The failure of our export enclaves

In 1980, the Export Oriented Unit (EoU) Scheme was launched in India to boost exports and increase production. Although a number of provisions and exemptions, including both fiscal and non-fiscal benefits, have been extended to the Scheme, the performance of EoUs has been far from satisfactory, particularly in the past few years.

Therefore, it is time for a relook at the EoU Scheme if India is serious about achieving its target of $900 billion exports by 2020 as envisaged in the Foreign Trade Policy (FTP) of 2015–20. This issue is pertinent in the context of India’s declining exports and rising trade deficit.

Owing to their flexibility and unique position, the EoU scheme flourished from 1980s up to the mid-2000s. This contributed to a process of structural change in domestic industry by way of technologies, skills, economic linkages and disaggregation of units.

However, there has been a gradual reduction in EoUs after the SEZ Act came into force in 2006-07. In 2007, the Comptroller and Auditor General (CAG) conducted a performance audit of EOUs; it revealed that many EOUs were not fulfilling the net foreign exchange (NFE) obligations, or not paying the central sales tax (CST), or were exceeding the limit in sales to the domestic tariff area (DTA).

In 2015, the report of another CAG performance audit of EOUs was submitted and tabled in Parliament. The audit examined 370 EoUs over the period between 2009-10 and 2013-14.

The CAG (2015) reviews the performance of EOUs and re-evaluates how successful they have been in achieving set goals. The performance evaluation brings out some startling facts on why EOUs have failed to deliver on its main objective, exports.

The growth of EoUs under the scheme (Chart 1) has witnessed a downward trend over the past few years. Though the proportion of non-functional EoUs has slowed marginally, it still constitutes around 20 per cent of the total registered EoUs. The major reason, apart from SEZ Act, is the government’s inability to utilise properly the uniqueness of the 100-per-cent-EoU Scheme.

Further, the performance of EoU exports has fallen drastically (Chart 2) and even turned negative in 2010-12. The declining growth of exports is the result of withdrawal of the tax benefits under the Income Tax Act, 1961 from 1 April 2011; as a result, EoUs opted out of this scheme.

Unfortunately, there is no special provision in the FTP to promote the unique 100-per-cent-EoU Scheme. Similar export benefits were available to SEZs, along with allowance for domestic sales, but without any ceiling.

The success of any scheme depends on proper regulation, auditing, and monitoring. However, and as observed by the CAG, the Ministry of Commerce and Industry (MOC&I) has not structured an internal audit mechanism to check and facilitate the functioning of EoUs.

Apart from the monitoring performed by the development commissioners (DCs) on quarterly/half-yearly/yearly performance, the Unit Approval Committee (UAC) monitors the Annual Progress Report (APR). But the CAG observes that few EoUs submitted the APR during 2009–2013. The CAG audit observed various cases of misrepresentation and non-compliance during 2009-14. Around 48 cases of incorrect/irregular DTA sales were recorded, which involved short-/non-levy of duty of nearly ₹62.50 crore.

As per the scheme, EoUs can sell goods up to 50 per cent of the free-on-board (FoB) value of exports conditioned to positive net foreign exchange (NFE); the corresponding percentage for units manufacturing and exporting more than one product is 90 per cent, if the total DTA sales do not exceed the overall limit. But clearance of products into DTA often exceeds these prescribed limits.

On the basis of the audit, the CAG gave the following recommendations to make EoUs more effective in boosting exports such as (1) initiate policies to stop the downward trend of EoU growth and performance with timelines by utilising the uniqueness of EoUs (2) implement an internal audit system and ensure that EoUs submit APRs timely containing relevant data related to exports, duty forgone, DTA sales, etc. (3) fixing liability for any non-compliance and modify the provisions for EoU to achieve objectives.

The EoU scheme has not been successful due to various reasons such as complexities that arise due to its size, lack of entrepreneurial talent, lack of promotion of the scheme, and its limited share in manufacturing.

Similarly, in an earlier performance audit report, 2014, the CAG found out that the performance of SEZs to promote exports has been far from satisfactory. There too, CAG recommended the implementation of appropriate mechanisms for monitoring and controlling these zones, in order to prevent irregularities and promote exports and trade. In fact, the CAG report sampled 152 SEZs, and found that they were under-performing on exports (ranging from 46.16 per cent to 93.81 per cent of their targeted exports).

Exports promotion schemes such as EoUs and SEZs need to achieve their main objective of improving merchandise exports if India is to achieve $900 billion exports by 2020. EoUs have been performing poorly over the past five years. Apart from the inability of the FTP to make the best of the 100-per cent-EoU scheme, systemic issues, like timely submission of APRs, relevant data on DTA sales, duty forgone, and irregular internal audit system, have added to the problems.

The first step is to clear the ambiguities and inconsistencies in role and procedure between policies and departments. To make the EOU Scheme succeed, the government could revise the scheme to suit the changing global environment and introduce new provisions to ensure proper functioning and monitoring, but without affecting its competitiveness with other related schemes and acts.

The writer is visiting fellow at Bruegel in Brussels and faculty at Institute of Economic Growth, Delhi