The Hindu Business Line : Exports on a high

While it was fairly evident that fiscal 2006-07 would be a wonderful year for the economy except for the creeping inflation, it was not clear how India would perform on the external trade front over the whole period. Now, the Annual Supplement 2007 to the Foreign Trade Policy 2004-09 says that India's manufacturing and services sector took the country's share in world trade from a paltry 0.76 per cent three years ago to more than 1 per cent in 2006-07. Given the severe competition from China and some Latin American countries that is indeed creditable. In value terms, fiscal 2006-07 closed with India's merchandise exports at $125 billion, in itself a doubling from the $63.54 billion three years ago. With an annual compounded growth of 25 per cent since 2004 compared to 12 per cent the previous three years it is hardly surprising that the Commerce Minister, Mr Kamal Nath, should raise the target for the current fiscal to $160 billion and provide a host of initiatives to enable it to be met.

For the gem and jewellery sector, one of the major thrust sectors that contributes more than 15 per cent of total exports, the policy grants duty-free import of capital goods; handlooms and handicrafts too will enjoy this privilege so as to allow the sector to modernise. But the most significant initiative is the exemption from service tax for service exports thus obliging an industry that has long demanded this exemption. The policy takes the traditional bow in the direction of agriculture with a series of incentives for agri-exports. Part of the reason for the wide range of initiatives is perhaps the dramatic increase in Foreign Direct Investments last fiscal that reached $16 billion surpassing portfolio capital flows. Mr Kamal Nath is right in assuming strong fundamentals and FDI flows as the twin basis for record export growth. But that is last year's story.

With inflation yet to be tamed and interest rates hardening, a new script is being written. Perversely, unabated capital flows will strain the ability to maintain a competitive currency, low inflation and at the same time soft interest rates, all essential for export growth. Over the last six months neither Mint Street nor New Delhi has been able to ride all these horses without tilting one way — letting the rupee appreciate, or the other — raising interest rates. The rupee is significantly stronger than it was this time last year. Exporters will, therefore, unlike the Commerce Ministry, be more modest; given a slowdown in India's largest market — the US — climbing interest rates and an uncertain rupee, it would be commendable if the target were attained.