Kamal Nath and comparative advantage

Updated: Mar 23 2005, 05:30am hrs
In just over a week from now, the minister for commerce and industry, Kamal Nath, will announce his foreign trade policy for the coming fiscal. Since hes already announced the quinquennial trade policy for 2004-07, theres not very much new he can say or do. He can, of course, reiterate his commitment to doubling Indias share in global merchandise trade in the next five years...by unshackling controls...simplifying administrative procedures to reduce transaction cost... and so on. He can also try and explain why many of his gran-diose schemes have not taken off and why, for all his talk of simplifying administrative procedures, nothing much has changed at the grassroots level.

But he need not worry. Public opinion is unlikely to be harsh on him. For, despite the failure of his ministry to translate words into action on many fronts, exports have done quite well in the current fiscal. Latest figures show Indias exports touched $70 billion during the period April-February 2004-05, with February alone recording exports to the tune of $ 6.7 billion. It is not an exception. The five-year period, 1999-2004, saw exports grow at an average annual rate of 14.68%.

So will the minister take his cue from that, leave policy well alone and scrap this annual jamboree

Unlikely. Ministers do not give up so easily. Give them an opportunity to grab a moment in the sun and few can resist the temptation. So minister Kamal Nath too will, in all probability, use the occasion to tweak existing schemes announce new versions of the DEPB, EPCG and DFRC schemes, as also fresh packages for whatever are the latest thrust areas and so on.

Ironically, none of this is necessary. Over the past few years, the composition of Indias balance of payments has undergone a significant shift. Unlike earlier, when merchandise export was overwhelmingly the main foreign exchange earner, today gross earnings from invisibles (essentially software and private transfers or remittances from Indians working abroad) run almost neck-to-neck with export earnings (see table). In 2003-04, the last complete year for which figures are available, gross earnings from invisibles stood at almost $52 billion, just $11 billion short of merchandise export earnings of $63 billion.

The foreign trade policy focus on export of goods is a relic of the past
It ignores the sea change in our BoP, with invisibles growing by leaps and bounds
It must focus instead on trade facilitation & faster opening of world trade in services
Given the much faster growth of services vis--vis the manufacturing sector and Indias greater comparative advantage in services as compared to manufacturing, chances are final numbers for the current fiscal will show invisibles either on par with merchandise exports, or maybe even exceeding these.

Yet, in a speech of 29 paragraphs last year, the minister devoted only two to services. The rest was devoted to a multitude of schemes aimed at promoting merchandise exports.

Is he barking up the wrong tree Consider. Export sops cost the exchequer a good deal of money. Accord-ing to finance ministry estimates, revenue foregone on account of ex-port sops cost the exchequer as much as Rs 39,000 crore in 2003-04. Given that total customs duty collection during the year was a little over Rs 49,000 crore, this is a huge price to pay. For a country like India, is it worth sacrificing revenues of this order

NEW PARADIGM
TRADE IN GOODS
03-04 02-03 01-02
Exports 62,952 52,512 44,915
Imports 79,658 65,422 57,618
INVISIBLES
Receipts 51,939 43,373 36,690
Payments 26,514 26,326 23,205
Figures in $ million

More so when it is increasingly apparent that Indias comparative cost advantage lies in services rather than in goods. Despite our good export performance in the past two years, Indias ranking among top exporting countries in terms of merchandise exports has slipped from 30 to 31. In contrast, we rank a far more respectable number 20 in the world when it comes to export of services.

To be sure, there are goods like auto components where we seem to have an edge. But even in textiles, where we thought we had an advantage, post-MFA, China is beating the pants off us. Chinese shipments of cotton knitted trousers increased 1,300% till February 23, 2005.

If the case for a policy announcement tailored to promote export of goods is weak, the argument that we need a trade policy to help generate employment is not convincing, either. As production pro-cesses become automated on the one hand and the provision of services becomes less elitist on the other, old beliefs that manufacturing creates more jobs than services are increasingly under attack. How many of the kids earning four figure salaries in call centres, for instance, would qualify for a job in a Tisco or a Maruti Perhaps not one!

India is the largest recipient of inward remittances in the developing world. As lower skill categories get vacated for white collar and technical specialists and the Western world, faced with greying populations, allows freer movement of labour, such remittances will only increase. So why not put our energies in pushing for faster opening up of services trade, especially mode 4 (movement of natural persons)

Remember, the underlying rationale of all international trade is comparative cost advantage. So isnt it time minister Kamal Nath realised Indias comparative advantage lies in improving trade facilitation and pushing ahead with WTO negotiations, rather than in continuing with relics from the past like the FTP