Poor coordination

While the United Progressive Alliance has set up a steering committee for coordination between the allies, the Congress party could perhaps do with a similar mechanism to deal with its own flock.

Differences have surfaced between Commerce Minister Kamal Nath and Finance Minister P Chidambaram over the trade policy that was announced a fortnight ago.

The fact that issues were not sorted out before the policy was announced leaves one with the feeling that the government is still not functioning as a cohesive unit.

This reduces policy-making to a farce, since it is now not clear which of the trade policy’s initiatives will finally come through and which ones won’t.

Even at the time the policy was announced, it was obvious that the Target Plus scheme of increased incentives for exporters surpassing their targets was open to abuse—and that is precisely the point the finance minister is making now.

Apart from the fact that the finance minister’s views were given the short shrift, it appears the policy wasn’t even shown to the Prime Minister.

It would have taken just a moment for someone of Dr Singh’s calibre to figure out just how vacuous this particular scheme was. So much for the PM’s statement asking cabinet colleagues not to make policy statements without clearing them with him at least three days in advance.

Indeed, at the height of the inflation crisis, when the government was cutting import duties to bring in cheaper imports, Agriculture Minister Sharad Pawar held a press conference to announce that there would be no cuts in duties on edible oils.

With edible oil prices skyrocketing, this is precisely what the government has now had to do.

On the trade policy issue, the larger point, of course, is whether the country needs to offer concessions of around Rs 40,000 crore a year on a total merchandise export base of around seven times this amount.

This is not to deny what the export community never tires of pointing out: that there are a large number of taxes, such as octroi, or higher relative costs of inputs (electricity, for example) that put Indian exporters at a competitive disadvantage. To level the field, these extra costs have to be reimbursed to exporters in some manner or the other.

But there is another way to look at the Rs 40,000 crore expenditure on export sops—as an opportunity cost. The amount is large enough to set up another 10,000 MW of power capacity, augmenting current capacities by a tenth, or pay for half the cost of the Golden Quadrilateral project.

Since we are talking annual savings here, the money saved on export incentives could, over the medium term, actually help lower the costs of exports by providing better infrastructure and cheaper (or at least more reliable) power.

The example of the automobile industry proves that what matters ultimately for exports are not tax incentives, but an overall improvement in the ability to compete.

Greater coordination between various ministries not only makes for better policy, but also for a lesser waste of resources.