Date:10/04/2006 URL: http://www.thehindubusinessline.com/2006/04/10/stories/2006041001130800.htm

Back Supplementing the goals

The new SEZ Act may queer the pitch for exporters by creating islands of tax and other privileges.

On surface, the Annual Supplement to the Foreign Trade Policy 2004-2009 reads like an ambitious goal-setting exercise and is reflects the optimism in the economic ministries. Spurred by exports crossing the `auspicious' figure of $100 billion, the Commerce Minister has pegged this year's target at $120 billion. This is in line with the trend of the past two years with exports growing 20 per cent annually. Even more promising is the increase in market share in developed markets; 30 per cent to the UK; 54 per cent to Singapore, 44 per cent to South Africa and, interestingly enough, a 34 per cent growth in exports to China. Overall, with the external trade generally becoming an important factor in the economy, the policymakers are paying increasing attention to the value of external trade. Exports not only add to forex reserves but also increase employment especially at skilled levels. So far then the Commerce ministry seems to be on track.

The focus on gems and jewellery and the objective of turning India, specifically Mumbai, into an international hub for value-added products in that sector reflects the confidence to take on new centres such as Dubai and Tel Aviv. The measures announced should help this hardy backbone of Indian exports stand up to new challenges by upscaling its value- addition potential. But behind the numbers are limitations the policy has not been able to overcome; some even it may be creating. Of the former one may note the fact that traditional exports such as gems and jewellery and to a lesser extent auto components have been consistent performers albeit with low value addition. While Information Technology has contributed dramatically to diversifying the basket of exports, India has not been able to cash in on the new shifts in the market for knowledge-based exports such as research and development. Second, some policies such as the new SEZ Act may queer the pitch for exporters by creating islands of tax and other privileges without contributing much either to the tax kitty or the foreign exchange leave alone of employment. The last is relevant as Mr Kamal Nath and his colleagues have made employment a significant objective of the export drive. Yet, the same policymakers have created the SEZ with its flexible labour laws. And given the other sops for SEZs, such as tax-breaks, unlimited power access and simplified procedures, the Commerce Ministry is flooded with applications from around the country and abroad.

Against this backdrop, the Annual Supplement simply rides the wave of good fortune in exports. For that kind of performance alone, and as a spur higher growth one would have expected major fiscal incentives even at the cost of some revenue leakage and a frown from the WTO; at least, the country would have earned foreign exchange. The SEZs, on the other hand, will bring in no revenue, little employment and paltry foreign exchange.