Changing the law at whim without Parliament approval & tweaking rules to favour importers, the DGFT has, over the years, shown its loyalties
Let us begin with a cliché that all of us are aware of – India is an agricultural country. Our policies, over seven decades since Independence, are consciously and carefully crafted keeping in mind the welfare of our farmers.
It is the duty of the Indian central and state governments to ensure that Indian farmers are not crippled by unfair competition from other nations, especially when it comes to staple food like rice, wheat and maize. This is the reason imports of these foodgrains are closely monitored and restricted. Because a flood of imports could cause domestic prices to fall and farmers would be hit hard.
It is in this context that the role of the Directorate General of Foreign Trade (DGFT) comes into question since 2011. The DGFT, for reasons best known to its officers, has announced a series of changes in rules which, in effect, modified the Foreign Trade Policy without the Parliament’s nod.
Worse, these changes in rules made by the DGFT, benefited importers of maize to the detriment of farmers.
So whose side is the DGFT really on?
Our story has its roots in 1991, when then Finance Minister Manmohan Singh unveiled his liberalisation policy. From being a Closed Door policy, India moved to an Open Door policy. And this meant that all goods were free for import unless specifically restricted. This was a complete reversal of India’s previous stand.
A Foreign Trade Policy was formulated and in 1993, Parliament passed an order restricting some goods for import only by government agencies. This included foodgrains like rice, wheat and maize. No individual or company could import foodgrains except the government agency, Food Corporation of India (FCI). The technical term for this process is canalisation. Any imports of foodgrains would be subject to 60% customs duty payable by the FCI.
A further clause was added in to prevent misuse of the policy – only “actual users” could import these foodgrains through the FCI.
Under the Foreign Trade Policy, an actual user is defined as “a person (either natural & legal) who is authorized to use imported goods in his/its own premise which has a definitive postal address.”
The policy further classifies the types of actual users into industrial and non-industrial.
““Actual User (Industrial)” is a person (either natural & legal) who utilizes imported goods for manufacturing in his own industrial unit or manufacturing for his own use in another unit including a jobbing unit which has a definitive postal address.
“Actual User (Non-Industrial)” is a person (either natural & legal) who utilizes the imported goods for his own use in.
(i) any commercial establishment, carrying on any business, trade or profession, which has a definitive postal address; or
(ii) any laboratory, Scientific or Research and Development(R&D) institution, university or other educational institution or hospital which has a definitive postal address; or
(iii) Any service industry which has a definitive postal address.”
In effect, this condition meant that a person buying the imported foodgrains from the state agencies could use the foodgrains as raw material to manufacture any product.
What they were not allowed to do was to sell the foodgrains as is, in the domestic market.
On 01 March 2002, the union Ministry of Finance, in a notification numbered 21/2002, slashed import duty on maize. Called the Tariff Rate Quota (TRQ) scheme, the government now allowed 15% import duty on four lakh metric tonnes of maize in 2001-02. Any further imports of maize would attract customs duty of 60% as previously charged.
The notification extended the reduced import duty of 15% to another 4.5 lakh metric tonnes of maize in 2002-03.
On 04 October 2002, another notification by the union Ministry of Commerce and Industry allowed state trading corporations such as NAFED (National Agricultural Cooperative Marketing Federation of India), MMTC (Metals and Minerals Trading Corporation), State Trading Corporation and a few other state enterprises to import maize. This notification also brought down import duty on maize from 60% to 51.05%. The clause though was clear – “However, they have to make imports only on behalf of actual users.”
The actual user condition remained intact despite the reduction in import duty.
In 2007, another notification was issued, making the import duty on maize zero.
It was on 18 May 2011 that the DGFT issued a controversial public notice numbered 47 (RE-2010)/2009-2014. In this notice, the DGFT stated that actual user condition is not mandatory for the import of all items under TRQ. Meaning that maize could be imported and sold as is by individuals or companies.
This decision had the potential to negatively impact maize farmers in India. And this decision had been taken by the DGFT without the knowledge or the approval of Parliament.
