Free the trade policy from trivia

The foreign trade policy for the coming year should have been announced before March 31, but has been postponed, reportedly due to differences between the commerce and finance ministries. It now awaits the arbitration of the Prime Minister. Ex-porters, who would like to see continuation of benefits and, perhaps, some further concessions that would make exporting more profitable, eagerly await this policy.

The policy goes back to the days of licensed growth, high tariffs and exchange control restrictions. The chief controller of imports and exports was a powerful figure: he would decide the incentives for exporters, the concessions for importers and, thus, alter the terms of trade. With the withering away of licensing and quota regimes, the director-general of foreign trade has been concerned with WTO compliance in the form of export incentives to neutralise the effect of local taxes on imports. Of the prevailing schemes, the most important are the Duty Drawback, through which exporters can claim the incidence of taxes paid on exported goods and the DEPB scheme, that provides for credit for inputs, whether indigenous or imported. There are also special windows in the Income Tax Act for export-oriented units, export processing zones, and for IT and software. Of late, there has been much talk (though little action) on special economic zones.

Over the years, the external environment has also changed. Most notably, foreign exchange is no longer a scarce commodity. Tariffs have come down and quantitative restrictions on imports have gone. Most important, industry has geared itself to meet competition and to take on the imports of alternatives. Finally, there is no flood of foreign capital wanting to set up manufacturing in India, a clear sign that the local industry enjoys ?protection? in the form of difficulties of setting up, running and exiting business in India. The export industry, therefore, is vibrant and growing.

It is also clear that some of the schemes, most notably DEPB, are not WTO-compliant and need to be changed. This is because the DEPB scheme provides reimbursement for deemed taxes, and not actual taxes in-curred, and there are several inst-ances where imp-orting countries imposed countervailing duties on the imports against these export incentives. This does not bother exporters, as the revenue loss is to the government and the income gain to themselves. There is also considerable confusion in the Duty Drawback scheme, where yet another committee has been set up to look at entitlements.

Is all this necessary? Now that customs duties are lower and excise duties standardised, it should be simple to determine the amount of duty suffered by each product and to compensate for it. Why is it necessary to articulate a list year after year, to tinker with numbers and to provide for flexible interpretations? If the policy expects that exports would grow only at the expense of government revenues and subsidies to exporters, it is obvious these exports would not be sustainable against global competition. It is important that foreign trade policy not be perceived as another instrument of patronage, of lobbying groups succeeding in their individual agenda and the commerce ministry as dispenser of this patronage.

There are other meaningful activities for the policy makers. The first is to make trade move faster. This is a system of linked activities, including ban- king, infrastructure, port handling and the host of logistics to take the product to the market. There is need for holistic solutions and for different sectoral minist- ries to work together.

Second, this is an opportunity to examine the barriers to trade, including non-tariff barriers that face our exporters. Almost 25% of all exports to the US face barriers in one form or another. There are several phyto-sanitary barriers to the export of agricultural products. For example, while there is external demand for our honey, we are not able to meet the standards for medicinal residues. Corrections require changes in farming and processing techniques. There are several problems that industry faces, but the trouble is that a long-term solution interests nobody, as it takes too much effort and time.

Third, do we have a vision? China considered special economic zones as an opportunity for creating employment, bringing in FDI and absorbing technology. It targeted the best of the multinationals in this venture. Twenty years later, its workforce is skilled, technology absorbed; it is ready to walk away from these zones. Do we have a goal and a purpose in the zones being created here? Who is pursuing that goal?

Robert Blackwill, the former US ambassador to India, articulated a trade vision at a CII meeting in Delhi last week. ?The US should integrate India into the evolving global non-proliferation regime, as a friendly nuclear-weapons state,? he said, ?We should also enter into a long-term programme of space cooperation.? He suggested the US develop hi-tech trade with India. Such a strategic partnership would move the technology of manufacturing pro-cesses forward in this country.

Finally, the advantages and disadvantages of FTAs must be examined. It is evident that benefits of the India-Thai FTA have, so far, been heavily skewed in favour of Thailand. The Singapore FTA and the Mauritius FTA are likely to be the same. Interestingly, all FTAs entered into by India have resulted in improving the balance-of-trade in favour of the FTA partner. There must be transparency about benefits to India, and these should be evaluated periodically to determine whether they are real. There?s a lot to be done. And no time to waste on trivia that the trade policy annually addresses.

The writer is a former finance secretary and economic advisor to the PM