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Latest ‘sops' will help exporters not exports hit by global recession

The Commerce Ministry has just released the annual supplement to the Foreign Trade Policy 2009-14 amidst a pervasive gloom over almost the entire global economy.

The world economy has not been as low as now and that sentiment is also reflected in trade; world trade has been slowing after 2010, according to data from the World Trade Organisation. After a strong rebound from the Wall Street debacle in 2010 with 13.8 per cent expansion, world trade decelerated to 5 per cent in 2011 and in its forecast last year for 2012, the WTO rued a further fall to 3.7 per cent this year.

As World Trade Organisation's Mr Pascal Lamy said while presenting the forecast for 2012, “More than three years have passed since the trade collapse of 2008-09, but the world economy and trade remain fragile. The further slowing of trade expected in 2012 shows that the downside risks remain high. We are not yet out of the woods”.

What may make matters worse are the responses to this feeling of being stuck in the woods. As Mr Lamy pondered, “…the sluggish pace of recovery raises concerns that a steady trickle of restrictive trade measures could gradually undermine the benefits of trade openness.”

Against this backdrop almost every initiative by an exporting country trying to edge into the big league of China or other East Asian exporting nations must appear hollow and foolhardy or symbolically heroic at best.

EXPORTS FALTERING

India's exports have been faltering for years in line with the fortunes of world trade. In an ideal world of growing economic prosperity around the world, the Commerce and Industry Minister, Mr Anand Sharma's annual statement on trade policy could make sense.

In typical fashion, the Commerce Ministry has rolled out a series of concessions worth Rs 1,200 crore to encourage exports. This robust boost comes on the back of a rather modest growth of 3.2 per cent in merchandise exports. Other concessions and fiscal incentives have also been introduced. As usual interest subventions are expected to encourage exports. The two per cent subvention has been extended to March 2013 for handlooms, handicrafts, carpets and small and medium enterprises.

Populism runs through the scheme. Thus as has been the case routinely, labour-intensive sectors, such as toys, sports-goods, processed agricultural products and ready-made garments will also now be covered under the interest rate subvention scheme.

The policy expects to give “a thrust to employment creation, encourage domestic manufacturing, reduce dependence on imports, help market diversification and cut transaction costs for exporters”, according to Mr Sharma. What the revenue implications for a fisc in this year of slowdown means, the Minster did not say.

Such concessions sound all too familiar, the concerns expressed and attempted to be addressed remain the same year after year in a way that is eerily out of sync with the times we live in. All these schemes of generosity for labour intensive industries could have conceivably worked when the global economy was booming and small industries required a leg-up to cope with competition.

The jury is out if they did; and in times such as the present such “sops” do not help exports so much as exporters. Interest subventions do not encourage product refinement innovation or market diversification; all they do is protect profit margins in falling-export scenarios.

Policymakers never draw that distinction between export growth and exporters' margins by defining very clearly that in truth, interest subsidies help the latter and not the former.

All that hype about aiding labour intensive industries and employment are like the rhetoric of populism meant to assure constituents unable to survive in a fiercely competitive export market that the Government stands by them.

Handloom exports have been a mainstay of merchandise exports but are slipping not just because of apathy in creative re-engineering but also competition from smaller countries such as Bangladesh moving up the value chain in apparel exports to the US.

In fact the current Foreign Trade Policy regime (2009-2014) was framed in parlous times, just a year after the Wall Street crash and its language too is brave and objectives futile: to arrest and stem the slide in export performance and to double the share of India's exports in global trade by 2020.

EUROPE, US WOES

That is a tall order: the world economy by which we primarily mean the US and Europe, that are crucial to the fortunes of emerging export economies including India, is not likely to improve soon. Parts of the Euro Zone and the UK are in recession and America is still slithering along the floor.

By 2014 Europe will have to face the music as bailed out governments have to renegotiate debt rollovers or redeem those three-year bonds. In any event, some panic will ensue and panic is not good for export growth.

Predictably, Indian exporter-associations are thrilled by the fiscal concessions and incentives announced by Mr Sharma.

The Federation of Indian Exporters' Organisations (FIEO) waxed eloquent: “…in the wake of contraction of global demand and Euro Zone crisis, the support extended through the Foreign Trade Policy was “tremendous” and will help in imparting competitiveness to exports.”

The sentiment is self-defeating: the contraction in demand cannot be turned around by fiscal concessions, “the support extended through the Foreign Trade Policy…” It has to be addressed by policies in the importing countries to boost consumer spending through income-generating economic expansion. That at the moment is missing and it is likely it will be for some time to come.

In the event, is the Foreign Trade Policy at all relevant at times such as the present? At moments when the world economy cannot sustain robust trade between nations, the question is a vexing one.

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