As per the recent developments, the Government of India is formulating a strategy to permit duty-free import of capital goods by the domestic industry. It appears that the new initiative could be directly linked with employment generation.
Moving Beyond Export-Oriented Units and SEZ
Typically, under the provisions of the Export Promotion Capital Goods (EPCG) scheme, exporters have been allowed to import capital goods without paying any duty. Similar benefits are also applicable for export-oriented units (EOUs) and Special Economic Zone (SEZ) units. However, since India’s per capita Gross National Income (GNI) consecutively surpassed the $1,000 mark for three years in 2015, it cannot extend export subsidies anymore as per the World Trade Organization’s (WTO) rules. This necessitates phasing out or withdrawal of such subsidies.
The US Complaint to WTO
In the current scenario, the United States lodged a complaint with the WTO’s dispute settlement body, alleging that India’s export subsidies were adversely impacting American businesses. The US pinpointed five export promotion schemes, including the Merchandise Export from India Scheme (MEIS), the EPCG scheme, and certain perks available to EOUs and SEZ units. They claimed these to be contravening the WTO Agreement on Subsidies and Countervailing Measures.
Key Features of the New Scheme
The novel scheme is being envisaged to provide comparable benefits to manufacturers while adhering to WTO norms. It could serve as an alternative to the existing export incentive schemes, which now need to be phased out or eliminated due to their inconsistency with global trade regulations. The planned duty-free import of capital goods scheme will be accessible to all domestic producers and will be tied to non-export criteria, such as employment. This implies exporters would continue to receive duty-free advantages along with other domestic manufacturers.
Challenges on the Horizon
Despite the potential benefits, the scheme to encourage duty-free import of capital goods might conflict with the interests of the domestic capital goods industry. Also, the Finance Ministry could face a revenue deficit if such an import scheme is put into effect since capital goods are a significant source of income through Customs duty. Consequently, the authorities would have to strike a balance between generating employment and bolstering the economy while ensuring that the domestic capital goods sector isn’t adversely impacted.