labels: industry - general, economy - general, trade
Pragmatic move news
Uday Chatterjee
12 April 2003

New Delhi: The Indian government had announced its modified Export Import (Exim) Policy for the year 2003-04 with much aplomb and fanfare. Well, the Exim Policy for the years 2002 to 2007 was already announced last year and is still in place.

But keeping in view the heartening growth of exports during the last 12 months, the government thought of bringing in some changes in the policy that would lend stability to the policy and maintain the momentum of healthy export growth.

International trade fundamentally arises out of what is known as comparative trade advantages. To understand this principle, let us go back to the time around the India's Independence. During those days, the products in which India had a comparative advantage were jute products.

A country like France, on the other hand, was strong in manufacturing wines. Apart from wine, France was also in need of jute products for its industrial activities. Given the ground realities, it made sense that instead of manufacturing jute products in France, France would be better off manufacturing wines and import its jute requirements from India. Likewise, India too would be better off manufacturing jute products and import its wine requirements from France.

Rational thinking
This is how foreign or world trade is driven, and this year's Exim Policy addresses this aspect by recognising services, textiles, auto, gems and jewellery and agricultural exports as the engines of growth during the next four years. The Exim Policy has identified areas in which we have competitive advantage and also deleted from its thrust focus items in which we no longer hold a competitive advantage.

As of now, India's share of the global trade is — hold your breath — 0.67 per cent and the target is that by the year 2007 this share of the global trade will rise to — hold your breath again — 1 per cent. A pragmatic and achievable target, one should say.

The Exim Policy focuses on exports of services, exporters' duty-free import of consumables, office and personal equipment, spares and furniture up to 10 per cent of the average export earnings in foreign exchange in the previous three years. By and large a symbolic gesture, but it has been welcomed by the services sector, specially the tourism sector.

For agricultural exports, the government has permitted private participation in agricultural export processing zones (AEZ). Companies investing in AEZs have been promised income tax benefits. The details of the benefits package has not been announced but it is likely that income tax concessions on a percentage of the income projected from investment in AEZs will be granted.

An export processing zone is essentially a demarcated area or a cluster where exporters operating in this area are given special concessions and facilities like offshore banking units, which enable the exporters to bring down their transaction costs and make them work in a hassle-free environment.

This is a concept that has worked successfully in China and other countries, and today about 25 per cent of a country's export trade come from their special export processing zones. It is also worth mentioning that in China nearly 40 per cent of the country's export comes from these special export processing zones.

Tackling issues
India has tried to replicate this model and had announced special zones and clusters in areas like Indore, Kochi, Tirupur, Panipat and Ludhiana. These zones have not taken off as intended and the prime reason why such clusters have not taken off is due to land acquisition problems. But we have it from the mandarins in the commerce ministry that all is well and these zones would be functioning fully in the current year.

The government is, along with the fiscal sops, offering infrastructure support to these units. The department of industrial policy and promotion has finalised a scheme, which aims to give common infrastructure backup to small- and medium-sized units in these clusters so that these clusters function as a large single unit.

International trade is just not about exports. Imports are also crucial. As we export, we develop foreign exchange reserves and these reserves are meant for import of items that the country does not manufacture but needs none the less. Today, India is sitting on a huge cache of foreign exchange reserves, nearly $80 billion and which is increasing by the month.

Such a huge reserve is actually an embarrassment of riches and recognising the need to spend these reserves, the government has, during the course of last year, eased many of the stipulations laid down for acquiring foreign exchange, both for individuals as well as businesses.

This Exim Policy has made the import of second-hand capital goods, which are the main vehicles of investment in this country, easier. The government has also announced duty concessions that will make the cost of import of capital goods cheaper.

For importing capital goods the manufacturer had to earlier undertake an export obligation, meaning that the manufacturer will export a certain percentage of his product to make good the amount of foreign exchange spent while importing. Relaxations have now been considered in such export obligations, which will make the manufacturer breathe easier.

The above packages are at the end targeted to ensure that that the country's share of the global trade grows at the rate of 12 per cent per annum and take our share from the present 0.67 per cent to 1 per cent by the year 2007.

Not a difficult target, considering last some years' export growth and keeping in mind the fact that during Independence, India's share of the global trade was 2.5 per cent, nearly four times more than what it is today.


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