Extend capacities, not subsidies

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: Stop-gap measures such as subsidies and exchange rate management to enhance the marketability of exports, without addressing core issues of efficiency and competitiveness cannot be used repeatedly—medicine that suppresses the symptoms of the disease, without targeting its root cause can ruin the health of the system in the long run.

Unfortunately, despite the rapid economic strides made by India, especially with regard to international transactions, its export management policy has often tended to be ad hoc—the emphasis has more often been on superficial tinkering with macroeconomic parameters such as the exchange rate and disbursals such as subsidies, rather than on permanent measures to shore up the supply side.

Instead of ringing in changes in infrastructure design and regulation, human capital formation and trade facilitation, which can make our exporters more cost-competitive in the international market, the emphasis has been on enabling producers/exporters to meet high costs through subsidies and costly sterilisation of dollar purchases.

Moreover, export management that solely relies on such channels leads to recurring and increasing expenditures, and deepening fiscal imbalances. The increasing incidence of shocks emanating from the world economy makes the use of such an approach to export management more difficult as each crisis calls for a fresh dose of the mentioned expenditures. In short, while the adverse impact of such an approach on the economy’s fiscal health is already noticeable, such effects might assume a far more serious magnitude in years to come.

Therefore, it’s high time that there is a shift in focus towards long-term capacity building, which in turn leads to a permanent increase in efficiency and help the exporters to compete effectively in the international market, without relying too much on the crutch of government’s fiscal support.

One major reason that results in inflated production costs for exporters is poor infrastructure. High power and transport costs—important inputs into the production and distribution activity of exporters—are major contributors to their incompetence. Such costs can easily be reduced through a combination of political will, civil society activism and sensible reforms.

Reforms that help reduce tariffs in the power sector and increase the magnitude of power generation & distribution are urgently required. Elimination of distortions such as subsidy of household power consumption through inflated industrial tariffs is also the need of the hour.