The author teaches at the University of Warwick, united Kingdom
The commerce minister, Arun Jaitley, has just announced the country’s export-import policy — or exim policy as it is popularly called — for this financial year. This complements the five-year exim policy announced last year by Murasoli Maran, the previous commerce minister. As Jaitley has pointed out, government policy has to be flexible and responsive to changes in the international economic environment. So, a five-year policy document can at best be indicative of overall government priorities and objectives since crucial parameters of the world economy change rapidly. It simply has to be supplemented by more short-term policy responses such as the annual policy statements.
Jaitley’s policy announcement comes against a somewhat ambiguous background, in which both positive and negative factors figure prominently. The positive feature is that Indian exporters have performed rather well in the period April 2002 to February 2003. During this period, exports have grown by over 16 per cent compared to the preceding 11 months. This impressive performance was not restricted to a few items or to a restricted number of regions. A number of sectors contributed to this performance, and Indian exports found markets throughout the world.The negative factor is obvious enough. Everyone is apprehensive that the war in Iraq may generate a worldwide recession. Of course, if this actually happens, then even the most pessimistic forecasts of exports may seem unduly optimistic a few months down the road.
And no one can accuse Jaitley of being an incurable pessimist. He seems to have taken quite seriously the goal announced in the five-year exim policy announced last year — that Indian exports should grow sufficiently fast so as to ensure that India accounts for one per cent of world trade by 2007. At current levels, the Indian share of world trade is only 0.67 per cent, and so Indian exports have to grow by roughly 12 per cent every year to reach the target.
How does the commerce minister plan to achieve this objective' The thrust of Jaitley’s policy document has been rather neatly captured in a newspaper headline: “New growth engines to be nurtured”. Put in more prosaic language, the government wants to select sectors or products which have the greatest potential for success in world markets, and then provide them with intensive support. The alternative would have been to spread government resources rather thinly across the entire spectrum of the Indian export sector.
A possible criticism of this strategy is that it is akin to putting one’s eggs in one or two baskets. Of course, there is nothing inherently wrong in doing this provided the baskets are chosen carefully. And here, Jaitley seems to have done his homework rather well because there is not much room for criticism as far as his choice of growth areas is concerned.
The most important engine of growth identified by Jaitley is the services sector. Given the tremendous success of Indian software engineers, an immediate response is to identify the software sector with the entire services sector. However, the commerce minister has successfully avoided this pitfall — he explicitly mentions sectors such as health, education and tourism. The policy stimulus sought to be given to boost exports from these sectors is by way of liberalized imports of required inputs such as consumables, office and professional equipment and spares.
This is certainly a step in the right direction. However, the specific way in which Jaitley intends to liberalize such imports seems quite myopic. The proposal envisages that existing services exporters will be allowed such imports up to 10 per cent of the average foreign exchange earned in the last three years, while newcomers will be allowed this facility if bank guarantees are provided to the extent of the revenue sacrificed. But, this is biased against existing exporters. An existing exporter may have had very low foreign exchange earnings in the last three years precisely because this facility was not available to him during the last three years. The commerce minister could have constructed a “level playing field” by allowing existing exporters imports against bank guarantees.
Other growth engines are agriculture and allied products, and the special economic zones. While there may be limited scope for the export of “staple” items such as rice and wheat, there is a lot of scope for exports of non-traditional items such as fruits, vegetables and flowers. The government will encourage investment in these areas in order to promote the adoption of the latest technology, and for setting up critical infrastructure in the form of practices such as water harvesting, and soil conservation.
In order to attract foreign direct investment, an SEZ attempts to provide potential investors with appropriate incentives to manufacture products both for foreign as well as the domestic market. The attempt is to provide manufacturers with an environment so that the final product can be manufactured at internationally competitive prices. Of course, this requires that input prices be at international prices. The current policy initiative intends to provide credit at international rates by exploring the possibility of setting up offshore banking units in the SEZs.
Will these measures be successful' While these steps are all in the right direction, there are too many imponderables, essentially arising out of the war in Iraq, for any sharp prediction to have a reasonable chance of being accurate. The sheer size of the American economy ensures that it casts an overwhelming influence on the world economy. If there is any widespread recession, then an inevitable consequence will be a shrinking in international markets. In such a scenario, it will be almost impossible for Indian exporters to break new ground. The most likely scenario will then be a maintenance of the status quo.
Could Jaitley have promised other policy responses which would have a better chance of promoting exports' Of course, there are a whole host of factors constraining the growth of exports. For instance, the sorry state of Indian ports and more generally infrastructure increases the direct and indirect costs of exports, thereby causing them to lose some competitive edge. However, there is very little that the commerce ministry can do directly to improve the quality of infrastructural facilities in the country. Given the instruments available to the commerce minister, this year’s exim policy must be given a fairly high grade.