The Government should consider re-jigging the basket of merchandise exports by adding more skill-based sectors in addition to the traditional labour-intensive goods.

A clear indication of the emerging view on the status of the stimulus measures is provided by the latest raft of concessions for the export sector that will set the Government back by Rs 500 crore. The relief has been sought by the exporters who have had a trying time since September 2008 with the beginning of the economic contraction in the West. The fall in demand for Indian goods squeezed merchandise exports for 13 straight months till last November when the trend reversed and exports registered a growth of 18 per cent; that record was repeated in the following month. If exports have turned the corner should the Government still be so generous with its duty concessions?

Commerce Ministry officials will nod affirmatively since they recognise the last two months' positive showing as a base effect, a comparative outcome given that exports had fallen severely 12 months ago. To effect real expansion, policymakers figure that exporters still need help and they are right. The issue however is: What kind of help and to what end? If the idea is to ensure that labour-intensive sectors maintain employment then retaining interest subvention for such industries makes sense. On the other hand, offering reduced interest rates for dollar loans of LIBOR (London Inter-Bank Offered Rate) plus one percentage point, instead of 3.5 per cent, may not necessarily earn exporters the market access they desire. At this point in the western markets the issue is not so much of price competitiveness as the absolute contraction in demand; unemployment in the US and Europe, with the exception of Germany and France, is still high. It is true that the incentive packages are also aimed at industries targeting new markets such as China and Japan but merchandise exports still find western markets most profitable. What else can policymakers do? They have extended the list of eligible products but this is a routine initiative. Labour-intensive industries need to upgrade their offerings and processes; incentive packages therefore must stimulate both providers of innovation and new technologies and industry-users.

Alongside, Commerce Ministry officials should now consider how to re-jig the basket of merchandise exports; adding more skill-based sectors in addition to the traditional labour-intensive goods could promote India's location as a global manufacturing hub. Some global firms are already at work on this idea; policy initiatives to push it along would surely boost exports immeasurably.

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(This article was published in the Business Line print edition dated January 18, 2010)
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