The objective of this paper is two-fold:

(i) to appraise the scheme of export promotion through import entitlement as it obtains to-day; and, (ii) to examine the present criterion on the basis of which import entitlements are fixed for various export

products and to attempt an answer to the question: Does the criterion lead to optimum export promotion?

[I must acknowledge my debt to N B A m i n of Jyoti Limited, Baroda, one of the small band of forward-looking businessmen in this country. He first made me aware of the existence of the problem. My subsequent discussions wi th him on the subject have been of immense help. But I would not like to commit h im in any way to the views expressed and conclusions drawn by me in this paper,

AS a measure of promoting the export of manufactured products

from India, the Government issues im­port licences against exports of speci­fied items. Against each export pro­duct covered by this scheme of ex­port promotion, a specified percentage of the FOB value of the export is allowed as import entitlement.

The import entitlement under this scheme may be used for the import of raw materials required in the ma­nufacture of export products and also for the import of machinery and parts. These import entitlements may be availed of by the exporter himself or transferred or sold to another manufac­turer who fa) manufactures products covered by the scheme and (b) exports (or sells for export) a part of his pro­duct,

The objective of the Government in giving the import entitlements is, to put it in the words of the 1964-65 Report of Ministry of Commerce, "to keep the (export) industries moderniz­ed and to asssit them with imported essential raw materials, components, etc,, which are not indigenously avail­able." In this manner, the Report argues, the manufacturers exporters are provided with "a dependable source of availability of these raw materials and components as compared to the manufacturers and producers who are too much attracted by the sheltered i n ­ternal markets and internal higher prices and, therefore, do not desire to export."

This import assistance is supposed to enable manufacturers/exporters to pro­duce, more not only for export but also for internal markets. It helps them "to partly compensate for the loss in exports and partly to be com­petitive wi th the non-exporting manu­facturers in the country," The element of help can he said to enter the scheme in two ways; (a) in the almost automa­tic entitlement to import the inputs

which arc not locally available, and (b) in the entitlement to import over and above the actual import-content of the export product. It is this second part of entitlement which contains a clear element of subsidy or bonus, the extent of subsidy, of course, depending on the premium the import licence for the import of the particular machinery or raw material commands. It is again this bonus element of import entitle­ment which really differentiates be­tween production for export and pro­duction for the internal market because even the latter would be given a licence to import the inputs not locally available, even though less expedi­tiously,

II From the same Report we learn that

out of the total annual exports of Rs 835 crores in 1964, exports valued at Rs 193 crores (ie, less than 23 per cent) were eligible for import en­titlements under the above scheme The rest of exports belong mostly to the category of traditional items which, the Report says, "do not require any major assistance for promoting their

exports because in most cases their in ­ternal prices are more or less at par with the international prices of these products."

Between 1962 and 1964, total ex­port earnings have gone up by Rs 150 crores. The report compares to this increase in total export earnings the increase in the value of import licences to the tune of Rs 15 to Rs 20 crores under the import entitlement scheme during the same period. The total value of import licences issued under the scheme is estimated at Rs 50 to Rs 55 crores in 1964.

The above comparison, to say the least, is not valid. How can credit for the expansion of the total export earn­ings be claimed for the import entitle­ment scheme when only 23 per cent of the export products are eligible for the import assistance under this scheme? It is the increase in export earnings of the products covered by the scheme which is relevant. Even then, the ques­tion remains: In orders to appraise the scheme, should the increase in ex­port earnings of the products covered be compared wi th the increase in the value of licences issued under the

Table 1 : Net Foreign Exchange Earnings under the Existing Scheme

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scheme or w i t h the total value of the licences thus issued or further w i t h the total value of only bonus entitle­ment claimed during the period? It is enough at this stage, to have posed this question. We shall take it up later in the course of this paper when other issues are cleared up.

I l l

The general principle on the basis of which import entitlement is deter­mined at present is to allow by way of import twice the import-content of an export product subject to a ceiling of 75 per cent of the FOB value of export. In actual practice, however, there are items in whose case import entitlement has been fixed at even 100 per cent. Among the group, Engineer­ing Goods, as many as 29 items are listed for 100 per cent import entitle­ment. For engineering goods, the import entitlement ranges from 20 per cent for items like wooden furniture, gramophone, records and bicycle com­ponents to 100 per cent for non-ferrous semis, alloys and fully processed manu­factures and stainless steel products.

Let us first examine the general principle of giving an import licence twice in value the import-content of an export product. Half of the im-port licence thus acquired may be, said to compensate the manufacturer/ exporter for the foreign exchange that he gave up in making the export1.

