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<b>Rahul Khullar:</b> Time to start shouting about trade

Five things the Department of Commerce could do to reverse the slide in India's exports

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Rahul Khullar
Merchandise exports have fallen continuously for the past year and a half. So too have merchandise imports. The resultant decline in the Current Account Deficit (CAD) has perhaps nurtured a false sense of security amongst harried Ministry of Finance (MoF) mandarins (one thing less to worry about). Sheer helplessness in the face of waning external demand may also have conditioned the lack of a concerted response from the government. This is no longer sustainable.

First, as India's exports have contracted, global trade has expanded, albeit slowly. Hence, our share in global trade and exports has contracted. Of greater concern is that market share in our major export sectors has fallen. Winning back market share is really hard. Second, the fall in the CAD was enabled by steady invisibles inflows, viz. IT services and remittances. However, with rising protectionism in the developed countries, IT firms are already feeling the pinch in terms of business growth and squeezed margins. The decline in crude prices has hurt energy exporters, in both earnings and government revenues. If oil prices do not recover, outright layoffs of migrant labour and a wage squeeze are distinct possibilities. Both bode ill for remittances and our CAD. Third, the revival of domestic investment and any oil price recovery will further strain the trade balance. The upshot is that there could be a sudden deterioration in the CAD.

Here are some suggestions on what we should be doing. It has been argued in this newspaper ('Look beyond the usual suspects': October 6, 2015) that domestic policy reform can address structural imbalances on our trade account. A strong dose of policy reform in sectors as diverse as pharma, coal, agriculture and education will contain import growth. Policy reforms can also boost export growth. Large medium- and near-term gains are possible. The Department of Commerce (DoC) could start by compiling a list of such reforms and asking MoF to then spearhead the reform effort.

Second, we need immediate revival of SEZs. They were the source of the fastest growth in exports during 2007-2011. The SEZ Act came into force in 2006; in less than five years the government reneged on all the promises of a stable and enduring tax regime, shattering domestic and foreign investor confidence. We first lured investors, they made the investments and then we changed the rules of the game. The action was prompted by the MoF's assessment of revenue losses. If the economic activity was triggered only because of the SEZ, then the revenue losses are entirely notional. EJs (economists, journalists and/or a combination thereof), with some notable exceptions, did their bit. Unsubstantiated allegations on agricultural production losses, real estate scams and land grab became routine; not one case was established. Then followed textbook economics of tax expenditures and distortions in resource allocation. The view from the pulpit is different from the trenches. Socio-economic outcomes have eluded attention. The entire polluting leather industry of Kolkata was moved out of the city to Bantala SEZ. The SEZs in and around Chennai witnessed large increases in real wages, increased participation by women, transportation to and from their homes, and improved provision of child welfare services. And, now, the gigantic Sri City SEZ is being held up as a showcase of Make in India. Ideally, we should revert to status quo ante, i.e. the pre-2011 position. If not politically palatable, the least is to reduce the MAT to one-third of that applicable in the Domestic Tariff Area (DTA). And, guarantee that the regime will not change for at least 10 years.

Third, diplomatic policy needs to be rejigged. Diplomacy is theatre, an enacted play with diplomats as stage managers. There is no room for ad libbing or unrehearsed moves. And, there is no give without a take. Every move has to be cold and calculated; impulsive decisions are a no-no. Shyam Saran has wisely pointed out that getting to the high table is but the first step; what counts is what you get from the high table. (Recall Henry Kissinger's "permanent interests, not permanent friends.") On high-value B2G and G2G transactions purchase leverage must be exercised. Even on B2B dealings governmental intercession is sometimes called for. We need to clearly relay: (a) No obstacles to our services (IT) industry; the same goes for pharma; (b) Unhindered market access in textiles and engineering goods (including autos and electronics); (c) Market access for other export industries (to be customised by country).

Fourth, MoF's penny-pinching ways on export incentives (duty free scrips, interest subvention, etc.) and market development assistance are proving pound-foolish. Rs 20,000 crore is not even one per cent of export value. And, DoC does not need that much. Retaliatory action is unlikely on grounds of de minimis. Apart from helping key sectors and labour-intensive activities, the restoration of incentives will provide a much-needed morale booster. The textbook-thumping EJs will boo. Those in the trenches will cheer. Go with the trenches. It works.

Fifth, DoC needs to do some homework. Should textiles get over 60 per cent of export incentives? Can a revised allocation yield greater bang for buck? The bulk of global trade in textiles is man-made textiles, not cotton. What is holding back man-made textiles? Why are engineering exports taking a beating? In which segments and geographies? On gems and jewellery: Diamonds may be down; why not push gold jewellery exports (half of all exports in the sector)? How do we corporatise the leather sector? Else, it will simply not grow and an opportunity will be lost. Also, identify sector-specific glitches, be they institutional or tax-structure related that are impeding export growth. Which are the destinations where exports are declining? To whom are we losing market share and why? How do we diversify our markets and intensify market development assistance?

Madam minister, the DoC has taken all the heat when many others are culpable. To be heard over the din in government it is sometimes necessary to shout. Time to shout.

The writer is a former Union commerce secretary
 
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

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First Published: May 28 2016 | 9:50 PM IST

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