The Hindu : Exports by tax incentives

Online edition of India's National Newspaper
Tuesday, Apr 02, 2002

Opinion

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Exports by tax incentives

THE TWO DEFINING features of the Export-Import Policy for 2002-07 are the removal of restrictions on agriculture and the provision of major fiscal concessions for exporters. The slew of measures that have been announced may well take India towards the objective of a one per cent share of world trade by 2007, though the 12 per cent growth in exports, in dollar terms, over the next five years that this target implies is a trifle over-ambitious. But the larger question is whether exports which are driven not by international competitiveness but by fiscal concessions are desirable or, for that matter, sustainable.

Confronted with huge stocks of some crops and falling domestic prices of a number of other agricultural products, the Government has decided to remove export restrictions on all but two commodities, the exceptions being onions and jute. In addition, financial assistance is to be provided for transport of commodities meant for exports. This is all very well but the basic problem which plagues India's agriculture is its low productivity. The only commodities where India is globally competitive are spices and tobacco and even in these products India has been slipping in the productivity league. Poor pricing policies have also hindered Indian agricultural exports, the best example being in wheat. If India has yet been able to export substantial quantities of wheat during the past year then this has been because of the subsidised price at which wheat has been made available for exports. Subsidies, like the new transport assistance that will be provided, run the risk of running foul of the WTO regime. This means that a long-term growth of agricultural exports is possible only with higher crop productivity. This is likewise true of manufactured exports as well, for which there are a range of new incentives or continuation of old schemes in the Exim policy. The biggest concession about which the exporters have heaved a sigh of relief is the continuation of the Duty Entitlement Pass Book (DEPB) scheme, which the Commerce Ministry had earlier suggested may be discontinued this year. The liberal norms of the DEPB make it extremely attractive for the exporters, norms that can be used not just for exports which is also why there have been murmurs about the scheme at the WTO that it provides an unfair subsidy. More tax incentives have been provided for the Special Export Zones and the Finance Minister is expected to announce additional fiscal concessions for certain categories of exporters on the eve of the adoption of the Union budget for 2002-03. Besides, exporters will now be given up to a year before repatriating their earnings and importers of rough diamonds have been freed from payment of even a token customs duty. Although the new policy does contain export incentives for handicrafts, small-scale industries and urban export clusters, the thrust by and large is on exports by fiscal incentives.

The fiscal impact of export incentives is revenue foregone that is reportedly around Rs. 21,000 crores a year currently; an amount that is sure to grow with the latest round of concessions. This means that every rupee of exports involves a revenue loss of 10 paise. It is not the magnitude of the revenue foregone that is important as that India's export strategy is being driven by such large fiscal concessions. Exporters will argue with more than some justification that such subsidies are necessary to neutralise the effect of high interest costs as well as expensive and poor infrastructure services. However, the Government and the export community will have to ask themselves if the slew of export incentives are in the nature of temporary concessions that will be abolished when the quality of infrastructure improves. The demands of the exporters and the thrust of the new Exim policy suggest the opposite.

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