Union minister of heavy industries and public enterprises, Praful Patel, wrote to finance minister P Chidambaram on October 8 seeking an increase in duty drawback rates to support exports of auto components.
In the letter seen by FE, Patel said the recent reduction in duty drawback rates has hit the morale of the $40.6-billion industry, rendering exports uncompetitive and unprofitable in many cases.
Patel said the auto component industry, comprising more than 1,000 small and medium entrepreneurs, has been impacted by the steady decline seen by the automobile industry in the last three quarters.
“In this context, the recent decision of the government to reduce duty drawback rates to the extent of 5-21% in the year 2013-14 has the potential of adversely impacting exports. The industry is facing further difficulty in carrying out trade with EU, Brazil, South Africa and Iran etc,” Patel said.
He added, “In such a scenario, the lowering of duty drawback has come as a severe dampener to the morale of exporters and manufacturers, to the extent of even diluting the effect of rupee depreciation on export competitiveness. I, therefore, earnestly request you to consider restoring the duty drawback rates to the earlier levels so that the industry reverts to the path of recovery soon”.
Duty drawbacks are refunds offered to exporters against imports, or excise duties originally paid on raw material or part imports, that are needed to make the final export product.
The domestic auto component industry, which employs about 9 lakh workers, grew at 19% CAGR till FY12, but in FY13 growth slipped to 5.6% on worsening economics both at home and in export markets. In fact, component exports in the April-June quarter this year have dropped 7% year on year.
An industry source said that auto component makers used to rely on the Duty Entitlement Passbook Scheme till 2011, when it was stopped by the government because it was not tenable with WTO. “After that, everybody shifted to the duty drawback scheme. In our sector, the margins are wafer-thin, so the refund under the scheme was all the money that was to be made.
Now exports have become uncompetitive because companies cannot even get out of long-term export contracts and they will have to supply even if they are not making money,” he said.