Misguided sops

| Updated on November 12, 2017

Taxpayers' money would be better spent on addressing gaps in power, road, rail and port infrastructure rather doling out sops of a questionable value.

Should a decline in growth rate from 81.8 per cent to 36.3 per cent in a space of three months for any sector be cause for alarm? Well, when it comes to exports, the Government seems to believe so. So worried has the Commerce Ministry been about the recent ‘slowdown' — despite exports on the whole registering a 52 per cent year-on-year increase to $160 billion during April-September — that last week it announced additional export incentives linked to specified products (from hand tools to potassium iodide) and destinations. These sops, mainly in the form of import duty credit as a certain percentage of the free-on-board value of exports, are expected to cost the exchequer about Rs 900 crore. Besides, the Reserve Bank of India, too, extended a two per cent interest subvention on rupee export loans for four sectors (handicrafts, handlooms, carpets and SMEs) — taking the total value of the ‘package' to Rs 1,700 crore or so. The exporting community couldn't have asked for a better pre-Diwali bonanza, which is cherry on the cake of a 10 per cent-plus depreciation of the rupee against the dollar since August.

The Government's defence of the latest handouts is that carpets and handicrafts are ‘labour-intensive' industries and hence deserve special support. As regards the extra incentives for exports to Mexico, Cuba or Kazakhstan, the stated reason is the weakening demand in developed markets and the need to diversify into ‘non-traditional' markets in Latin America, Africa and the Commonwealth of Independent States. But the way they have been done, through duty credits, is questionable. It is one thing to reimburse taxes suffered on goods manufactured for exports (permissible under the WTO rules); but it is quite another to hold that India's carpet and handicraft exports suffer import duty on inputs. In the case of special duty credits for exports to non-traditional markets, even the fiction of additional tax imposts has not been maintained. It is simply being given as a market penetration incentive. In any case, it is the job of exporters to anticipate shifts in demand and build new markets. In fact, some level of diversification has happened even without much policy intervention. In 2000-01, the developed OECD economies accounted for nearly 53 per cent of India's exports; this has since fallen to 33 per cent in 2010-11.

If one were to promote exports, the best way to do it is by investing more in power, roads, rail and port infrastructure. Currently, the average turnaround time for ships in Indian ports is over four days, against less than a day in Singapore. Likewise, it takes days for cargo to reach the ports from the hinterland, where the manufacturing process itself would have required running on diesel generator sets in the absence of reliable supply from the grid. Taxpayers' money would be better spent on addressing these concerns rather doling out sops of a questionable value.

Published on October 17, 2011

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