New Delhi: Further easing of foreign trade norms and incentives to explore new markets are expected to be the cornerstones of India’s foreign trade policy for 2008-09, to be released on Friday.
The policy announcement comes at a time when export growth has slowed to its lowest levels in four years due to a rising rupee and a global economic slowdown.
The government has already announced a series of measures to offset the impact of a rising rupee, which has particularly affected sectors such as textiles that are labour intensive and, thus, cause a much larger socio-economic impact.
Experts say there is only so much that fiscal sops can do to revive export growth. Instead, the solution, they say, is to address structural problems in the economy, particularly in terms of poor infrastructure and unwieldy bureaucratic norms. Therefore, expectations that the foreign trade policy would provide a short-term fix may be misplaced.
The foreign trade policy is a five-year perspective document updated every year.
“The steep appreciation in the rupee was certainly unexpected. It’s correct that the traditional and the labour-intensive sectors have taken a hit. That’s why from June onwards, the ministry of commerce has been pushing for these sectors to be given some relief so that they remain globally competitive,” said a commerce ministry official, who did not wish to be identified.
Ironically, the rupee’s growing strength exposed the structural weaknesses afflicting the export sector and which the new foreign trade policy is expected to address.
“Transaction costs in India are one of the highest in the world. Moreover, infrastructure is a huge drag. Be it roads or ports, we are totally out of shape,” said Biswajit Dhar, a professor at the Indian Institute of Foreign Trade (IIFT).
Transactions costs include additional expenses for Indian exporters due to cumbersome trade procedures, inadequate logistics and time delays.
Dhar believes that with 70% of India’s trade denominated in dollars, Indian exports have been disproportionately affected by the rising rupee. “In the short term, there is little that anyone can do in the face of a sharp appreciation (of the rupee) apart from giving relief. However, the government should make structural changes by finding new regions like Africa to export, boost infrastructure dedicated for exports, and bring down the overall transaction costs in order to restore India’s competitiveness,” said Dhar.
The commerce ministry official conceded that the government’s focus so far has been only on fiscal sops. The official said that while the commerce ministry lays out the trade policy, the problems of exporters are not well appreciated by other departments.
“Commerce is the front end for exports. But exports depend upon good roads, good ports, customs trade facilitation, railways, regular and cheap power availability, and so on. Now, exporters in our country are already disadvantaged due to high transaction costs and so the relief (in terms of fiscal sops) they ask for is really to compensate for the structural inefficiencies and higher costs,” said the official.
Throughout the fiscal ended 31 March, the Centre tried giving relief to exports, including raising exemption rates under the duty entitlement pass book and drawback schemes (through which exporters are refunded all Central levies paid on their inputs), and reducing interest rates applicable on export credit.
“Moreover, as manufacturing growth showed some deceleration, RBI (Reserve Bank of India) has intervened in the last two months (February and March) and as a result, the rupee depreciated,” said the commerce ministry official.
When the foreign trade policy for 2004-09 was announced by the United Progressive Alliance government in August 2004, it set out two objectives: to double the level of exports from $63.8 billion (Rs2.6 trillion today) in 2003-04 to $127 billion by 2008-09, and to use global trade as an instrument to generate employment.
India’s exports, estimated at $155 billion in 2007-08, have grown by almost two-and-a- half times the 2003-04 levels, and a total of 13.6 million jobs have been added, according to the official.
But a closer look at the data suggests that in the last three fiscal years, and especially in 2007-08, the policy may have failed to anticipate the extent of rupee appreciation as well as its impact on Indian exports. Also, estimating the value in dollar terms without correcting for the rise of the rupee may be overstating the growth.
For 2007-08, the government had set an export target of $160 billion. But with a 7.32% rise in the rupee against the dollar and the 7.21% appreciation in the real effective exchange rate (that adjusts the nominal rate with inflation) in 2007-08, the government estimates actual exports to be only $155 billion.
However, while setting the target last year, the policy expected the exchange rate to be Rs42 to a dollar, while it has actually averaged Rs40.24 in 2007-08. It means that in rupee terms, Indian exports at Rs6.2 trillion have fallen short of the target by Rs50 crore.
The fact that between April 2007 and February 2008 exports grew by 8.94% in rupee terms against 22.9% in dollar terms reflects the real impact of the rising rupee on exports.
“The over 20% growth in dollar terms was masking the poor growth in rupee terms. The government is already on record that around two million jobs have been lost as a result of appreciation,” said the commerce ministry official.
Experts also maintain that export performance has got a boost because of a jump in the export of petroleum products. The share of petroleum exports has risen from 11.22% to 17.35% over the last three fiscal years, according to the department of commerce. In the last year, crude oil prices have topped $100 a barrel. This has meant that earnings from exports of petroleum products have risen commensurately.
“The higher value of oil exports contributes heavily towards meeting the overall target of $160 billion, but it hides the fact that we have performed poorly in actual volume terms,” said Ajay Sahai, director general, Federation of Indian Export Organisations.
Both Sahai and IIFT’s Dhar believe the rupee will continue to appreciate.
“It could touch Rs37 per dollar as early as November this year. I think the government should scale down its target for 2008-09 from $200 billion to $175 billion,” said Sahai.
But the commerce ministry official said that though it was true that an exchange rate of Rs37 per dollar would hit exports, the government will not allow it to happen.
“We will set a target higher than $200 billion and also come up with a long-term strategy for exports,” said the official.