May 4, 1998

Get rid this hi-tech fixation; the key to exports is low-tech.

Jairam Ramesh

The Export-Import Policy for 1998-99 is a homeopathic dose of reforms. But it is significant because it punctures the anti-WTO rhetoric of the BJP. Power obviously moderates, just as the absence of power unhinges. Commerce Minister Ramakrishna Hegde has continued from where his predecessors have left off. The process of dismantling quantitative restrictions is on track, although it has been arbitrarily done. Import liberalisation is on course, although Hegde has allowed free imports of bindis, sindoor and kumkum, while the import of crude oil is still canalised and subject to licensing.

But will Hegde's policy deliver a 20 per cent growth in exports? Most definitely, it will not. Quite apart from the fact that the growth rate in world trade is now half of what it was in the mid-'90s, the real issues that bedevil our exports have not been addressed.

Import liberalisation is necessary to provide an impetus to exports. At the same time, export liberalisation will certainly not hurt us. This is not just to liberate all exporters from the tyranny of forms and procedures but also to help realise the full export potential of important sectors in the economy. The most notable example of a sector still hamstrung by export controls in the form of quotas, bans and stop-go policies is agriculture and agro-industry. Yet, it is Indian agriculture that stands to gain the most from the new WTO regime.

The years 1993-94, 1994-95 and 1995-96 were a boom period for Indian exports. Exports, in dollars, grew by 20, 18 and 21 per cent respectively. Part of the explanation for this is that world trade growth itself was very buoyant. It grew by 10 per cent per year in these three years. But the more important reason was the change in the value of the dollar from Rs 18 in June 1991 to Rs 31 by January 1993.

True, compared to early 1993, when we first moved over to a market system for determining exchange rates, the real effective exchange rate had appreciated by about 14 per cent in August 1997. Since then there has been a substantial correction and the quantum of appreciation has come down to just about 4 per cent. Faster import liberalisation is the best way to deal with the negative effects of an appreciating currency in an open economy.

But compared to June 1997 in real terms, that is after adjusting for inflation rates, the rupee is now up 8 per cent against the Thai baht, 35 per cent against the Malaysian ringitt, 18 per cent against the South Korean won, 23 per cent against the Philippine peso and 152 per cent against the Indonesian rupaiah.

In the short term, the rupee's appreciation against the east Asian currencies could adversely affect our export prospects in areas like gems and jewellery, textiles, engineering and pharmaceuticals. Given the exchange rate policies of our competitors and given the slow growth in world trade itself, it would be foolish to adopt a fundamentalist line on the exchange rate. This, particularly if the market perception is that the exchange rate is still overvalued and the market "expectations" are that of a depreciation.

No policy has hurt the cause of exports more than the ill-conceived reserving of over 830 items for exclusive manufacture in the small-scale sector. These include textile products (like garments), leather products, plastic products, engineering components, toys, electrical appliances and sports goods. Right through the '80s and '90s, the industries where world trade expanded fastest -- garments, consumer goods and light engineering -- were all reserved for the small-scale sector. They were thus deprived of new investment and technology, given the way we have defined the small-scale sector.

In 1985, India's export of so-called low-tech items amounted to $2.5 billion. China's was marginally more at $3 billion. By 1995, while India's exports of these low-tech items increased to $13 billion, China's zoomed to $72 billion.

Pick up any consumer item in any American department store. Chances are it will be marked "Made in China". This is where we have lost out, particularly in textiles and electronics, because we cling to an outmoded idea of the small-scale sector. Elsewhere, the small-scale sector is a technological and commercial reality. In India, it is a fiscal artefact.

Trade and investment are closely interlinked. Here too we have lost out. A growing proportion of international trade -- now about 30 per cent -- comprises intra-company sales. Such sales take place when these companies make investments in different countries and use these countries as manufacturing platforms.

For India to emerge as a global production base, we must realise that the critical element of competitive advantage in today's world is time. We may have all the skills that MNCs need but if these companies are not able to evacuate things made in India out of India in a matter of hours, we will continue to be beaten by the Irelands and the Spains. The "hassle" factor of doing business in India, apart from our continued ambivalence on foreign investment in the consumer goods, textiles and electronics industries, is costing us dear.

Hegde plans to exhort big Indian corporates to export more. His energies would be spent more profitably interacting with foreign companies already in the country -- and helping them make India a global resource base.

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