Exporting beyond the sops

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Simply pacifying exporters with what they want — a weak rupee — is not the way to add new goods to the export basket. Realising that the RBI’s non-intervention in the currency market is deliberate policy, exporters must expand the basket of goods and destinations while the Government must re-think the SEZ concept, says ASHOK UPADHYAY


Speaking to this paper a fortnight ago, Mr Gopal K. Pillai, Secretary to the Commerce Ministry, said that a relief package for exporters was on its way. Readers could be forgiven for assuming he was talking of a community ravaged by floods or famine or even severe power outages when in fact it is nothing more than the dollar earners experiencing a dip in their super profits following the strengthening of the rupee. For more than a decade, exporters have enjoyed the benefit of a rupee falling against the dollar, even with surging foreign exchange reserves.

That has been achieved by the Reserve Bank of India, mopping up the dollars for rupees precisely at a time when the demand for the rupee was growing at a rapid pace. By doing so, the central bank was going against the grain of market forces because it wanted to keep the rupee low against the dollar. Like China and Japan, both of which follow a ferociously interventionist policy to keep their currencies weak, India has managed its currency for the same reasons, one of which was to make exports more competitive, price wise.

With an average export growth of 25 per cent over the last four years, the country has benefited from a weak currency. But those gains in merchandise trade have come at a high cost; a cheap rupee and lowered tariffs have added to the import bill and widened the trade deficit even with a commendable record of services exports. Barring the information technology sector that has catapulted India to the global market place Indian exports have not had much to say for itself if you peer into the basket of goods leaving Indian shores.

The same old basket

Textiles account for a fifth of merchandise exports, gems and jewellery 15 per cent and engineering goods 16 per cent. These are the mainstays of India’s exports, have been so for decades, but ideally should not continue to be so given the structural shifts in the economy. Most exporters tend to focus on one altered circumstance — an unfavourable exchange rate. Textile exporters have already scaled down their forecasts for the current year, the gems and jewellery sector is jittery about its earnings and the Commerce Minister has sought help from the Prime Minister on their behalf.

But there are other mitigating circumstances that can be worked to change the contents of India’s export basket. A free import regime all these years has increased the import intensity of manufacturing. One study, although a bit dated shows the import of technology as percentage of sales increasing from 0.7 per cent in 1990-91 to 4.8 per cent in 1996-97; between the same period the import of capital goods however remained steady at around 2.5 per cent.

Another study correlates trade liberalisation to Foreign Direct Investment (FDI) flows and exports. Predictably, States such as Maharashtra, Karnataka, Gujarat and Andhra Pradesh have witnessed substantive flows of FDI and are major export centres. The study does not provide a break-up of exportables but it is fairly obvious what that basket would contain. CSO data on merchandise trade are hardly illuminating for the diversity or novelty of exports and that should be more cause for concern to the Commerce Ministry than a slippage in export earnings of a section of exporters.

Whose side are you on?

For exporters hit by a strengthening currency to lobby is one thing; in a democracy that is their right and ministers need to listen to them. But it is quite another for an arm of the government to actively lobby for partisan interests. Governments have to weigh the outcomes of their policies for the larger good. Often that itself is an ambiguous category but at the very least it encompasses more than a particular group.

One of glaring weaknesses of the UPA Government has been the incapacity or unwillingness of some of its members to keep that larger good in mind when entering the public domain with opinions or policy. Often this has resulted in a dissonance of stances rarely of an unprecedented kind. The Special Economic Zone and its outcomes or even its purpose is a prime example of cross-purpose functioning; land acquisition has been another.

The Commerce Ministry’s support for those traditional exporters hit by the rising rupee is a variation on the same theme because it has one arm of government wanting to undo what another arm; the RBI has done for what is deemed the larger good. Whatever its merits, the RBI’s present non-intervention in the exchange rate market is a deliberate policy occasioned by the same philosophy that makes it intervene to keep the rupee low; currency rates must be adjusted on the basis of a perception of “price stability”. Now, the central bank wants to reduce the cost of imports, perhaps mitigate supply shocks by allowing cheaper wheat and other foodgrains imports. Unlike the US Fed or the Bank of England, the RBI does not allow the market alone to determine exchange rates and that is why the Indian exchange rate is partially flexible, or partly managed.

Assuming that the RBI is on the right track in its pursuit of inflation, then allowing the rupee to strengthen, for a while till prices de-escalate and an overheated retail and real-estate credit demand is dampened, is a policy that should have the imprimatur of all policymakers even if one section of economic agents, exporters, suffer temporary dips in earnings..

Sops for all

At the same time, the Commerce Ministry must do its bit to boost exports in a radical way. That is what it is meant for and the best it can do is to look at the most obvious candidate for this job — the SEZ. With all the problems that continue to dog its development into townships, one key feature has been forgotten. That feature is embedded in the SEZ Act of 2005, but forgotten ever since the February 2006 notification that enthused developer-applicants.

This January, the Empowered Group of Ministers for SEZs pondered over an export obligation clause for the zones but ended inconclusively on the subject. Mr Kamal Nath later clarified that the issue of obligatory commitments had been discussed with reference to new SEZs; the Commerce Secretary added separately that the 63 notified SEZs would not be affected by any new rules. Why not? An export obligation for an SEZ is not a new rule. It was the underlying philosophy of the SEZ Act of 2005 that morphed the existing Export Processing Zones into SEZs and legislated new ones. Admittedly, the Act and the subsequent notification widened the notion of exports to “trade operations”. But the SEZ, both as concept inspired by the Chinese equivalent and in law, was an export-oriented “duty-free enclave” for globally competitive goods and services.

Revive SEZ idea

When the E-GoM briefly considered the export obligation idea it was returning the concept to its original premise. But that premise, or identity, was vociferously opposed by some ministries, quickly abandoned and has never again figured in discussions on SEZs. Perhaps the Commerce Ministry should revive the idea if it is serious about exports.

But most governments choose the expedient over the rational; it makes far more sense for the Commerce Ministry to champion the SEZ for their investment potential alone (to what end?) and bravely promise sops for exporters miffed over the rising rupee even as it denounces subsidies by American and European governments.

What kind of sops can exporters hope to get? They want a weak rupee. The RBI may discover that inflation is heading southward; already officials are claiming headline inflation has fallen below 5 per cent. What that figure stands for is anybody’s guess but it probably means little, being an average of other, more relevant indices that show no signs of abating. But if the inflation-that-counts for the Finance Ministry sustains at below 5 per cent levels the RBI may just revert to its interventionist mode and mop up the dollars and thus strengthen it once again. That might just be the one “sop” the Commerce Ministry acted upon.

(This article was published in the Business Line print edition dated June 30, 2007)
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