The foreign trade policy, to be released by Union commerce and industry minister Kamal Nath today, will in all probability bow to industry pressure in trying to curtail the adverse impact of cost increases and the rupee’s appreciation on Indian exports. The policy will be released at a time when the growth forecast for India has been pegged back at 7.9% for 2008-09 and inflation, which is hovering at around 7%, is threatening to erode some of the benefits of high growth. Given the pessimism surrounding the economy, reinforced by sluggishness of stock market indices, the ministry will want to inject some much-needed cheer into the markets.
But let us remember this is a foreign trade policy and not an instrument to address troubles of the economy in general. True, India’s share of trade in GDP has increased to an all-time high of 35 %, but rising prices and the rupee’s appreciation are outside the domain of the Union commerce ministry. To offset their adverse impact, however, sops are likely to be given to exporters in the form of extension of duty-free entitlement passbook (DEPB) scheme till 2010 and a higher entitlement under this, and another extension in the deadline to shift to the goods and services tax (GST). The objective of DEPB scheme is to neutralize the incidence of basic customs duty on the import content of the exported products. Other export promotion schemes such as export promotion capital goods (EPCG) and duty-free import authorization (DFIA) are likely to continue. All measures introduced or extended will, of course, need to be WTO-consistent.
Let’s look at the export figures. Data that has just been released shows that while exports will fall short of the targeted $160 billion (Rs6.4 trillion) set last year, their growth is likely to be in excess of 20%, despite the strengthening of the rupee. One estimate puts the rupee’s appreciation over last year at around 11%. Commerce ministry data shows that sectors with higher import content such as petroleum products, gems and jewellery, pharmaceuticals and chemicals, and agriculture, etc. have provided the momentum for export growth. The overall impact of the rupee appreciation on these sectors is ambiguous, since the rupee’s appreciation lowers import prices. Granted, the real benefit in terms of exports will come?from?sectors such?as?textiles, handicrafts and leather where import content is lower or negligible, but these sectors suffer from structural problems the foreign trade policy is not equipped to address. For example, textile players want state levies that vary between 6-7% of overall exports to be removed or reduced. They also demand lower power costs and relaxation in labour regulations so they don’t have to bear the burden of the labour force during off season. All of this is outside the ambit of the commerce ministry. The largest share of India’s export basket comes from export of engineering goods, which have been affected by high steel prices. Already warnings to steel (and cement) producers not to raise prices have been issued by the government to ease the impact on exporters.
In the context of the overall trade policy, the ministry’s stated objective is not trade itself, but a strategic channel to achieve high economic growth and national development. Tinkering (or fine-tuning!) annually with a host of schemes such as DEPB, EPCG, DFIA, etc., that are driven by lobbies will provide short-term relief, but are unlikely to address the underlying problem of lack of competitiveness. We know that concessions or ‘distortions’ once introduced are difficult to withdraw and such knee-jerk reactions do nothing in the long term.
Significantly, one forecast for the Indian rupee estimates it to appreciate further by the end of the year to Rs38, which, in turn, will persuade exporters to lobby for more concessions next time around. I recall a statement made by finance minister P. Chidambaram in November 2007: “We should learn to trade in an environment where the rupee will strengthen.” The message is profound, trade policy should not be used as an instrument to ‘counter’ adverse shocks to exporters on 31 March every year. If it does, policymaking is an art no more, it gets reduced to an annual exercise in discretionary allocation of benefits.
Rajat Kathuria is currently a professor of economics at the International Management Institute, New Delhi. He specializes in regulation and competition policy and can be reached at email@example.com