Clearly, An EXIM Policy That’s More About EX Than IM

Font Size

Print

Feedback

Email

Discuss

: In January, we had the Medium-Term Export Strategy for 2002-07. Yesterday we got the Medium-Term Policy. According to the former, India’s share in world exports will increase from 0.67% to 1%, up from $46 billion to more than $80 billion. What does it take to accomplish this 11.9% annual rate of growth in exports in dollar terms? That is what the 2002-07 Exim (export import) policy was supposed to spell out.

At a conceptual level, three sets of factors influence export growth — supply-side, demand-side and the exchange rate. The track record of export growth in the 1990s was the best ever since 1947. In half of those years, exports grew by more than 15% in dollar terms.

Most supply-side constraints require domestic reforms, which have not only been tardy, these constraints also explain high transaction costs associated with exporting, variously estimated to be between 15% and 20% of export price. Since reforms have been tardy, the 1990s export growth is largely explained by rupee depreciation, buoyant demand and decline in import protection, tariffs as well as QRs (quantitative restrictions).

Why do we need a policy specifically for exports and imports? There is not much to be said on imports. Article XVIIIB type QRs on imports disappeared last year. Article XX and XXI type QRs remain, covering around 600 items. If anything, last year’s Exim policy was extremely defensive about QR elimination — war room for 300 sensitive items, non-tariff barriers (NTBs) and stuff like that. Since imports haven’t exploded, this year’s Exim policy is far less defensive.

Import duties are the province of finance ministry and we have a time frame of peak basic customs duty of 20% on industrial products in three years, with a slab of 10% for raw materials and intermediates. However, the policy does mention 0% duty on rough diamonds, spliced with end of import licensing on roughs. And barring some canalisation, QRs on exports of agro products have gone. While on imports, one should, however, mention the adoption of the 8-digit harmonised system. This will not just reduce disputes, as the speech highlights, it will also enable hikes in disaggregated import duties, since India’s WTO bound commitments are usually at the 4-digit level.

The main focus in this year’s policy should have been on cleaning up export incentives/subsidies. Export incentives are WTO compatible. Export subsidies are not, although for most products, India is below the threshold of export competitiveness of 3.25% world market share and the prohibition on export subsidies doesn’t apply to India. However, given the non-transparent indirect tax structure, legitimate export incentives can be interpreted as export subsidies and become actionable by trading partners. The DEPB scheme is a case in point. Had VAT been introduced from April 1, 2002, as was originally intended, perhaps the cleaning up would have happened. But with VAT postponed till next year, the mess also continues.

So what does the policy do? With general liberalisation, Exim policy becomes irrelevant. But since general liberalisation runs into the usual political economy problems, the policy continues to harp on the selective sectoral approach. Harp on 20 agri export zones and regional rural motors.

Agriculture and agricultural reforms are indeed important. But honestly, does the government have any business to decide whether pineapples should be grown in West Bengal and gherkins in Karnataka? However, since genuine agricultural reforms have got stuck thanks to the states, perhaps one can selectively develop transport and other infrastructure. Harp on the cottage sector and handicrafts. Give them funds from the Market Access Initiative (MAI). Relax EPCG and Export House norms for these. With import duties declining, how relevant is the EPCG? And what incrementa incentive does one obtain from Export House status? Ditto such schemes for Khurja, Tirupur, Panipat and Ludhiana. Harp on gems and jewellery and reduce value addition norms for jewellery.

Why do we need value addition norms at all? Harp on Special Economic Zones (SEZs). Give them IT concessions (details not yet known), greater capital account convertibility and relaxation from CRR and SLR norms. Is the SLR relevant any more? Obviously, one can’t have easier labour laws for SEZs, although the speech does mention differential treatment for EOUs. SEZs can indeed be magnet and glue, but the idea is perhaps 20 years too late. Harp on Assistance to States for Infrastructural Development for Exports (ASIDE). Do we have reliable figures on exports according to states? Harp on Electronic Hardware Technology Parks (EHTPs). Harp on the critical mass of small and medium enterprises (SMEs).

The Medium Term Export Strategy reflected this selective approach, identifying 106 items on the basis of comparative advantage. What historical comparative advantage implies is anyone’s guess. And having identified 106 items, what do you do with them? Special fiscal incentives are no longer possible. Operationally, what does focusing on Latin America (last year), Africa (this year) or CIS (next year) mean? Link this with MAI and ASIDE?