The Hindu : Exporters may get some relief

Online edition of India's National Newspaper
Monday, Feb 25, 2002

Opinion

Opinion - News Analysis

Exporters may get some relief

By Sushma Ramachandran

NEW DELHI, FEB. 24. The two critical areas of the economy where the Finance Minister, Yashwant Sinha, is expected to provide some succour are exports and foreign direct investment (FDI). These sectors had been hit hard by external circumstances since the global recession deepened after the events on September 11. As a result, exports are down to about one per cent growth while FDI flows are not rising as expected though this may be the best years so far for foreign investment.

Exporters are looking more towards the Reserve Bank of India (RBI) rather than Mr. Sinha for help as intervention by the central bank may help in devaluing the rupee. At this stage, some amount of rupee depreciation would be the fastest way of helping exporters get back on track. Even while releasing the new medium term export strategy, officials in the Commerce Ministry stressed the need for achieving a real effective exchange rate that would give a boost to the export effort.

Rupee depreciation, however, is a double-edged sword as it simultaneously makes imports more expensive and this in turn could affect the domestic industry's imports of raw materials and components. It would also make bulk imports like petroleum products costlier a time when the Government is trying to reap the benefits of low world prices while dismantling the administered pricing mechanism for the oil sector.

Even so, the Finance Minister is bound to give some concessions for the exporting community to enable them to survive the effects of the worldwide recession. External economic circumstances have already brought export growth plummeting down from double digit levels of last year to barely a single percentage point in the current fiscal.

As for FDI inflows, the latest data shows they may touch $five billion in 2001, higher than ever before. But the inflows have not reached expected levels since potential investors are waiting for conditions to improve globally before making a move in emerging markets. Besides, the South Asian region is now considered suspect owing to the Afghanistan war and hostile relations between India and Pakistan. International media focus on prospects of war breaking out between the neighbours has not exactly boosted prospects of higher foreign investment flows.

The Enron imbroglio has contributed to the slowing of investment flows. But the rapid collapse of this former U.S. energy major and revelations about its financial misdeeds makes complaints about India reneging on contracts appear somewhat misplaced.

The fact that Indian authorities were tied into an expensive contract with Enron for the Dabhol power project has long been known but it has been claimed the problem arose largely because of inexperience since this was the first case of foreign entry into the power sector.

Sombre comments by the U.S. authorities here over the impact of the Enron dispute on future foreign investments thus carry little credibility since the furore over its accounting procedures is refusing to die down in the U.S.

In any case, the failure to achieve the high levels of FDI recorded by either China or Southeast Asia has more to do with bureaucratic red tape especially in the States. Mr. Sinha has already gone a long way in simplifying revenue collection procedures as well as in cutting down complexities in the existing tax system.

It is to be hoped he goes further in this direction in the next budget to try and make the climate easier both for foreign direct investments and inflows from the diaspora of non-resident Indians.

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