Govt hasnt made any attempt to counter the fall in global demand

Written by Sebastian Morris | Updated: Aug 28 2009, 05:37am hrs
The announcements made by commerce minister Anand Sharma in the Foreign Trade Policy for 2009-14 are most disappointing. When world trade demand has shrunk by over 9%, a restatement of developmental efforts that have been going on, very marginal and routine things like promise to reduce transactions costs were the only elements. There is no strategy, no big push and certainly nothing to attempt to counter the fall in world demand.

The credit initiatives, tax benefits, 15% enhancement of incentive rates in the advanced authorisation are hardly adequate to address the problem of sinking exports. Similarly, the announcement of trade agreements with the Asean, Korea and other countries are part of the developmental process of Indias trade relations and has nothing to do with addressing the present near emergency situation.

This was the time the government could have straightened the tax regime by moving completely to zero vatting of exports of all taxes both central and state, casting the same on a cash basis. It could have put in place an additional scheme to compensate exporters for the high-energy prices (administered) in the country on account of especially electricity.

It could have forced the power ministry to rework all cross subsidy charges as taxes that could then have been vattable. It could have announced a credit support at rates that match the credit supplied by China, Japan to Indias project and capital goods exports. It could also have announced major bilateral credit support to countries in Africa and elsewhere at zero rates for purchases made this year and the next, and built into the policy the commitment to match the credit terms of the governments of competing countries notably of China, Taiwan and Japan.

Similarly, it could have announced very long duration rupee credit loans at near zero interest to many countries, not necessarily Third World, from whom there are purchases, especially of raw materials by India. Defence purchase offsets being directed to purchases from India is another measure that could have been announced in coordination with the defence ministry.

But perhaps the biggest option to really perk up Indias exports lie outside the government. What the minister did not mention is the huge trade deficit of more than 10% of GDP before the crisis, resulting from the adverse exchange rate and monetary approach of the Reserve Bank. This is in contrast to the huge surplus of the order of 6% of GDP on trade in China due to the more relevant interest rate targeting by the Chinese central bank.

Even when exports grew at over 17% in the four years before the crisis, Indian exporters had lower returns on exports as compared to domestic sales. China now has had the reverse situation ever since 1982. The RBI of course is bent on magnifying the Dutch disease on Indian exports caused by the absolute advantage that we have in software and the large remittances that we receive owing to labour flight.

The writer is professor, Indian Institute of Management -Ahmedabad