The implementation of export promotion schemes

Business Standard has an informative article on the Merchandise Exports of India Scheme (MEIS), the flagship export promotion scheme of the government of India. The article talks about plans to disband the scheme and transfer its resources into the new Production-Linked Incentive (PLI) schemes in select sectors. 

This balance sheet of MEIS says it all,

Public tax liability under the MEIS ballooned from Rs 20,232 crore in 2015-16 to Rs 43,500 crore in 2019-20, becoming unsustainable. However, exports remained stuck at $313 billion in 2019-20 against $310 billion in 2014-15... Introduced in 2015 under the Foreign Trade Policy, the mega MEIS was created by merging five reward schemes. Initially, exporters earned duty credits at fixed rates of 2 per cent, 3 per cent, and 5 per cent, depending on the export of certain products to three sets of countries. While it originally covered 4,914 tariff lines, it currently covers 8,059, which constitute 75 per cent of all traded products. "Gradually, the scope of the scheme got widened. The country differentiation was removed and MEIS rates were liberally increased. Over a period of time, MEIS was given at rates varying from 2-20 per cent. With such attractive investment, it was anticipated that exports would grow substantially and capture new markets. The MEIS liability continued to grow all these years as its coverage grew, the MEIS rate grew and rupee devalued,” said a person in the know. The wide coverage of MEIS meant that resources are spread across a number of tariff lines without focus. Additionally, liabilities on accounts of MEIS have grown faster than the rate of growth of exports.

The scheme itself was under threat since the WTO had ruled against it and had directed that such direct subsidies be discontinued. The Commerce Ministry had however repackaged it and announced a new scheme last year. 

Obviously a rigorous analysis requires more disaggregated data. But the headline takeaways, when coupled with numerous failed precedents of previous schemes, are likely to be as reported.

Predictably, both the Commerce Department and the lobby associations have opposed the disbanding of the scheme and point out that it would have disastrous consequences. These are self-serving and need to be dismissed. At best, one could accept the argument that the scheme should not be abruptly disbanded mid-year so as to not disrupt plans made by exporters keeping the policy availability for the year.

This whole episode of MEIS highlights the point I have been trying to make on the issue of implementation. Basically, an MEIS implemented well is an export incentive. An incentive provision raises the question of what is being incentivised, its rationale, and whether the underlying is responding to the incentive. Further, an incentive also means that the activity would not have have happened without it. Finally, it also means that it is linked to the growth target for the underlying activity. This raises several questions. 

What are the tariff lines being incentivised? Why do they need incentive? And what makes us believe that the incentive would be sufficient to relax binding constraints on the growth? How do we know that the incentive is not being captured by growth which would even otherwise have happened? How are the incentive growth targets fixed? How are they being monitored? How is the incentive allocation reviewed every year? 

These are basic issues of implementation. Then there is the question of iterating and improving the scheme over the years. Which among the 4914 tariff lines are not responding well and which are doing good? What are the emergent distortions and how are they being addressed? One would imagine doubling down on the successful tariff lines and disbanding the less successful ones. One can easily imagine distortions in all such large schemes, and the need to respond to them. These are important to promote export competition, itself an important incentive requirement to the success of any such incentive programs. 

Obviously the answers to many of these questions also have issues of political economy and vested interests. But, even in the messy and state capacity constrained real world, there has to be some element of objectivity in addressing these questions and concerns. There should be some institutional mechanism to monitor them. For example, the annual budget proposal be accompanied by an independent assessment, atleast of a year earlier, based on some pre-defined objective parameters. Besides, of course, there should be internal assessments within the Commerce Ministry.

I also suppose many of these things are being done, but in a very perfunctory, as to be superfluous, manner. Then the challenge is to focus on a minimal and doable agenda, given the circumstances.

In fact, all the questions raised above are atleast as much or more relevant to the new PLI scheme. 

Instead MEIS appears to have shown all the problems with such incentive schemes. They are poorly designed and administered, suffer from mission-creep, and over time the incentive slips into becoming an entitlement.