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Business Commentary/Bibek Debroy

Tinkering is in, expertise is out, exports are down

The present Export-Import Policy is for the period 1997-2002, though modifications are announced occasionally, usually on March 31. So we have just had a new set of announcements on March 31, 1999.

Commerce Minister Ramakrishna Hegde has given up on export targets, after various impossible targets made the commerce ministry a laughing stock.

Three years ago, the ministry had an export target of $ 100 billion in 2000, later scaled down to $ 75 billion. In 2000, India's actual exports are unlikely to be much more than $ 35 billion. Throughout 1998-99, Hegde kept harping on an export target of 20 per cent growth in dollar terms and he stuck to this target even after nine months of the financial year, when export growth was zero per cent.

Later, he scaled the target down to 15 per cent. We have data for April 1998 to January 1999 and growth has been 0.41 per cent. That 15 per cent target, which has not yet been scaled down officially, is ridiculous.

The commerce minister has not quite given up hope on 20 per cent. His speech states: "I had also expressed the hope that because of the signs of early revival of the world economy and the new strategy we were planning to adopt, it should be possible for the country to achieve a high export growth rate of 20 per cent.... Because of last year's experience, I'm refraining from mentioning any specific export growth target."

With some East Asian economies recovering, I suspect that if we get a dollar growth of five per cent, we should be happy.

What are the ingredients of a strategy the commerce minister has in mind? First, withdrawal of quantitative restrictions or QRs on exports and imports. Second, electronic commerce. Third, rationalisation of labour laws. Fourth, reducing transaction costs. Fifth, removal of small-scale industry sector reservations. Sixth, improvements in infrastructure.

Admittedly, not all these are under the purview of the commerce ministry. But has Hegde been able to push through the required changes in the Cabinet? The answer is no, and that does not enhance his credibility.

Consider the ones that are in his jurisdiction and I must clearly state that I'm sceptical of the numbers. India's imports (and exports) belong to five categories -- OGL (open general licence, meaning a licence is not required), canalised (through state trading organisations), restricted (needs a licence), special import licence (SIL category -- a subset of the restricted category) and banned or prohibited.

The commerce ministry follows an eight-digit harmonised classification system now. According to this, around 10,500 items are described. Before 1991, 8,000 of these were on import licensing regimes and in April 1997, the figure was around 2,700.

QRs violate GATT (General Agreement on Tariffs and Trade) and WTO (World Trade Organisation) principles. However, under Article XVIIIB, a country that has Balance of Payments problems, is freed from this ban. Historically, we have justified QRs by invoking Article XVIIIB. But since the Indian BoP is no longer precarious, it is difficult to justify QRs using this article.

Accordingly, we already have agreements with trading partners like Australia and the European Union that QRs will be phased out over a six-year period (divided into sub-periods of three years, two years and one year), beginning April 1, 1997 and ending on March 31, 2003. (A QR dispute with the United States is pending before the WTO).

Therefore, roughly 500 to 600 items have to be phased out every year, so that in March 2003 there is only a very small prohibited list of items that is protected on environmental or religious grounds. If you add up all that has been done so far, before March 31, 1999, around 2,300 items should have been on QR regimes. In his recent announcement, Hegde moved 894 items to the OGL list and 414 to the SIL list and we are told that only 667 items remain on the restricted list.

Something is not adding up somewhere and the mystery will be sorted out only when a detailed matching is available with the eight-digit classification. If the 667 number is right, we will be phasing out QRs much before the 2003 deadline.

Broadly, India's import licensing covers five major import categories -- agro products, textiles and garments, petroleum products, fertilisers and consumer goods. Agro products and textiles and garments are tied to Uruguay Round agreements in these areas.

Petroleum sector liberalisation is linked to domestic reforms as a prerequisite. That leaves fertilisers and consumer goods, with consumer goods contributing the numbers. Hence the commerce minister has concentrated on consumer goods, with some agro products (dairy, fish, processed foods) thrown in.

There has also been decanalisation of crude oil. Liberalisation can take two tacks. Items can be directly moved to the OGL. Alternatively, they can be first moved to the SIL category to gauge impact on the BoP or political resistance, and subsequently moved to the OGL list. As on earlier occasions, the commerce ministry has used both approaches.

We have had a variety of export promotion schemes in the past -- 100 per cent export oriented units, export processing zones, the Export Promotion Capital Goods Scheme and export house status. These represent legacies of an earlier era, when you could not liberalise across the board and therefore liberalised in selected enclaves.

With reforms, these no longer have a role to play, apart from the fact that they have never contributed much to India's export. What do you expect if the Kandla Free Trade Zone is set up in 1965 with the avowed intention of helping develop the under-developed region of Kutch?

But instead of looking forward to an era when exports must be pushed in the absence of such schemes, each Exim Policy announcement has modifications to such schemes and the present changes are no different. What are these new FTZs? What will exporters do with green cards? What will they do with golden status certificates? And what is this crazy idea of linking grants to states in accordance with their development of export infrastructure?

In the Budget speech, there was some talk of transaction costs on exports and a committee (the N K Singh committee) was set up to examine the issue. In a press statement, Hegde had said that this committee's report would be available before March 31, but the report is clearly not available.

In reacting to transaction costs, Hegde has also mentioned finance and infrastructure. These are outside his direct purview. But transaction costs also increase because of the horrendous procedures the commerce ministry itself imposes on exporters and importers.

This is something the commerce minister can and should have addressed. But apart from tinkering with procedures on earlier export incentive schemes, Hedge does not know how to go about this. This is perhaps bound to happen if you thrust someone with no particular expertise on the commerce ministry. The commerce ministry has not had good ministers since P Chidambaram.

The vision is lacking. So one tinkers around, hopes for the best and when exports don't grow, you can always blame world recession and protectionist barriers in developed markets.

Until this changes, we are stuck with five per cent dollar growth. The 20 per cent dollar growth that Indian exports put in for three successive years, was an aberration.

Rather intriguingly, exports account for a little more than ten per cent of gross domestic product. Therefore, if we can get a 20 per cent export growth, we will have a two per cent incremental growth in GDP, the missing gap between 5.5 per cent GDP growth and 7.5 per cent.

Bibek Debroy

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