Report to the President of the International Bank for Reconstruction and Development and the International Development Association on India's economic development effort (Vol. 7 of 14) : Export policy

 PREFACE "Export Policyn, Volume V I I of t h e Report t o t h e P r e s i d e n t of t h e IBRD by t h e 1964/65 Economic Blission headed by Bernard R. B e l l , was prepared by M r . David Holland, t h e n a member of t h e s t a f f of t h e IBAD. The r e p o r t i s based on s t u d y i n I n d i a i n t h e p e r i o d October 1964 t o March 1965. \ k i t i n g of t h e r e p o r t was completed i n September 1965. The r e p o r t has n o t been r e v i s e d o r updated except by t h e a d d i t i o n of a few minor footnotes.  F TABLE O CONTENTS Page No. U MR S M AY i - iii CHAPTm H O I: T E RECLVT DEVELOP~~iNTF INDIAN EXPORTS CHAPTER 1 : ~4EASURESF R TH.3 FROl.IOTIOiJ O EXPORTS 1 O F A. F i s c a l Meas.~res ( i )I n d i r e c t Taxes ( ii ) Direct Taxes ( i i i ) A Note on Direct Tax Concessions t o Exporters ( i v ) Subsidies (y.7 1 Railirray Freight Re bates ( v i ) Other Public Zxpenditures B. Entitlement Schemes ( i 1 Spe:;Fi;l Lxport Pornotion Schemes ( i i ) Entitlements t o A l l i e d Imports ( i i i ) Import Allocations t o Exporters; and Export Obligations C. Trade Agreements and Barter Deals ( i ) Trade Agreements ( i i ) Barter Trade D. Other Promotional Fieasures (i) Q u a l i t y Control (ii) Price Surveillance and Control (iii) Narksting A c t i v i t i e s (iv) Export Credits (v) The I n s t i t u t i o n a l Background t o Export Promotion E. Export Assistance f o r Export Commodities 42  Page No. CHA PTER I 1: 1 PROBLIQB I N EXPORT PROlIOTION 4.4 A. Planning f o r Higher Exports 4.4 B. The Supply of Exports 51 C. Linkages between Exports and Irnports 56 ( i ) Linkage through Trade Agreements 56 ( i i ) Linkages through Import Entitlements 60 ( i i i ) Linkakes through Barter Deals 63 D. Inducements t o P r i v a t e Enterprise 63 CHAPTER IV: O POSSIBLE GUIDZLINES F R EXPORT PEONOTIOiJ POLICIES 71 A. Principles 72 ( i ) Discrimination within Agriculture 73 ( i i ) Discrimination bett~een Agriculture and Industry 75 ( i i i ) Discrimination between Manufactures 76 ( i v ) A Perspec.tive 76 B. Sources of Assistance a0 C. The Use of Assistance 83 (i) Assistance on t h e Lover T i e r 83 (ii) Assistance on t h e Higher T i e r 87 ( i i i) Unanst~eredQuestions 89 (iv) A Concluding Note 90 1. Chapter I contains a brief survey of developments in I n d i a ' s v i s i b l e exports i n recent years. The increase i n t h e Third Plan period has been impressive by comparison with previous periods, even though t h e magnitude of t h e recent increase tends t o be exaggerated by changes i n t h e coverage of export s t a t i s t i c s and by t h e use of a base year (1960-61) i n which exports were r e l a t i v e l y low. The l a t e s t data suggest t h a t there has been a pause i n t h e gro~rth of exports. The increases during t h e Third Plan have been mainly a t t r i b u t a b l e t o higher earnings from a l i m i t e d number of a g r i c u l t u r a l and agriculture-based commodities; about one-half of a d d i t i o n a l earnings derive from shipments t o East European countries, whose share i n I n d i a ' s export t r a d e has been r i s i n g rapidly. 2. Especially during t h e l a s t decade, India has made conscious e f f o r t s t o promote an increase in exports. The measures which have 1 been taken a r e reviewed i n Chapter 1 . I n t h e f i s c a l f i e l d , s t e p s have been taken t o reduce t h e incidence of i n d i r e c t taxes on export production: customs d u t i e s and Central excise d u t i e s a r e e i t h e r not l e v i e d o r rebated, and only c e r t a i n S t a t e taxes nor? impinge on exports. In addition, t h e r e have been t h r e e d i r e c t t a x concessions t o exporters: t h e f i r s t was granted t o a i l exporters, and t h e l a t t e r two t o exporters of p a r t i c u l a r commodities. Subsidies a r e &ranted t o a few s e l e c t e d export commodities, e i t h e r d i r e c t l y from t h e aidget or throu;;h t r a d i n g l o s s e s incurred by public t r a d i n g corporations. The Government a l s o contributes t o t h e financing of c e r t a i n marketing and other promotional expenditures. 