Are the trade policy's export targets feasible?

DEBATE

While export targets as set out in the Exim Policy may be attainable, much remains to be done to unshackle the Indian export sector.

Ramu Deora
Former President , Federation of Indian Exporters Organisation

"By giving a special thrust to agriculture and the small scale sector, the government is on track to achieve the ambitious export target"

The Indian commerce ministry has set an ambitious target to increase India's share in world trade by more than one per cent. With the Exim Policy announced last week, I am sure the country would surpass the target of $160 billion exports in the fiscal 2008 and meet the world trade target. Even so, there is scope to do more, so that the exporters do not face red tape and unnecessary paperwork.

Many steps have been taken in the Exim Policy which would have a long-term impact on exports and help us to meet the target, particularly in agriculture and the small scale sector. These are, at present, the largest employment generating sectors of the economy.

As per government statistics, 93 per cent of exporters from the country have annual revenues of below Rs 10 crore and only seven per cent (by number) are from the large houses. By giving a special thrust to increase exports from these sectors, the country has realised the importance of these small companies. A special emphasis has been made on the interest of delayed payments.

During my last meeting with the commerce ministry, I made some specific suggestions to boost the country's exports. Many of these suggestions have been incorporated in the final policy. The service tax, for example, will now be reimbursed against the export of merchandise goods. It will now also be exempted for the commission paid to service providers abroad. The Indian export sector suffers a lot due to red tape. Therefore, the simplification of procedures and the reduction of paperwork and transaction cost by scrapping Appendix 26 for the renewal of export house certification is a step in the right direction.

I had also suggested that the country should dispense with one-star, two-star and three-star export status and bring back the old concepts of export house, trading house and star trading house which are being implemented to enhance the image of Indian exporters abroad""much like the Japanese concept.

The government has decided to dispense with the verification of advance authorisation and Export Promotion Capital Goods (EPCG) licenses at par with the Duty Entitlement Pass Book (DEPB) which will reduce the hassles of exporters. I also feel that the DGFT should have dispensed with the Redemption of Advance License/Authorisation. When direct online data is available, what is the need for additional paperwork? The special incentive to status holders by way of offering 10 per cent of the free-on-board (FOB) value of agricultural exports to import duty free capital goods related to their agro processing equipment is a step to promote agriculture exports and generate additional employment in rural areas. The trade was expecting zero duty on EPCG.

The definition of manufacturing will be incorporated in the Income Tax Act which will avoid litigation for export oriented units. Due to revenue constraints, they could not pay anything to exporters for taking care of the transaction costs. However, the trade was expecting some more incentives.

I had suggested to continue DEPB and all other schemes and implement one additional scheme of taking direct credit of the basic customs duty by the manufacturer-exporter along with CENVAT credit. Those who are not covered under Central Excise should opt for Brand Rate of Duty Drawback. When Excise CENVAT at 16.5 per cent is allowed, why are basic customs duty at 5 per cent or 7.5 per cent not allowed? They are WTO-compliant and hassle-free without any transaction cost and revenue loss. This is a question which the commerce ministry needs to address.

The entire country is now debating the status of SEZs which are supposed to give a fillip to the country's exports. In my view, the government is not on the right track in clearing a huge numbers of SEZs. What the country requires now is the SEZ model developed by China which has gone a long way to meet the Chinese export targets. Real manufacturing for export production should be encouraged, instead of speculation of land.

(As told to Dev Chatterjee)

Deepak Pahwa
President,
Indo-American Chamber of Commerce

"The rupee hardening may not necessarily lead to a decline in exports, since a sizeable percentage of our exports are import-led"

Export competitiveness is a function of a few variables, like exchange rate, the strength of infrastructure, domestic inflation, interest rate and so on. In an economy like India, which is getting increasingly globalised, external factors like the direction of global trade will also have their impact on exports.

Global trade is not showing any slowdown so far, though many are saying that a possible recession is around the corner. Interest rates are moving northward in most countries, including the developed ones""perhaps excepting Japan and China. The greenback is steadily getting depreciated in terms of other global currencies mainly because of the huge current account deficit "" currently estimated to be upwards of $850 billion "" that the US is facing.

The overvalued dollar is now being depreciated to shore up the export competitiveness of the US. The rupee has appreciated against the dollar considerably in recent days. Since 90 per cent of India's trade is dollar denominated, this is having an impact on Indian exports. Indian exports, which are price elastic, are being priced out. Secondly, rupee realisation of the exporters and BPOs has gone down by at least 10 per cent in the last few weeks, because of its steady appreciation against the dollar.

Significantly, a parallel process is also taking place in the Indian economy that has led to the rupee hardening. Capital inflows into the country in respect of foreign direct investment, portfolio inflows, private transfers, remittances, flow of invisibles like proceeds of software exports, hedge funds through brokerages and so on, have gone up considerably. Since we do not have a free float of the rupee, RBI intervention to keep the value of rupee within manageable limits is taking place from time to time.

This intervention is mainly through a complex process of sterilisation wherein money supply is augmented to maintain the rupee-dollar parity. This leads to an inflationary pressure to contain which the government has to follow a tight money policy by increasing the interest rates and other measures to suck out excess liquidity. This is the peculiar situation that we are facing now.

The pertinent question is whether the appreciation of the rupee is likely to continue for long. The rupee hardening against the dollar may continue for some more time. But that may not necessarily lead to a decline in exports. The first and foremost reason is that a sizeable percentage of our exports are import-led. With rupee appreciation, imports become cheaper and the manufacturers can leverage that benefit to make good of the erosion in the price competitiveness on account of hardening.

Secondly, FDI inflows into India have touched record highs. This trend is likely to go up in the coming years and a substantial chunk of this investment will go into the SEZs and manufacturing, thus enhancing the volume of exports from the country.

Thirdly, it is expected that the inflation, which is ruling slightly over 6 per cent, is likely to slide on account of the supply- side revamp being contemplated by the government, not only for the primary goods but also for the core intermediates like cement, steel and so on. Once the inflation is brought under check, say hovering between three and four per cent, the RBI may relax its grip on the interest rates. That would make the exporters to source goods for export purposes at a lesser cost.

Significantly, the continued slide of the greenback will force the exporters to reduce the dollar-denominated trade exposures and increasingly go for other currencies like the yen, euro, pound and so on, which demonstrate more strength than the dollar these days. Also, the systematic effort of the government to liquidate the dollar holdings by relaxing the investment criteria, both in manufacturing services and stocks and bonds can soft-land the rupee to an optimal exchange rate vis-a-vis the dollar. Therefore, the present steep appreciation of the rupee is a passing phase and it will have minimal or nil impact in the medium and long terms.