Themes > Current Issues
05.04.2002
The Export Dreamer's Guide
Jayati Ghosh
The new Medium Term Exim
Policy focuses attention on increasing agricultural and other exports, but
does not address the basic reasons for export stagnation.
Commerce Minister Murasoli Maran is right to be concerned about India's export performance. Over the past year, export growth has faltered to such an extent that even the much reduced target of 3 per cent growth will certainly not be met. In fact, the latest data reveal that aggregate exports in the period April 2001 to February 2002 barely increased at all, registering a pitiful 0.06 per cent rise over the corresponding period of the previous year. Since March is notoriously a bad month for exports, this suggests that exports in dollar terms are likely to have been stagnant over the past fiscal year.
Nor is this only a reflection of the poor growth of world markets. It is true that total world merchandise trade slowed down dramatically in 2001, growing at only 2 per cent compared to 12 per cent in 2000. But Indian export growth has been even lower than this - in fact 33 times lower !
Meanwhile, our imports have continued to grow – in value terms by 2.3 per cent and by much more in volume terms. Even this relatively moderate increase is largely related to the low world oil prices which prevailed over much of the year. Non-oil imports are estimated to have grown by nearly 9 per cent in value terms, and even more in volume terms, over this period. This obviously means that import penetration continues to affect domestic producers adversely. But it has also meant a significant increase in the trade deficit, to $6.76 billion for the period April 2001 to February 2002.
So the Commerce Minister is certainly justified in deciding to make export growth one focus of the new medium term Exim Policy, which was announced on 31 March. He is probably also correct in arguing that export pessimism played a role in the fact that export performance in the past was not more impressive. It is likely to have inhibited the emergence of a more strategic policy with respect to exports, without which no major exporting country has been successful in recent times. Clearly, a successful export thrust in the future will have to be associated with a systematic policy, since it is now clear that relying only on private market-determined responses is inadequate for the purpose.
The objectives of the Exim Policy 2002-07 are clearly ambitious. It explicitly aims to facilitate export expansion such that India's share of world exports reaches at least 1 per cent of world trade by the end of the period. In addition to this it proposes to stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumables and capital goods requires for augmenting production and providing services.
The Policy further plans on enhancing the technological strength and efficiency of Indian agriculture, industry and services, thereby improving their competitive strength while generating new employment opportunities. It proposes simultaneously to encourage the attainment of internationally acceptable quality standards. All this would then provide Indian consumers with good quality goods and services at internationally competitive prices.
Obviously, everyone would welcome such a paradise for Indian producers and consumers; it is beyond question "a consummation devoutly to be wished". How to get there, of course, is another matter. It is here that the Exim Policy suggests that the Commerce Minister may have missed the basic point in terms of what determines export growth and improved “competitiveness”.
The apparent belief is that even more liberalisation combined with some fiscal concessions will do the trick. However, it is quite clear to most observers – and especially to exporters themselves – that problems of poor and costly infrastructure facilities, and inadequate access to reasonably cheap credit are among the most significant problems currently plaguing Indian producers.
In fact, the Exim Policy statement does not even mention these issues, much less discuss ways in which such problems could be dealt with. One of the most urgent problems for goods exporters relates to the backlog and slow rate of movement through India's ports, which raises costs and affects markets for export goods. The problems of poor transport in general and unstable (and increasingly expensive) access to power and other essential inputs put domestic producers at a major disadvantage compared to their international competitors. Another major area of concern is the difficulty faced by small-scale exporters in raising bank credit, especially after financial liberalisation measures have reduced allocations for priority sector credit.
Obviously, it would be too much to expect the Commerce Ministry alone to tackle these issues. But since these are among the most important constraints on India's exports currently, it was to be expected that the Commerce Minister would take note of these and at least try to co-ordinate with other Ministries such as Power and Surface Transport in order to ensure some cohesive policy with respect to these problems. (Instead, the only co-ordination seems to have been with the Ministry of Finance, and that too, only because the strategy conforms to the Finance Ministry's known approach of preferring tax giveaways to increased public productive expenditure.)
