Still the old mindset

If commerce minister Kamal Nath wants to double the country's share of global merchandise trade in five years, the five-year Foreign Trade Policy unveiled yesterday is not the one to get us there.

While the policy is full of small sectoral initiatives that will generate the usual round of applause from potential beneficiaries, it misses the big picture.

Exporters will certainly welcome the initiatives to lower transaction costs by allowing them to access credit without bank guarantees. Some sectors, such as gems and jewellery, and even service exporters, will welcome the decision to give them more duty-free import entitlements that can be sold at a premium. The continuation of the DEPB scheme and the freeing of all exports from service tax will also be widely welcomed.

To be sure, it is an open question whether such benefits actually stimulate exports in the manner desired. Much is made, for instance, of the agriculture package that includes a five per cent freely transferable duty-free import entitlement.

Since the maximum benefit this can give any exporter will be in the range of one or two per cent of the total export value in most cases, the overall stimulus to farm exports can’t be too much.

On the other hand, the biggest issue facing farm exports, apart from low productivity, is that government-mandated local prices are generally much higher than export prices. Tackle this, and farm exports would probably increase much faster.

Or look at the success story being scripted in the export of complete cars from India. Maruti, Hyundai and Tata Motors are seeing significant export orders not because of incentives, but because the sector as a whole has become more competitive within the country.

The larger question, thus, is whether you can focus on making the exporting part of the economy healthier without treating the rest of the system.

While it is obvious that a low import duty regime will make Indian manufactures, and therefore exports, much more competitive, Kamal Nath can do little about this without the finance minister’s consent.

In the event, the commerce minister has tried to reduce import duties by granting more duty-free entitlements fairly liberally. And his babus have then used this to do what the bureaucracy loves most - play favourites.

Through a fairly arbitrary and opaque process, the ministry has decided that while exports of handlooms and handicrafts will get duty-free imports equal to five per cent of the export value, leather units should be allowed only three per cent! And gems and jewellery units are to be allowed a two per cent re-import entitlement for rejected jewellery.

At a time when the use of anti-dumping provisions the world over is increasing, the ministry’s decision to reimburse costly legal fees for exporters trying to fight cases in places like the US and the EU is a good one, especially since victory for one exporter can help the country as a whole.

But even here the fact remains that India is one of the world’s largest users of anti-dumping duties and, to the extent this increases the cost of imported inputs, it reduces our export competitiveness.

Despite the forward movement in several areas, the policy does not move away from the principle of selectivity. A genuine Foreign Trade Policy should aim to make Indian products competitive. Period.