3 The most d i s t i n c t i v e measures f o r export promotion a r e those vhich grant entitlements t o a d d i t i o n a l scarce goods. Exporters of c e r t a i n commodities become e n t i t l e d t o imported inputs i n addition t o those a l l o c a t e d t o them through t h e control mechanism, and a l s o t o a d d i t i o n a l a l l o c a t i o n s of some scarce indigenously-produced inputs. These entitlements have a value, deriving e i t h e r f r o n t h e a d d i t i o n a l output f o r t h e domestic market which exporters a r e able t o produce, o r from t h e premia 1.rhich these scarce goods co~mandwhen t r a n s f e r r e d t o other users. Entitlement schemes a r e in operation f o r most products of newer manufacturing i n d u s t r i e s , and f o r a l i m i t e d number of products f r o m older i n d u s t r i e s and a g r i c u l t u r e . Each scheme has i t s ovm d i s t i n c t i v e f e a t u r e s : generally speakink, t h e value of t h e schemes t o exporters v a r i e s from industry t o industry, and from product t o ;product within i n d u s t r i e s . 4 The Government has a l s o sought t o widen t h e market f o r Indian exports i n general by negotiating f o r increased l e v e l s of t r a d e on b i l a t e r a l terms, e s p e c i a l l y with East European countries. Analagously, b a r t e r has been used a s a means of providing markets f o r p a r t i c u l a r commodities.  (ii) 5. Chapter I11 takes up certain problems t~hichare implied by the approach to export promotion described i the previous chapter. A n discussion of the process of establishing export targets suggests that considerations of comparative cost do not weigh heavily in the fortrard planning of exports, whereas the availability of supplies for exports and the ability to market supplies in external markets tend to be regarded as important constraints. The next section indicates that supply constraints are indeed serious for several important export commodities which at present receive relatively little assistance. 6. There are also problems involved in the linkage of export receipts with import payments which is a feature of several promotional measures: there are linkages, for example, in bilateral trade agreements and in entitlement schemes. An examination of the nature of linkage problems leads up to the suggestion that they need to be recognized and watched: but that they are probably not the crucial problen~sassociated with the present approach to export promotion. The problems deriving from the response of private enterprise to the inducements offered, and particularly those offered through entitlement schemes, are certainly more crucial. The discussion suggests that as a consequence the export effort may be spread too thinly, and that serious exporters may not in fact receive inducements in a form which encourages them to make major and longer-term commitments to exporting. 7. PIost of the measures for export promotion which have been taken are designed, in one way or another, to make exporting nore attractive financially. They constitute recognition that, at the existing exchange rate, and vith the existing level of internal costs and prices, many export products require such assistance. a. The last Chapter is pitched at a more general level. An examination of the discrimination betrjeen commodities and products involved in the present approach to export promotion leads up to the suggestion that this discrimination is probably excessive, and that a move could appropriately be made towards a different approach to export pronlotion hich tsould take greater cognizance of comparative advantage. 