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Business News/ Opinion / Export boosters: can we go beyond tax breaks?
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Export boosters: can we go beyond tax breaks?

Research shows that India's RCA in overall manufacturing, is in steady decline since 2000 and slipped below 1 in 2008

Photo: ReutersPremium
Photo: Reuters

Reports indicate that the commerce ministry wants to exempt exporters in special economic zones (SEZs) from paying taxes. Its concern to revitalize exports, falling for more than a year in a row, is appreciated. But the suggestion is not. If tax breaks ever boosted exports, one has to only look at past causal outcomes: production is diverted to SEZs and government loses revenues. Worse, once fiscal incentives are instituted, there is resistance to withdrawal as interests get entrenched. Gains, if any, are at best limited to improved infrastructure facilities such as better power supply and connectivity. Exporting gains from the 2006 SEZ policy, which gave a 10-year tax break, have remained controversial. Research shows that India’s revealed comparative advantage (or RCA, an index with values below one indicating relative disadvantage of a country in that segment) in overall manufacturing, is in steady decline since 2000 and slipped below 1 in 2008; losses were more marked in textiles.

Fiscal or for that matter monetary (for example, interest rate subsidies) incentives, are the easiest thing to do. A notification suffices with visibly low cost. This is why opposition to such enticements is largely confined to the finance ministry which has to then mobilize offsetting, additional tax resources. Far more daunting is the task of raising productivity, and hence, comparative advantage of exports by lowering production costs through other sources, such as better roads and logistics to reduce time lags, lesser congestion at ports and faster customs clearances to bring down the waiting period for shipping goods, and lower production costs through removal of rigidities in factors of production.

The government has a ‘Make in India’ vision, at the heart of which is large-scale, export-led manufacturing to make India the world’s factory a la China. Notably, the Chinese export-led growth was built on several pillars. One of them was creation of national investment and manufacturing zones (NIMZs), but another central feature was an exchange rate policy of undervaluation to keep exports consistently competitive. According to some studies, critical differences between Chinese and Indian manufacturing firms lie in size—the median Chinese firm employs 400 people compared to 88 people in India. Among other factors, Chinese labour has higher computer and IT skills and labour flexibility. Besides, an ability to restrain growth in real wages for a very long period of time played an important role. That’s one guide when looking to raise exports.

China also benefited from an exceptional macroeconomic environment in its export-led growth period. This fortunately coincided with the “Great Moderation" phase, characterised by benign global inflation and reduced macroeconomic volatility, roughly from the mid-1980s to 2007-08. But in today’s strained external environment, particularly marked by plenty of overcapacity chasing too few buyers across the world, there is all the more need to not seek quick-fix solutions such as tax breaks for export stimulation. It won’t last and will compound existing fiscal weakness. It is better to spot the real issues and work on these while the lucky turn in terms-of-trade favours Indian producers. That will impart lasting export strength.

Renu Kohli is a New Delhi based economist.

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Published: 02 Feb 2016, 08:14 PM IST
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