To understand the plausible reasons behind this irregularity by the DGFT, it is important to first understand the background of maize itself.
Maize or corn is the third most important foodgrain in India after rice and wheat. Corn comes in four types – dent corn, popcorn, sweet corn and baby corn.
“47% of maize goes to poultry feed, 13% goes to animal feed, 14% goes to the starch industry, 13% is food consumption and 7% becomes processed food,” explained Sujay Rakshit, Director of the government Maize Research Centre in Ludhiana to The Lede.
Of the four corn varieties, dent corn is used as poultry and animal feed as well as in the starch industry. Baby corn and sweet corn are consumed by humans as food, while popcorn is processed by popping and sold at movie theatres and malls as popular snacks.
India exports locally grown dent corn to countries such as Japan, Indonesia, Malaysia, Bangladesh, Sri Lanka and Oman among others.
The imports of maize that this report has repeatedly referred to is the import of popcorn – the variety of grain that goes into your microwave on movie nights.
Popcorn grain is largely imported from the USA, Argentina, Brazil and South Africa. This is because the quality of the popcorn grain is better than that of the older Indian native varieties, according to industry experts.
The popping quality of the imported grain is 100%, meaning there would be no burnt unpopped grains left behind. Indian popcorn grain, however, in the early 2000s, had only 50% popping quality, meaning half the grains would be left behind unpopped.
Today, of course, good quality Indian hybrid popcorn seeds are available which can compete with the international ones.
The largest players in the popcorn market are ConAgra, an American multi-national firm that produces ACT II popcorn (microwave popcorn) and Gourmet Popcornica which produces popcorn for movie theatres. There are a number of smaller firms that import the popcorn grain, pack it in bags and sell to retailers.
The question of actual user condition arises in this context – that popcorn retailers in the home market import grain, add oil and salt, repackage and sell it. Popcorn retailers in the movie theatre market do the same.
How this amounts to using the popcorn grain as raw material to manufacture a product is the sticky point.
Now that the import of popcorn grain had no “actual user condition” as per the DGFT’s 2011 notification as detailed above, one man was dismayed. Hyderabad-based Venu Akula, founder of VenAgro and Sriven Marketing, who entered the popcorn business in 2006, told The Lede that he was taken aback by the notice which was quite blatantly illegal and against the Foreign Trade Policy.
“Section 11 of the Customs Act of 1962 clearly states that it would not tolerate any injury or damages to domestic injury,” said Akula. “And here was the DGFT doing away with the actual user condition. We had been researching new hybrid varieties of popcorn seed and giving it free of cost to farmers to cultivate, along with a buyback agreement and the government was effectively allowing imported popcorn grain to flood the market. Shouldn’t we be encouraging our own farmers to grow popcorn and make profits instead of allowing other countries to benefit from our imports?” he asked.
Akula then dragged the DGFT and other departments of the Centre to the High Court of Andhra Pradesh and Telangana in May 2011.
As part of his argument, Akula produced an RTI response from the DGFT dated 06 August 2010 wherein the DGFT states that the actual user condition is in place. However the Directorate contradicted itself in court.
The DGFT in its counter affidavit stated that the “Government of India relaxed the customs duty and made it concessional at 15% in discharge of the obligations of India under WTO.” World Trade Organisation negotiations were also touted to be the cause behind the zero percent import duty on maize.
The Directorate also said that the quota of 5 lakh metric tonnes of maize under the Tariff Rate Quota scheme had not been utilised in full between 2002 and 2005.
The DGFT relied on this data to state that the imports were “insignificant to affect the domestic market.”
They also argued that “for the years 2009-2010 and 2010-2011 the exports of maize (corn) were 26 lakh MT and 17 lakh MT respectively whereas the imports were only 19,000 MT and 7,000 MT respectively. Thus, the imports being less than 1% of the exports, being insignificant, no harm, or prejudice is caused to domestic market.”
The DGFT failed to mention that the exported maize was dent corn while the imported maize was popcorn, a different commodity.
As for the withdrawal of the actual user condition in 2011, the DGFT stated that maize, “being a food item, the compliance with actual user condition may not be entirely possible.”
