D K Mittal, former secretary in the department of financial services in the finance ministry, should be laughing up his sleeve at recent reports suggesting a likely change in the government's approach towards special economic zones (SEZs). Stung by the blow that falling exports have led to the country's worsening current account deficit (CAD), the government is apparently considering giving a fresh policy boost to SEZs - an idea that earlier had been questioned and debunked for a variety of reasons.
The reason for this sudden change of heart is simple: the government seems to be of the view that all possible steps should be taken to shore up exports, which till January this financial year have fallen by five per cent. With imports continuing to rise, the trade deficit in these months has risen eight per cent over the same period last year, putting pressure on CAD. One way to relieve that pressure, according to the current government thinking, would be to boost exports by promoting SEZs once again, since whatever the problems may have been, they resulted in higher exports.
But why would Mittal laugh up his sleeve at such a turn of events? Let us go back in time. A fact that may have been forgotten now is that before his eventful innings in the finance ministry as the financial services secretary, Mittal served a fairly long tenure in the commerce ministry, and one of his key responsibilities was to promote and implement the idea of SEZs.
Never found wanting in his ability to push an idea that he believed in, Mittal ensured that SEZs kept mushrooming in different parts of the country and were assured of the statutory support of tax incentives as well. And he indeed looked a dejected man when SEZs fell out of favour, since many industries were found to be using the policy merely to grab land and the government realised that SEZs might not have resulted in substantial incremental exports.
Nothing has changed since then. The arguments used against SEZs are still valid - existing exports do get diverted to these special zones because of their incentives, and industries can use this scheme to acquire land for real estate gains. What has changed now is the government's realisation that with the widening CAD, there is a dire necessity to promote exports with whatever incentives or schemes that can be devised. Like Mittal, many other officials in the commerce ministry may wonder what benefits SEZs can yield for exports now, if it was indeed considered useless, discredited and deprived of continued policy support.
Why only talk about SEZs? The mood in the finance ministry and the department of commerce is now different. The relations between the two have also become much more cordial. Gone are the days when for every commerce department's proposal for a fiscal incentive to boost exports would be subjected to close scrutiny by the finance ministry, and questions would be asked if exporters really needed the proposed incentives and whether exports would go up even without these. On the contrary, there is now an active search going on for incentives that could be devised to give a leg-up to exports.
Only last year was there a major row over the continuation of the duty entitlement passbook scheme that allowed duty-free import of goods meant for export production. The scheme was overseen by the commerce ministry, and the finance ministry's concern was that there were large-scale revenue leakages because of inadequate monitoring of the scheme's implementation. In any case, the logic of continuing the duty entitlement passbook scheme was in question since the finance ministry was willing to expand the scope of its duty drawback scheme that would largely address the concerns of exporters on reimbursement of duties paid on goods meant for exports. Yet, the department of commerce was apprehensive over the manner in which the finance ministry would address exporters' concerns.
With the finance ministry now on the back foot on the question of such a duty reimbursement for exports, it is likely that the debate on why and how the duty drawback scheme could be made more effective would resume all over again. Indeed an even bigger change in the government's approach is perceptible from the manner in which it has begun preparations for the annual supplement to its trade policy, which are usually announced by the last week of March or the first week of April.
A meeting of the board of trade has already been convened. Industry bodies are once again busy lobbying with the government on what kind of fiscal or non-fiscal incentives could be given to boost exports at a time the major markets for India's goods and services are drying up, since those economies are facing an adverse economic situation. The announcement of the annual supplement to the five-year trade policy had become almost a non-event in the last few years. But this year, it has suddenly acquired importance for both policy makers and industry. And all this because India's CAD has widened to an unsustainably high level, and exports are once again a big priority for policy-makers.
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