Has the Indian duty-free scheme boosted African LDC exports to India?
Abstract: This article critically examines India’s duty-free trade preference scheme and seeks options to improve it.
India’s offer of a duty-free scheme for LDCs – the first of its kind among emerging economies – is a welcome initiative and an example for other developing countries “in a position to do so” to follow. However, while the intent of the scheme is surely good, its success is to be judged by its effectiveness in stimulating LDC exports to India.
The duty-free tariff preference (DFTP) scheme was launched in April 2008 and became fully operational in October 2012 when the tariff phase-down was completed. The scheme – until its revision in August 2014 – offered duty-free access to LDC exports on 85 percent of Indian tariff lines, and a margin of preference on an additional 9 percent of tariff lines; the remaining 6 percent of tariff lines were excluded. Following the scheme’s revision, duty concession was extended to 98 percent of tariff lines in April 2014. The exclusion list was trimmed down substantially; yet, some products of key export interest to African LDCs – such as coffee, tea, some spices and oilseeds, milk and cream, onions, cashew nuts (shelled), tobacco, copper and related products – continue to be excluded.
To date, 29 LDCs have joined the scheme, 22 of which are from sub-Saharan Africa. The International Centre for Trade and Sustainable Development – publisher of Bridges Africa – has conducted a series of studies in order to survey the actual implementation of the Indian DFTP scheme for LDCs, assess its impact on LDC exports and identify factors that may be constraining the scheme’s effectiveness.
Before assessing the scheme’s impact, it is useful to ask if LDCs fulfil certain necessary conditions to benefit from the scheme. These include (a) the LDC’s capacity to export, (b) the degree of inclusiveness of the scheme, and (c) the extent of product complementarity between beneficiary-country exports and India’s import needs.
Based on the above three conditions, Bangladesh, Madagascar and Myanmar are found to be relatively better positioned than the other Beneficiary Countries (BCs) to take advantage of the market access opportunities offered by the DFTP scheme. Other countries are less likely to benefit since they perform poorly on one or more of the three indicators. At the bottom of the list are Burundi, Rwanda and Somalia. These LDCs have very weak export capacity; many of their export products are excluded under the scheme; and there is a low degree of complementarity between their export basket and India’s import demand.
Assessing the impact of the Indian duty-free scheme
We also examine the scheme’s impact by comparing LDC export trends before and after the scheme came into effect. Specifically, we compare average exports in the post-DFTP period (2009-2011) with average exports in the pre-DFTP period (2005-2007).
The scheme would be deemed to have been effective if the first and at least another of the following conditions hold:
- Exports of preference products (PP) to India by BCs in the post-DFTP period are higher than in the pre-DFTP period, and exports of PP increased more than exports of non-PP during this period;
- Exports of PP by BCs to India post-DFTP increased faster than to the rest of the world. (Consequently, India’s share in BCs’ exports of PP increases post-DFTP);
- Share of BCs’ exports of PP in India’s global imports increases post-DFTP.
Our analysis suggests that:
- For all BCs, post-DFTP exports are 62.2 percent higher than pre-DFTP exports. However, non-beneficiary LDCs have seen their exports grow even faster (by 243 percent) after the launch of the scheme. Moreover, exports of excluded products from both LDCs and non-LDCs have also increased appreciably – albeit more slowly than for preference products.
- For 16 of the 29 BCs, exports of preference products to India post-DFTP increased faster than their corresponding world exports. On the other hand, in Burkina Faso, Eritrea, Gambia, Rwanda and Zambia, world exports soared while exports to India declined, with the sharpest decline occurring in Gambia and Zambia.
- India’s share of total LDC exports edged up 1 percentage-point between the pre- and post-DFTP periods. When exports are disaggregated into duty-free, excluded and MOP (margin-of-preference) products, it is observed that the share increased across all three categories, even though the increase was only marginal for excluded products. This might suggest that the DFTP scheme encouraged LDCs to increase their exports of preference products to India more than to other export markets.
