The Hindu Business Line : Level the field for exporters

THE DATA ON India's external trade for January 2006, specifically exports, confirm certain trends that the Finance and Commerce Ministries would do well to keep in mind when drawing up policies, both in the Budget and in the future. For one, Indian exporters have posted a good performance in the face of a sluggish world economy, stiff competition from China and other developing countries including Bangladesh (in readymade garments, for instance), and an exchange rate that has not always been favourable. What is more remarkable is that the traditional sectors — gems and jewellery, engineering and textiles — have been the mainstay of that growth. And this growth has been achieved despite the odds stacked against them in terms of the high transaction costs that poor infrastructure, red-tape and other hassles cumulatively add to the price of the exportable.

With a 21 per cent growth in dollar terms last month, on the back of a cumulative 18 per cent growth during April-December 2005, Indian exports were in sync with the upswing in the economy. Even more impressive, the cumulative exports for April-January were higher than the non-oil imports. The policy implications of this performance in the face of odds, both domestic and global, are clear. The Budget and the current Foreign Trade Policy (2004-2009) need to be tailored and tweaked to provide strategic opportunities for exporters to do even better in the years to come. This becomes all the more necessary in view of the demand of exporters from the domestic tariff area for tax parity, and their perception that they are discriminated against vis-à-vis units in Special Economic Zones.

It is bad enough that the SEZ units enjoy tax exemptions — for instance, the tax holiday for five years and 50 per cent tax for two years subsequently — while the Section 80 HHC that used to confer similar concessions on exporters from the Domestic Tariff Area (DTA) has been withdrawn. It becomes worse when viewed in the context of studies that have shown SEZs to be poor performers. Common sense demands that policy should focus on helping the better performers to excel. With the SEZ Act, the Commerce Ministry has done just the opposite.

The data for January are a stark reminder of the need to end the discriminatory tax policy that favours one section of exporters (and the wrong one, if experience is anything to go by). The current government professes rational fiscal policies that are pro-growth; it has helped create SAFTA that will rationalise tariffs for freer trade in South Asia and is a votary of tax parity in global trade, in general, at the WTO. It is only proper, then, that the same set of policy-makers creates a level playing field for all exporters. Fiscal concessions are, however, the least efficient and often costly (to the exchequer, that is) way of boosting exports. A better method would be to reduce those hidden transaction costs by simply extending the relevant provisions contained in the SEZ Act to all exporters and rationalise the tariffs. This is the most important lesson that the Commerce Ministry should draw from the data on India's exports.

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