The foreign trade policy announced on Friday by commerce minister Kamal Nath did not come as a surprise. In fact, in my previous column (on Friday), I had mentioned that recurring government intervention in fine-tuning policy often results in rent seeking behaviour in the short term, with the sops given away unlikely to yield any long-term benefits.
The announcement, along expected lines, incorporates a number of sops for exporters. Thus, the duty entitlement pass book (DEPB) scheme has been extended till 2009, almost all services related to exports are proposed to be exempted from service tax, and the export promotion capital good (EPCG) scheme has been further liberalized, with the custom duty payable being reduced from 5% to 3%. In addition, sector-specific initiatives have been announced for IT, toys and sports goods, and floriculture. And to combat the effect of rupee appreciation, the scheme of interest subvention has been extended by one more year.
Apart from these expected concessions, the commerce minister struck a note of optimism in evaluating India’s trade performance over the last four years. Trade has more than doubled during this period and India’s trade of roughly $400 billion (Rs16 trillion) today represents about 35% of our GDP. And if services are included, then India’s engagement with the world economy would constitute 50% of our GDP. This is truly remarkable and worthy of praise. This is where I agree with the commerce minister.
Where I do not agree is his evaluation of trade having resulted in substantial employment generation. According to the commerce ministry, an estimated 13.6 million new jobs were created as a result of enhanced trade (export) activity. This estimate would naturally include jobs envisaged to have been created as a result of increased service sector activities outsourced to India (the so-called Mode I trade in WTO parlance).
In a celebrated article written in 1996, eminent economist Paul Krugman compellingly argues that export promotion is unlikely to increase the total number of jobs in an economy. Krugman says, “When the US secretary of commerce returns from a trip abroad with billions of dollars in new orders for US companies, he may or may not be instrumental in creating thousands of export related jobs. If he is, he is also instrumental in destroying roughly equal number of jobs elsewhere in the economy. The ability of the US economy to increase exports has nothing to do with its success in creating jobs.” Critics would scoff at the applicability of such a phenomena for India and rightly so, given the levels of unemployment. But given the shortage we have been witnessing in skilled labour (presumably the target of exporters), it is highly unlikely that heightened exports from India would have netted 13.6 million new jobs.
While exports may not create jobs of the order of magnitude suggested, where the commerce minister’s optimism is somewhat warranted is in expecting India to improve on its successes of the last four years to achieve a 5% share of world trade (inclusive of services) by the year 2020. Even the commerce minister feels this target is ambitious, but if we were to set our infrastructure in order, improve trade facilitation and get a favourable rub of the WTO green, I think it is possible. The clincher will, of course, be services trade where India enjoys a significant competitive advantage.
An interesting new feature of the Exim Policy tucked away in the annual supplement (2008-09) is the creation of a new export council for the telecom sector. This is indeed good news for two reasons; one for the recognition that telecom sector in India has ‘arrived’, and two, that services, in general, and telecom, in particular, could lead the next surge in exports. One hopes, however, that the council performs a facilitation rather than an interventionist role.
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