People's Democracy

Trade Policy, Growth And India’s BoP

 C P Chandrasekhar

INDIA’S balance of payments presents (BoP) a peculiar picture. To start with, while the merchandise trade deficit is large and growing, the current account has been in surplus for the last few years. The trade deficit has been widening not because of an unusually poor export performance, but because the country’s net import bill has been rising from 17.1 billion dollar in 2002-03 to 25.4 billion dollar in 2003-04. This year, high oil prices would ensure that the figure is much higher.

However, these high net import figures have not posed a problem because of huge inflows on account of software and IT-enabled services (totalling 11.7 billion in 2003-04) and on account of private transfers or remittances, which stood at a staggering 18.9 billion last financial year.

SURPLUS IN THE CURRENT ACCOUNT

In the event, the current account on India’s balance of payments has been in surplus, leading to the second paradox. While a surplus on the current account implies that India did not require capital inflows to finance its balance of payments, such inflows stood at a net figure of 22.2 billion dollar in 2003-04, largely because of a huge 11.4 billion dollar of net portfolio flows. The result has been an embarrassment of riches, reflected in rising foreign exchange reserves.

These two paradoxes provide the background to assess the new trade policy released by the commerce minister. Clearly at the moment, earning foreign exchange to finance the current account is not what concerns the government. This has resulted in the view expressed by the minister that he is seeking to project exports as an “engine of growth”. “Exports, as many look at it, is not merely a dollar generating activity. It is an incremental economic activity,” he has said. This perception has been embodied in the objective that India needs to double its meagre share of world exports in the coming five years.

MEDIUM-TERM STRATEGY 

This emphasis on a medium-term strategy is positive, in as much as it implicitly recognises that India should not rely on potentially volatile financial flows on the capital account to meet its foreign exchange requirements. Unfortunately, the same emphasis does not appear to be reflected in the government’s policies with regard to financial flows themselves.

A second positive feature of the trade policy is that it seeks to realise a quantum jump in exports by emphasising merchandise exports. While seeking to build on India’s strengths through new concession for services exporters (including individuals) under the “Served from India” scheme, the policy statement pays much attention to the merchandise exports area. The questions that remain therefore are: What are the means being used by the government in its effort to boost merchandise exports? And which are the areas of focus when it comes to realising its goal of doubling India’s global export share?

DOUBLING THE SHARE OF MERCHANDISE EXPORTS

There are four ways in which the target of doubling the share of India’s merchandise exports in world trade is sought to be achieved.

The first is by adopting the attitude that we need not “export our taxes” and therefore should neutralise the disadvantage that domestic taxation of inputs creates for exporters through tax drawbacks or duty free imports.

The second is by adopting promotional policies such as provision of infrastructural support, revamping and revitalising the Board of Trade, launching special schemes in key export areas, etc.

The third is through strengthening the export processing zones and export-oriented unit schemes, which provide special concessions for specialised exporting units.

And the fourth is to provide economic incentives in the form of duty free import concessions, some of which are in the form of unrelated imports, to exporters.

DISCONCERTING FEATURES OF THE POLICY 

Most of these are a mere continuation or reiteration of pre-existing schemes. To the extent that they strengthen such schemes they are welcome. But there are a couple of features of the policy that are disconcerting. One is the use of access to duty free imports as a means of providing export incentives. This not merely reduces the net foreign exchange earning derived from exports, but can serve as the means through which even the dwindling protection for crucial sectors of Indian manufacturing can be further eroded with damaging consequences for domestic growth and employment.

It needs to be noted that with the liberalisation of imports and reduction of import duties, the strength of this incentive has been substantially eroded. Considering that such incentives did not help deliver export buoyancy even in the period when imports were strictly controlled, it is unlikely that Indian manufacturers would take to exporting because of the possibility of accessing duty free imports. To the extent they do they would focus on areas of import where duties are still relatively high to protect domestic industry, and the impact on domestic production would only be adverse.

The point to note is that liberalisation has increased the tendency among domestic producers to import freely without bothering about the foreign exchange implications. Thus the export policy should have included a component that seeks to discipline domestic producers to target global markets, in return for the access to imports they are being offered in any case. What the policy does is to say that access to imports would be even better if these firms contribute to export revenues. Even if, at the moment India’s foreign exchange situation is comfortable, the fundamental principle that those who absorb large amounts of foreign exchange from the national kitty have a responsibility to earn to some foreign exchange needs to be emphasised. That is, the issue is not to offer access to easy imports to those who export, but to ensure that those who resort to imports also earn some foreign exchange through exports. Unfortunately, by declaring that exports are now required more from the point of view of growth rather than the earning of foreign exchange, the trade policy statement has departed from this principle.

MISUSE OF IMPORT INCENTIVES

There is evidence that duty-free import incentives encourage foreign exchange profligacy. In fact, in the past some of these schemes, such as the export promotion capital goods scheme, which allows duty free or concessional duty-based imports of capital goods in return for a commitment to meet pre-specified targets with regard to exports over a certain time period, have been misused. The benefit of the scheme is availed off but the commitment is not met. Despite this the government has carried forward and strengthened the scheme in the new policy. Besides encouraging foreign exchange profligacy, this amounts to removing all protection for and threatening the viability of the domestic capital goods sector, which has played an important role in India’s industrial development.

In terms of sectoral priorities too the trade policy statement reflects some lack of innovativeness and an unwillingness to depart from past trends. There is still an overemphasis on traditional exports such as handloom, handicraft and gems and jewellery, to which flowers, fruits and vegetables have been added. It is time India focused on diversifying its exports much more into non-traditional areas of manufacturing, which is where world markets are expanding fast.

Moreover, there is some danger that export incentives are seen a substitute for the domestic support needed for sectors that have traditionally been an important source of livelihood for the poor. The emphasis on agriculture, handloom and handicrafts – all sectors faced with crises of one kind or another – suggests that this is a soft option that the government may be toying with. That is an option that cannot work and cannot be an alternative for dealing with these crises. The responsibility for earning foreign exchange through merchandise exports must rest with large, non-traditional manufacturing firms. And growth and buoyancy in the traditional sectors must be delivered through support in the domestic market. Unfortunately, the trade policy statement seems to have reversed these priorities. Whether this has been done consciously or unwittingly is, however, not clear as yet.