9. It is recognized that discrimination beta~eencommodities can be justified by either elasticity or infancy arguments. But it is suggested that the procedure should be to establish a uniform level of assistance applicable to all exports, 16th departures from that uniform level being admissible only if patently justified by such arguments. A n ~ attempt is made to indicate h o a uniform level of assistance could be made available through devaluation or some alternative technique of equivalent effect; and h r the below-standard assistance justified on or elasticity grounds and the above-standard assistance justified on infancy grounds could be provided for. 1. 0 n !,#%at is proposed, i effect, is the replacement of an approach involving highly selective assistance to exports by one L & i ~ h presumes that uniform assistance trill be provided unless a strong case for discrimination in favor of, or against, particular commodities or industries can be made out. This proposal is ride in the confidence that a major impetus will thereby be kiven to the urgently-needed exploitation of India's export potential.  CHIIPTB I: T E RECENT DEVCLORENT O I N D I A N FXPORTS H F 1. n A increase i n exports in t h e F i r s t Plan of 20$ over pre-Plan l e v e l s ; a prolonged stagnation s t r e t c h i n g through t h e Second Plan; and a surge forward in t h e Third Plan, with exports i n recent years shotring a very marked increase over 1960-61 l e v e l s . So runs a recent summary d e s c r i p t i o n of t h e development of Indian exports over t h e l a s t decade and a halfL( 2. It i s a description which stands in need of some q u a l i f i c a t i o n . The increase i n t h e F i r s t Plan i s obtained by ignoring exports i n (pre- Plan) 1950-51, on t h e grounds t h a t exports in t h a t year were unduly inTluenced by t h e Koreaa boom; and by not ignoring exports i n 1951-52 which :.rere even more influenced by t h e Iiorean boom. A s Table 1 S ~ O ~ J S , t h e inclusion of 1951-52, when p r i c e s were exceptionally high, s u b s t a n t i a l l y r a i s e s t h e a q u a 1 average of export values f o r t h e F i r s t Plan period. For t h e same reason, t h e s i m i l a r i t y i n t h e averages of export values i n t h e F i r s t and Second Plans, t ~ h i c hi s sometimes c i t e d a s evidence of a decade of stagnation, i s r a t h e r misleading; i n terms of export volumes, t h e average Second Plan performance shows a s u b s t a n t i a l improvement over t h e F i r s t Pian. 3 Sinilarlj., t h e surge f o r ~ i a r di n t h e Third Plan can be exaggerated: 1900-61 i s a p e c u l i a r l y favorable year on brhich t o base comparisons. Fxport p r i c e s have indeed f a l l e n somewhat since 1960-61, s o t h a t t h e increase i n export values since then somewhat understates t h e growth i n volume. But 1960-61 seems t o have been a year i n which export volume was low by Second Plan standards: so t h a t a p a r t of t h e volume increase s i n c e then must be regarded a s a recovery t o l e v e s previously achieved. I!oreover, t h e customs valuation of e x p o r t s d has been i n f l a t e d by changes i n t h e coverake of t h e s t a t i s t i c s . The inclusion of Goa r a i s e d export t o t a l s by some R s . 1 8 croreszh t h e inclusion of - / See iblemorandum f o r t h e Indian Consortium, 1965, pages 41-42. 1 - Detailed sdiscussions of export performancet aai neyears q u ibased bont acustoms 2/ data. A Table 1 shor?~s,t h e r e a r e i n c e r r usually te su s ntial divergences between these data and t h e exchange c o n t r o l data are used in t h e construction of balance of payments t a b l e s . The differences i n d e f i n i t i o n , coverage and timing f o r t h e t ~ i os e r i e s a r e such t h a t divergences a r e t o be expected. For a discussion of these differences, s e e t h e Report of t h e Informalijor!ting Group on t h e Discrepancies betrreen Customs and Exchange Control Data, undated, - 3/ I n some published s e r i e s , an adjustment t o include Goan exports i s made i n t h e 1960-61 t o t a l of exports. I n most d e t a i l e d tabulations, and i n t h e s e r i e s shown in Table 1, it appears t h a t Goan exports a r e not included u n t i l 1961-02.  