Who SEZ exports can’t do better? Financial Express August 24 2010

The last two years have been fairly turbulent for Indian exports. After six successive growth rates of over 20% per annum up to FY08, there was a slowing down to 12.3% in FY09, followed by a decline of 2.6% in FY10. The $200-bn mark has been elusive for some time now. The target for this year has been placed at $216 bn, which implies growth of 21%. Going by the first four months’ performance, prima facie looks probable. The Exim Policy is in place up to 2014 and the announcements made in this regard in the Annual Policy should be viewed against this background.

There are basically three issues concerning exports from a macroeconomic standpoint. The first is its composition. Today, around 50% of our exports are traditional goods through textiles, petro & agro products, gems, ores, etc, while another 22% is in the fast growth category of engineering goods. These are the ones that have growth potential and can put exports on a higher trajectory. Chemicals are important, accounting for 10% of exports, but are a commodity that grows in a negative way as the developed countries would prefer to import them rather than produce for environmental reasons. When there was a slowdown in exports, it was the engineering sector (automobiles, machinery and metal products) that got hit the most. Exports of gems & jewellery and petro & agro products registered marginal increases as demand is typically inelastic in these sectors.

The second is the direction of exports. The US and EU account for 30% of our exports, which means that growth in this segment would be contingent on what is happening there. Africa and the Middle East account for 29% while Asia 31%. But the core of our growth will be guided by what happens in the US and EU.

The third is the exchange rate. A point often argued is that rupee depreciation is required for exports to increase. While this is theoretically true, it has been observed that between September 2008 and September 2009, exports declined on a month-on-month basis, but the rupee was weakening. This indicates that currency weakening is not a sufficient condition for the growth of exports. Demand is a critical factor that drives growth in this sector, which has to be supported internally by appropriate incentives.

If demand is the deciding factor, what are the prospects for growth in the world economy? Currently, there are mixed signals coming in. According to the IMF, global trade is to recover meekly to grow by 2% this year over negative 11.3% last year. The US economy has slowed down from an apparent recovery in Q1, while the Eurozone has grown rapidly, with Germany spearheading the process. This is a refreshing development considering that the Greek crisis had threatened to throw the region back into a recession. The UK, too, has bounced back. Japan is clawing to stay afloat while China is displaying a feeble growth path. In this situation, imports would show a varying trend. A view is that whatever growth has been witnessed is largely due to the stimulus packages invoked by various governments and supported by the central banks. As a corollary, there are doubts of its sustainability in case of a withdrawal of stimulus.

The logical approach would be to focus on incentivising the traditional goods where India has a comparative advantage and focusing on the engineering goods segment where there are growth numbers to be had. In this context, what has the Policy done?

The commerce minister has indicated that the trade policy has to work within the limits of resource constraints and that high inflation will place restrictions on export of agro products. The Policy has worked within these contours and extended the DEPB, focus market scheme, SHI and EPCG schemes for 6-12 months. It has also extended the 2% interest rate subvention schemes for thrust areas such as leather, textiles, jute, small engineering, etc.

While these measures are beneficial for propping exports, an aggressive policy on the SEZ front would have been effective to turn things around. The exchange rate cannot be relied upon to provide the competitive edge, with a range of Rs 46 to a dollar expected for the year. The current measures are basically extensions of existing provisions, which will help lower transaction costs for exporters. The thrust has been more on labour-intensive industries, which, though useful, may not be able to bring about the desired acceleration. So, while the government has done well in retaining the status quo, exporters could be justified in wishing for more.