The Hindu Business Line : It has a job cut out for itself

Competitive strength and outsourcing capabilities should drive the export promotion effort rather than financial incentives and sops doled out to exporters.

THE COMMERCE Minister, Mr Kamal Nath, releasing the Supplement to the Foreign Trade Policy... Accent on growth and employment. — Kamal Narang

The Annual Supplement to the Foreign Trade Policy (2004-09), unveiled by the Commerce and Industry Minister, Mr Kamal Nath, lays special emphasis on employment generation through exports. The paradigm shift in the country's foreign trade policy became evident ever since Mr Kamal Nath unveiled the country's first National Foreign Trade Policy on August 31, 2004, replacing the 2002-07 Exim Policy.

While the accent in earlier years was mostly on earning foreign exchange, the Foreign Trade Policy, for the first time, tried to integrate the trade policy with the process of economic development. Fortunately, with forex reserves crossing $150 billion, just earning foreign exchange to pay for imports is no longer a pressing need. Though imports in 2005-06 touched $140 billion and trade deficit rose $39 billion, largely because of surging oil bill, policy-makers do not seem to be worried.

New schemes

To provide more employment opportunities in semi-urban and rural areas, this year's policy supplement has introduced two schemes — Focus Product and Focus Market — replacing the earlier Target Plus Scheme. The Focus Product scheme would include value-added fish and leather products, stationery items, fireworks, sports goods and handicraft items, while the Focus Market scheme would try to diversify geographies by focussing on emerging destinations such as Africa and Latin America.

Some two million additional jobs are expected to be created in 2006-07 through a 20 per cent growth in merchandise exports. As of now, the merchandise export activity seems to sustain about 16 million jobs. According to a report, Towards an Employment-oriented Export Strategies, prepared by RIS, New Delhi, released along with the trade policy supplement, 13.6 million additional jobs are expected to be created by 2008-09 if exports cross $150 billion by then, as projected.

Policy initiatives

In the new policy, incentives have been given to make India a global hub for gems and jewellery and auto-components while tailoring export-oriented schemes to create more jobs. The RIS report has identified 12 export sectors as employment-intensive. These are textiles and garments, leather goods, gems and jewellery, cereal exports, horticulture exports, flowers, fruits and vegetables, dairy products, process foods, toys and sports goods, pharmaceutical industry, automobiles and auto-components, and consumer electronics and electronic hardware.

However, the RIS report notes a decline in labour-intensive exports in recent years due to slower growth in world demand and stiff price competition from countries such as China, Vietnam and Bangladesh. What is worrying is that the share of labour-intensive products fell by 18 percentage points from around 76 per cent of total exports in 1995-96 to 58 per cent in 2003-04, says the report.

Evidently, much more needs to be done to provide a boost to labour-intensive exports so as to generate more employment opportunities. Some of the labour-intensive sectors such as textiles, handicrafts, and food processing, have been demanding flexible labour laws and permission to employ contract labour during busy seasons. Also, small-scale units need greater financial and marketing backing, testing facilities and infrastructural support.

It is heartening to note that the country's exports in dollar terms have improved 25 per cent in 2005-06 on top of the 26 per cent growth achieved in 2004-05. In fact, the country's export growth has been sustained at over 20 per cent for four years since 2002-03. The Commerce Minister expects exports to exceed the targeted level of $150 billion by 2008-09.

While there is no denying that many industries have been able to improve their competitive strength through restructuring, modernisation and quality improvements, much ground still remains to be covered. According to the latest figures, India's share in world exports inched up to 0.9 per cent in 2005 from 0.8 per cent in the preceding year. India's ranking as a merchandise exporter has gone up just one slot to 29 in 2005 from 30 in 2005. Only certain categories of manufactured goods have contributed to the recent export growth with bulk of the contribution coming from iron and steel, chemicals and engineering goods.

EXPECTATIONS BELIED

With the ongoing process of global integration and the effects of the WTO agreements, it was expected that India's exports of agricultural goods, textiles and garments, leather and leather goods and gems and jewellery would register significant increases. However, a recent study by C. P. Chandrasekhar and Jayati Ghosh (Business Line, February 7) finds that the share of these categories has actually declined in the recent period.

In the case of services exports, on the other hand, India's performance has been much more impressive. The country's share in world services exports has gone up to 2.8 per cent in 2005 from 1.9 per cent in 2004. The share of services in India's total trade rose from 23.5 per cent in 2003-04 to 29.1 per cent in 2004-05 and further to 35 per cent in 2005-06. As a service exporter, India's rank has gone up to 10 in the world in 2005 from 16 in 2004.

Improving infrastructure

While this is no doubt good news, there is an imperative need to increase the share of manufactures both in the production and export to increase employment opportunities for the relatively low-skilled labour force which the country has in abundance. Hopefully, the setting up of the National Manufacturing Competitiveness Council (NMCC) to prepare a strategy for the revival of the manufacturing sector should help accelerate the export of manufactured items. Currently, infrastructure remains the single most important constraint to export growth.

PHASE OUT SOPS

Incidentally, the time has come for the country to phase out the plethora of sops and export promotion schemes and divert such funds for improving the infrastructure facilities, including export infrastructure. The Finance Ministry has expressed serious concern over the rampant misuse of some of the existing export promotion schemes. The revenue foregone on account of various schemes in 2004-05 was estimated at Rs 35,430 crore. Experts have argued that artificial sops only create distortions and dissuade entrepreneurs from making sound business decisions.

The Finance Ministry officials fear that the recently notified SEZ Act and the clearing of more than 140 proposals for setting up of SEZs will cost the national exchequer several thousand crores in terms of revenue forgone. This is all the more reason to phase out the various export promotion schemes which have outlived their utility. Moreover, some of the schemes may not be WTO compatible.

Competitive strength and outsourcing capabilities should drive export promotion efforts rather than financial incentives and sops doled out to exporters. To improve the competitive strength of Indian exports, concerted efforts are needed to reduce the transaction costs through procedural simplification, development of world-class infrastructure and labour law reforms. But many of these lie outside the scope of the trade policy.

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