Table 1: EXPORTS, 1951-65 (Rs. Crores) Year Exchange Co t r o l i V a l u a t i o ?a n, ! Customs lb Valua ti on- , Export Price ~ n d e x( 1958=1001/C i 1st Plan Average 622 609 I 2nd Plan Average 628 t j 622 1 I 668 I 660 682 701 802 800 (Estimate) I I I 3rd Plan Estimated Average 752 1: i 767 1 I I 4th Plan Target ! i Average 102C i 1029 I Sources: - /a 1951-52 t o 1363-64, Report of the Informal Working Group on t h e Discrepancies between Customs and Exchange Control Data; 1964-65 and 1965-66, I Iemorandum f o r t h e Indian Consortium 1965; 4th Plan Target, 1-iinistry of Co~xnerceReport 1964-65. - /b 1951-52 t o 1952-63, Report of the Informal Working Group on the Discrepancies between Customs and Exchange Control data; 1963-6h data supplied by Ministry of Comerce; 1964-65, The ECOIIOX~C Tiines, August 5 , 1965; 1965-66, estimate f o r current year given i n Appendix I X of the Eiinistry of Commerce Report f o r 1964-65. - /c IPIF, International Financial S t a t i s t i c s . Data a r e f o r the calendar year i n which the bulk of the f i n a n c i a l year (April- . Xarch) f a l l s ( 1) Estima.te i n ElIarch 1966 = about 800. parcel post exports added a f u r t h e r 2s. 10-12 croresL4 and overland exports t o Nepal, of unspecified inagnitudez/, have a l s o been included. I f these changes i n coverage a r e taken i n t o account, t h e increase in exp~rt values betveen 1960-61 and 1363-64 i s reduced from the 27$ shown i n Table 1 t o about 2; 0 i f account i s a l s o taken of t h e d i s t i n c t l y low volume of exports i n 1960-61, the surge asswnes niuch more modest proportions. 4 Taking note of these qualifications, it would appear t h a t only since 1963 have export volumes been very s u b s t a n t i a l l y above those attained i n 1959-60, or even 1955-56. It might be questioned whether the experience of t h e l a s t two years provides a long enough period on which t o base an inference t h a t there has been a decisive break a:ray from the slugkishness of previous years t o a sustainable r i s i n g trend of export values and volumes. Indeed t h e l a t e s t i n f o r m a t i o d is anything but encouragink. The t o t a l of exports f o r 1964-65, which had been given a s R s . 839 crores, has been trimmed down t o R s . 813 crores following a recheclcink of s t a t i s t i c s . Furthermore, it appears t h a t exports i n t h e f i r s t quarter of 1965-66 were some Rs. 15 crores lower than i n t h e 7 corresponding quarter of 1964-65. Unless there i s a marked upsurge in l a t e r quarters of this year, there > C l l be a substantial s h o r t - f a l l from t h e estimated earnings of R s . 870 crores f o r 1965-66.4/ - 5 Although t h e remarkable increase i n exports between 1962-63 and 1963-64 niay have generated an undue optimism, it cannot be denied t h a t export perromance i n the Third Plan has been impressive i n comparison r.5th e a r l i e r Plans. Table 2 compares the values of exports of individual commodities i n 1964-65 and 1900-61, t h e l a s t year of the Second Plan. 6. J u t e manufactures, tea, and cotton f a b r i c s a r e I n d i a ' s major foreign exchange earners. Over t h i s period, t e a and cotton f a b r i c s contributed l i t t l e t o t h e increase i n foreign exchange earnings: but the increase i n earnings from jute inanufactures was very s t r i k i n g . Indeed, but f o r the increased exports o a product t h a t has been regarded as having a very limited potential-, f/ recent export performance would appear much l e s s encouraging. The second group of commodities shorm i n Table 2 comprises a s e t of a g r i c u l t u r a l and mineral products r~hich have made l i t t l e contribution t o h i ~ h e r export earnings during t h e Third Plan. - A s estimated i n t h e Report of the Inforclal Working Group, op. c i t . I/ - Total exports t o Nepal mounted t o 1 2 crores i n 1963-64, and .17 crores 2/ i n 1964-65. - The Economic Times, .?.ucust 5 , 1965. 