Gujarat remained India’s biggest exporting state for the sixth consecutive year in 2025-26, even as exporters faced a challenging global environment characterised by steeper US tariffs, subdued demand in key markets and persistent supply-chain disruptions. However, the scheme designed to help manufacturers modernise their plants and boost exports is increasingly being described by businessmen as a burden, with established units struggling to meet average export obligations (AEO) amid geopolitical tensions, weak global demand and rising costs.The Export Promotion Capital Goods (EPCG) scheme allows manufacturers to import plant and machinery, production equipment, computers and software forming part of the machinery, spares, modules, dies and tools without paying customs duty.The duty saved can amount to 20-30% of the value of expensive machinery. However, manufacturers availing themselves of the benefit must fulfil a specific export obligation equivalent to six times the duty saved within six years.For instance, if a manufacturer imports machinery worth Rs 1 crore and saves Rs 30 lakh in customs duty, it must undertake exports worth Rs 1.8 crore within six years.Exporters say they have generally accepted this condition. Their concern, however, is the additional AEO, under which an established exporter must maintain the average export level achieved during the preceding three years, over and above the specific obligation linked to the duty saved.“We get punished for securing good orders in one year and for facing a market downturn in another year due to international problems — situations that are not in our hands,” said an exporter. Under the policy, failure to meet the prescribed export obligation can require the manufacturer to pay the customs duty that was saved at the time of importing the machinery.Scheme’s conditions a heavier burden for established exportersExporters have termed the arrangement “EPCG licence injustice” for established manufacturers, arguing that it places them at a disadvantage compared to new exporters. For example, a new exporter who saves Rs 35 lakh in customs duty through an EPCG licence would have to fulfil a specific export obligation of Rs 2.1 crore over six years.An established exporter with the same duty saving would also have to maintain an AEO based on its export performance during the previous three years. If its average annual exports were Rs 50 crore, its total obligation over six years would be Rs 302.1 crore — comprising Rs 300 crore under AEO and Rs 2.1 crore as the specific export obligation.“An established exporter who has built an export history or legacy is penalised with an AEO, while a new exporter with zero export track record enjoys a clean and simple specific obligation,” said an exporter.In Gujarat, manufacturers of engineering goods, auto components, ceramics, chemicals, pharmaceuticals, textiles and food processing use the EPCG scheme to import capital goods..Maintaining AEO tough for Morbi’s ceramics cluster amid falling exportsThe ceramic cluster in Morbi and surrounding areas imports costly machinery from China, Spain and Italy. Machinery for a small unit can cost around Rs 40 crore, according to industry representatives. Units typically need to replace their machinery every six to eight years.Manufacturers say old machinery often has to be scrapped before new equipment is installed, but the replacement does not automatically result in a corresponding increase in exports. The Morbi Ceramic Association represented the issue to its Member of Parliament in Jan, stating that US tariffs and anti-dumping duties in several Gulf and European markets had made it difficult for manufacturers to maintain AEO.“The scheme is helping us with technology upgradation. But, given the current non-availability of gas, higher production costs due to gas prices, increased freight rates and sluggish global demand, our exports are down by 70-80%. We are not in a position to maintain the AEO and need relaxation,” said a ceramics exporter.Garment exporters stretched, find meeting EPCG commitments difficult Garment exporters are also finding it difficult to meet their EPCG commitments amid a slowdown in major international retail markets. The scheme allows apparel manufacturers to import advanced sewing and processing machinery without paying customs duty. In return, they must export goods worth six times the duty saved within six years.Exporters say high inflation in Western markets, rising ocean freight rates and competition from countries offering zero-duty access have made it increasingly difficult to meet the targets.“The global economic slowdown has severely disrupted our capacity utilisation. We modernised our factories expecting robust demand, but overseas buyers have cut orders and are demanding heavy discounts,” said a director of a leading garment manufacturing company.“With working capital already locked up because of supply-chain delays, enforcing rigid export obligations at this stage is causing immense financial stress. We urgently need policy flexibility, including a temporary or localised reduction in the annual AEO to survive this cycle,” the director said.Delays in EODC certificates add to working-capital stressExporters are also raising concerns over delays in obtaining Export Obligation Discharge Certificates (EODCs). After fulfilling their export commitments, EPCG beneficiaries must obtain an EODC from the directorate general of foreign trade (DGFT) to close their cases. The certificate enables them to reclaim bank guarantees and cancel customs bonds.Exporters say prolonged processing times, manual verifications and repeated compliance requirements have left closure applications pending, blocking capital that could otherwise be deployed for production and exports. Exporters are seeking temporary relaxation or recalibration of the AEO, particularly for sectors facing demand shocks.An officer from DGFT said, “A central-level committee reviews whether exports from a particular sector have declined globally. If an entire sector is facing a decline, EPCG licence holders in that sector may get some relaxation in meeting their export obligations. For example, if export of the entire sector fall by 20%, all exporters of that sector get a 20% relief in AEO.Exporters can also meet their obligations by supplying goods to SEZs.” However, exporters are terming these steps as using a bandage to treat a fracture.
Industry speaks
