Providing Incentives For Exports

Two items in the newspapers last week made interesting reading. The first one described a long list of new incentives which the commerce ministry has proposed for inclusion in the Union Budget for 1997-98 in an attempt to reverse the disturbing trends in export performance. This list of incentives includes total exemption from tax for profits earned through exports of goods and services, as well as the exemption of exporting companies from the purview of the controversial minimum alternate tax. Tucked away in one of the inner pages was the second item. This declared that Indian exporters are reluctant to sign rice export contracts because they fear that the government may impose a ban on exports of non-basmati rice.

 

All this comes at a time when the performance of the export sector during the current year has highlighted one of the major weaknesses of the Indian economy. Readers may still recall the euphoria generated by the record performance of exports in 1995-96. Exports during that year had grown at more than 20 per cent. Commerce ministry officials rather optimistically claimed that the export sector was poised for sustained growth, and projected a similar growth rate for the current year.

Unfortunately, Indian exports have fared rather dismally in world markets this year. Even the most optimistic estimates do not forecast growth rates exceeding 10 per cent for the entire fiscal year. The Nehru- Mahalonobis fascination with heavy industries and import substitution was mainly responsible for the establishment of a high-cost and relatively capital-intensive economy. Of course, the strategy of import substitution also required extensive protection to Indian industry. The protected industry had neither any incentive to practice economy or to improve the quality of goods. They could sell their products in the domestic market since Indian consumers had no other option. However, foreign markets were practically non-existent since foreigners were more discriminatory.

In contrast, most of the fast-growing Asian countries exploited their comparative advantage in cheap labour and actively promoted the growth of a labour-intensive export sector. The strategy of export promotion, apart from generating a healthy balance of payments, has also enabled these countries to increase employment at a much higher rate than India.

Over the years, Indian policy makers seem to have learnt from the experience of these countries. We have increasingly moved away from our previous fascination with import substitution. Export promotion has become an important goal and exporters have been offered various incentives from time to time. Despite all the incentives, Indian exporters have not been particularly successful in foreign markets. Although the Indian export basket today is more diversified than it was some time ago, there has not been any significant and sustained increase in volumes. Even a cursory comparison of the average growth rate of the export sector in India with those in say South Korea or China establishes this point quite starkly. So, we need to examine why the Indian export sector has not been able to grow at desired rates despite the shift towards export promotion.

An important problem with the Indian strategy of export promotion has been its concentration on improving profitability in foreign markets. While it is essential to increase the competitiveness of Indian products relative to that of our foreign rivals, this by itself cannot promote the volume increases which are projected. Even if Indian exporters can sell in foreign markets, they may not want to simply because the domestic market may be a more attractive option. In other words, even if exports are profitable, Indian producers may want to sell in the domestic market because of higher domestic profitability. Domestic markets are much less competitive than foreign ones.

In order to be successful in foreign markets, producers have to provide a guarantee about reasonable quality, maintain strict punctuality in delivery schedules and so on. All these increase direct and indirect costs if production is for exports. Moreover, some of the export incentives are illusory. One software exporter tells me that the paperwork and running around required to reap the benefits of some of these incentives is not worth the effort. Time is costly after all. We have also not exploited the potential of the agricultural sector as a major foreign exchange earner. In particular, restrictions on foodgrain exports have been the rule, although there has been some relaxation in the last couple of years.

The ostensible rationale for these restrictions is that foodgrain exports would push up domestic prices. While this is a valid argument for maintaining restrictions on the export of food staples consumed by the poor, this cannot be used to justify a ban on exports of superior varieties of foodgrains. For instance, why should the government ban exports of all varieties of non-basmati rice? The moral of all this is that policymakers need to look beyond measures such as tax concessions for exporters. Simplified procedures, the removal of unnecessary quantitative restrictions, and the opening up of domestic markets all of them can promote the growth of exports!