Sunday, March 30, 2003

Exports as an Engine of Growth

The Minister of Commerce and Industry opened his speech by re-iterating the goal of increasing India’s share of merchandise trade to 1% of global levels by 2007 (“up from the level of 0.67”). He followed this up by taking head on the question of “whether we need an annual EXIM policy?” The most noteworthy aspect of the Exim policy was the identification of service exports and special economic zones as, “engines of growth.”
Growth Performance & Target
In the fiscal year 2002-03 till February 2003, exports are reported to have grown by 16.8% in US dollar terms, over the corresponding period of the previous year, a noteworthy achievement. This achievement comes however on the back of negligible growth the previous year (2001-2). Thus the level of exports during this period is only about 17% over the exports in 2000-1. In an earlier study (India’s BOP crises and external Reform) we have shown that during the eighties and nineties India’s export growth exceeded world growth, as a result of which our share of world exports rose from 0.42% in 1980 to 0.67% in 1999. Even if our export growth exceeds that of Asia, which it did during the nineties, and given the trend rate of economic reforms, our export share is unlikely to exceed 0.8 % of world exports by 2009. There was nothing in the EXIM policy (or the Budget) that denotes an acceleration of trend rate of reform.
Engine of Growth
One of the most interesting things in the EXIM policy is the assertion that, “Exports can act as the motive power of growth for a rapidly developing Indian economy.” This is perhaps the closest any official document of the government of India has come to recognising, Exports as an Engine of Economic growth and the minister is to be commended for bringing this to the attention of the nation. This fact has been well known to S. E. Asian and E. Asian countries, including China, for many decades and they have fully exploited it to achieve high growth rates over the past two to four decades.
The minister has identified two sub-engines of growth, namely service exports and Special Economic Zones (SEZ). We are in full agreement with him about the important role that these can play in propelling growth of exports. Sadly however there is little in the EXIM policy that will ensure that this happens, particularly in the case of Special Economic Zones.
Special Export Zones
As is by now well known India’s exports of labour intensive manufactures (as well as the employment in such production for export) are a fraction of those from China. We can identify SSI reservation, Labour laws and procedures and bureaucratic control mentality as factors that have discouraged FDI in such export-oriented manufactures. Special Economic Zones provide an area where we could minimise or eliminate such handicaps. Unless this is done Special Economic Zones cannot attract sufficient FDI to act as engines of growth for the economy. Though we cannot fault the EXIM policy per se for not doing anything about these matters, unless the Minister of Commerce and Industry can convince his cabinet colleagues about the importance of these reforms, the promise of Special Economic Zones engine of growth will not be fulfilled.
Service Exports
In our view service exports can play an important role in accelerating economic growth. The extension of zero duty imports of, ‘consumables, office and professional equipment, spares and furniture….’ to the service sector can act as positive (short term) signals to encourage export of services. By themselves, however, it is unlikely that they will propel service exports to the point that they begin to act as engines of growth for the economy as whole. For this to happen we need a change in our mind set with respect to the global rules of Service trade from that of protection from imports and external forces to looking at the world in terms of the opportunity for service exports. Our research has identified a number of internal and external policies that need to be liberalised if India is to become a major exporter of Services.
Agriculture Export Zone
The proposal in EXIM policy to involve corporates in the AEZ is a positive one. As in the other cases liberalisation of land related policies and other laws relating to agricultral produce such as the Essential Commodities act and the unification of Food related laws, rules and regulations are essential for a sustained increase in value added aggriculture and allied products.
Quantitative Restrictions
I was both pleased and dismayed to read the announcements on lifting of QRs. The removal of 69 import items and 5 export items from the restricted list is very positive feature of the EXIM policy. I am however dismayed that so many items remain on the restricted list. Such restrictions are an anachronism that must be eliminated in the next EXIM policy. All QRs on imports and exports must be eliminated, leaving only those restriction on health, safety and security grounds that are common even in OECD countries and those required by international obligations (such as on export of endangered spicies).
Transaction Costs
Any measures to reduce the very high transaction costs for importers are welcome. I, however, have a small caveat. Electronic Data Exchange (EDI) a proprietary technology, was the technology for trade about 10 or 15 years ago. It is my understanding that during the past decade the Internet has replaced EDI in up and coming e-enabled countries. The MOC may like to take another look at this alternative.

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