India is not only undergoing an overall economic change but there is a perceptive attitudinal change among the politicians at the centre particularly. Be it a hike in the diesel prices or opening up of the insurance sector, all such steps only corroborate one fact: there is a consensus that India needs to change.

Strong intent
This year the government is quite confident that it will achieve its disinvestment target. The process has begun with 74 per cent of the government's stake in Modern Foods getting transferred to Hindustan Levers and Indian Airlines is up for sale. How well will privatisation proceed is not the issue at present. But, the fact is that the government is willing to transfer 51 per cent of its stake to private hands. This clearly speaks of the government's future intentions.

Today, India has opened up the gates for liberalisation but this year’s millennium budget has not done much on the international trade front. The Rao-Singh era saw the end of licencing which saw an unprecedented growth of 7.7 per cent during period between 1994-97. This year's budget too does not have any major trade liberalisation measures.

Licence Raj
As mentioned earlier, it was under the Narasimha Rao government that his finance minister Manmohan Singh initiated the reforms, which did away with licensing virtually on all capital and intermediate goods. Peak tariff rates stood at 400 per cent and approximately 60 per cent of the items were subject to tariff rates between 110 to 150 per cent. More than 96 per cent of the items were subject to peak tariffs of 60 per cent and above. This painted a very unhealthy picture for the Indian exports. Customs duty was then drastically cut in February 1994 and the highest rate came down to 65 per cent. A year later it was further bought down to 50 per cent. In the same year, tariffs on capital goods were also brought down to 25 per cent or less and those on intermediate inputs to 40 per cent or less.

Faded euphoria
Just when India was trying to break the rigid trade barriers, the then union finance minister P Chidambaram introduced the Special Customs Duty of two per cent in his budget of 1996-97 without any major tariff reductions. In the following budget, this tariff was further increased to five per cent . To offset the increase in protection, the tariff applicable to intermediate and capital goods was further reduced to 30 and 20 per cent respectively. Protection continued and the present finance minister Yashwant Sinha in Union Budget 1998-99 introduced yet another special additional duty (SAD) of as much as six per cent points for high tariff goods. This again broke the liberalisation trend. Once again, tariff rates have soared to above 50 per cent. As to whether India will be able to compete in the world markets with such high tariffs is the question being asked now.

Last year, Sinha scrapped the special customs duty introduced by Chidambaram. But he took some protectionist steps too: he substituted the existing 10 per cent rate by 15 per cent and merged the rates of 20 and 25 per cent into 25 per cent and that of 30 and 35 per cent into 35 per cent. This was going a step backward. Thus, it is very doubtful whether the customs duty has really gone down by more than five per cent points since the Rao-Singh regime.

Why did the government wait for so long to liberalise on the consumer goods front? Import of consumer goods would allow the consumers the same benefits of cheaper and high quality imports that businesses have enjoyed through liberalisation of capital and intermediate goods. But, finally when India made the WTO commitment, this came to an end and forced the government to favour the consumers. Accordingly, 1429 consumer goods items are to be taken off the licensing list starting April 2001.

High tariffs retard growth
India's high tariff rates make Indian exports less competitive. In comparison, Sri Lanka's import weighted average tariff rates have fallen to 10 per cent, while ours exceed by 20 per cent. In India, given the escalation in tariff rates according to the stage of production, the effective protection on higher stage of production is substantial. The fallout: consumers pay for the cost of protecting not only the inefficient domestic producers but inefficient foreign producers as well.

Apart from inefficiency, the macroeconomic forces operating in the world are also pushing for more import liberalisation. Capital inflows have been putting severe pressure on the Rupee. Today, India is in a position to manage its forex reserves but looking ahead into the future the scenario does not appear to be all that rosy. It is then imperative that trade is evenly balanced, or else fluctuations in the Rupee value could adversely affect India's trade performance. To achieve a higher export-GDP ratio of around 20 per cent from the current 10 per cent, import liberalisation is the only option.

