Good Morning India! Here are some bits from The World Economic Situation and Prospects 2013 report, courtesy United Nations Department of Economic and Social Affairs and UNCTAD, to spoil our evening. Let’s start with the headline from the executive summary: “The world economy is on the brink of another major downturn.”

And these are the first few opening lines: “As foreseen in last year’s issue of this report, the world economy weakened considerably in 2012. A growing number of developed economies, especially in Europe, have already fallen into a double-dip recession, while those facing sovereign debt distress moved even deeper into recession. Many developed economies are caught in downward spiralling dynamics from high unemployment, weak aggregate demand compounded by fiscal austerity, high public debt burdens, and financial fragility.

“The economic woes of the developed countries are spilling over to developing countries and economies in transition through weaker demand for their exports and heightened volatility in capital flows and commodity prices.” End of quote and of the news for the year.

Recession NEEDS tweaking

What’s clear from the above remarks that come not from some melancholic Cassandra but from the United Nations is that deepening recession in the developed economies robs emerging economies’ exporters of their major buyers. In other words, simply put, developed nations are not buying from the developing as much as they used to, nor will they buy as much as they have done so far.

To put it very simply, exporting countries had better realise that their honeymoon with the Western consumers is over.

And yet more in China

Exporting economies like China that put so much store by the export-led growth model and gained hugely by it are not taking any chances; they are looking within and wondering just how they can do two things --- moderate growth so as to manage better the detritus of their successes (overheating, killer smog, asset price bubbles); at the same time, they want to rebalance demand, and encourage domestic consumption to maintain that moderate level of growth.

There’s more happening in China. According to a report on global competitiveness by Deloitte Touche Tohmatsu Limited along with the US Council on Competitiveness (2013 Global Manufacturing Competitiveness Index), China still ranks first according to more than 500 chief executives from around the world, while India comes fourth. Interestingly, China’s top ranking flows from its repositioning as a destination for high-end manufacturing, even as it vacates low-end manufacturing to countries such as Vietnam.

The study finds that China’s knowledge and technological capabilities along with policies focusing on key high-value industries are beginning to pay dividends; China may no longer be the world’s premier workshop for every useless thing the American consumer needs because it’s focusing on high-end manufacturing. It is entering advanced areas, right from electronics to green industry to fashion.

Has China read the world economy’s distress signals and its own, correctly? By focusing on high value manufacturing, and shifting emphasis towards consumption and away from investments in property, Chinese policymakers feel more confident of regulating inflationary excesses and reducing the effects of uncertain consumer demand from the developed world.

And in India…

Indian policymakers seem clay footed by comparison. Where wisdom might call for pegging growth rates lower if only to pause, take stock of infrastructure and plan for more sustained, moderate growth, they dream of the fast-track, yearn for yesterday’s glories, so to speak, when growth hit 8 per cent: growth drivers, it seems can be revved up with just a little nudge.

How else are we to consider the latest initiatives of the Commerce Ministry to boost exports?

More often than not, the Ministry can think of nothing better than to offer tax breaks for exporters in the hope that such privileges would turn their products more competitive; in reality what tax “sops” do is to enable exporters retain their margins in a falling market.

The market, as the report from United Nations, reminds us is falling for structural reasons not some consumer whimsicalities or shifting demand preferences. When India was knocked off the top-five apparel exporters perch by Bangladesh Vietnam and other arrivistes, one could have imagined tax sops as a form of subsidy helping Indian apparel exporters out-price others.

That SEZ again

Now, however, US and Europe are in a recession, and in such circumstances tax breaks can hardly be expected to work. Under the circumstances, what is one to make of the news that the Commerce Ministry intends to discuss the removal of the Minimum Alternate Tax of 11 per cent imposed by the 2011-12 Budget on manufacturing SEZs that had hitherto enjoyed complete tax exemption?

Several issues arise here. SEZs have been dismal export hubs if one were to leave out the IT software parks. For officials to assume that developers will renew their interest in SEZs with the removal of MAT is to fool no one; the SEZ charm has worn off largely because of popular )and even some policymakers’) resistance to what has been perceived as a pure private rent-seeking, public-revenue losing operation.

The biggest reason for the Finance Ministry not to consider the proposal, however, is its own reckoning on how much revenue loss the ill-thought out SEZ Act of 2005 and its operation since then has caused the exchequer.

The Finance Ministry might want to reflect on its own estimates of that loss; incidentally, the Chief Economic Advisor to the Finance Ministry would do well to recall his earlier comment on the arguable benefits of SEZs and the tax breaks as “perverse incentives.”

The revival of the plea for tax relief breaks for a patently failed project such as the SEZ could be seen as perverse; more charitably it would show how history repeats itself: the first time as folly, the second as absurdity.

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