New Delhi: Managing inflation, not promoting trade, was the main theme of the annual trade policy announced by India’s commerce and industry minister Kamal Nath on Friday.
Thus, it dealt more with reducing input costs than addressing structural constraints such as high transaction costs that hurt trade. It also offered sops and incentives to revive exports, currently at the lowest level in four years. Still, inflation, now at a three-year high of 7.41% was the central theme of the policy. Accordingly, it added cement to the list of banned products, which already includes non-basmati rice, pulses and edible oils. And it withdrew incentives on export of primary steel items.
To address the structural problems, the minister announced a joint task force comprising representatives from the Union government, state governments, panchayati raj institutions, industry and exporters, that would draw up an action plan in six months.
Nath also set an ambitious export growth target of $200 billion (Rs8 trillion) for 2008-09. Measured in rupee terms (this will factor out the impact of the appreciation in the domestic currency against the dollar), the commerce ministry has projected a growth of 30%, compared with the 9% in 2007-08—even as expectations of a sharp slowdown in global growth gather momentum.
The US, India’s largest trade partner is already in recession.
The minister maintained that India would account for 5% of world trade by 2020, implicitly arguing that the country’s exports would grow at an average of 25% for the next 12 years. “In practical terms, this means a fourfold increase in our percentage share in the next 12 years. Considering that world trade is itself increasing, this would translate into an eightfold increase in absolute terms,” said Nath.
A senior commerce ministry official, who did not wish to be identified, said the government has assumed an exchange rate of Rs40 per dollar in its estimates.
“Based on this assumption, the ministry has concluded exporters are unlikely to face any erosion of competitiveness caused by appreciating rupee as was the case last year. In addition, tinkering in the policy, such as interest on delayed refunds, would improve the environment in which exporters operate,” the official added.
The sops in the policy include extension of the duty entitlement pass book (which compensates exporters on all Central levies on inputs) till May next year, reduced cost of capital goods imports for exporters (duty will now be 3% not 5%); and continued income-tax exemption for 100% export-oriented units.
“Meeting the target may not be so difficult, especially if the prices of certain imported inputs continue to rise. Just like the increase in the prices of gold, crude oil and steel in 2007-08 led to the increase in the export, in value terms, of gems and jewellery, petroleum products, and engineering goods, respectively. So, overall growth could be there, but employment generating sectors like textiles will not show growth,” said G.K. Gupta, president, Federation of Indian Export Organisations (Fieo).
Between April and December in 2007-08, these three sectors (gems and jewellery, petroleum products and engineering goods) together accounted for nearly one-third of India’s exports. Some experts say that in a strange way, an appreciating rupee may even help India reach the target set out by Nath.
“Given the high import intensity of certain key sectors like gems and jewellery, petroleum products and engineering goods, rupee appreciation may help reaching the $200 billion target in terms of value,” said Ram Upendra Das, fellow, Research and Information System for Developing Countries, a government body.
Ahead of the policy there was an expectation that it would include more measures to reduce the high transaction costs and a long-term plan to resolve infrastructure bottlenecks, especially in India’s already overcrowded ports. All the more since export growth of employment-intensive sectors such as textiles have been seeing a steady decline in the last three years largely because they have become less price competitive. The 7.31% appreciation in the rupee in 2007-08 only aggravated this problem.
While the policy announced incentives for exports of toys and sports goods, and certain vegetables and flowers, it held nothing for the flagging sectors of textiles, leather and marine products.
Das said that since the government was only announcing an annual supplement and not a full-fledged policy, no one should be surprised at the short-term orientation of the measures.
“Our exports, especially in the traditional one, are loaded with state levies, which are not refunded. As a result, their price is higher. The policy did not address the issue,” said Sanjeev Saran, chairman, Synthetic and Rayon Textiles Export promotion Council.
“In my opinion there was no (significant) measure that’s been announced,” said Rakesh Shah, chairman, Engineering Export Promotion Council.
With the global slowdown affecting demand from many of India’s traditional export markets, especially the US, it was also expected that the government would generously expand the focus market scheme, or FMS, and focus product scheme, or FPS, which allow concessions to exports to certain countries and of certain products. The policy included 10 more countries under FMS, which presently has 57 countries, while it retained FPS at the existing 103 products.
“More countries could be have been brought under FMS from Africa considering that economic survey points at Africa as an area of major growth and we are looking at doubling our trade with Africa,” said Ajay Sahai, director general of Fieo. He added that the policy wasn’t disappointing. “Not much was expected since this was the last year of the policy. From that standpoint, whatever has been done is commendable,” Sahai said.