Column: What trade policy fails to account for account for

Written by Amitendu Palit | Updated: Aug 28 2009, 07:10am hrs
Indias trade policies usually overlook a critical aspect of exports. They fail to realise that constraints affecting exports are more internal than external. The current policy is not an exception.

What are the internal constraints facing exporters Many presume that these are confined to access to credit. However, credit is only a part of the exporters woes. Manufacturer exporters are affected by all constraints that impact overall manufacturing production. These include erratic supply of raw materials, particularly the imported inputs and intermediates and poor infrastructure.

In recent years, imported input prices have fluctuated sharply. Such fluctuations prevent rational assessment of costs. Exporters suffer from this problem more than others. Since they rely on trade credits for financing production, improper costing impedes assessment of credit requirements as well. However, national trade policies hardly address these difficulties. They also avoid infrastructure bottlenecks such as irregular electricity supplies that upset production schedules and increase costs.

Access to creditboth pre and post-shipmentremains an issue. Liberal credit terms are the need of the hour. Again, national trade policies do not address credit requirements since they are left to the purview of the RBI. While these are domestic supply-side difficulties, external problems pertain to the demand-side. In the context of the current trade policy, external demand is hardly a source of inspiration. However, optimistic news about global recovery suggests that export demand will recover in the medium term.

The policy envisages an export target of $200 billion by 2010-11. A recovery in demand might see this happening fairly easily. But the critical assumptions pertain to years thereafterexport of goods and services are to double by 2014. Furthermore, Indias share in global trade is expected to increase from its current level of 1.5 per cent to 3.0 per cent by 2020.

All these are laudable objectives. But how will they happen Growth in exports is a function of competitiveness and barriers to market access. Resolution of the second depends on successful negotiations. The issue, again, has not been squarely addressed by the trade policy.

What about competitiveness Higher competitiveness implies lowering costs without sacrificing quality. Access to imported inputs at cheap rates can partially help. Resolution of other domestic constraints can also make major differences. These include bringing down transportation and storage costs. But these are perhaps too micro to be considered within the framework of a macro trade policy!

Theres another key aspect to competitiveness whose omission from the policy is rather baffling. Which are the products that will dominate Indias export growth in the years to come It does not make much sense to hang on to the traditional sectorsleather, textiles, handicrafts and the likeand expect them to perform miracles. It is important to identify products that have comparative advantages vis--vis competitors in different markets.

Comparative advantage of Indias exports will vary between markets and products. Unless these facts and details are clearly ascertained, there is little point in introducing sector-specific measures.

Refined petroleum product exports have been increasing at a rapid pace in recent times. They wouldnt have grown the way they have unless they were competitive in global markets. But are there any conscious efforts to encourage these exports The policy doesnt appear to suggest so. Similarly, are there efforts to encourage export of products where India has got fresh market access through regional agreements It is incorrect to assume that simple grant of access will automatically increase absorption of exports. With Indias competitors also enjoying similar access, competitiveness holds the key to market penetration. And competitiveness can improve through closer analysis and reduction of operation costs. Most of the internal constraints are oft-repeated and discussed. Better facilities and capacities will lower transaction costs. Certain generic improvements such as upgraded export infrastructure will help all product lines. Costs can also reduce through better alignment of national trade documentation practices with those of partner countries. This will help in wider use of bilateral trade pacts, some of which are avoided due to high usage costs.

But lowering transaction costs, again, is probably pass in an atmosphere of sops and subsidies. So export growth remains more a function of hope than economic parameters.

The author is a visiting research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views