The FNCCI, following a strong lobby by GAN, has asked the government to extend at least two percent cash incentives to all exports, irrespective of value addition and destination. Currently, the government offers two percent of total export revenue as cash incentive if there is 30-50 percent value addition, three percent for 50-80 percent value addition and four percent for over 80 percent value addition.
The main purpose of cash incentives scheme is to increase exports and reduce trade deficit. Just by giving cash incentives won’t achieve this because the cash incentives received by exporters will hardly be reflected on the price of final exported items. Cash incentives are given after goods are exported and they do not necessarily boost price competitiveness. As of now it is a misplaced export incentive with too much bureaucratic hassles to claim cash (plus incongruous with other policies’ emphasis on domestic value addition together with employment generation).
Quick comments:
- Cash incentives won’t be directly reflected on the price of final exported items. Hence, it won’t directly boost price competitiveness. It might just compensate the lost revenue due to high cost of production arising from exogenous factors to the firm/sector in question (e.g. load-shedding and cost of diesel, strikes, bandha).
- Conditioning cash incentives on value addition is one hook for not letting the scheme be inefficient. It should be further linked to employment generation as well, i.e. offer such incentives to those strategic sectors that have both high value addition and high employment generation. See this presentation for more on this.
- Cash incentives or other export promotion measures should be designed keeping in mind the factors/determinants that boost competitiveness of manufacturing sector: government forces (education policies, energy policies, economic, trade, labor, financial and tax policies, science and technology policies, manufacturing and infrastructure policies); capabilities (innovation, technology, process, infrastructure); market forces (demographic, macroeconoimc environment); and resources (human, materials, energy, financial).
- Fundamentally, export incentive packages that increase productive capacity and address binding constraints to exports growth work more often than simply doling out cash based on certain value addition criterion. The same amount of money can be used to construct roads up to manufacturing plants or to provide credit and concessional loans to emerging entrepreneurs or to subsidize insurance premium during transportation of goods to the nearest port in India or to construct the much needed special economic zones. These measures will help enhance our exports and add to productive capacities more than the cash incentives.
- Cash incentives as of now is unlikely to alter Nepal’s export destinations and composition of export basket.
- Competitiveness of Nepali export items is going down. The main reasons are: lack of adequate supply of infrastructure, political instability/strikes, labor problems, lack of innovation by private sector, and government’s inability to implement key reforms enshrined in major policy documents. The state of trade facilitation in Nepal is pathetic, ranking 124 out of 132 countries. Nepal has the fifth worst logistics efficiency in the world. Supply-side constrains have eroded competitiveness to a great extent. Cash incentives for exports won’t directly address these problems. If these issues are resolved (by both government and private sector), then you won’t need cash incentives to boost competitiveness (if it can!) and exports and to reduce trade deficit.
