INDIRECT TAXES
| Ambitious targets for exports Mon, 21 Mar 2011 |
| Early this month, the Union Commerce Ministry released a draft strategy paper for doubling exports in three years to $450 billion by 2014. The immediate target is to reach $225 billion by the end of this year. The doubling of exports will be possible if shipments grow at an annual rate of 26 per cent. The draft paper, now put up for a wider circulation, is in the nature of a visionary document, something to aim for but is it realistic? Rather propitiously, there has been some good news on the trade front soon after the strategy paper was released. Exports breached the $200-billion mark to touch $208 billion in April-February. The target for the whole year (April-March 2010-11) was $200 billion and was achieved in the first 11 months itself. The strong recent performance has been possible because of the robust demand from the U.S. To the extent these developed economies maintain their recovery; Indian exporters are assured of a stable market for their merchandise exports. The export strategy aims to, in Commerce Minister Anand Sharma'a words, a doubling of exports in textiles, tripling of shipments in gems and jewellery and engineering, tripling of exports in electronics goods, doubling of agri exports and tripling leather sector exports. There is nothing wrong in having ambitious targets, especially when the strategy paper is more in the nature of visionary document. However, most of these points have been made before in the Foreign Trade Policy and other forum. Now, the infirmities if any, in the Commerce Ministry's approach lie in the fact that the achievement of its stated goals depends on some outside factors and other arms of the government. For instance, demand in the advanced economies is exogenous. The spiralling commodity prices, especially of petroleum products might put a brake on the recovery process. Again, while so much is made of reducing transaction costs, the Commerce Ministry by itself can only simplify procedures relating to say export incentives. For many other simplification of procedures, it has to depend on other arms of the government. Transaction costs, of course, arise because paucity of infrastructure development has been a top priority of macro economic policy. There is very little that the Commerce Ministry can, by itself, do to speed up infrastructure projects. Rupee appreciation, frequently mentioned by export organisations, as a deterrent to export competitiveness, is again an issue that concerns the entire macro economy. Besides, a stronger rupee is beneficial to importers. Despite a recent rising clamour to fashion an exchange rate policy that will help in moderating the rising trade deficits, it is difficult to visualise a scenario in which the exchange rate of the rupee is managed in a way to benefit exporters alone. The other point is that a portion of imports go into exports. Exports of petroleum products from India are growing phenomenally even as India imports 80 per cent of its petroleum products. There are many other examples of imported items going into exports. The whole point is that neither exports nor imports are watertight categories. The impact of exchange rate movements cannot be so easily measured. According to the Commerce Ministry, imports also went up by 21.2 per cent in February, leaving a trade deficit of $8.1 billion. During the first 11 months (up to February) imports grew by 18 per cent to $305.3 billion. Imports are set to close the year at $350 billion leaving a merchandise trade deficit of about $125 billion. The Economic Advisory Council (EAC) to the Prime Minister headed by C. Rangarajan has estimated the merchandise trade deficit for the current and next year to be at the same level of 7.7 per cent of gross domestic product (GDP). The current account deficit (CAD) for 2011-12 is projected at about $56 billion or 2.8 per cent of GDP. The position on net invisibles is also expected to remain at the same level of 4.8 per cent. Improvement in service sector exports is likely to be offset by an expansion in the outflow of investment income. On the capital side, flows of a similar magnitude amounting to $76 billion (3.8 per cent of GDP) is projected for 2011-12 which will leave a modest surplus of $20 billion to be added in the foreign exchange reserves. The EAC has admitted that the large absolute values of current account deficits that have been in evidence from 2009-10 onwards are likely to persist in 2011-12. As a percentage of GDP, the current account deficit has been 3.7 per cent during the first-half of 2010-11 and even touched 4 per cent during the second quarter. Even if CAD were to stabilise at a lower level of around 2-2.5 per cent, it is clear that large capital inflows will have to come in. Domestic conditions need to be favourable to attract the right type of inflows, foreign direct investment and those that do not create debt. Recent thinking calls for a continued vigil on the levels of CAD even if the deficit can be attributed to bright economic prospects in the country leading to excess of investments over savings. C. R. L. NARASIMHAN |
Online Poll