Sustained export expansion requires a more comprehensive and systematic macro strategy on the part of the government, which includes a substantial increase in public infrastructure spending. Such a strategy would also end up improving conditions for producers for the domestic market as well, and therefore aggregate employment conditions.
Sadly, the Exim Policy does not appear to have recognised this at all. Instead, it sticks within the now familiar and largely discredited “liberalisation” paradigm, in which it is assumed that deregulation and tax sops will be sufficient to make private producers not only increase production but also improve productivity. In fact, the only evidence of some strategic orientation is the launch of the new “Focus Africa” programme, which is certainly welcome.
Consistent with the basic market-determined framework, the main focus of the new Exim Policy exercise is on a range of measures that will further liberalise the export trade, especially with respect to agricultural exports, and on providing some fiscal incentives including duty neutralisation and other tax sops to exporters. It also relies on more Special Economic Zones, provided with even more incentives, to take up the task of export promotion, even though the experience with Export Processing Zones so far has been dismal.
For agriculture, the Policy contains a number of measures. Quantitative restrictions have been lifted on exports of all commodities except onion and jute. There is provision for a transport subsidy for exports of fresh and processed fruits, vegetables, floriculture, poultry, dairy products and products of wheat and rice. Registration requirements, which were earlier necessary for farm exports, have been removed. The minimum export price condition has been lifted. While these will obviously reduce bureaucratic delays and assist more exports, there are questions about how small cultivators facing large and often monopsonistic distributors would able to manage in the new scenario in which they are to face these forces without any element of mediation.
The Commerce Ministry obviously wants to assist the Food Ministry in getting rid of the embarassingly large public stocks of foodgrains through more exports. It is quite happy to assist in a process which will deprive millions of poor hungry people within India of access to such grain, in order to push this grain out as (implictly) subsidised exports. Of course, this attempt may come up against WTO regulations, so the Exim Policy proposes an internal transport subsidy on movement of foodgrain from FCI godowns to the nearest port, which it believes will bypass the WTO restrictions.
In addition to all this, twenty agri-export zones (AEZs) have been sanctioned, covering mainly horticultural products. Mr. Maran is clearly a keen promoter of such zones : past Exim Policies have witnessed the declaration of various Special Economic Zones. The 13 existing SEZs are also to be allowed to open overseas banking units, which are effectively offshore banks free from domestic restrictions such as those on Cash-Reserve ratio and Statutory Liquidity Ratio. In addition, they have been promised tax concessions as well.
Now "cluster town" such as Tirupur, Ludhiana and Panipat are also to be provided with similar status, in the form of various fiscal incentives. Thus far, of course, such incentives have not made much difference to the actual export performance of these areas or sectors, although they imply quite a lot of tax revenue foregone in the interests of providing export incentives.
The other main plank of the new Exim Policy is the provision of a range of fiscal concessions and tax sops to exporters under various schemes. Mr. Maran has probably extracted more fiscal sops for exporters than any previous Commerce Minister, even though export performance has not displayed any greater dynamism as a result. Already over the fiscal year just concluded, the revenue loss from the various export promotion schemes is estimated to have been as high as Rs. 23,000 crore or more. In 2002-03, rough calculations suggest that revenue outgo could amount to more than Rs. 27,000 crore, or 60 per cent of budgeted customs duty collection !
It is interesting that this has been allowed by the same Finance Ministry that has prevented increased allocation for public employment schemes that would have increased rural employment, provided rural infrastructure and helped dispose of the excess food stocks. Since revenue foregone is in budgetary terms analogous to increased expenditure, this also means that nearly Rs. 30,000 crore which could have been spent on improving infrastructure conditions even for exporters, has instead been diverted to lining the pockets of some exporters. The past experience with such sops suggests that this would not necessarily lead to increased exports either.
Of course, one plausibly question the basic approach of this Exim Policy, which privileges export growth as the main objective of trade strategy and as the engine of Indian development. But the point is that, even within this framework, the approach adopted by the Commerce Minister is unlikely to deliver in terms of improved export performance, even while it wastes thousands of crores from the public exchequer that could be used for more productive purposes.