It then revealed that an Inter-Ministerial meeting in 2003 had recommended that the actual user condition for maize be done away with. The minutes of this meeting, they claimed, was what they had based their decision on, eight years later.
On 23 January 2012, Venu Akula got his first order from a single judge – Justice Vilas V Afzulpurkar. The judge dismissed Akula’s petition on the ground that it was not possible for the court to tinker with the import policy.
By this time, prices of imported popcorn grain had fallen to around Rs 28 to 30 per kilogram and many times, was cheaper than the local popcorn grown by farmers in India.
Worried that farmers could get hit harder, Akula filed an appeal against the order of the single judge. The case went before the First Bench of the court – Chief Justice Madan B Lokur and Justice Sanjay Kumar heard the appeal.
Akula won this round. In April 2012, he got an order staying the DGFT notification of May 2011 that removed the actual user condition.
The Bench observed - “The Learned Judge ought to have seen that the impugned public notice dated 18-5-2011 of the 4th Respondent herein has been issued by withdrawing the restriction of “Actual Users” without application of mind, which will directly impact the marginal impoverished farming community in India and as such it is not in Public interest.”
Calling the DGFT’s public notice of 2011 “a colourable exercise of power”, the Court also stated that “under Section 6(3) of the Foreign Trade (Development & Regulation) Act 1992, the Central Government has no power to delegate its power of amending a Policy to the Director General of Foreign Trade/4th Respondent herein and the 4th respondent herein has no power to issue the impugned public Notice dated 18-5-2011 amending the policy for imports.”
This order remains unchallenged.
On 29 September 2014, the DGFT once again issued a notification numbered 93 (RE 2013)/2009-2014. This made the import of maize completely free – meaning that not only was the actual user condition deleted, but the foodgrain was no longer canalised through the Food Corporation of India or other state agencies.
In effect, anyone could import maize without having to go through a government agency and without having to be an end user of the grain. The DGFT had opened up the floodgates for dumping of imported maize in India to the detriment of farmers.
Venu Akula, facing losses, moved the court once again. In final orders, Justice P Naveen Rao allowed the import of corn that had already arrived in India at the time so that importers would not suffer losses. Additionally he directed the DGFT to comply with actual user condition.
“On account of status quo granted by this Court, grave prejudice is caused and the same is irreparable as it being corn, its quality diminishes if not utilized immediately. Thus, in the meanwhile to protect the interest of the petitioners as - well as the respondents, and similarly situated persons, who intend to import the Maize (Corn), in modification of the earlier orders, it is directed that the persons may be permitted to import the Maize (corn) subject to fulfilment of ‘actual user condition’ and on payment of customs duty prevailing, but not the TRQ customs,” wrote Justice Rao in his order.
In February 2020, the TRQ scheme was removed by the Centre.
“Thanks to the uncertainty in import policy, there is uncertainty among farmers and the price of popcorn grain is now at Rs 60 per kilo,” said Venu Akula.
“There used to be around 50,000 acres of popcorn cultivation in Karnataka alone. But this year it has come down to around 30,000 acres. This is mainly because farmers are not sure whether they will get buyers for their crop.”
Akula says that if 65,000 to 70,000 acres of land come under popcorn cultivation in India, using good quality seed, the country would not need to import any more popcorn grain.
“The consumer market in India is growing above Rs 6500 crore. It is growing at a huge pace of 20% every year. The government needs to encourage that and provide support to our own farmers rather than give a free hand to imports,” he said.
It has taken a multitude of contempt petitions and other litigation by Akula to ensure that the DGFT follows the court’s rulings. In the interim, a flood of imported popcorn grain made its way into India, as the DGFT watched, silent.
Experts in the know say that the DGFT has remained silent despite importers not being actual users. Under-invoicing too has been taking place in the form of showing popcorn as dent corn. Dent corn is less than half the price of popcorn and by doing this little jugglery, importers cheat the government of customs duty.
An email sent to the DGFT officials did not elicit any response. This report will be updated if and when the Directorate replies.