It Is Pointless To Fake Exports

Financial Express, 30 September 2004

Genuine exports based on efficient firms and sound exchange rate needed

Protests by textile exporters on the withdrawal of the Duty Entitlement Passbook scheme should not pressurise the government into bringing back export subsidies. The issue is not merely one of WTO compatibility. It is a much deeper one of the choice of growth strategy. There is no doubt that exports help a country grow. However, exports faked by export subsidies do not have the beneficial impact that comes from internationally competitive exports.

The drive for exports as an engine of growth has acquired almost mercantilist hues in the last few years. The logic of why exports are good has been forgotten and all that is being remembered is that export growth should be raised. This is perhaps a reaction to the inward-looking policies that had cramped growth in India for many decades. But it is time to stop confusing the means with the ends.

For many decades, export pessimists ruled the day and India embarked on inward-looking policies where imports were banned or curtailed and foreign companies were prevented from operating here. In the late 1960s and the early 1970s, the intellectual battle against inward-looking policies was won through the research of Jagdish Bhagwati, TN Srinivasan and Anne Krueger. Among the first studies in this field was a DPhil thesis at Oxford in 1962 by Manmohan Singh, in which he questioned India’s inward-oriented export policy.

The logic for exports consisted of two steps. First, there was a rediscovery of the idea of “gains from trade” — which demonstrates that trade is almost always beneficial, and that opportunities for trade are prolific even if Indian firms are weak and incompetent. More importantly, there was the issue of “dynamic gains from trade,” which consisted of greater competition, an inflow of new ideas, and innate pressures to breakdown bad domestic policies.

These economists demonstrated that there was no case for such “export pessimism” and that there were deep benefits in terms of higher growth by switching from looking inwards to having an outward-orientation. Ironically enough, India did not learn from these scholars, and idly watched as the countries of East Asia, including China, leaped ahead. By the early 1980s, however, the pendulum swung to the other extreme, and everyone started worshipping at the altar of exports.

Pretty soon, there was a ministry of commerce chasing a target for exports growth. At this point, something started going seriously wrong in terms of confusing means and ends.

The basic logic of export-led growth is one where firms are efficient, and so firms are able to export, and the country benefits because of having efficient firms. The “export promotion” bandwagon turned this upside down and started thinking “since our firms are inefficient, we should give them export subsidies so as to make them export”. This was a major blunder, one that mixed up means and ends. What India needed was genuine exports, based on efficient firms and a sound exchange rate. Instead, what the government system started pushing for was fiscal subsidies and manipulated exchange rates so as to produce fake exports. But if firms are inefficient and exports owing to subsidies, this does nothing for Indian industry. Fake exports don’t increase competitiveness.

Drive for exports has acquired mercantilist hues in recent years
Govt should reduce subsidies and bring benefits of competition to industry
We now have an elaborate government machinery paying out export subsidies in various ways. These include duty drawback schemes, DEPB, explicit export subsidy programs, tax incentives for exports, etc.

RBI too jumped into the act, and thought that it could chip in by doing market manipulation of the currency market. This led to the massive pileup of reserves in a few years, which has given us a bit of an indigestion.

It is important to shake our heads clear of this confusion. India needs efficiency and India needs genuine exporting success. Fake exports are merely a drain upon the exchequer and do nothing for Indian growth.

We need to steadfastly engage in sound economic policies which will foster exports. These include tax reforms, infrastructure, R&D and FDI. It is when these policies yield export growth that GDP will grow. We must shake off the illusion that there is something to be gained by faking it.

One of the major economic policy achievements of the NDA was cutting tariffs. The contribution of the UPA government should be to cut export subsidies and bring to the industry the benefit of international competition./p>

Ila Patnaik