The Hindu Business Line : New Foreign Trade Policy

First, it is not that the world is sleeping and only India is trying to actively boost trade. By relaxing a few impediments, if India hopes to not only catch up but overtake the other countries which are focussed, it may be in for surprises.

India has been in the liberalising mode for 13 years now, but its share is still tottering at 0.8 per cent. Whether this policy will push it up to 1.5-2 per cent of world trade is doubtful.

Second, the end-to-end manufacturing under one roof is largely over. It will be difficult henceforth to name a single country manufacturing from cotton to designer apparels. We are moving towards a world in which cotton will be grown in Egypt or the US, spun into yarn in Indonesia or Sri Lanka, designed in Bangalore, stitched in Mauritius or Thailand for an Italian brand, and sold by Wal-Mart, the world over. Least cost producers will be found for every point of value-addition (transaction and transportation cost adjusted).

This has already happened in services where, of course, the transaction costs are comparatively less, and is beginning to happen slowly in manufacturing.

The days of product-based segmentation and marketing policies are all but over. Hence, trade policies based on specific items of manufacture may no longer be effective, but India's latest blueprint has excessive emphasis on this.

If things had been viewed this way, India could have garnered a greater share in the cutting and polishing of diamonds; gone far ahead in medical, auto ancillaries, and textiles sectors.

But the policy does not focus on this. And the country would not be giving so much importance to agro and horticulture products, which require so much more investment for processing and storage facilities and, worse, attract heavy import duties in Japan, the US and many other developed countries.

Third, the services. Looking at the profit margins of software majors they do not seem constrained by costs. They may not be willing or able to grow at 100 per cent year after year — it may be difficult to manage the processes, or find qualified staff.

Subsidies to this segment (measures galore have been announced) would only increase the profit margins rather than boost billings. Subsidies should be aimed at areas of value-addition, where India is per se competitive, but out-quoted because of governmental inefficiencies, lack of infrastructure and other externalities. IT-related segments suffer the least from government impediments; it is the manufacturing sector. Why should we be heaping the former with goodies? The IT segment will grow no doubt — with or without this policy — based on its inherent strengths.

Fourth, the `target plus' kind of schemes are anabolic steroids at best. Last year, there was a similar scheme and instead of promoting exports, it enhanced internal trade by way of exports being `purchased' by some to reach the magic figures.

A hasty clarification and retreat had to follow. Even if that aberration is addressed, at the lower (more likely) end, 5 per cent of incremental 20 per cent, the cost advantage may be 0.15 per cent. To expect miraculous growth in exports with this incentive, is expecting an athlete to win an Olympic medal by boosting him with a solitary packet of glucose.

India should grow on the strength of sustainable cost advantage, not by trading exports and front-ending next year's exports or other such statistical juggleries. And schemes such as these do not re-direct efforts towards building lasting comparative advantages.

Fifth, the administrators must get rid of the ``I am more patriotic than thou'' attitude and can, perhaps, follow the `trust but verify' approach. They seem to be under the impression that more the nit picking they do, sharper the focus becomes; the more slabs they create, the more promotional the policies become.

Else, how does one explain the convolutions in the duty credit entitlements in service forex earners? A minimum prescription of Rs 5 lakh, a slab at Rs 10 lakh, a distinction between individuals and others, between stand-alone restaurants and hotels.

If forex earning is the issue why not make a common scheme? If the minimum slab is to discourage low-value claims, why not prescribe an application fees and leave it to the earners to decide? And why should the hotels not get a higher entitlement on their restaurant sales?

Measures such as doing away with guarantees for some, rationalisation of validity periods, parking higher amounts in EEFC accounts, may be removing some impediments, but are not enough. One is not sure if the current pruningprocedure, attempted for non-software sectors, has minimised the handicap between the practices abroad and in India, by one-fifth. One cannot expect a big bang policy every time. But since this government had been hibernating for about eight years in the Opposition, one hoped they would have accumulated enough ideas to come out with a path-breaking policy. They could have perhaps done more.

(The author works with a large chemical manufacturer exporter. Views are personal.)

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