The rapid rise in the current account deficit (CAD) is of great concern. If not arrested, it might lead to an economic crisis much deeper than what we witnessed in 1991. I have pointed out in the India chapter of a forthcoming volume of the Political Economy of Trade Policy in the BRICS Countries, the urgency of implementing second-generation trade reforms to avoid any balance of payment (BoP) crisis and to make us a global economic player with a significant rise in our trade share. I indicated that "failure to do so will be costly in terms of growth and poverty alleviation. The continued success of an outward-oriented strategy that India began under Rajiv Gandhi (1984-1989) and strengthened and expanded in 1991, is intrinsically tied to it. So is the achievement of a high and sustained growth that is both inclusive and employment generating. Trade policy, in my opinion, should again be at the centre stage of development policy."
Unfortunately, this view is not shared by policy makers or by entrenched lobbies in the manufacturing and services sectors. Policy makers are overly preoccupied with short-term movement of a few economic indicators. There is still the lack of an outward-oriented mindset in both government and industry circles. There is still a lurking fear that the time is not ripe for full exposure to external competition.
This mindset was also manifested in the 2013-2014 Budget, in which the finance minister outlined antiquated measures to tackle the CAD problem: restricting gold imports; encouraging foreign direct investment (FDI) and capital inflows without any measures to address the deteriorating business environment; and doling out export sops in the Annual Supplement 2013-14 to the 2009-14 Foreign Trade Policy (FTP) by the commerce ministry. Reference was also made in the Economic Survey to the fact that Indian exports suffered on account of a global slowdown.
Unfortunately, the problems behind the deterioration in BoP are structural in nature, and cannot be solved through the measures suggested. We need to tackle the second-generation trade reforms: trade-facilitation reforms, tariff rationalisation; services sector reforms to diversify exports of services; focused regional trade policy to counter the decline of the West; and innovative and focused intervention in the foreign exchange market to prevent appreciation in the real exchange rate by building up reserves, and to avoid excessive opening up of the capital account on the debt side.
Economic slowdown in Europe and the US is not the principal reason for the slump in Indian exports. India's share of global exports is just 1.7 per cent compared to China's over 10 per cent. There is sufficient room to expand exports to other countries. Philippines and Indonesia have shown that this is possible. Market diversification, unfortunately, is not in the radar screen of the commerce ministry, which is still preoccupied with a Free Trade Agreement with a declining European Union (EU), despite knowing that India will not benefit from tariff preferences in agriculture or entry of services. Also, EU's manufacturing tariffs are already low.
Restricting gold imports makes little sense in a country that fought hard to successfully dismantle the most complex import licensing regime in the world in 1991. Trying to control gold imports would lead to widespread smuggling given that its demand is as much due to its traditional role in the financial security of households and liquidity in the market.
Sustained FDI inflows in the long term will only take place because of strong macro fundamentals (sustained high growth), stable and transparent policies and, most importantly, ease of doing business. As argued in my earlier piece, loss of investor confidence with General Anti Avoidance Rules, or GAAR, in the previous Budget, and the lack of government attention towards improving Doing Business indicators, will definitely hinder greater inflows. Moreover, securing strategic resource-based assets abroad is becoming a priority for both private and public sector companies. This would lead to increased outward FDI, which going by the trends, will soon match inward inflows and neutralise the impact of FDI in addressing CAD.
Most disturbing is the faith the finance minister retains in FTP to revive export growth. There is absolutely no room for an annual ritual of an Exim Policy that dishes out doles to exporters and importers. We need to recognise that we are now a mature economy - not a protected one. A mature economy does not boast of spare change given to exporters and importers. If we get rid of the plethora of antiquated, ad hoc incentive schemes and only rely on an efficient duty drawback system, we have no need for a Directorate General of Foreign Trade. Export promotion councils and organisations can be looked after by a unit in the commerce ministry, and the Directorate General of Commercial Intelligence and Statistics should be placed again under the Economic Division where it rightfully belonged as long as we had reputed economists as economic advisers. Exports should be guided by a realistic exchange rate, low tariffs and minimal trade transaction costs. These actions fall under the Reserve Bank of India (RBI) and the finance ministry, respectively, with close consultations with the commerce ministry. Simultaneously, the trade policy department (TPD) in the commerce ministry should be revamped to develop focused multilateral, regional, bilateral, and unilateral trade policies befitting India's geographical position in the world. It is high time the commerce ministry builds up its TPD to focus on increasing market access and to push for the second-generation trade reforms outlined earlier. The revamped TPD must have an economic adviser with international stature. It is disheartening to find that the only trade economist in the government is the present prime minister who is, I am sure, preoccupied with much more important problems.
To sum up, a mature, open economy like India with a focus on an outward-oriented growth strategy should just rely on a realistic exchange rate, a rational tariff structure, a transparent administrative system with low transaction costs, and a revamped TPD in the commerce ministry to help secure market access in goods and services and monitor the progress of second-generation trade reforms. The commerce ministry should work with the RBI to ensure that a competitive exchange rate is maintained. It should also work with the finance ministry to move towards a rationalised tariff regime and a duty drawback scheme that does not discourage exports. The commerce ministry should also ensure that cargo clearance is in conformity with international norms by having a modern customs service that relies on a paperless clearance process and a system based on trust and modern risk-management practice. In fact, a significant portion of the policies to reduce CAD, mainly trade-facilitation reforms and tariff rationalisation, should have been announced in the Budget, and immediately implemented. I have highlighted these in my write-up on the Budget in this column on March 4. It is time for the finance ministry to get into the act fast. Chidambaram cannot pass the buck to Anand Sharma.
The author is a trade economist who served as Economic Adviser in the commerce ministry between 1988 and 1993
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