Commerce Minister Murasoli Maran is right to be concerned about India's export performance. Over the past year, export growth has faltered to such an extent that even the much reduced target of 3 per cent growth will certainly not be met. In fact, the latest data reveal that aggregate exports in the period April 2001 to February 2002 barely increased at all, registering a pitiful 0.06 per cent rise over the corresponding period of the previous year. Since March is notoriously a bad month for exports, this suggests that exports in dollar terms are likely to have been stagnant over the past fiscal year.
Nor is this only a reflection of the poor growth of world markets. It is true that total world merchandise trade slowed down dramatically in 2001, growing at only 2 per cent compared to 12 per cent in 2000. But Indian export growth has been even lower than this - in fact 33 times lower !
Meanwhile, our imports have continued to grow – in value terms by 2.3 per cent and by much more in volume terms. Even this relatively moderate increase is largely related to the low world oil prices which prevailed over much of the year. Non-oil imports are estimated to have grown by nearly 9 per cent in value terms, and even more in volume terms, over this period. This obviously means that import penetration continues to affect domestic producers adversely. But it has also meant a significant increase in the trade deficit, to $6.76 billion for the period April 2001 to February 2002.
So the Commerce Minister is certainly justified in deciding to make export growth one focus of the new medium term Exim Policy, which was announced on 31 March. He is probably also correct in arguing that export pessimism played a role in the fact that export performance in the past was not more impressive. It is likely to have inhibited the emergence of a more strategic policy with respect to exports, without which no major exporting country has been successful in recent times. Clearly, a successful export thrust in the future will have to be associated with a systematic policy, since it is now clear that relying only on private market-determined responses is inadequate for the purpose.
The objectives of the Exim Policy 2002-07 are clearly ambitious. It explicitly aims to facilitate export expansion such that India's share of world exports reaches at least 1 per cent of world trade by the end of the period. In addition to this it proposes to stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumables and capital goods requires for augmenting production and providing services.
The Policy further plans on enhancing the technological strength and efficiency of Indian agriculture, industry and services, thereby improving their competitive strength while generating new employment opportunities. It proposes simultaneously to encourage the attainment of internationally acceptable quality standards. All this would then provide Indian consumers with good quality goods and services at internationally competitive prices.
Obviously, everyone would welcome such a paradise for Indian producers and consumers; it is beyond question "a consummation devoutly to be wished". How to get there, of course, is another matter. It is here that the Exim Policy suggests that the Commerce Minister may have missed the basic point in terms of what determines export growth and improved “competitiveness”.
The apparent belief is that even more liberalisation combined with some fiscal concessions will do the trick. However, it is quite clear to most observers – and especially to exporters themselves – that problems of poor and costly infrastructure facilities, and inadequate access to reasonably cheap credit are among the most significant problems currently plaguing Indian producers.
In fact, the Exim Policy statement does not even mention these issues, much less discuss ways in which such problems could be dealt with. One of the most urgent problems for goods exporters relates to the backlog and slow rate of movement through India's ports, which raises costs and affects markets for export goods. The problems of poor transport in general and unstable (and increasingly expensive) access to power and other essential inputs put domestic producers at a major disadvantage compared to their international competitors. Another major area of concern is the difficulty faced by small-scale exporters in raising bank credit, especially after financial liberalisation measures have reduced allocations for priority sector credit.
Obviously, it would be too much to expect the Commerce Ministry alone to tackle these issues. But since these are among the most important constraints on India's exports currently, it was to be expected that the Commerce Minister would take note of these and at least try to co-ordinate with other Ministries such as Power and Surface Transport in order to ensure some cohesive policy with respect to these problems. (Instead, the only co-ordination seems to have been with the Ministry of Finance, and that too, only because the strategy conforms to the Finance Ministry's known approach of preferring tax giveaways to increased public productive expenditure.)
