The Hindu : The slow pace of reforms

Online edition of India's National Newspaper
Tuesday, Mar 25, 2003

Business

Business

The slow pace of reforms

By Prem Shankar Jha

In its overview of the performance of the economy, the Economic Survey for 2002-03 took special pride in the fact that, 11 years after the 1991 economic reforms, the Indian economy had at last begun to get integrated into the global market economy. The proof of this was that in April to December 2002, the country exported 2.15 lakh automobiles, a 62 per cent increase over the previous year and that in the information technology sector, India was not only a leading exporter of software, but had begun to export increasing amount of hardware as well. In fact in 2001-02, its IT hardware exports had grown by over 22 per cent to exceed a billion dollar. In these sectors, it concluded with some pride, more and more major international producers had begun to use India as a platform for export-oriented production.

The Government has reason to feel pleased. But a closer look at the economic regulations still in force in the country shows that India remains a forbiddingly difficult place for any foreign investor to work in. Two recent news items show just how far India still has to go.

The Revenue Department recently amended the definition of exports to include the shipment of goods by Indian manufacturers to the export promotion and special economic zones (SEZs), where they would be used in the manufacture of exports. This had become necessary because till now only those goods were deemed to have been exported that actually left the country. This change entitled them to recover the custom and excise duties that they had paid on goods they supplied to the export promotion zones (EPZs).

The notable feature of this reform is not that it has taken place but that it has taken 12 years for the Government to enact it. A parallel scheme, called the duty entitlement passbook scheme, which enables exporters in the SEZs to claim a duty refund for inputs purchased from the domestic market, was announced only last year. But as if to rub salt in the exporters' wounds, a year later they are still waiting for the government notification that will spell out the procedures for claiming the duty entitlement.

Even after both amendments have been `notified', manufacturers selling to units in the SEZs will still be at a disadvantage in relation to `genuine' exporters. This is because the Customs Act of 1962 also defines exports as goods that are sent out of the country and no amendment of this Act is as yet in sight. As a result, while sellers to the SEZs will soon be able to claim a duty drawback on customs and excise duties paid by them, they will not be entitled to the exemption from income tax that `genuine' exporters enjoy.

The second news item concerned the contents of a draft Contract Labour Bill, soon to be submitted to Parliament, that will define which industries will be allowed to employ contract labour legally. Apart from legalising the use of contract labour in a host of service industries, the most important change this Bill is intended to make is to allow export oriented units to hire contract labour to meet seasonal peaks in the demand for their products. What it unwittingly reveals is that enterprises in the SEZs also do not as yet have the freedom to employ contract labour and therefore are bound down by all the labour laws that make hiring and firing or for that matter increasing the labourforce to meet peaks in demand, next to impossible.

These are only some of the legal hurdles that investors in the EPZs face. It is therefore no surprise that, announced three years ago, the scheme has not succeeded in creating a single viable EPZ so far. The promoter of one zone, at Positra in Gujarat, has abandoned the project. The Tamil Nadu Government seems to have lost interest in a second at Nanguneri. All the remainder but one, at Surat, have not even got off the ground.

The Centre has redesignated the former export promotion zones at Santacruz and Kandla, as EPZs but a change in name does not by itself lead to an increase in exports.

The manner in which the two sets of reforms described above are being carried out explains not only the failure of the EPZs but also, more generally, the ineffectiveness of India's economic reforms. As China and Southeast Asia have shown for EPZs to be successful, prospective investors need top quality infrastructure, the maximum of operational flexibility and the minimum of bureaucratic red tape.

Dismantling a command economy to create such a market friendly environment, even in a limited area, requires the coordinated efforts of a number of ministries and departments. That in turn needs the establishment of strong lateral links between ministries in a project or task oriented governmental system. The Indian bureaucracy is about as far away from such a result-oriented system as it is possible to get. All of its decision-making links are vertical.

As a result each ministry carries out its share of legislative reform at its own pace in its own time. By the time all the pieces are in place the project, or scheme, is usually dead.

Printer friendly page
Send this article to Friends by E-Mail

Business