The Foreign Trade Policy released by the Commerce Minister Kamal Nath on 7 April, 2006 has disappointed trade. The complete withdrawal of the Target Plus Scheme has taken the exporters by surprise, they expected the continuation of the scheme under a new label in the value added product segments such as textiles, engineering goods and chemical products. The substitute to Target Plus under the title of “Focus Product” covers a very small part of the export segment and here too the entitlement is only 1.25 percent of the turnover as against five percent in the scheme for fruits and vegetables export (VKUY).

The trade is also not too happy with the postponement of the policy detail. The new DEPB rate schedule, products and markets under the new ‘Focus” initiatives and the customs notification under the advance authorization scheme are still cooking in the bureaucracy’s pot.

The new advance license: The only relief to the exporters is that they can now sell their quantity based advance licenses, now called Duty Free Import Authorisations (DFIA), in the market after fulfillment of the export obligation. Traders too can buy these scrips and avail the exemption of the 16.32 percent countervailing duty of excise as well as the four percent countervailing duty of VAT imposed in the recent budget, besides the existing exemption on basic duty of 12.5 percent. The anti dumping duty which is applicable on many sensitive goods like Nylon filament yarn too will be exempt in the hands of the trader.

The new name of DFIA for the advance license may fool the VAT officials of the State government and the income tax officers into thinking that the new instrument is not a license for some time. The premium on licenses will go up, specially when the shopping list contains a number of small value items whose import is not viable except when clubbed together over several licenses on which the major items have been utilised.

The exporters holding Target Plus scrips can use their entitlements for duty free imports for manufacture and simultaneously sell their Duty Free Authorisations in the market at handsome premiums, specially where the shopping list is subject to import restriction or anti dumping duty. The window to encash the Target Plus is now open. Transferability is back in a roundabout way. In sum, advance licenses will be attractive once again.

Import restrictions back in a big way: There are a number of restrictions on imports which are missing in the minister’s speech. Import of aircraft for private use is subject to a licensing procedure, only public service operators licensed by the DGCA can import freely. For example, the import of second hand and retreaded tyre is now restricted altogether, the earlier regime allowing import of high value retreaded tyres has been withdrawn.

Sandalwood import is subject to a complex licensing procedure with a ceiling of 5,000 cu meters. Possibly, Indian sandalwood, otherwise considered precious and rare and meant to be preserved does not like the smell of competition even if it conserves a scarce resource.

Second hand capital goods were put on the free list in order to promote industrialization and let the market forces work without artificial restrictions. However, this time, a spoke has been put in their free importability. The DGFT says that “re-manufactured” second hand machinery is not freely importable. This means that the machinery should not go through any change by way of reconditioning and renovation in the foreign country before import.

This condition is very difficult to observe in a practical sense, how does the importer satisfy the suspicious customs inspector that the machinery was not reconditioned before import. Is a declaration from the foreign party at the exporting end adequate or should a chartered engineer’s certificate be produced. In the absence of clarification these points must be settled by the importer in protracted negotiations with the customs each and every time a second hand machinery is imported.

Metal scrap supplier registration procedures introduced: The DGFT has laid out a complex procedure for registration of metal scrap suppliers at the exporting end as a condition for import of metal scrap to ensure that the supplies do not contain explosive material. As many of 15 types of scrap ranging from steel and going on to copper, brass, nickel, aluminium, zinc, tin and magnesium is covered in the registration procedure. However, only scrap in loose form is covered, shredded scrap is exempt from registration and can be freely imported at all ports. The erstwhile system of inspection by so called international agencies has been junked in favour of the new system.

Supplier registration will be required at the last link at the exporting end in the chain of movement to India. Only LC cases are allowed, high sea sale is prohibited, there must be a direct link between the supplier and the importer. The DGFT says that the supplier registration will be canceled in case of violation of the policy. The earlier inspection based clearance system will operate simultaneously with the supplier registration systems for another three months till 30 June after which there will the new system alone will operate.

Apparently, the inspection system was not working very smoothly and explosive shells were being discovered during customs inspection in scrap consignments even after certification by the recognized inspection agencies. It was difficult to nail the source of the violation and also punish the agency. In some cases, the importer could not get a suitable agency to certify goods ready for shipment in far off locations.

It is a moot point whether the present system will work. To begin with, the importers supply sources will be limited due to the registration procedure. Monopoly conditions will lead to further price rise in an already overheated ferrous and non ferrous market. The action of deregistration on errant suppliers may not detract the unscrupulous. The exporting country and its official authorities must be made to take responsibility for allowing shipments containing explosives. Only then will be the system get some teeth. Till then, the experiments in policy making will continue and the users in the steel plants and elsewhere must bear the significant transaction cost of observing the import restrictions.