- The share of BCs in India’s global imports of preference products increased slightly – from 0.76 percent to 0.82 percent between the pre-DFTP and post-DFTP periods.
Altogether, it is difficult to conclude from the analysis whether the scheme has had the desired impact on BC exports. On the one hand, India has become a significant export market for Asian LDCs like East Timor, Bangladesh, Cambodia and Lao due to their geographical proximity and cultural and economic affinity with India as well as the fact that the DFTP scheme includes the bulk of the products exported by these countries. On the other hand, India remains a marginal destination for many African LDCs’ exports. Some LDCs, such as Uganda, have seen overall growth in exports but closer analysis shows that exports of excluded products increased faster than preference products’ exports – something that is difficult to rationalize. By 2012, only 1 per cent of Uganda’s world exports were directed to India. And in the case of LDCs such as Zambia, Rwanda, Eritrea, and Burundi, exports to India actually decreased since the implementation of the scheme.
Limitations of the DFTP scheme
At the fundamental level, it appears that the scheme’s effectiveness is limited by its very design: before it was revised, the scheme excluded many products in which African LDCs are reputed to have a comparative advantage. These exclusions affect both countries with more diversified exports (such as Ethiopia) as well as those with highly concentrated export structures (e.g. Burundi).
Further analysis shows that the margin of preference on a number of duty-free products is rather low (e.g., 0 percent on cotton, 2.5 percent on aluminum and copper ores, 10 percent on ready-made garments), suggesting that the scheme does not confer any material advantage compared to the MFN regime.
There is also some evidence of escalation in the tariff structure. For example, while raw cashew nuts enjoy duty-free treatment, shelled cashews are excluded from the scheme altogether. This practice has the effect of depriving countries like Tanzania of real opportunities to develop higher value-added activities around cashew processing.
Moreover, even where duty-free treatment is given to a product, its export may actually be limited by various types of non-tariff measures applied by India. These include the administrative costs of complying with the DFTP scheme, regulatory requirements such as SPS, and rules of origin.
Improving the scheme’s impact on LDCs’ exports – and ultimately development – requires actions on both sides – India and the beneficiary countries.
On India’s side
1. Improving design and coverage of the scheme
Excluding products in which LDCs are most competitive is at odds with the declared objective of helping these countries increase their exports to India. While India claims that exclusions amount to a mere 6 percent of its tariff lines, in value terms, excluded products presented 15 percent of post-DFTP global exports, with the share ranging from 0.1 percent (Lesotho) to 82.4 percent (Burundi). This means that the scheme has differential impacts on LDCs, hurting some of the more vulnerable – that is, less diversified – countries the most. The revised scheme extends duty concession on a wider range of products; nonetheless, critical exclusions (e.g. coffee, tea, copper, etc.) persist.
Simulation results suggest that global welfare and welfare of African LDCs would increase by $US 561 million and $US 1201 million, respectively, if India moved to a 100 percent duty-free quota-free regime. The loss to India would be a paltry $US 171 million. The Government of India should keep this in mind when visiting the scheme next time.
2. Creating awareness of the scheme
Another aspect of the scheme’s coverage is the number of beneficiary countries. It is a matter of concern that, of the 49 eligible LDCs, only 29 have so far signed up for the scheme. One reason for the low degree of participation is the lack of awareness, among LDCs, of the Indian scheme, and the potential benefits it offers. Case studies in Uganda and Tanzania suggest that, even though these are BCs, the exporter community as well as exporter associations in both countries are, by and large, unaware of the existence of the scheme. The Government of India believes that it has done its part by setting up a trade preference scheme for LDCs, and that the onus was now on the LDCs themselves to take advantage of the scheme. It is clear however that significantly more could be achieved if India went the extra mile and publicised the scheme more effectively. This can be done by Indian high commissions (where they are present in LDCs) through existing channels (e.g. monthly newsletters) at no extra cost.
