Despite the hype, foreign-trade policy statements such as the one announced on Thursday are quite meaningless. Export competitiveness has clearly more to do with macro management of the economy than an annual tinkering with schemes and concessions for exporters. Indian exporters are today likely to be more concerned about the appreciating rupee than the latest sop thrown to them by the commerce ministry. The same goes for constraints such as port capacity or power supply. Once these are in place, it is up to industry to seize opportunities in the global market.
Ideally, the five-year trade policy of 2004-05 should have been enough to spell out the policy framework. If there is a need for changes in this five-year policy, there is no need to wait for an annual event. Periodic hyped-up announcements only place exporters in a phase of uncertainty that builds up over many months.
Just two examples of the latest statement suffice: First, the trade policy pushes directed lending targets for the small and medium industry. But the approach simply does not deliver, since the state-owned banks are still averse to providing credit to this segment, which they either perceive to be risky or cost-ineffective clients. The real answer lies in opening up the banking sector to global competition, and even small industry associations would hold this view.
Second, it extends the DEPB (duty entitlement passbook) scheme once again, as expected. Exporters may be relieved but this scheme has been the subject of much debate over the past couple of years for its World Trade Organization (WTO)-incompatible elements. A replacement was being considered, but typically, bureaucratic hurdles and lack of consensus came in the way.
Ad hoc and interim solutions are not the answer; policy clarity and consistency are. Besides, the underlying problem does not ease. This scheme gives tax credit to exporters for a few central taxes, mainly customs and excise. But they still face a bunch of other taxes, especially at the state level. We have not been able to make matters simple for those doing business in the country, particularly the small business segment that the trade policy keeps referring to as a critical source of Indian exports.
It is the complexity in our tax regime at the central and state levels that creates the ‘rationale’ for concessions in various duties imposed. The answer lies in speeding up the WTO-compliant integrated goods and services tax (GST), which will cover all indirect taxes where the exporters get credit for these automatically.
Now, recall the policy’s special emphasis on employment-creating exports. Then look at the textile sector. Despite special incentive schemes, India’s textile sector has not been able to take advantage of the opportunity that came its way after the international quota regime in textiles and clothing (the Multi Fibre Arrangement) ended in 2005. It’s worth asking why.
Apart from the need for an enabling business environment, the immediate concern among exporters is the relentless rise of the rupee, which could make some exports uncompetitive. The Reserve Bank of India (RBI) seems to have decided to use a strong rupee as part of its inflation-management strategy. In the absence of central-bank intervention, the rupee will rise and fall in tandem with capital inflows. That’s fine. But exporters will need to protect their earnings by hedging their foreign-exchange exposures. For that, we need a deeper forex market and a variety of forward and option contracts. These immediate and practical issues need to be addressed. Homilies on “export promotion” are merely vestiges of mercantilism.
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