Sustained export expansion requires a more comprehensive and systematic macro strategy on the part of the government, which includes a substantial increase in public infrastructure spending. Such a strategy would also end up improving conditions for producers for the domestic market as well, and therefore aggregate employment conditions.
Sadly, the Exim Policy does not appear to have recognised this at all. Instead, it sticks within the now familiar and largely discredited “liberalisation” paradigm, in which it is assumed that deregulation and tax sops will be sufficient to make private producers not only increase production but also improve productivity. In fact, the only evidence of some strategic orientation is the launch of the new “Focus Africa” programme, which is certainly welcome.
Consistent with the basic market-determined framework, the main focus of the new Exim Policy exercise is on a range of measures that will further liberalise the export trade, especially with respect to agricultural exports, and on providing some fiscal incentives including duty neutralisation and other tax sops to exporters. It also relies on more Special Economic Zones, provided with even more incentives, to take up the task of export promotion, even though the experience with Export Processing Zones so far has been dismal.
For agriculture, the Policy contains a number of measures. Quantitative restrictions have been lifted on exports of all commodities except onion and jute. There is provision for a transport subsidy for exports of fresh and processed fruits, vegetables, floriculture, poultry, dairy products and products of wheat and rice. Registration requirements, which were earlier necessary for farm exports, have been removed. The minimum export price condition has been lifted. While these will obviously reduce bureaucratic delays and assist more exports, there are questions about how small cultivators facing large and often monopsonistic distributors would able to manage in the new scenario in which they are to face these forces without any element of mediation.
The Commerce Ministry obviously wants to assist the Food Ministry in getting rid of the embarassingly large public stocks of foodgrains through more exports. It is quite happy to assist in a process which will deprive millions of poor hungry people within India of access to such grain, in order to push this grain out as (implictly) subsidised exports. Of course, this attempt may come up against WTO regulations, so the Exim Policy proposes an internal transport subsidy on movement of foodgrain from FCI godowns to the nearest port, which it believes will bypass the WTO restrictions.
In addition to all this, twenty agri-export zones (AEZs) have been sanctioned, covering mainly horticultural products. Mr. Maran is clearly a keen promoter of such zones : past Exim Policies have witnessed the declaration of various Special Economic Zones. The 13 existing SEZs are also to be allowed to open overseas banking units, which are effectively offshore banks free from domestic restrictions such as those on Cash-Reserve ratio and Statutory Liquidity Ratio. In addition, they have been promised tax concessions as well.
Now "cluster town" such as Tirupur, Ludhiana and Panipat are also to be provided with similar status, in the form of various fiscal incentives. Thus far, of course, such incentives have not made much difference to the actual export performance of these areas or sectors, although they imply quite a lot of tax revenue foregone in the interests of providing export incentives.
The other main plank of the new Exim Policy is the provision of a range of fiscal concessions and tax sops to exporters under various schemes. Mr. Maran has probably extracted more fiscal sops for exporters than any previous Commerce Minister, even though export performance has not displayed any greater dynamism as a result. Already over the fiscal year just concluded, the revenue loss from the various export promotion schemes is estimated to have been as high as Rs. 23,000 crore or more. In 2002-03, rough calculations suggest that revenue outgo could amount to more than Rs. 27,000 crore, or 60 per cent of budgeted customs duty collection !
It is interesting that this has been allowed by the same Finance Ministry that has prevented increased allocation for public employment schemes that would have increased rural employment, provided rural infrastructure and helped dispose of the excess food stocks. Since revenue foregone is in budgetary terms analogous to increased expenditure, this also means that nearly Rs. 30,000 crore which could have been spent on improving infrastructure conditions even for exporters, has instead been diverted to lining the pockets of some exporters. The past experience with such sops suggests that this would not necessarily lead to increased exports either.
Of course, one plausibly question the basic approach of this Exim Policy, which privileges export growth as the main objective of trade strategy and as the engine of Indian development. But the point is that, even within this framework, the approach adopted by the Commerce Minister is unlikely to deliver in terms of improved export performance, even while it wastes thousands of crores from the public exchequer that could be used for more productive purposes.
© MACROSCAN 2002