The Telegraph
Monday , October 17 , 2011
Since 1st March, 1999
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The trade policy released by Anand Sharma, the minister of commerce, was unexpected for a number of reasons. First, India is supposed, nowadays, to have a long-term trade policy to shape entrepreneurs’ expectations and to prevent giving them sudden shocks. Supplements to the trade policy are issued once in three to five years. In view of this standing practice, an ad hoc trade policy was a surprise. Second, trade policies are issued on April 1, after the hullabaloo over the budget, presented at the end of February, is over; a trade policy in October is unprecedented. Finally, the balance of payments is holding up, and even the balance of trade has been improving; the need to do something to improve it further is not obvious. The explanation offered by the minister was that he was alarmed. The global environment is so unsettling. The Eurozone is depressed. The United States of America’s recovery is limping. Exports to some countries that the minister considers to be India’s traditional market have fallen. So Mr Sharma took pre-emptive action. India promised other members of the World Trade Organization that it would not give any export subsidies. But it has found a way of breaking its promise: instead of giving exports a direct subsidy, it reduces duty on imports made by exporters. India’s trading partners look the other way because it gives them a right to break their own promises.

Mr Sharma has given duty credits of a few per cent on exports of many products and to many countries. The credits are small enough. Still, they are undesirable for an important reason, namely, subsidies are given by the government, and getting them out of the government calls for red tape — making applications, submitting documents, and — last but not least — giving bribes. So subsidies do not necessarily increase exports. They favour string-pullers vis-ŕ-vis genuine exporters. Also, Mr Sharma’s way of looking at trade is so schizophrenic. It is the balance of payments that matters, not the balance of trade. The balance of payments is not nearly so unfavourable as the balance of trade, since India has a surplus on service exports and transfers. Capital is flowing in to cover any payments deficit. So there is nothing to worry about on the external sector.

Further, if the government were determined to get worried about it, it would be better to depreciate the rupee than to give selective export subsidies; depreciation would be equivalent to a combination of a generalized export subsidy and import duty, neutral between all products and countries. The Reserve Bank of India has been hesitant about depreciating the rupee because it requires buying foreign exchange and increases reserves for which it has no use. But if Mr Sharma managed to improve the balance of trade with his export subsidies, he too would increase the reserves. So he should ideally stay as inactive as the RBI.

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