Chandan Sapkota
South Asia Watch on Trade, Economics and Environment (SAWTEE)
November 11, 2011
Presented at Policy Study on Cash Incentives for Export Promotion in Nepal workshop, November 11, 2011, Hotel Annapurna, Kathmandu, Nepal
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Presentation outline
Export promotion and national policies Current trade performance Cash incentives scheme
Comments/Discussion
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Export promotion
Governments use export promotion measures to support export-oriented sectors so that they have an added incentive to produce goods with high value addition and sell them abroad. Objectives:
Increase exports, reduce trade deficit, maintain balance of payments Increase foreign exchange reserves Support structural transformation, employment generation, and industrialization Increase competitiveness of exported items by covering a portion of cost Assist in export diversification
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Trade Policies
Trade Policy 1983
Considered as first trade policy; aimed to promote investment in export-oriented sectors and promote indigenous products in the international market. Tax concessions, duty drawback, cash incentives,
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Initial amount Rs 240 million (increased by Rs 60 million later on). Budget 2011/12 allocated Rs 300 million. It makes a total of Rs 600 million.
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Department of Customs:
Value addition= [(FOB price - Raw material cost, CIF) / Raw material cost, CIF]*100
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India
Cash incentive between 2%and 5% Cash incentives on exports of agriculture goods (oleoresins, forest products, flowers, fruits and vegetables); cash incentives on import of technology for upgrading in leather, textile and jute, handicrafts and engineering sectors
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VA 50-80 percent:
209 firms, producing seventeen manufacturing products, qualify for three percent cash incentive 45.93 percent of all manufacturing firms produce carpet and rugs, followed by fibres and woven textiles (20.57 percent), pulp, paper and paper board (10.05 percent), knitted and crocheted fabrics and articles (4.31 percent) and wearing apparel except fur apparel (3.83 percent), among other products.
VA 80 plus percent:
137 firms, producing five manufacturing products, qualify for four percent cash incentive 86.86 percent of all manufacturing firms produce carpet and rugs, followed by textile fibres and woven textiles (8.03 percent), wearing apparel except fur apparel (2.92 percent), pulp, paper and paper board (1.46 percent) and grain mill products (0.73 percent).
If the sole criterion is value addition then overall the carpet and rugs exporters will claim the highest amount of cash reward, followed by textiles, apparel and pulp, paper and paper board exporters. Very few agro manufactured goods and those giving high employment dont feature here. Promotion of NTIS 2010 products??
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VA 50-80 percent:
Manufacture of pulp, paper and paper board has the highest value addition (76.7 percent), followed by knitted fabrics, vegetable and animal oils and fats, casting of non ferrous metals, and paper and paperboard, among others. In terms of value added per worker, manufacture of basic iron and steel (7927) followed by manufacture of vegetable and animal oils and fats (1456), and manufacture of pulp, paper and paper board (1219) has the highest values. The value addition per worker of carpet and rugs is 95 only, but value addition is 61 percent. It means that if we consider then value addition criterion only, then carpet and rugs will take away more cash incentives in 50-80 percent value addition category than manufacture of precious and nonferrous metals, which has value addition of 59 percent but value added per worker of 601. The products not listed in NTIS 2010 would take away more cash incentive than the ones listed in priority products if we distribute cash just on the basis of value addition. Carpet and rugs is not one of the 19 products in NTIS 2010, but jewelry is.
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In terms of exporting goods with high value addition and touching upon development goals, the above analysis indicates that looking at value added per worker as well would make cash incentives scheme more attuned to the objectives of both TYIP II and TP 2009.
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1400
Value addition per worker (Rs '000) for products that qualify for two percent cash incentive
1200
600
200
0.05
0 1531 1542 1711 1721 1722 1724 1730 1810 1911 1912 1920 2101 2102 2109 2421 2710 2720 2732 0 1531 1542 1711 1721 1722 1724 1730 1810 1911 1912 1920 2101 2102 2109 2421 2710 2720 2732
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8000
Value addition per worker (Rs '000) for products that qualify for three percent cash incentive
0.7
7000
0.6
6000
0.5
5000
0.4
4000
0.3
3000
0.2
2000
0.1
1000
0 1514 1531 1542 1711 1721 1722 1730 1810 1920 2101 2102 2109 2421 2710 2720 2732 3691
0 1514 1531 1542 1711 1721 1722 1730 1810 1920 2101 2102 2109 2421 2710 2720 2732 3691
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Value addition per worker (Rs '000) for products that qualify for four percent cash incentive 1200
0.84
600
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Looking at both value addition as well as value added per worker for cash incentives would help the scheme achieve twin goals of boosting exports and touching upon development goals as envisioned in TYIP II and TP 2009. Gives credence to the argument that these schemes could be designed to aid exports of pre-defined products or sectors that have been extensively analyzed as having both export potential and socio-economic impact. This indicates that cash incentives in Nepal could better be designed more in terms of Indian and Bangladeshi model of flat cash incentive rates to key sectors.
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Cash incentives program aimed at addressing coordination externalities/market failures would help in better linking different sectors in the economy and buttress structural transformation.
Cash incentives directed to achieve this goal would also help in diversification of export basket with addition of new products linked to high productivity sectors.
Cash incentives program at least should be used to aid pre-defined exportable products that have high proximity with high productivity sectors and have plenty of sophisticated nearby goods.
Distributing cash just based on value addition, whose calculation and verification itself might be subject to gross manipulation, might not contribute much in terms of meeting the goal of the scheme
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6. Conclusion
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Conclusion
Cash incentives on exports based on value addition criterion is the sole consideration right now. However, if employment generation by the firms meeting value addition criterion is also considered, then it will touch upon the development aspects (increasing employment) of export promotion, the intended goals of the latest TYIP II and TP 2009.
CME 2006/07 analysis shows that sectors that have high value addition do not necessarily have high value added per worker.
If value addition is the sole criterion then the products that are not listed in NTIS 2010 might claim more cash than those listed there and also have medium to high export potential and socio-economic impact.
However, if value added per worker is also considered, then some of the products listed in NTIS 2010 would claim more cash than those not listed. It implies that this added consideration will help align the cash incentives with development goals envisioned in TYIPs and TP 2009.
It gives credence to the argument that cash incentives might be better put to use if it is given to pre-defined sectors with high employment generation and decent value addition like India and Bangladesh are doing.
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Discussion
Comment on paper Views on cash incentives Will it achieve the goals of boosting exports and reducing trade deficit? Following Indian and Bangladeshi model (predefined sectors)? Pros and cons? Any issues on export promotion
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NSIC code Sample products from CME 2006/07 1514 1531 1542 1711 1721 1722 MANUF. OF VEGETABLE & ANIMAL OILS & FATS MANU. OF GRAIN MILL PRODUCTS MANU. OF SUGAR PREPARATION & SPINNING OF TEXTILE FIBRES; WEAVING OF TEXTILES MANUF.OF MADE-UP TEXTILE ARTICLES EXCEPT APPAREL MANUF. OF CARPET & RUGS
1724
1730 1810 1911 1912 1920 2101 2102 2109 2421 2710
2720
2731 2732 3691
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