Developing countries have started manufacturing industries only recently. As a result, their cost of production generally tends to be high because of the following reasons:
(i) Total market availability within the country is small with the result that the economies of large-scale production cannot be reaped.
(ii) Productivity of labor is low because the level of mechanization as compared to that in the developed countries is low.
(iii) The cost of production is generally a function of experience, i.e. â€œLearning by Doingâ€. This can be reaped only when the labor employed in manufacturing operations acquires experience over a period of time.
(iv) Manufacturing units in developing countries, being small and new, have considerably less expertise in the field of international marketing and because the volume of exports is low, the per unit cost of trade promotion expenditure tends to be high.
India has to raise higher resources for development which has to be done through a number of indirect levies which tend to push up the overall cost of production.
Most developing countries have, therefore, resorted to a number of export promotion measures. India has also been providing export assistance to Indian exporters.
However, the WTO Agreement on Subsidies and countervailing duties does not allow specific types of export subsidies. The Government of India is, therefore, removing those export incentives which are not WTO compatible.
New System of Export Assistance:
From 1992, export incentive system in India has been made simple. There are essentially three major incentives. These are: (1) Market-based Exchange Rate; (2) Fiscal Concessions, and (3) Facilities under the Export-Import Policy. These are discussed in detail below:
Market based Exchange Rate:
For long, external value of the rupee was managed by the Reserve bank of India (RBI) by pegging the value of the rupee to a basket of currencies. RBI used to keep the value of the rupee at a level which was higher than the real value. In the post-Economic Reforms period, the Government of India decided to abolish all direct incentives to exports and promote exports through the exchange rate mechanism. Accordingly, the Liberalized Exchange Rate Management System (LERMS) was introduced.
Under this system, there were two exchange rates: one official rate which was determined by the RBI as was the practice earlier; and second, a rate which was quoted by the banks based on the demand-supply position. Exporters had to surrender 40 per cent of their foreign exchange earnings to banks and could sell the residual 60 percent at the market rate which was normally expected to be more attractive than the official rate.
Through this mechanism the Government hoped to achieve two objectives: First the difference between the market rate and the official rate would provide enough incentives to the exporters. Second, this would introduce a self balancing mechanism for the balance of trade, because only that much imports could be made which could be financed through the market i.e. the resources available through the 60 percent account.
One yearâ€™s experience revealed that rupee remained stable in the international market. This gave to the Government for full convertibility on the trade account. Accordingly, rupee was made fully convertible for export-import transactions in March 1993.This would provide more financial benefit to the exporters as under the LERMS, they had to surrender 40 per cent of their receivables at a discount which averaged about 15 per cent when LERMS was in operation. Since March 1993, the exchange rate of the rupees is fully determined by the demand supply conditions in the market. Under such a system, exporters will get benefit when rupee depreciates while importers will lose. When rupee appreciates, the balance of benefits will be just the reverse.
(a) In the computation of total income, Section 80-HHC allows a deduction of the whole of the profit derived from the export of goods or merchandise. The requirements of minimum tax contained in Section 115-J does not apply to exporting corporate assesses. This benefit is also available to supporting manufacturers exporting through Export/ Trading Houses provided that the amount of deduction claimed is retained as a reserve for the purpose of the business of the assessee. However, the budget for the year 2000-2001 has reduced this exemption by 20 per cent every year to be phased out in five years.
(b) Exemption from taxation of the profits from overseas projects to the extent of 50 per cent.
(c) Exemption from taxation of 50 per cent of royalty, commission, fees or any similar payment obtained from the exports of technical know-how and technical services.
(d) A 10-year tax holiday for 100 per cent export-oriented units and for units located in Free Trade/Export Processing Zones.
(e) Discounted rates of customs duty on imports of selected items of machinery for export production.