Export subsidies help the favoured few

EXIM MATTERS

Will the finance minister abolish export subsidies? That would be an interesting point to watch out for in Budget 2005, especially in the light of the pressures from the Left to target the subsidies towards to the poor.

Economists are almost unanimous that export subsidies have to be abolished. Their views get dismissed because many of them tend to get carried away and label even schemes that intend to remove the tax burden on export products as export subsidies. Rebate of such duties are quite necessary and similar schemes are used worldwide.

There are, however, several other schemes announced by the commerce ministry that amount to nothing more than giving away public money to select favoured few. The most notorious among these are the duty-free credit entitlements for export houses (including target-plus scheme) and services exporters.

The finance ministry has not prevailed upon the commerce ministry to withdraw these schemes. At the same time, the duty-free scheme for export houses has not been given full effect. The uncertainty must end.

Similarly, the finance ministry is rather weary of the scheme for Export-Oriented Units (EOUs), because of the large-scale misuse under the scheme, especially in the textile sector.

The scheme was perhaps a necessity, when it was introduced more than two decades back and continued to remain relevant till a few years ago. However, of late, many EOUs have come up merely to take advantage of the income-tax exemption. The Special Economic Zones (SEZ) scheme is a non-starter so far.

The idea to revamp the scheme of Export Processing Zones (EPZ) scheme was mooted in 1998. Seven years later, all that the government has to show is the renaming of the seven EPZs that already existed. The private SEZ at Surat has attracted very little attention from manufacturers and is, in any case, too small.

Similarly, the joint-sector SEZ project at Pithampur has attracted little investment. The rest of the SEZ proposals exist merely on paper.

In 1991, amidst great foreign exchange crisis, Manmohan Singh took over as finance minister. The first action he took was to devalue the rupee and, simultaneously, abolish direct export subsidies. P Chidambaram was his commerce minister then.

The export subsidies made a comeback through exim scrips, special import licenses, value-based advance licenses, duty entitlement passbook, etc. But, none of these schemes was as blatant as the duty-free certificates for export houses and service providers.

Under both these schemes, the beneficiaries get entitlements in proportion to their export performance. Even under the duty entitlement passbook scheme, the problem is that higher exports earn higher duty credits. So, there is an incentive to over-invoice exports.

The present commerce minister, Kamal Nath, seems intent on continuing such subsidies to exporters and, indeed, give some more. Little effort seems to have been made to persuade him to abolish the schemes.

Nath's proximity to the Congress president seems to restrict the finance minister. Chidambaram and Prime Minister Singh say that they are committed to fiscal prudence but whether they will boldly tackle the problem of export subsidies this time is far from certain.

In 1991, the small exporters made up the lobby of exporters. Now, the big companies are the major beneficiaries of the subsidies. They seem to have a solid grip on the commerce ministry.

tncr@sify.com