The Hindu : Export with incentives

Online edition of India's National Newspaper
Wednesday, Apr 02, 2003

Opinion

Opinion - Editorials

Export with incentives

FAR FROM BEING merely procedural in nature, the amendments to the five-year Export-Import Policy (2002-07) that have been announced significantly expand the scope and content of concessions for the export sector. Besides offering incentives to new thrust sectors, the revised Exim policy, presented by the Union Commerce Minister, Arun Jaitley, continues with the old tradition of what can be called "export with incentives". Such an approach may add to the dollar value of Indian exports, but it is doubtful if it contributes in any significant measure to value added and, more importantly, to an improvement in productivity in the larger economy, which ultimately is the basic objective of an outward orientation.

After a stagnancy in 2001-02, exports have shown a commendable performance in 2002-03 registering a growth of over 16 per cent in the first 11 months of the financial year. There is, however, good reason to believe that an important element in this new momentum is an over-invoicing of exports in specific sectors, the result of "reverse capital flight" that took root in the second half of the financial year. Still, this should not remove the gloss from the rapid growth in some areas (notably pharmaceuticals and engineering goods) where "real" export growth has taken place. The Exim policy seeks to build on the export growth of recent months, the measures contained therein can be seen as of three broad types. The first is the identification of service exports as a thrust area. Other than software, there is no service where India is even remotely export competitive although the service sector contributes to 50 per cent of GDP. Now, a package of measures has been announced for the health and entertainment sectors, part of a strategy to develop India as a base for both service activities. The package for the health sector aims to build on the fiscal package for this industry that was announced in the Union budget for 2003-04. While the Indian health care industry has indeed come to offer inexpensive and on occasion high quality services to patients from a few of the neighbouring countries, India is still a long way from emerging as a regional let alone world-class health centre. For that to happen, it would require significant improvements in the hotel and transport industries of which there is little sign. The second set of measures contained in the Exim policy pertains to the liberalisation of many existing incentives and the provision of new concessions under the Export Promotion Capital Goods (EPCG) and the Duty Entitlement Pass Book (DEPB) schemes. The import of older second-hand machinery and a relaxation of the export obligation commitments are some of the features of the EPCG scheme. With import tariffs on capital goods still quite high, there is a justification for the operation of the EPCG scheme. But there never has been a rigorous assessment of the benefits obtained from the EPCG scheme since its introduction a decade ago. Until the benefits are established, the EPCG scheme will remain an instrument of ad-hoc incentives to improve the capital goods base of the Indian export sector. The third component of the Exim policy also comprises many incentives — greater freedom to sell in the domestic tariff area, a relaxation of the norms for repatriation of export incomes and many more of the same kind — for the Special Export Zones. Unfortunately, while the older export processing zones have been converted into SEZs, a greenfield zone is yet to become operational two years after the formation of SEZs was announced.

The revised Exim policy removes the last remnants of products (other than drugs and arms) which attracted quantitative restrictions. But more important and controversial is the decision to take paddy out of the list of products whose export is controlled by the Government. India's rice exports have been substantial in the past couple of years, but mainly because the Government has offered stocks at less than cost price from its reserves procured at very high prices. Merely removing rice from the restricted list is not going to encourage exports.

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