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EFFICIENCY OFF THE SCALE

- India’s customs officials are a real discouragement to trade

India was an inward-looking, protectionist country. Its new rulers after Independence believed that the British had turned the world’s leading industrial country into a poor agricultural backwater. They were determined to undo the damage and re-industrialize India. To that end, they used the quantitative import restrictions that the British had left behind to keep out imports and force industrial goods to be produced within India, whatever the cost.

The cost was terrible. They developed industry that was too inefficient to face international competition, turned importing and smuggling into the country’s most lucrative business, and forced India to fall behind all other newly industrialized countries. The country booted them out of power, but it could not avoid the consequences of their self-righteousness. It went through two searing payments crises, first in the 1970s and then at the end of the 1980s.

That led to a reversal of policies, a dismantling of import licensing and reduction of import duties. Today, India is not a conspicuously closed economy. Its import-gross domestic product ratio of 29 per cent and export-GDP ratio of 18 per cent for 2010-11 are what one may expect in an economy of its size. It received foreign direct investment equal to 11 per cent of its GDP, which too is respectably high; no country other than China is a bigger favourite of foreign investors. These figures can change rapidly; but at least for now, it is difficult to find anything abnormal.

It is India’s neighbours that are exceptional. They are all much smaller than India. Smaller economies should be more open, but they are not. The comparable export and import ratios are 21 and 19 per cent for Bangladesh, 22 and 24 per cent for Sri Lanka and 12 and 16 per cent for Pakistan: Bangladesh and Sri Lanka are about as open as India, and Pakistan is distinctly less open. The FDI-to-GDP ratio was 6 per cent for Bangladesh and Sri Lanka — much lower than India’s — and 14 per cent for Pakistan.

Their less-than-normal openness is confirmed by world rankings. India was number 11, 10, 19 and 35 in terms of nominal GDP, imports, exports and foreign direct investment. The corresponding figures were 59, 66, 68 and 106 for Bangladesh, 74, 84, 89 and 115 for Sri Lanka, and 47, 54, 67 and 32 for Pakistan. All three countries were lower down in terms of their imports and exports than in terms of GDP: they traded less than could be expected from their GDP. Why?

That is because their neighbour, India, traded less with its smaller neighbours than any other big country. The United States of America accounted for 50 per cent of Canada’s imports and 75 per cent of its exports, and for 48 per cent of Mexico’s imports and 80 per cent of its exports. The European Union accounted for 59 per cent of Poland’s imports and 79 per cent of its exports, and for 53 per cent of Netherlands’ imports and 74 per cent of its exports. Even South Africa, which is a protectionist country like India, accounted for 68 per cent of Namibia’s imports and 32 per cent of its exports, and for 34 per cent of Mozambique’s imports and 21 per cent of its exports. India accounted for 13 per cent of Bangladesh’s imports and 4 per cent of its imports, and for 20 per cent of Sri Lanka’s imports and 6 per cent of its exports. Its trade with Pakistan is negligible. So compared to other big neighbours, India’s trade with its small neighbours is tiny. And whereas the US and EU are more important as markets to their small neighbours, India is more important to its neighbours as a supplier: it is an insignificant market for them. Its neighbours look less open because they can sell less to their big neighbour than is normal in other parts of the world.

Import restrictions no doubt explain this failure to trade to some extent: the average most-favoured-nation applied tariff in 2006-09, according to World Bank, was 6.8 per cent in Sri Lanka, 11.3 per cent in Bangladesh, 12 per cent in India and 12.2 per cent in Pakistan against a world average of 4.5 per cent. The country-specific trade restrictions would be lower because India has given trade preferences to its neighbours on 60 per cent of its tariff lines under the South Asian Free Trade Area and the Saarc Preferential Trading Arrangement. In 2008, India cut tariffs on 259 items to a half or a quarter of the normal tariff on imports from Bangladesh, Bhutan and Sikkim. But to qualify for these concessions, Bangladeshi exporters have to satisfy country-of-origin requirements: the goods must be produced in Bangladesh with a minimum import content under 20 per cent. Indian exporters are entitled to refund of import duty they paid on imports embodied in their exports. But claiming refund requires considerable documentation. It is not enough for them to submit documents; Indian customs must approve them, which they do in only one place — Petrapole — on the Indo-Bangladesh border. That is also the only place where there are money changers licensed by the Reserve Bank of India.

Trade with India involves considerable red tape, and the government of India has confined facilities to do all the bureaucratic processes in one place, Petrapole. India and Bangladesh do not allow the other country’s trucks to run on their roads; so trucks from the two countries have to meet and goods transferred from one to the other. There are no warehouses on the border where this can be done; so the number of trucks that can transfer goods at any time is only about a hundred. As a result, trucks on both sides simply stand in queues for many days. On September 29, the queue on Bangladeshi side was five kilometres long; a truck would take 10 days to traverse that distance, which would cost the exporter 20,000 taka in demurrage. The Indian customs work only five days a week; that turns 10 days into two weeks.

Customs do not delay movement just by not working; they add more to delays when they work. Their dilatory ways do not normally get recorded. But the chief commissioner in Calcutta held a meeting last December in which his officers were supposed to address exporters’ complaints. Here are some examples of their defensive explanations: the special tax recovery cell has given its no objection certificate, but the internal audit department has still to give one; a change in rules entitles the exporter to a higher drawback than he claimed, but the system on the computer has not been programmed to allow it; it is the fault of ICEGATE (software on the customs website) if it does not record what the exporter has entered; the exporter must produce a sample of his export — after the goods have already been exported — before drawback can be finalized, etc etc. The record shows how irresponsible most of the customs’ explanations are: they simply do not acknowledge that they owe any service to traders. They are India’s unique, distinctive trade destruction department. Finance ministers are generally too timid to tackle the customs. P. Chidambaram has the guts to do it; the question is whether he will.