Time To Rethink Crutches For Exports.

The robust performance of our exports in December 2010 is heartening for a number of reasons. One, it is a sign that exchange rates have ceased to be a significant factor in export performance. In the period April-December, the real exchange rate of the rupee showed a mixed trend.

It appreciated 3.7% on the basis of the trade-weighted six-currency basket but depreciated to a lesser extent against the broader 30 and 36-currency baskets. Despite this, exports grew 36.4% in December 2010 to $22.5 billion, suggesting Indian exports no longer ride only on a cheap currency; they are intrinsically competitive.

This is a sea change from the days when Indian exports were so commoditised that demand was essentially a function of how much cheaper they were compared to other countries' exports. Two, it is a sign that many of the initiatives taken by the commerce ministry to diversify both the export basket as well as the destination of our exports - the Look East policy, the increased focus on Latin America and Africa as alternate destinations - have paid off.

Economic recovery, and hence demand, in the western world is still uncertain. In contrast, many emerging markets are registering strong growth. Both factors taken together would suggest exports in the current fiscal are set to cross the magical figure of $200 billion as India has already totted up exports of $164.7 billion. And we have three months yet to go.

Three, strong export growth could help us bridge the widening trade and current account deficit. The sharp increase in imports during the first half of the current fiscal saw India's trade deficit widen to $35.4 billion causing the current account deficit to shoot up to 3.7% of GDP (well above the widely-accepted danger-mark of 3%), prompting fears that our external position was becoming increasingly unsustainable.

A reversal in trend, with exports growing faster than imports, is therefore a happy augury. It also suggests it is time to rethink, and perhaps phase out, some of the crutches given to exporters such as cheaper bank credit and tax sops and focus instead on facilitating exports through better infrastructure and easier procedures. Will the government bite the bullet?

Source : economictimes.indiatimes.com