven months of
2017/18 fiscal year were 6.34 trillion rupees, government data showed on Thursday. In absolute
terms, the fiscal deficit – the difference between expenditure and revenue – was Rs 5.25 lakh
crore during April-October of 2017-18, according to data of the Controller General of Accounts.
India’s debt-to- GDP ratio stood at 68.6 percent and a government-appointed panel has
recommended lowering it to 60 percent by 2023. Lower government revenues than planned in
the Budget and somewhat higher government spending could lead to a deficit, somewhat wider
than targeted. A continuous widening deficit emits bad signal at global platform.

Two such bad consequences are:

        One It leads to excessive Government borrowing from the market which causes
       rise in market interest rate. Higher market interest rate tends to reduce private
       investment. Further, it reduces the resources available for private sector
       investment.

       Second, the extent to which a large fiscal deficit is financed by borrowing from
       the Reserve Bank of India which issues new currency for the government. This
       causes greater expansion in money supply through the process of money
       multiplier and generates inflationary situation in the economy. Thus, to check the
       rate of inflation, fiscal deficit has to be reduced through both raising revenue of
       the government and reducing government expenditure.

Creating impetus through exports is one of the robust instrument which commerce
ministry has recently announced under Foreign Trade policy, Mid Term review. This move is
surely going to ameliorate the fiscal deficit situation which is acting like a trauma the
Government, if not nullify.