The second support, namely, tax exemption for export profits, is failing to deliver. Faced with a domestic recession, manufacturers should have gone all out for exports in search of tax-free profits. But they are not doing so. It is time to ask, how right is the exchange-rate policy? The US dollar is currently quoted in the Rs 42.50-60 range, against Rs 36 about a year ago.

This may give the impression that the rupee has depreciated enough. The problem, however, is not only that currencies of East Asia and Pakistan have depreciated far more, but that the dollar has appreciated vis-a-vis major currencies.

Though the nominal depreciation of the rupee (from the Rs 36 per dollar level) is about 18 per cent, the real depreciation has been farless because the dollar has strengthened during the period. There is a fairly strong case for letting the rupee depreciate by a few percentage points.

But neither the finance minister nor the commerce minister is willing to take a hard look at the rupee. Policy remains committed to a stable rupee, which, in effect, has resulted in an overvalued currency. (Collections under the Resurgent India Bonds, slated to cross the $2-billion mark, will bloat foreign-currency reserves. This will only strengthen the rupee.)

Tax exemption of profits from exports is a great incentive, but it seems to have lost its effectiveness. This calls for a close look at the way 80 HHC works. It apportions profits between exports and domestic turnover. The formula for arriving at export profit is: total profit multiplied by export turnover; the result divided by total turnover.

Where the domestic profitability rate is higher than the export profitability rate, the formula apportions a part of domestic profit to export profit,which is tax-exempt. Thus, assume export profits are zero.

The formula deems a portion of the domestic profit to be export profit. This is done on the basis of the proportion of export turnover to the total turnover. The formula works wonderfully when domestic profitability is booming. It pays to increase exports even if export profits per se are modest. But with the recession in its fourth year, domestic profitability is under a squeeze.

Domestic profits cannot support burgeoning export volume. This is the reason why the current recession has not inspired manufacturers to look for markets abroad. Exports are, therefore, flagging. Where the export profitability is higher than domestic profitability, 80 HHC appropriates a part of the export profit and treats it as taxable domestic profit.

(Imagine domestic profits to be zero; a part of the export profits would then be deemed to be domestic profit on the basis of the proportion of domestic turnover to total turnover). In the prevailing recessionarysituation, 80 HHC willy-nilly acts as a deterrent to expo-rts. The trouble is that there is no way of correcting the working of 80 HHC. Segregation of profits from exports and domestic turnover would require detailed working of costs and margins. This will be slow and cumbersome in manufacturing units producing for both the home and export markets. But what the working of 80 HHC shows is that when the domestic economy booms, exports surge, and if the domestic growth flags, exports sag. Therefore, policy must focus on the revival of domestic growth. Is enough being done in this regard? It is generally accepted by business that public investment needs to be raised. The finance minister has increased budgetary support for public investment. This increase must translate into a rise in real investment quickly, and not frittered away on covering pay hikes of public-sector employees. There is also a strong case for deliberately increasing the monetised deficit to boost the budget support for real publicinvestment.

It is also necessary to give foreign direct investment a fillip not merely by making the Foreign Investment Promotion Board clearances free from conditionalities, but by also speeding up tariff reform in power (for example) and raising charges on infrastructure supplies.

Financial institutions are talking of aiding financial closures, but they must get their act together, fast. Perhaps, there is also a case for liberalising monetary policy to accomodate growth in real investment. Domestic growth is a must for reviving exports. But export growth, too, can give a fillip to domestic growth. A fresh dose of depreciation of the rupee will help. But more will need to be done to make the export multiplier significant. The policy-maker must find out why exporters are not pushing up exports, or why some of them have lost interest in exporting. What is required is a hard-headed approach to fundamentals, not cliched sops to uncompetitive exporters.