Extend capacities, not subsidies

The Financial Express, June 30, 2009

By Pradeep S Mehta & Siddhartha Mitra

Stop-gap measures such as subsidies and exchange rate management to enhance the marketability of exports, without addressing core issues of efficiency and competitiveness cannot be used repeatedly—medicine that suppresses the symptoms of the disease, without targeting its root cause can ruin the health of the system in the long run.

Unfortunately, despite the rapid economic strides made by India, especially with regard to international transactions, its export management policy has often tended to be ad hoc—the emphasis has more often been on superficial tinkering with macroeconomic parameters such as the exchange rate and disbursals such as subsidies, rather than on permanent measures to shore up the supply side.

Instead of ringing in changes in infrastructure design and regulation, human capital formation and trade facilitation, which can make our exporters more cost-competitive in the international market, the emphasis has been on enabling producers/exporters to meet high costs through subsidies and costly sterilisation of dollar purchases.

Moreover, export management that solely relies on such channels leads to recurring and increasing expenditures, and deepening fiscal imbalances. The increasing incidence of shocks emanating from the world economy makes the use of such an approach to export management more difficult as each crisis calls for a fresh dose of the mentioned expenditures. In short, while the adverse impact of such an approach on the economy’s fiscal health is already noticeable, such effects might assume a far more serious magnitude in years to come.

Therefore, it’s high time that there is a shift in focus towards long-term capacity building, which in turn leads to a permanent increase in efficiency and help the exporters to compete effectively in the international market, without relying too much on the crutch of government’s fiscal support.

One major reason that results in inflated production costs for exporters is poor infrastructure. High power and transport costs—important inputs into the production and distribution activity of exporters—are major contributors to their incompetence. Such costs can easily be reduced through a combination of political will, civil society activism and sensible reforms.

Reforms that help reduce tariffs in the power sector and increase the magnitude of power generation & distribution are urgently required. Elimination of distortions such as subsidy of household power consumption through inflated industrial tariffs is also the need of the hour.

The aborted agenda of highway reform has to be reactivated to facilitate faster, cheaper and safer transport of inputs and products. Our sea ports have to be brought up to international standards through the use of regulatory mechanisms that promote more competition among these—the associated decrease in costs for freight carrying ships would act as a boost for shipping and, therefore, economic activity around these ports. Obviously, exporters will benefit.

Use of dry ports is essential for a country like India—distances from the nearest sea port are often large and an inhibiting factor for trade, and long boundaries with neighbouring countries often provide considerable, albeit underutilised opportunities for international trade. Unfortunately, many blue prints for dry ports in different parts of the country have been floated but very few have seen implementation. The new government should put the setting up of such ports on the top of its infrastructure-creation agenda.

Along with improvements in physical infrastructure, major breakthroughs are required in trade facilitation efforts. These include a variety of diverse initiatives—from better information about procedures to more updated, accurate and easily accessible information about non-trade barriers employed by foreign economies to lower time in customs clearance at trading posts. Quite often we forget that cheap imports of vital raw materials and machinery are as necessary for the economic viability of exporters as accessibility to international markets. A less myopic approach is, therefore, the need of the hour in this regard.

On the part of the civil society, it’s important to realise that responsibility for developing a more enabling business environment for exporters rests with the Centre as well as the state governments. In 2002, the department of commerce notified a new scheme called ASIDE (Assistance to States for Infrastructure Development and Exports) to develop complementary infrastructure for exports, such as export promotion industrial parks, minor ports etc. The disbursals to state governments through this scheme are linked to export performance. Thus, state governments now not only have the wherewithal for boosting export related activity but also enough incentives to make efficient use of funds provided through this window.

To conclude, it’s true that the central government needs to amend its approach to export management by adopting a series of reform measures, which focus on improving the supply side rather than compensating exporters on a recurring basis for costs enhanced by poor infrastructure. However, to be fair the central government has taken some important steps in this regard, which make the state governments powerful potential agents of the needed infrastructure change.

From now on the bouquets or brickbats, for success or failure in leveraging exports, must rain equally on both levels of government.

Pradeep S Mehta is secretary general and Siddhartha Mitra is director (research), Cuts International

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