Ten Years Of Trade Reforms: The Control Virus Still At Play

Updated: Apr 6 2003, 05:30am hrs
We have come a long way since 1991-92. In many respects, therefore, commerce minister Arun Jaitleys task was easy, but even easy tasks have to be performed well and with aplomb. That is what Jaitley did on March 31 and hence he deserves our congratulations.

The government has remained true to the path of liberalisation and globalisation of the countrys trade. Merchandise exports should have crossed an important milestone on March 31 $50 billion which is approximately Rs 2,42,300 crore. This has been possible due to a robust growth rate of over 16 per cent during 2002-03, albeit the increase was over the zero per cent growth rate during 2001-02.

Jaitley has rightly set a target of $80 billion by 2007. If we achieve that level, we will cross another milestone, namely, a 1 per cent share of the global merchandise trade. This will require a sustained growth rate of 12 per cent over the next five years. It is an ambitious goal, but not impossible.

The stumbling block is the mindset. In 1991-92 when I announced the first liberal Export-Import Policy, we were faced with two formidable obstacles. The first was export pessimism that had become ingrained in the minds of our manufactures and producers. Time ended this disease. We told the industry to export or perish. The message got through more quickly than we had anticipated. The leaders saw the opportunity and readily adopted the mantra of export and prosper. We may envy the embarrassing riches of our exporters, but these are the persons who pulled the country out of an abyss and are largely responsible for our comfortable forex reserves of $75 billion.

The second problem was the control mentality in the bureaucracy. When DR Mehta first walked into my chamber in June 1991, I asked him tongue-in-check, Mr Mehta, I can understand why you are the chief controller of imports, but please tell me why you are also the chief controller of exports Mehta was stumped, but to his credit he went along with me (and Montek Ahluwalia and Ganesan) in tearing up the infamous Red Book.

I am afraid, time has not fully cured the control virus that is deeply embedded in the body of the bureaucracy. And if Jaitley wants evidence, he need not look farther than his own Exim policy.

In 1992, I promised that the exim policy will be reduced to a book containing no more than 100 pages of normal type written in simple, plain English language. I believe we kept the promise. Over the years, the policy book has become slimmer, and Jaitley has been able to contain the policy in 67 pages. My concerns are deeper.

Ten years after reforms began, we are still clinging to measures that were intended to be transitional. It is not the fault of Jaitley that the process has been slow; his fault is that he has not recognised or declared that these measures are purely transitional and that a time line would be drawn to phase them out. There was an opportunity last year when the five-year exim policy (2002-2007) was announced, but Maran, then commerce minister, failed to seize the opportunity. I had hoped that Jaitley would do so this year and make the necessary corrections at the end of the first year of the five-year policy.

Take, for example, the advance licences or the export promotion capital goods scheme. The raison detre of these schemes is the high customs duties and the need to rebate these duties for exporters. Hence, exporters are given an advance licence to import raw materials and consumables duty free, provided they accept export obligations and prove to be net forex earners. Likewise, in the case of the EPCG scheme, a manufacturer is allowed to import capital goods duty free, subject to his assuming an export obligation to be fulfilled over a fixed period. These schemes, although appearing to be non-discretionary, are still administered on a case-to-case basis. Besides, they are cumbersome and require monitoring (read administrative control and discretion) over a period of time. The root of the problem is the high customs duties.

The commerce ministry has no control over customs duties, and would like nothing better than removing such duties or keeping them at the bare minimum level. The finance ministry zealously guards customs duties because it thinks (wrongly) that the customs regime is intended to be a source of revenue. Manmohan Singh once explained to me why customs duties are a tax on exports, and why the developed world has low customs duties. The path forward in reforms is to set a time line for reducing customs duties. For example, the government should declare that, save in exceptional cases, by 2007, customs duties on capital goods will be 5 per cent, on raw materials and consumable 10 per cent and on finished goods 15 per cent. Once this is done, if the government wishes to rebate the customs duty for manufacturer-exporters, such rebate should be granted ex-ante as a straight and simple percentage of the foreign exchange earned through exports in the previous year. Let the exporter use the rebate to pay the customs duties in the current year. The cycle should repeat itself. In one stroke, advance licences, EPCG etc can be taken out of the exim policy.

There are other irritants in the policy which also ought to be phased out as quickly as possible. For example, the actual user condition. Another is the restriction on second-hand goods. The whole concept of deemed exports also needs to be revisited. It is not the business of government to tell business and industry what they should import, how they should use the imported goods and to whom they may sell or not sell. The price mechanism (and the comparative advantage of doing this or that) is usually sufficient to lead people to make intelligent choices. The government should not presume to impose its intelligence on the market.

The commerce minister must see himself as an evangelist. He should travel to the tea gardens of Assam, to the hosiery town of Tirupur, to the acquaculture farms of Kerala, to the coffee plantations in Coorg, to the gem factories in Rajasthan, and exhort people to export. Simultaneously, he should carry his battle into the North Block to reduce customs duties so that he can make a ten-page exim policy on March 31, 2007.