A number game
Simply put, India's good export performance of 13 per cent is just a number game. Usually, when a country achieves a high export growth, it is followed by capital flight which is followed by a currency devaluation. Similar is the case with India. In the years preceding devaluation, India's official exports to the US rose though what the US imported from India was far less. Thus, clearly capital flight was disguised as exports. But as the dollar is the ruling currency, a Rupee devaluation does not change the US import value figures, it grows successively on a trend line.

All that reflects a change in the official US export figures to the US. Well, if then Indian exports are not affected by the real exchange rate then what is all this hype about? Indian exports depend a great deal on the movement in world trade. They respond positively to the quality of transport, berthing and warehousing infrastructure. If red tapism is eliminated at all levels, there will be a quantitative jump in India's export performance. Exchange rates may not matter for exports, but an exchange rate aligned to fundamentals is of great help in keeping capital home. Most of the rumours of a currency devaluation results in dollars getting stocked abroad and proceeds not flowing in . Here the government and the Reserve Bank of India (RBI) should play a positive role in capturing the true picture of actual exports and value of exports that has come in.

Everybody knows that a high export growth with a steady Rupee is not a trend that can last for long. In the long run, the Rupee will slip and along with it the exports. If the government does not gear up, it is very unlikely that, with no significant change in the existing infrastructure and no positive attitude on trade liberalisation, exports will follow a trend line of 6-8 per cent achievement next year.

Post-reforms performance
Now with a turnaround in exports after hitting the negative 4 per cent mark to a high positive 11 per cent mark, it is not a very convincing picture. Export growth has been lower in some months of the last fiscal and a monthly growth picture does not speak much about the trend. Governments over the years have tried to correct their mistakes and fallacies in policy-making aimed at achieving a higher sustained growth. Existing distortions are replaced to achieve a better performance. However flexible and liberal, the Exim policy is driven by WTO commitments. There is limited flexibility and changes are superficial in nature. More often, the Exim policy ends up putting more commodities on the Open General List (OGL) without considering the ability of the economy to bear it. Year on year, this exercise is losing it relevance as it is not improving export procedures. A look at the export performance must examine the issue of an unchanging commodity composition and dominance. Although last year the Economic Surveypointed towards a change in the value of exports, there has been no significant change in the commodity basket since the economic reforms.

Where the policy faults
India's share in world trade is not very impressive and a mismatch in world trade and India's exports is widening year after year. Changes in technology composition between the two is the root cause. This year rightly the Exim policy has focused on sector-specific areas. What India needs to do is to diversify the export basket towards high value-added products and importantly on products with higher technology content. The latest policy identifies the problem and even gives an export thrust to such sectors as agrochemicals, biotech and pharmaceuticals, silk, leather, granites, gems and jewellery and minerals . But this will hardly serve the purpose.

What needs to be done is not just reducing tariffs but also to diversify the markets and alter the commodity composition looking at the world demand and pattern of trade. India has to gear up to quicker market access and a faster implementation procedure through the Uruguay Round of talks. What India needs is a strong Tariff Commission to counter barriers to market access in importing countries.

WTO does not allow subsidies and protection. But, in a very rare case, state protection should be given to exports but making it

WTO-compatible. Such restructuring would necessarily mean supporting R&D activity, which is essential if industry is to survive the challenge of an open and competitive regime. Industry today is still not geared towards quality upgradation of R&D and rests on the government for its support.

This is an important aspect for improving the health of the industry. The latest Exim policy does not look into this aspect. Even today, with open door policies and liberalisation, there are still procedural hurdles that block free trade especially more noticeable for capital-intensive items. These costs have acted as disincentives for exports across product groups. The Exim policy has made an attempt to remove some of the procedural bottlenecks involved such as phasing out of the DEPB scheme, abolishing the special advance licence for the electronics sector, scheme for transferable advance licence and neutralising duties on inputs for exports. Abolition of SIL is in line with WTO and in ending incentives for exports.

Simplification of procedures has also been carried forward by rationalising the duty exemption licence facility, registration-cum-membership certificate, trading house certificate and specifying norms for import of second-hand capital goods. Free trade zones encouragement would mean less hassles for exporters. Besides, restructuring of ports, green cards for exporters, golden status certification for trading houses and electronic filing of applications are other necessary changes required to achieve higher sustainable exports.