A limited dent

An inter-ministerial group, with inputs from industry, commerce and trade, was set up to recommend simplifications in export procedures. Other than faster use of electronic data interchanges (EDI) and adopting risk management systems, the proposals involve credit payments for some transactions, single-window documentation, allowing bonds instead of bank guarantees, a single bank account per exporter for claiming duty drawback, and a single bond across licences. These proposals will be implemented on a pilot basis in major trading centres like Delhi, Mumbai, Chennai and Kolkata.

Such changes are welcome for two related reasons. First, trade facilitation is on the WTO's agenda, regardless of what happens in Hong Kong. Second and more importantly, if India has an export target of $100 billion, the transaction costs associated with exports must come down. More than demand conditions or exchange rate competitiveness, it is supply-side problems that constrain exports. These supply-side problems aren't always procedure-related, of course. For instance, there is the infrastructure issue. But while infrastructure improvements can be expected only over the long haul, procedures can be eased quickly. Having said this, a caveat is in order. There are export procedures connected with the mere physical act of exporting, and there are those concerned with claiming export incentives. The former is easier to simplify and there have already been improvements since 1991. If there are complaints today about transaction costs connected with exports, they mostly concern export incentives. This is not merely an import duty issue. Had only import duties been involved, one could have argued that as liberalisation reduces duties, these become relatively unimportant. However, there are also domestic indirect taxes. In other words, transaction costs are linked to domestic indirect tax reform and a resultant revamping of export incentives.

In the absence of such reforms, any trade facilitation will be a limited exercise. To complicate matters, some recent trade policy initiatives have increased trade-related transaction costs. Rules of origin requirements, connected with free-trade agreements, are an example, although these plague imports more than exports. Standards, which require testing and certification, being available in only certain ports, are another instance. In a general sense, export procedures emanate from distrust of exporters. This may not be unwarranted, because of historical trends of invoicing manipulation and capital flight. However, does one presume exporters are innocent unless proven guilty, and clamp down heavily on those who violate the law, or does one start with the presumption that all exporters are guilty and take little action against those who are truly guilty? The historical mindset has been in favour of the latter.

It is easier to transit towards the former if there are fewer exporters and more large ones. More than two-thirds of India's exporters are small-time and fly-by-night exporters are not rare. Historically, claiming export incentives was linked to the actual act of exporting. Removing legacies of export subsidies (not incentives), revamping incentives, and eliminating small-scale reservations should lead to a desirable shake-out and fewer exporters. The smaller manufacturers will not die out, but will perform a supply-base function. This also makes marketing costs and compliance costs associated with standards abroad easier to handle.