Stretch targets

Ever since he came into office, the minister for commerce and industry, Kamal Nath, has been extremely bullish on India's export potential. This was reflected in the exim policy statement, in which he set a target of doubling exports in five years, to an impressive US $150 billion.

Going by recent performance, his optimism does not seem unfounded. However, the point that needs to be emphasised is that, as far as much of India's merchandise exports are concerned, Mr Nath's ministry is simply irrelevant.

Most of the factors holding back exports are in the domain of other ministries and, to convert Mr Nath's good intentions into reality, his ministry's enthusiasm must be matched by others'.

The physical infrastructure is a critical constraint that curbs export growth. In recent months, even as we have seen exports grow at commendable rates, the visual images of laden trucks queuing up for weeks to enter the Jawarharlal Nehru port, which is among the country's most modern major ports, showed just how serious this constraint really is.

Indian exports, with a few significant exceptions, compete in highly competitive markets with easy substitutability between one source country and another.

People will recall the glee with which the SARS outbreak in China was greeted, because it was felt that importers would have little choice but to shift their sourcing to India. The same thing can easily happen in the reverse direction, as Indian exporters find it more difficult to adhere to tight delivery schedules.

A particularly pressing issue is the degree to which tax incidence continues to adversely affect India's export competitiveness. Customs and excise duties, of course, are refundable, but there is a host of state and local levies, whose incidence is not effectively neutralised.

A couple of percentage points on sales value make an enormous difference between profitable and unprofitable exports. The only systematic way to offset these is to bring them into the fold of VAT so that exporters can claim their due exemptions.

Unfortunately, the first generation VAT, which is supposed to be implemented by states on April 1, 2005, does not provide for exemptions from a whole range of taxes levied by state and local authorities.

Infrastructure cannot be dealt with instantaneously, but inefficient taxes can. Under the circumstances, the move by the ministry of finance to facilitate trade by reducing "transactions" costs is welcome.

Better use of IT and a re-engineering of the entire customs clearance process will no doubt make life a little easier for exporters and importers.

But that is not enough. The ministry needs to take a holistic view of the constraints; deductibility of state and local taxes may not be under its direct purview but it must begin to push states into integrating all their taxes into VAT.

It should take the initiative to articulate a framework within which the entire burden of domestic taxes on exports is offset, with minimum impact on revenue collection.