Protecting Indian exports

Published : Apr 13, 2002 00:00 IST

The new Exim policy attempts to mitigate the problems of Indian exporters by improving the infrastructural endowments in certain export enclaves.

MARCH 31 has in the last two years been a day in the international limelight for the Union Commerce Ministry. March 31, 2000, represented a crucial threshold in India's decade-long process of integration into the global economy, when the process of dismantling quantitative restrictions (QRs) on imports in line with World Trade Organisation (WTO) norms was sharply accelerated. The process was concluded on March 31, 2001, with the announcement of a series of amendments to the 1997 Export-Import Policy.

Alongside this, on March 31 last year Commerce Minister Murasoli Maran inaugurated a new phase of export promotion with the announcement of a scheme to set up a number of Special Economic Zones (SEZS) which would function under a different set of regulatory norms and laws than the rest of the country. With all these foregoing developments, when the time came to review and renew the Exim Policy norms on March 31 this year, there must have been a serious shortage of practically useful measures that could be conceived of.

One half of the regulatory agenda effectively vanished with the removal of QRs on imports, which meant that tariffs fixed by the Finance Ministry would be the only measure of control. As a practically useful set of measures, the Exim Policy was saved from obsolescence by the specific conditions that prevail in the world economy today. After a period of fairly buoyant growth through much of the last decade, the world economy lurched into a recession as the last fiscal year wore on. India's dollar rate of export growth tumbled from a robust 19.6 per cent in 2000-01 to a paltry 0.6 per cent in the first six months of 2001-02. In framing his Exim Policy proposals, Maran was guided by the understanding that the modest growth persisted well beyond the first six months of the year.

His response has been to provide a further impetus to the concept of the SEZs, and to try and extend the principles involved to other sectors of the economy. Although Tirupur, Panipat and Ludhiana may not feature in the list of SEZs, the Commerce Minister has now designated them as "towns of export excellence", focussing respectively on their traditional capabilities in cotton hosiery, woollen blankets and woollen knitwear. Recognised associations of exporting units in these towns would be eligible for official assistance under a newly announced Market Access Initiative (MAI), which could enable them to set up common showrooms, conduct surveys and promote their brands in prospective markets. Common service providers in these industrial clusters would be entitled to import equipment under the Export Promotion Capital Goods (EPCG) scheme, which would conceivably give them - and derivatively, the exporting units - better economies of operation.

This is one among the Commerce Ministry's initiatives to address an endemic problem of the Indian export effort. Poor infrastructure normally entails higher costs of operation for exporters. Estimates by industry associations put the magnitude of the cost disadvantage that Indian exporters suffer on account of higher power, transportation, finance and other infrastructural costs, at between 10 and 15 per cent. The new Exim Policy seeks to mitigate this problem by focussing its attention on improving the infrastructural endowments in certain export enclaves.

One of the proposals is to initiate a programme known by the rather attractive acronym of ASIDE, or assistance to States for infrastructure development for exports. This programme builds upon certain schemes that were announced in 2000 to encourage the participation of States in the export effort. Of the Rs.330 crores that has been allocated for ASIDE in 2002-03, as much as 80 per cent will be divided in accordance with the two criteria of the total quantum and the rate of growth of exports originating in the respective States. The remaining 20 per cent would be spent on selective infrastructure projects that would spread their benefits across States.

In relation to the infrastructure bottlenecks - particularly those in the energy and transportation sectors - that hamper Indian industry, the expenditure that the Commerce Ministry intends to undertake would seem nominal or even worse. The more critical voices, which have never quite reconciled themselves to the export orientation of the decade of liberalisation, may well conclude that this is the saving grace of the Exim Policy, since it lessens the probability of creating enclaves of privilege in a generalised context of stagnation.

Exporting units would be allowed to set up captive power plants that effectively insulate them from the vagaries of the electricity grid. Fuel for these plants would be made available free of duty, to the extent of between 3 and 7 per cent of the value of exports.

In certain sectors such as agriculture, horticulture, floriculture, poultry and dairy, the Exim Policy conceives of a programme of "transport assistance". The terminology is crafted in such a manner as to steer clear of the many pitfalls inherent in WTO rules on the application of subsidies. Issues in the administration of the transport assistance facility remain to be worked out.

IN the area of finance, Maran has proposed that within SEZs banks be allowed to set up units that would function under a distinct regulatory framework. In particular, the overseas banking units (OBUs) would be exempt from maintaining the statutory reserves mandated by the Reserve Bank of India (RBI), which would conceivably reduce the costs at which they are able to provide finance to exporting units. Certain critics have wondered about the utility of this scheme during a period in which banks are flush with funds and their costs are rapidly decreasing. Others have pointed out that the OBUs could well provide an easy avenue for money-laundering or financial arbitrage.

In many ways the rural and agricultural sectors constitute an important focus of Maran's endeavour. After certifying India's export of 7.3 million tonnes of wheat during the last year as a major success story, the Minister has unveiled a proposal to begin discussions with the Ministries of Food and Agriculture, in order to create an accelerated programme that will bring down the burgeoning stocks of wheat and rice with the government. This seems to run at cross purposes with the reading that the growth in food stocks is a consequence not so much of a genuine surplus in relation to needs, but a compression of demand occasioned by economic hardship. The proposal that the government should export its way out of the seeming embarrassment of food stocks is at variance with the reality that such a venture would earn prices even lower than those at which the grain was procured.

If the government is willing to assume that burden of subsidies, it could well be asked why it could not just step up outlays on rural employment programmes. Maran's reading in this respect, that a one percentage point switch in terms of trade towards agriculture will result in additional purchasing power to the tune of Rs.8,500 crores, may well be accurate. But it is not clear that planning for exports at knock-down prices would contribute to this shift in terms of trade.

In ostensible continuation of the abolition of QRs on imports, similar restrictions on exports have been removed. This means that with the exception of certain very sensitive items, which would be canalised through designated agencies, exports of all agricultural commodities would be subject to no controls. Even a cursory analysis of the domestic production and demand situation would seem to indicate that problems of availability and price could be a consequence of unfettered export growth. A case in point is that of raw cotton, where production levels have stagnated and even fallen marginally in recent times.

Certain procedural changes initiated, such as the adoption of an eight-digit classification scheme that promises to reduce vastly disputes over customs categories, have been welcomed by exporters and industry. Exporters availing themselves of the EPCG facility in excess of Rs.100 crores would be obliged to fulfil their export obligations over a period of 12 years as against the eight-year stipulation that is applicable now. This meets a major demand that has been made in the past by steel, automobile and other industries, where gestation periods between investment and stable production are rather long.

The mandatory period for repatriation of export earnings has been extended from 180 to 360 days. This is expected to cut the transaction costs of exporters. A similar outcome is expected from the large-scale revamp that has been undertaken in the offices of the Directorate-General of Foreign Trade (DGFT). With all offices having been computerised and online transactions approved for many of the special incentive schemes administered by the DGFT, it is possible that exporters may have to spend considerably less time in obtaining routine clearances.

Perhaps it is a telltale admission of the adversities facing the Indian export sector that many of the special incentives that were earmarked as early as 2000 for phase-out this year, have instead been continued. The duty entitlement pass book (DEPB), the duty free replenishment certificate (DFRC), advance licences and other special incentives will now continue. Maran was, by his own admission, disinclined to risk any policy changes that might unsettle the export sector at a time of acute uncertainty. It remains to be seen whether, within the limited powers available to him, he has managed to provide Indian exports with a shelter within which they can grow, despite the inclement winds sweeping the world economy.

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