The other half represents the bonus intended to offer the necessary incen­tive to exports,

In Table 1, we have classified export products into seven categories- and calculated net foreign exchange earn­ings from the export of each of the seven categories of export products. The categories are arranged in the ascending order of import entitlement. In this Table a distinction is drawn be­tween 'Net Export Earning, and 'Net Foreign Exchange Earning' in the fo l ­lowing manner:

Export Earning = FOB value of Ex-port minus CIF Value of Import Content

Net Foreign Ex­change Earning = FOB value of Ex­

port minus Imp­ort Entitlement

Since by definition:

Import Entit le­ment = Entitlement aga­

inst Import Con­tent plus Bonus Entitlement

Therefore, Net Foreign Ex­change Earning — Net Export Earn­

ing minus Bonus Bonus Entitlement

The distinction drawn above is, as w i l l be observed, very useful. It helps bring out the incidence of the bonus

Table 2 : Bonus Entitlement under the Existing Scheme

element in import entitlement on ex­port earnings. While for product A, export earnings are reduced from Rs 90 to Rs 80, for product G, export earnings decline from Rs 50 to Zero. But more important, by making this distinction it is possible to see clear­ly that under the present .scheme the bonus entitlement increases with de-creases in net export earnings. For product A, whose net export earn­ing is Rs 90 the bonus entitlement 4s Rs 10, whereas for product G whose net export earning is Rs 50, the bonus e n ­titlement is as high as Rs 50. Thus, the lower the net export earnings of an export product, the greater is the bonus entitlement it earns under the existing scheme. That is, a higher bonus is offered to an export product yielding a smaller export earning. It is incredible but true that a scheme designed to promote exports wi th a view to augmenting the country's ex­port earnings should, in effect, have a bias operating in the opposite d i ­rection.

The second drawback of the exist­ing system of 'import entitlement is that it has to stop short at the point where net export earnings comprise 5 per cent of the FOB value of ex­port because at this point the bonus entitlement w i l l work out to 50 per cent and thus the entire export earn­ings are wiped off. That is why net foreign exchange earning at this point is Zero. Thus it creates the anamolous situation in which an export product whose net export earning works out to, say 40 per cent of FOB value ( i e C I F value of import content is 60 per cent) contributes as much to foreign ex­change earnings of the country where­as an export product w i t h 50 per cent export earning contributes nothing to the country's foreign exchange earnings.

Now we can easily anticipate the answer that even as things stand to-day it is not that the export product wi th 00 per cent import content is not en­titled to any bonus entitlement but w i th the effective ceiling of total im­port entitlement at 1.00 per cent, the bonus entitlement could not exceed 40 per cent. Hence, the type of anamol­ous situation feared by us w i l l not, it can be argued, arise.

Be it as claimed in the above argu­ment, we shall be very happy that at least this drawback of the existing scheme is being taken care of.

Assuming that export products w i th

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import content exceeding 50 per cent do get covered by the scheme under review, but subject to an effective ceiling of 100 per cent import entitle­ment, the position with regard to bonus entitlement for various catego­ries of export products would be as is worked out on Table 2. It can be observed that the bonus entitlement increases as the export earnings decline unt i l we reach the export product G. From there onwards, bonus entitlement as a proportion of net export earnings remains constant at 100 per cent.

I V At this point in our discussion, let

us make a slight digression and raise the question: What is the gain to the economy in allowing 100 per cent i m ­port entitlement? Obviously, the gain in foreign exchange earning in such eases is ni l . The only defence that one can put up for giving 100 per cent import entitlement is in terms of its being a purely temporary measure in­tended to help manufacturers/exporters in these particular lines to establish their foot-hold abroad. Once they are established, the quantum of import entitlement might be reduced.

But the much more important ques­tions remain: Is it appropriate that bonus entitlement should be tied wi th the import content of an export pro­duct? Since the purpose; of giving the bonus is to stimulate net export earn­ing, w i l l i t not be much more bene­ficial to the economy to relate the bonus to net export earning of an ex­port product rather than relate it to the import content of the export pro­duct? If bonus entitlement is linked to the import-content of an export pro­duct, the tendency on the part of the exporter w i l l naturally be to go in for the export of products with higher i m ­port-content, Also, there w i l l be an urge to overstate the import-content3. If on the other hand, bonus entitlement is linked to net export earning, the natural tendency on the part of the exporters should be to go in for exports wi th lower import content and, if any­thing, the urge w i l l be to overstate the local content of the export product.

Clearly, the right thing to do is to relate bonus entitlement to the net ex­port earning of an export product i n ­stead of to its import-content. In Table 3 (A) and 3 (B), it is indicated

how this can be done and what the change would imply in terms of net foreign exchange earning for each of the export products.

