The stickiness of bad policy

Domestic policy reform is a better way to help exports

It would appear at first glance that the annual supplement to the Foreign Trade Policy of UPA-II does what is necessary to restore robust export growth. Ballooning oil prices and gold imports during 2011-12 combined to cause a current account deficit that had reached a worrying four per cent of gross domestic product; clearly, India’s exports needed a push. However, the agenda unveiled by Commerce Minister Anand Sharma quite comprehensively misses the point. There are several aspects to the approach that the ministry has taken to resolving the slowdown in India’s exports, which grew just 3.2 per cent year-on-year in April. Among them is the extension of the zero per cent import duty on capital goods meant for export production, as long as they are matched by a manifold increase in foreign exchange earnings. In addition, an interest subvention scheme – under which interest to exporters is reduced by two percentage points – has been extended by a year, and the scheme itself has been broadened to include readymade garments and toys.

Naturally, exporters are happy, since they are being given tax breaks by the government. But that is not a useful indicator. The question is: given that such sector-specific concessions are notoriously sticky, causing interest groups to organise against their removal, are their benefits sufficient to justify their danger? After all, the rupee has crashed from Rs 43 to Rs 55 in the past year. Is a 28 per cent fall not a sufficient boost to competitiveness? Should the fiscally constrained Centre – pushing hard for tax revenue – assume that this is revenue it can easily forgo, given that the depreciation should produce a boost, anyway? According to estimates reported by this newspaper, it will cost the exchequer Rs 1,850 crore. Naturally, this does not include the indirect costs that accrue from those using the regulations to avoid legitimate excise and import duty. The loopholes allowing this to happen have not been closed; they have, in fact, been widened by allowing “scrips” earned through exports to not just offset customs duty but even excise on internal purchases of capital goods.

One major argument that is being made in favour of these specific exemptions is that exports are “special” because of the current account deficit. Yet the premier lesson of 1991 is that exports boom when domestic production is freed up and deregulated. There are no short cuts to that. Returning to attempts to prioritise foreign-exchange earners is woefully pre-liberalisation thinking. Another often-heard argument is that exports are labour-intensive, and employment must not suffer in this downturn. If that is the concern, then policy is even more incoherent than otherwise. If the labour composition of exports is what matters politically, why is the government subsidising capital intensity by waiving duty on capital goods for export production? Will that not artificially lower employment in the sector? In itself, promoting domestic industry substituting for imports is not a bad thing. However, it cannot be done through schemes that try and divert spending, but by allowing it to become relatively more productive. The best export promotion policy is domestic reform.