The Hindu Business Line : Policy illusions

THE COMMERCE MINISTER, Mr Arun Jaitley, has left no one in doubt that the timing of his latest Exim policy initiatives had to do with the impending elections to the Lok Sabha. But whether his announcements were a genuine attempt at ushering in some much-needed reform that would benefit the exporter community or merely a cynical attempt at reinforcing the `feel good' sentiment would depend on how soon these intentions are translated into concrete action. For, if the implementation is to take place only well into the next financial year, then these announcements serve no purpose. Worse, he runs the risk of being accused of indulging in a bit of partisan politics.

But doubts on the timing apart, the changes now contemplated do signal a larger policy shift in managing the rupee's external parity. The principal approach to stabilising the external sector has been to provide incentives for boosting exports so that the resultant flow of convertible foreign exchange provides a stable environment for the rupee. This policy option, at least in the short run, is proving to be ineffective. Whether the policy impulses for export growth have had any effect at all or not, a surge in portfolio investments and the near stable conditions on the current account with prospects of further improvements, is threatening to undermine the Reserve Bank of Inda's strategy of stabilising the external sector through intervention in the currency market. It would appear that in the Government's view, the time has come to open up another front of potential foreign exchange outflows so that the forces of demand and supply can play themselves out evenly and moderate thereby, if not preclude altogether, the need for the RBI intervention. The freedom afforded to the jewellery trade to import precious metals, no doubt in the nature of a trade facilitation measure, has additionally the potential to lead to a surge in its imports as merchant establishments could stock up metals in anticipation of higher demand.

This is not to suggest that the Government does not care for higher exports. Indeed, the intent to remove the impediments to exports is still evident, but the policy shift is that it is now opposed to setting up artificial props for exports such as keeping the rupee artificially weak, and securing unrealistic export commitments from those importing capital goods at concessional duty. Mr Jaitley has now reduced the old export commitments. Similarly, the decision to mitigate the effect of high energy cost by letting exporters to source fuel at international prices is another initiative where exports are given a leg-up through sustainable manufacturing efficiencies rather than policy-induced comparative advantage. The process has to be sustained.

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