In constructing Table 3(A) two considerations have been kept in mind: (i) it is taken as a given restraint that the total outlay of foreign exchange in the form of bonus entitlement must not exceed what is given away at present (i e Rs 187.5 in our illustrative exercise as against total net export earning of Rs 512.5) and (ii) bonus en­titlement has to be related to net ex­port earning from an export product instead of to its import content. As a proportion of total net export earnings from products A to G, the present total outlay on bonus entitlement works out to 36.5 per cent. Therefore, in our ca l ­culations bonus entitlement is distribu­ted among these export products at the rate of 36.5 per cent of their res­pective export earning. This yields an interesting result. Unlike under the existing scheme, bonus entitlement as a proportion of the FOB value pro­

gressively increases as the net export earning rises.

In Table 3 (B) bonus entitlement is separately worked out for products H to L. If these products were included in Table 3 (A) , the outlay available for bonus entitlement would have added up to Rs 287,5 against total net export earning of Rs 612.5 and therefore, the proportion of export earnings which could be given away in bonus entitle­ment within the l imit set by our res­traint would be as b i g h as 47 per cent.

It is important to note that w i th the proposed modification in the fixa­tion of bonus entitlement, products G to K which now yield Zero net foreign exchange earnings would be making some contribution to the country's foreign reserves. Only product L would not. But then it would not be ordinarily exported.

V I This brings us to the Question of

appraising the achievement so far

Table 3A: Bonus Entitlement on a Modified Basis

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under the existing scheme whereby bonus entitlement accrues on the basis of the import-content of an export pro­duct. In appraising this scheme, the relevant data would be (a) the increase in net export earnings of the country from the export products covered by the scheme and (b) the total outlay on bonus entitlement during the period under review. It is the bonus part of the import entitlement which, as we observed at the very outset, can make a material difference to the exporter and is, therefore, the relevant part to be taken into account in making the appraisal. Also the total outlay and not the increase in outlay on bonus entitlement should be taken into ac­count because it is the entire bonus entitlement which is supposed to be directed to securing an increase in export earnings.

Let us now apply this criterion to the performance between 1962 and 1964. On the assumption that half of the value of import entitlement licenc­

es issued during the period represented bonus entitlement the bonus part in the year 1964 would be around Rs 25 to 27 crores. If , however, one allows for the fact that for certain export products (like products H to K) bonus w i l l work out to less than 50 per cent of import entitlement, bonus entitle­ment for the year 1964 may be put at Rs 22 to 24 crores. As against this, the increase in the FOB value of ex­port products covered by the scheme in 1964 may be put at Rs 40 crores (See Table 4 for principal items covered by the scheme) and our rough calculations yield a figure of Rs 30 to 32 crores for the increase in net export earnings of the same products.4

As it is, therefore, the gain in net export earnings from the present scheme no doubt, exceeds the bonus entitlement but by just about Rs 8 crores. In other words, credit can be claimed by the present scheme of import entitlement for contributing to the increase in the country's net

Table 4: Performance of Principal Export Products Covered by Import Entitle­ment Scheme, 1962-64

foreign exchange earnings to the ex­tent of only Rs & crores and not Rs 150 crores. If, however, the scheme is mo-dified on the lines suggested in this paper, it should be possible to achieve much better results, because a clear incentive w i l l then have been introduc­ed to increase net export earnings--an incentive which does not exist at present. Bonus entitlement, when re­lated to net export earnings should stimulate efforts on the part of manu-facturers exporters to increase their net export earnings and that is precisely what the scheme is supposed to pro­mote.

Notes ] We put it in this way deliberate­

ly. Under the import-entitlement scheme, one is not obliged to export one's produce on utiliza­tion of import entitlement. Having once made an export of the product eligible for import-enti­tlement, one becomes eligible for an import licence regardless of whether one partakes the subse-q u e n t export-cum-entitlement round or rounds.

2 This follows more or less the classification of Engineering Goods under the existing scheme of I m ­port Entitlement.

3 It must be conceded that if the import-content is independently determined on the advice of ex­port advice available to the Gov­ernment, and the bonus admissi­ble thereon does not vary from transaction to transaction, the scope for overstatement of i m ­port-content or of under-state-ment of local content does not exist except through pressure at the very stage when experts are engaged in fixing the import-content.

4 According to the I964-65 Report of Ministry of Commerce, the increase in the value of import entitlements was of the order of Rs 15 to 20 crores. Assuming, that at least half of it represented the value of import-content we get the figure given in the text. If the import-content was somewhat higher, the net export earnings ought to be smaller by that amount.

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