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Will Kamal Nath's package bail out exporters?

June 20, 2007 13:08 IST
With the rupee expected to continue to appreciate, sops cannot be given endlessly, and exporters will have to learn to hedge their exposures.

Ganesh K Gupta, president, FIEO

Those exporting under DEPB and the drawback will be largely compensated. With some more measures, I'd say we may still meet the year's export target of $60 billion.

Though the rupee appreciating is not a new phenomenon, the sharp and sudden appreciation we're seeing right now is unheard of. Over the 8.7 per cent appreciation last year, the rupee has already appreciated 8 per cent. No one can argue that the rising rupee will not affect exports given how price sensitive Indian exports are and how they are predominantly invoiced in dollars.

Textiles, leather, engineering, pharmaceuticals and agro commodities are already feeling the pinch. The fear of slowdown in export growth is reflected in recent export figures. Export growth decelerated to 5.2 per cent in January, rose to 7.8 per cent in February and 8.8 per cent in March 2007. April showed double digit growth but aggregate exports in April 2007 ($10.6 billion) were less than in March 2007 ($12.5 billion).

What is of greater concern is the IMF forecast which says that US growth will slow down from 3.3 per cent in 2006 to 2.2 per cent in 2007. Besides, with the US current account deficit nearing 7 per cent of GDP, the dollar is slated to move even further down.

Indian exporters have already lost a few billion dollars of exports and, even after taking into account the advantage we have by way of cheaper imports, we have lost around 8-9 per cent of our export competitiveness, and are on the verge of losing important markets nurtured over a period of time. This will have serious implication on employment. A conservative estimate is that if things go on the way they are, we could lose around 8 million jobs this year.

It is heartening that on the day the commerce minister convened a meeting of the head of FIEO and other export promotion councils, he announced a package to deal with the alarming situation which includes enhancing the Duty Entitlement Pass Book and Duty Drawback rates by 5 per cent, cutting the rate of interest on pre-shipment and post-shipment credit for exporters to 6 per cent from the current 9-11 per cent, making the Exchange Earners' Foreign Currency accounts interest-bearing, mandating that scheduled commercial banks have to meet their 15 per cent export credit disbursement target, making sure there is no delay in service tax exemption/refunds and reducing the Export Credit and Guarantee Corporation's premium by up to 10 per cent.

Apart from compensating exporters, these measures will also send a positive signals to the exporting community since they underline the government's resolve to extend a helping hand in dealing with extraordinary situations.

Quantifying the impact of these measures and whether they will help stem the slowdown in exports is a tricky issue. Those exporting under the DEPB and drawback route will find costs getting offset by about 7-8 per cent and so will be largely all right. Exporters using Advance Authorisation and DFIA schemes will probably get benefits amounting to just 2-3 per cent, as will units in EOUs, EHTP, STP and SEZs. I'd say around 60 per cent of exporters will get a significant benefit.

That said, the announcements made need to be implemented immediately, and then supplemented with other measures. All un-rebated taxes and duties, Central and state, have to be refunded and a scheme needs to be announced to neutralise the high cost of electricity in the country -- it is around 2.5 times the international benchmark.

The scope of the MDA scheme also needs to be enlarged to cover all exporters and the restrictions on the number of visits should go. FIEO has been asking the government to create an Export Marketing Fund with a corpus of about 0.5 per cent of exports so that sizable amount is available for venturing into new and untapped markets besides cementing the presence in the existing market. I am sure that if these additional measure are taken by the government and those already announced are extended to all exporters, we will still this fiscal's target of $60 billion.

TNC Rajagopalan, trade analyst

Many of the sops announced have already been factored in by the exporters, so it is unlikely that they will make much of a difference to export competitiveness.

Commerce Minister Kamal Nath's package to help exporters cope with the impact of strengthening rupee is more of a symbolic gesture. The finance ministry may not accept some of his recommendations and even if they do, exporters who do not learn to hedge their foreign exchange exposures may not be better off.

On his part, Nath left the exporters in no doubt that whether rupee rises or not, competition in global markets is a fact of life which has to be addressed and that the exporters must also look at new markets. "It is also an opportunity for all of you to move towards greater efficiency, reducing costs and enhancing competitiveness", Nath told the exporters. The finance minister has also echoed the same views in his interview to a business news channel.

What the exporters haven't been told explicitly is that they are already enjoying certain subsidy by way of duty drawback rates and Duty Entitlement Pass Book rates that are based on the pre-budget customs duty rates -- the peak rate of basic import duty was brought down from 12.5 per cent to 10 per cent in the budget; for chemicals, it was cut to 7.5 per cent; it is 5 per cent or less for quite a few others. Since drawback rates were not reduced accordingly, the government already gives back the exporters more duty than it collects.

A strengthening rupee does not hit the exporters alone. Even the government revenue takes a hit because imports are invoiced in foreign currency and customs duties are collected on the basis of equivalent rupee value arrived at by using the exchange rates. A strengthening rupee means less duties for the government.

A strengthening rupee hits the domestic producers also because the imports get cheaper. In the last four months, the rupee has strengthened and even the customs duties have gone down. So, the domestic producers have to cope with the effect of not only lower customs duties but also a stronger rupee. Undoubtedly, the impact may be felt by domestic producers through lower market share, lower output, lower profits and lower employment. Does it call for subsidies to domestic producers to cope with cheaper imports?

The exporters must appreciate that in the last three weeks the foreign exchange reserves have gone up by about $5.7 billion, mostly due to Reserve Bank's interventions in the foreign exchange markets. That means a release of over Rs 22,000 crore (Rs billion) in the system. The Reserve Bank earns very little on these reserves whereas it pays more for the securities that it issues to mop up the excess liquidity.  This can not go on for ever.

Nath's offer to pay deemed exports dues quickly has little to do with foreign exchange rates. The duty drawback rates already factor in service tax and fringe benefit tax and most exporters anyway take credit of service tax. So, his announcements regarding service tax do not amount to much. Availability of export credit is not an issue.

The lower interest rates he wants for exporters can come only though a subsidy. Export credit guarantee may become cheaper but it may tell on the willingness of Export Credit Guarantee Corporation to settle claims quicker. Interest on balances in Exchange Earners Foreign Currency accounts may only help those who have idle funds. Thus, many of Nath's recommendations may leave the exporters feeling that something is being done to help them but may not amount to much.

As a temporary measure to cope with the impact of very sudden rise of the rupee, the finance minister may agree to give some relief to exporters in certain sectors like garments, leather etc. that are manufactured mostly in the unorganised sector. Beyond that, exporters should expect little. They must learn to use the hedging tools available to cope with the volatility in the foreign exchange markets.

Business Standard in New Delhi