Budgeting for export reform

The budget should essentially focus on capacity creation and holding the rupee within a band

The finance minister faces the unenviable task of balancing conflicting interests in his budget-making. This year, there is one development that make things even more challenging. India’s rate of growth has touched the 9 per cent mark and the resultant inflationary pressures are adversely impacting production costs. This puts a question mark over the competitiveness of Indian products in the short run.

The budget should essentially focus on capacity creation and holding the rupee within a band, because the long-term solution to temporary inflationary spikes lies in expanding capacities. Take China. Despite having more than $ 1 trillion in foreign exchange reserves, it continues to have a near fixed exchange rate vis-a-vis the dollar. Clearly, when one of our most important competitors is following a near fixed rate of exchange against the dollar, it makes little sense to let the rupee appreciate. We must emulate the Chinese in other ways too. Given that capital inflows to India are putting pressure on the rupee, why not create a fund where some portion of our foreign exchange kitty is used to give interest free loans — ranging from $ 1 billion to $ 5 billion — repayable in 30-40 years to some African countries with which we are contemplating free trade agreements on the condition that the loans are resource-tied to Indian goods and services? This will not only service the loans but have a multiplier demand impact on our products.

There is much to cheer about India’s macro number, but there’s no room for complacency. The real GDP increased by 9.2 per cent in the second quarter of 2006-07, up from 8.9 per cent in the first quarter and 8.4 per cent a year ago. Accordingly, real GDP growth firmed up to 9.1 per cent in the first half of 2006-07 from 8.5 per cent in the first half of last year. Real GDP, originating in the agriculture, industry and services sectors, rose by 2.6, 10.1 and 10. 6 per cent respectively, during the first half of 2006-07 as against 3.7, 7.9 and 10.2 per cent last year, same time. Industrial activity too has picked up — the index of industrial production rose by 10.6 per cent during April-November 2006 as against 8.3 per cent last year. Our exports in the first nine months of 2006/07 has been to the tune of $ 89 billion, indicating a growth of 36 per cent over the same period last year, while our imports were $ 131 billion, reflecting a similar rate of import growth during the same period last year.

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These numbers look good, but they need to be scrutinised more closely. Take engineering. It accounts for 10-12 per cent of India’s GDP and 30.6 per cent of employment. Today, India’s engineering exports are growing at 20 per cent, accounting for a fifth of India’s exports. Engineering imports last year was to the tune of $ 49 billion, more than double of India’s exports. The trend for the current year seems similar. Thus, 15 years of economic reforms have ushered in competitive market conditions in manufacturing, which need to be nurtured sensibly. It is here that the government will do well to contemplate the impact of a drastic cut in duties of final goods on industry — especially small and medium industries, which contribute substantially to employment.

The small and medium scale exporter is generally short-changed by commercial banks. When it comes to export credit, bankers are cagey. It may be a good idea, therefore, to make export credit a part of priority sector lending for domestic commercial banks. Also there is a case for rationalising our indirect duty structure. The finance minster has promised 2010 for going live with the Goods and Services Tax. But what happens till then? The experience that exporters have had with VAT has varied. While the White Paper on VAT on January 17, 2005 explicitly mentioned that “for all exports made out of the country, tax paid within the State will be refunded in full, and this refund will be made within three months. Units located in SEZ and EOU will be granted either exemption from payment of input tax or refund of the input tax paid within three months”. So far for non-EOU exporters, the VAT refund is yet to take place in many states.

India’s economic reforms based on a policy of gradualism have brought about a sea change in its fiscal policy. We hope the forthcoming budget keeps up the good work carried out by successive finance ministers since 1991.

The writer is chairman, Engineering Export Promotion Council