Export-oriented units shut down at fastest pace as tax incentives vanish

Market News

Export-oriented units shut down at fastest pace as tax incentives vanish

With India’s exports shrinking persistently over the past year, more than 120 export-oriented units (EOUs) have shut operations in the first eight-and-a-half months of this financial year, the fastest pace at which such firms have downed shutters. The total number of operational EOUs stood at about 1,975 by the middle of this month, compared to almost 2,100 in March 2015, said a senior government official. The EOU was India’s original export promotion scheme introduced in 1980 to promote manufacturing and value-added production activities, but it has been losing ground after critical income tax benefits were withdrawn in 2011.

“In 2013-14, about 50 export units shut down and another 140-odd closed down last year. But this year, we have already seen over 120 units close in the first three quarters,” the official said. This assumes significance in the backdrop of mixed signals from key economic ministries on whether India’s exports are a cause of concern for economic growth, with the Commerce Ministry claiming there is no need to panic about India’s shrinking trade basket. Indian exports have contracted for 12 months in a row starting from December 2014, falling by a quarter in November 2015 compared to the same month a year earlier. The Country logged $310 billion of exports last year, but industry expects garnering $260 billion worth of exports would be a challenge in 2015-16.

Exporters view the situation as worse than the peak of the global financial crisis in 2008-09 and foresee large-scale job losses. However, the Commerce Ministry, in a statement last week said that ‘there is no cause for alarm and no crisis in India on the export front. The Ministry also sought to dismiss an assertion by the Finance Ministry in the mid-year economic review that the fall in exports is dragging down economic growth by about one per cent in 2015-16. The Government has scaled down its economic growth estimate for this year to a range of 7-7.5%, compared to its original estimate of 8.1-8.5%.

“The fall in exports has to be viewed in the context of sluggish global trade volumes. If the drop in export is resulting in increased current account deficit or/and reduction in growth of GDP then there could be a need for alarm,” according to the Commerce Ministry. “There is no significant decline in India’s exports except in the petroleum and gems and jewellery sector, according to the statement. The accelerated pace of shutdowns at export-oriented units this year suggests that industry doesn’t share the ministry’s outlook.

“The interest in EOUs has been waning in recent years, particularly after the introduction of special economic zones in 2006. Since 2011, when EOUs lost their income tax benefits, there has been a gradual decline in the number of operating units,” the official said, adding that the pace of shutdowns is highest so far this year. While overall exports continue to shrink each month, the number of items registering positive growth is shrinking. In November 2015, just seven of India’s top 30 export items logged marginal positive growth, down from nine items in October.