Subsidising exports

When India was desperately short of foreign exchange, making it difficult to meet domestic demand for a range of commodities, it perhaps made sense to encourage exports with the help of subsidies.

These subsidies were useful in offsetting the burden of numerous domestic distortions, which combined to make the domestic market an area of easy pickings for producers.

The latter, quite logically, avoided the cut-throat international market like the plague. The foreign exchange constraint has now vanished.

Financial sector and foreign investment reforms have attracted substantial capital inflows, while exchange rate realism and the inherent competitiveness of several sectors have kept exports growing at a healthy clip for the last several years.

No longer does the country have to worry about where its next dollar is coming from, even in today's circumstances, when the price of oil briefly threatened to go through the roof.

If foreign exchange is no longer a constraint, the export-at-all-costs proposition adopted by policymakers needs to be reconsidered. Subsidies may have provided a boost to exports, but they impose a significant fiscal burden.

According to the government's own estimates, as reported by this newspaper yesterday, the revenues forgone add up to almost Rs 40,000 crore in 2003-04.

To put this into perspective, the estimated revenue deficit of the central government in the 2004-05 budget is Rs 76,000 crore. This is a gap the government is committed to eliminating over the next five years. Imagine how much easier it would be if export subsidies were to vanish overnight""or even over the next three years.

Unfortunately, the ministry of commerce and industry, which unveiled its new foreign trade policy last Tuesday, persists with the belief that subsidies are vital to export growth.

Collectively, the new and expanded subsidies announced in the policy are estimated to add a further Rs 5,000 crore to the fiscal burden. The Target Plus scheme, which provides tax incentives to rapidly growing exporters, emphasises growth in volumes without adequate safeguards for domestic value addition.

This is a clear throwback to the export-at-all-costs era and is completely inconsistent with the economic circumstances that the country finds itself in today.

There is a far greater compulsion to narrow the fiscal deficit than to bring more dollars in. The latter is happening quite nicely on its own, while the former needs significant intervention from all parts of government.

The ministry of commerce has an extremely critical role to play in protecting the country's interests in the evolving global trade scenario. This is where the bulk of its attention should be focused. It also has a role in ensuring that Indian exporters do not suffer because their inherent competitiveness is neutralised by a hostile environment.

But, to do this, it needs to bring several other ministries, notably those which deal with infrastructure and labour, onto a common platform of export facilitation. There is little sign of this happening.

Subsidies are simply not a substitute for the right kind of investments and regulatory reforms. The continuing dependence on fiscal sops by the ministry is an unfortunate admission that it has simply been unable to play this latter, far more critical, role.