Ship Runs Aground

Absolutely nothing!", exclaims Ranjit Lall, director-general, Federation of Indian Export Organisations (FIEO), neatly summing up what Union Budget 2002-03 has for exporters. "Find me the mention of exports in this year's budget! Tax reliefs like section 80 HHC find no mention in Sinha's speech. That apart, 10A and 10B reliefs have been cut by 10 per cent."

The rollback on tax benefits has come as a rude shock for Indian exporters, who, anyway, have to contend with infrastructure bottlenecks, a hostile labour regime and a "relatively high transaction cost".

And this when prospects of a global recovery are improving. As the Dow Jones average posted its fifth weekly gain after reports indicated renewed US consumer confidence in March and the real GDP growth in the fourth quarter of 2001 touched 1.4 per cent over the Q3 of the same calendar year, sentiments are better in the US. Consequently, India's exports in January 2002 shot up by 18.18 per cent to $4,252.57 million compared to $3,598.39 million in January '01.

Even exports during April-January 2001-02, valued at $3,6526.14 million, were marginally (1.56 per cent) higher than the corresponding figure last fiscal. "With the US registering an upswing, our export bill will also climb," says Rajesh Chadha, economic advisor, NCAER. A weak rupee—slipping by 0.9 per cent since it opened after new year—has also been a boon.

To be fair, budgets are "not a policy document for trade and hence it's wrong to expect incentives from it", says Bibek Debroy, director, RGF. It's a macro framework but the bigger picture has ramifications for our trade bill as well. "This budget is not a growth-oriented one. To that extent, it's not beneficial for exports," he adds.

But has Sinha really done nothing? There are a few schemes. For promotional activities, Sinha has enhanced the allocation for export incentive schemes and offered further tax benefits for special export zones (SEZS). The commerce ministry is also getting 25 per cent more funds at Rs 1,710 crore for 2002-03. The plan expenditure has seen a 68.5 per cent rise to a budgeted estimate of Rs 775 crore on account of the Rs 310 crore provisioned for the centrally-assisted scheme to states for creation of infrastructure and export-driven activities.

Shouldn't the focus on infrastructure impact exports? The government thinks it ought to be so. "Considering the circumstances, this has been a balanced budget. There are some harsh measures, but the hike in plan outlay for infrastructure and the increased allocations for trade should counter them," says N.L. Lakhanpal, director general, foreign trade.

However, a tax-heavy budget is bound to be detrimental for growth prospects. Exporters, hitherto enjoying complete tax exemption on profits under 80 HHC of the IT Act, first came under the Finance Bill scanner two years ago when Sinha announced a phased rollback of 20 per cent annually, over five years. In the last budget, a 10 per cent concession was awarded, only to be rolled back this time. "Service tax on inland haulage services, storage and warehousing would further hike the transaction costs, while dividends taxed in the hands of the receiver will further jeopardise the small and medium exporters," says Lall.

The worst blow of all: 10 per cent of export earnings of units in SEZS, free trade zones, STPIs and other EOUs will now come in the tax net for a year. It's a complete turnaround from last year's budget—guaranteeing a 10-year tax holiday for such units. "Going back on the tax holiday commitments affects the sanctity of government policies," says Mohandas Pai, CFO, Infosys. "Unstable policies impact company investments and strategies go haywire. Clarity is essential for our survival," says C.S. Shukla, ED, Engineering Exports Promotion Council.

Debroy's argument that fiscal incentives aren't beneficial in a liberalised setup finds support in industrialists like S.P. Oswal, CMD, Vardhaman Spinning Mills. "The industry has to stand on its own feet and must get over the crutches of tax sops," he says. But Soumitra Chaudhuri, economic advisor at ICRA, would blame the government's inability to address key infrastructure, labour and reforms issues. "People are disgusted with the unkept promises. Naturally, the exporters have a grudge if they see even a rollback on the tax benefits. Give the guys something to fall back on," he says.

Allowing duty-free imports of inputs and capital goods is certainly a positive step as is crystallising the agricultural export zones and removing the restrictions on such exports. "The budget clearly recognises the need to promote agri-exports and it's a landmark. Finally, we are giving our farmers internal market access," states Anil Swarup, chairman, APEDA. Adds T.S. Vishwanath, consultant-international trade, CII: "We've always subscribed to the idea of food and income security for our farmers. But now we're clearly opening up towards an area of great opportunity." The figures speak for themselves: till December '01, compared to the last year, our agri-exports alone have increased by 4.71 per cent in dollars against a total exports growth of 0.64 per cent.

But key issues wait to be addressed. To begin with, the high minimum support price. "Corporatisation of agriculture is essential but state laws are also to be considered before anything concrete can happen," says a spokesperson from HLL, which has a Rs 1,200-crore export turnover from foods. Equally important is creating a long-term plan to hike productivity at the farmer level. "Improve the yields in our mills. Mechanisation is a must to drive down cost and improve the quality of produce," points out Abhiram Seth, ED, exports, Pepsi Foods.

For the success of both SEZS and agri- zones, feels Amrit Pandurangi, chief, infrastructure advisory, KPMG, it's crucial to have strong private sector sponsors. "Governments do not have financial resources or entrepreneurial spirit. But our private sector is not yet geared to handle large infrastructure or agriculture projects. Thus we will have to strike a delicate balance."

By reducing the excise from 16 to 12 per cent and customs on textile machinery from 25 to 10 per cent, the FM has clearly shown his concern for the ailing textile sector that still contributes over 25 per cent to export earnings. "The positive moves and the lower rate of tax will stimulate investment, modernise the sector and improve revenue collection," says Oswal.

The current export stagnation is a long way off the pathbreaking reforms of the '90s that propelled trade to double-digit growth. A lot needs to be ironed out. The HLL official sums up: "Simplicity, transparency and commitment to reforms are a must. Just learn a few lessons from China. Zhu Rongji is retiring as PM this year—get him as India's CEO with full economic decision-making authority. The politicians can continue with their temple circus, we can hope for progress." Exporters right now are just in the mood to heed his words!