Learn from the North Block, Mr Nath

The commerce minister ought to seek validation for his incentives with the finance ministry.

Reserve Bank of India Governor Y Venugopal Reddy announced the 2007-08 Annual Monetary Policy on April 24, six clear days after Commerce Minister Kamal Nath unveiled the third edition of the five-year foreign trade policy. While outlining the new initiatives in the trade policy, Nath also talked about buoyant exports, which, he revealed, had grown by 22 per cent for the whole of 2006-07 to $124.65 billion.

There was, therefore, some surprise when the RBI Governor's monetary policy talked about merchandise exports for only the April-February 2006-07 period. Why didn't the apex bank take into account the full year's exports figure which the commerce minister had so proudly announced almost a week before?

There are several explanations doing the rounds in government circles and the most charitable one says that the central bank might have preferred to rely on the formal release of the export-import data, instead of just banking on what the commerce minister claimed in his trade policy statement.

Nevertheless, the mystery remains unresolved. Going by the minister's claim of a $125 billion exports in 2006-07, the country's merchandise exports in March 2007 should have been more than $15.5 billion representing a 40 per cent growth over the March 2006 figure. This would have defied all forecasts and the single digit exports growth trend witnessed in the three preceding months from December 2006.

Going forward, the Institute of Economic Growth has also forecast that the average monthly exports growth rate in the next three months (March to May) would not cross 11 per cent, thanks to a relative slow down in the global economy.

So, did the commerce minister go overboard with his optimism? He has targeted exports of $160 billion in 2007-08, which would mean a growth rate of 28 per cent. And for 2008-09, the exports target is $200 billion, which indeed is highly ambitious, given the manner in which global demand for goods has seen a downturn. The strengthening rupee may make the exporters' task even more difficult, although there are views that a stronger rupee against the dollar may not be much of a dampener.

Since India's import-intensity of exports has gone up substantially, a stronger rupee acts as a countervailing force by reducing the cost of imports and thereby enhancing export competitiveness.

The commerce minister's problem is not just the strengthening rupee. His bigger problem is his failure to convince the finance ministry of the need to neutralise the incidence of domestic taxes on all exports. The most significant foreign trade policy initiative announced on April 18 was the  removal of taxes on services when these are rendered abroad or to exporters in the domestic market.

When such announcements are made as part of the new foreign trade policy, the expectation is that these must have been preceded by discussion with the finance ministry which is the final authority on the waiver of taxes.

But as it turns out, the finance ministry is not in agreement with the manner in which the commerce ministry wishes to reimburse the taxes paid on services. This was a big surprise as the commerce ministry had claimed earlier that the new policy had been approved by the prime minister and the finance ministry was also consulted on the proposed changes.

But North Block's reaction to the trade policy move suggests otherwise. This is reminiscent of Yashwant Sinha announcing labour market reforms, downsizing bureaucracy and the privatisation of Indian (then Indian Airlines) in his Budget speech some years ago, when he was the finance minister. But when it was time to implement those announcements, the ministers in charge refused to initiate follow-up action. Since then, finance ministers have refused to announce any policy change in the Budget that is not within their jurisdiction.

It is time Kamal Nath learnt this lesson from his counterpart in North Block. Fiscal concessions are not his territory. Even with special economic zones, the finance ministry is now insisting on export obligation to the tune of 51 per cent of a zone's turnover before agreeing to tax concessions.

So, a commerce minister can announce fiscal incentives only after he has got the finance minister's specific approval. Till this realisation dawns on the commerce minister, policy announcements from Udyog Bhavan, the headquarters of the commerce ministry, may lack credibility.