3. Addressing non-tariff barriers
Even where duty-free treatment is given to a product, its exports may actually be limited by various types of non-tariff measures applied by India. These include the administrative costs of complying with the DFTP scheme, regulatory requirements such as SPS, and rules of origin. Indeed, survey data by the International Trade Centre suggests that obtaining a certificate of origin and an SPS certificate are the most burdensome NTMs that African firms exporting to India face. Similarly, while rules of origin are clear and simple (30 percent domestic value added and a change in tariff heading), the fact that no cumulation is allowed, whether regionally or with India, may in the long run discourage both south-south trade and product upgrading along the value chain. India should comprehensively review these NTMs along with the DFTP scheme to ease market access for LDC exports.
Building LDCs’ productive or export capacities
India can do much to build the productive capacity of African (and other) LDCs through aid, investment and technological collaboration. India is a leading investor in Africa among the emerging economies. Yet again, its investments are concentrated in a few countries – not surprisingly in the very same countries from which India imports the most. FDI can be a conduit for technology transfer and knowledge spill-overs, and can therefore play an important role in the structural transformation of African LDCs.
In this, India’s efforts are commendable, but more could be done. Indian firms are contemplating resource- and efficiency-seeking investment opportunities in Africa. Such investments can transfer India’s low-cost processing technology to African LDCs, resulting in jobs, and value addition in the host country in the short run, and impetus to the development of indigenous processing activities over the long term.
On the LDC side
1. Disseminating information on the DFTP scheme
At the country level, information flow is obstructed by bureaucratic delays and poor inter-agency communication at various stages of the information chain. Furthermore, our field work in Uganda and Tanzania suggests that there is significant information asymmetry between India and the LDCs. The Uganda Export Promotion Board, for example, was aware of the scheme early on, but they expected further communication from the Government of India, and convocation to a capacity building workshop of the kind that happened when the Chinese duty-free scheme was launched two years after India’s. India, on the other hand, had assumed that LDCs would take responsibility for seeking and diffusing information themselves, and did not take further steps to promote the scheme.
Bridging the information divide requires constant and effective communication between capitals, and, in BCs, among all stakeholders. There is need to empower and capacitate export promotion agencies, and export associations to reach out to a broader constituency of exporters across the entire spectrum. The Aid-for-Trade initiative could play a useful role in this regard.
2. Promoting exports more aggressively
Beneficiary-country governments have a key role to play in promoting exports. Fundamentally, this starts with defining an export policy, and laying out a strategy for its implementation. Unfortunately, in a number of LDCs, including two of the case-study countries that we visited – Uganda and Tanzania –, such policy is either absent, or not well articulated, and where it exists, stakeholders are not fully aware of its contents, much less its implementation. In Uganda, a landlocked country facing formidable infrastructure barriers, regional trade takes precedence over exports to international markets. Some exporters justified this focus in terms of the thin marginal benefit of exporting beyond the region, which may not be worth the hassle of complying with the stringent rules-of-origin and product standards prevailing in foreign markets. This suggests that the real culprit is supply-side constraints, which must be addressed more vigorously to foster exports – both to the region and beyond.
3. Building productive and export capacities
Some stakeholders expressed the view that, even if the DTFP scheme offered preferential access for their agricultural exports, they were not sure that they would be able to supply India’s large market. This follows from the limited production capacity of most exporting firms. In our view, however, such thinking suffers from reverse causality. It is likely that production is limited by the size of the market. Prospects of supplying a large export market should, in theory, encourage firms to expand. Where this is not the case, other, more severe export supply constraints may be at work, including constraints at the level of the firm itself. These need to be addressed through targeted investment, technical assistance and aid.
This analysis is based on studies conducted before the Indian Duty-Free Tariff Preference scheme was revised in April 2014. The dissemination of the new scheme did not start until much later - in August - when the papers on which this analysis is based were in the final stages (see page 12). As such, much of the analysis presented in this article remains valid.
Authors: Vinaye Ancharaz: Senior Development Economist at the International Centre for Trade and Sustainable Development (ICTSD).
Paolo Ghisu: Programme Officer at ICTSD
 See more details in “Can India’s Duty-Free Scheme foster Trade and Development in African Least Developed Countries?”, GREAT Insights, ECDPM, April 2014