Moving Up A Gear

There is no reason to dispute the message in these numbers. But if this diagnosis is correct, that is an argument for pursuing reforms in the external sector with greater zest. There are four directions such reforms should take. First, since exports are sluggish, there cannot be a case for artificially maintaining a high value for the rupee. By the RBIs own admission, it has intervened in both the spot and forward markets to prevent further depreciation. With inflation differentials being what they are, real appreciation hurts price-sensitive exports. As long experience should have taught the country, a high exchange rate is not a matter of national pride, it is instead an invitation to trouble.

 

Second, the Foreign Exchange Regulation Act (Fera) must be amended without delay. Since immediate capital account convertibility is impossible, scrapping Fera is not the answer. But Fera needs to be replaced by a new piece of legislation, which will remove several of its draconian provisions. There has been some discussion on capital flight arising out of under-invoiced exports and over-invoiced imports. Such phenomena should not be interpreted as a case for further bureaucratic policing. They pin-point lack of liberalisation, not too much of it.

Third, quantitative restrictions (QRs) on imports must be phased out. The commerce ministry has pre-empted the exim policy due in April, by moving 69 consumer goods items to the open general licence (which means unrestricted imports), and 92 items to the special import list (SIL) category that is available to exporters. It would have been better sense to move these items also to the OGL list, as the differentiation between the OGL and the SIL lists is completely arbitrary. For example, why should aluminium beverage cans be in the SIL list and burglar alarms in the OGL list? While some liberalisation is better than none at all, it must be remembered that there are nearly 3,000 items on the restricted list, and 900 on the SIL list.

Finally, customs duties must be brought down significantly. The effective rate of protection has not come down by very much over the past six years, because of the substantial devaluation of the rupee since 1991, and a reformist finance minister should address this task without delay.