3/ 4/ - The I'linistry of Commerce deport, 1965-66 shows a f a l l i n calendar .year 1965 t o 2 s . 807 crores. - 5/ one r e c e n t ex-mple of the pessimism regarding jute exports inay be quoted. Earnings f r m jute manufactures i~both 1964-65 and 1965-66 ?.lere estimated a.t Rs. 149 crores, as c m p a r e d v i i h a c t u a l earnings of Rs. 135 crores i n 1960-01, <:nd 1%. 157 crores i n 1963-61:. See 1ndia.n Economic S t a t i s t i c s Part 1 1 1964, Annexure II. The value of exports of jute manufactures i n 1, 196k-65 was i n fa,ct Rs. 169 crores and R s . 16L crores i n calenda,r 1965.  Table 2 : EXPORTS O SELECTED PROIIUCTS 1960-61 AND 1964 F (Rs. Crores) Total w o r t s I. J u t e iianufactures Tea Cotton Fabrics 11. I r o n Ore Leather and l e a t h e r manuf a c t u r e s k Hides and s k i n s Spices Vegetable O i l s a R w Cotton i ianganese Ore ;,?ica Coir 1 . 1 1 O i l Cakes Cashew Kernels Tobacco Sugar Coffee IV. Chemicals and A l l i e d Products 3 7 4 Engineering Goods 9 14 5 Footwear 3 4 1 A r t i f i c i a l S i k Fabrics 7 7 0 Source: - /a 1, i l i n i s t r y of Finance, Indian Econoinic S t a t i s t i c s , P a r t 1 1 August 1964. /b Data supplied by i i l n i s t r y of Commerce. - Revised f i g u r e s given i n t h e Economic Times, August 5, 1965. o N doubt c e r t a i n other f i g u r e s i n t h i s column w i l l have been revised, but f u l l d e t a i l s of t h e recent r e v i s i o n s a r e not y e t a v a i l a b i e . - /d t i i n i s t r y of Commerce Report 1964-65. - /1 Ekc luding footwear . Iron ore looks out of piace in t h i s group: but t h e increase shown i s very l a r g e l y a t t r i b u t a b l e t o the inclusion of Goan exports, which added some Rs. 18 crores t o export earnings from i r o n ore in 1961-62. Discounting t h i s change in s t a t i s t i c a l coverage, i r o n ore export earnings have not shown a major increase during the f i r s t four years of the Third Plan. Jute manufactures apart, the important (non-llstatisticalll) increases in t o t a l export earnings i n t h i s period were derived from exports of the a g r i c u l t u r a l commodities shown i n the t h i r d group of Table 2. I n percentage terms, the increases were remarkable: t h e export earnings of t h i s group of f i v e commodities more than doubled i n four years. Export earnings from some of the ll~lewerli manufacturing industries l i s t e d in the fourth group have indeed increased in recent years. But the export earnings from these industries are s t i l l r e l a t i v e l y small; and t h e i r contribution t o the increase in t o t a l export earnings has been slight. 7. Indian exports during the Third Plan have not, therefore, shown any marked d i v e r s i f i c a t i o n away from a g r i c u l t u r a l and mineral products. India i s s t i l l dependent on these products, and r e l a t i v e l y simple manu- factures based upon them, f o r an overwhelming proportion of her export earnings. N major export product&owed any significant decline in o export earnings aver t h i s period; and much of the increase i n t o t a l export earnings which occurred can be credited t o a limited number of a g r i c u l t u r a l products. 8. Table 3 shows where the additional exports over t h i s period were marketed. The most s t r i k i n g increase absolute terms - - both in percentage and was in the value of exports t o Eastern European countries; exports t o these c o u n t r k s very nearly trebled over a period of four years, and they absorbed one half of the additior~t o t o t a l exports. Developing countries in A s i a , Africa, and Latin America did not, on the whole, offer buoyant markets f o r Indian exports; and the experience with r e l a t i v e l y developed countries was mixed. The United Kingdom, s t i l l the l a r g e s t single market f o r Indian exports, decreased her purchases marginally; and IJestern Europe as a whole was a stagnant market. But Japan and, more especially, the U.S.A. took s i g n i f i c a n t l y l a r g e r quantities of Indian exports. 9