Export incentives in FY2014 amounted to just Rs.24,662 crore. Meaning: export incentives accounted for only 7% of revenues forgone by the Customs department. Conclusion: the lion’s share of the loss was on account of foreign trade agreements that India had signed over the years. Shocking!

Steven Philip Warner | The Dollar Business

Eldrick Tont – the name does represent whatever an individual can achieve. Greatness, popularity, wealth and even indignity! For Eldrick, success was quick to come. At 21, he was officially the world’s best in his business. Between early 1998 and late 2009, event after event, for abundance of luck or lack of a competitor, he continued to hit pay dirt! The second-richest African American when 2009 ended, for a decade, endorsements followed his game and wealth followed his fame. When 2010 began, he was however found appealing for a second chance at reputation. His extramarital indiscretions won him profound public scolding. It’s been five-and-a-half years since, and barring a few months in between, Eldrick has never been his former “super” self. Today, he seems to be growingly making a pig’s ear of his sport. A day before India’s new Foreign Trade Policy was announced this year on All Fools’ Day, he fell outside the top 100 rankings for the first time since he had turned professional two decades ago. Call him Woods…Eldrick Tont “Tiger” Woods.

Woods’ overnight villainy overpowered sights of his coronations at tournaments. That famous smile with the shadow of his cap’s bill covering his eyes became a symbol of disaster. His victories were televised and written about; his fall was watched, read, and discussed! A situational metaphor – China is headed down the path where Woods’ shoe-marks are still fresh. And in a fashion as sudden. All predictions are about the after party hangover in China. Words like “fall”, “shock”, “slowdown” and “trouble” are now used to describe it. It’s interesting how depreciation of the yuan in a day became such an interesting headline across dailies last month – China’s recalcitrance regarding the yuan wasn’t anything new, was it? [For decades, every time a cock crew in Beijing, the yuan would be pegged to the US dollar by its Central Bank!]. In times to come, be it media in India or anywhere (except China!), criticisms on China will get louder. But no one, almost no one, will talk about why China became great in the first place. It will be like how Woods lost his fans overnight. And in this process, we will miss the woods for the trees! Want an example?

The awe-inspiring story of export incentives that China gave to its exporters has assumed a bitter flavour. And this aspect of foreign trade happens to be closely connected to my recent visit to India’s national capital – my meetings with two senior officials, one in the Ministry of Commerce & Industry (MoC) and another in the Ministry of Finance (DoR, MoF). Both were narrowly divided in their perspectives about export incentives, given the very task assigned to each at the Centre. But only “narrowly divided”. The MoC official opined that while incentives are required, sooner than later, India’s export community will have to learn to live without this support system. The DoR official seemed to be a believer in both a quiet and isolated work environment, and giving Indian exporters no incentive whatsoever. He was apparently unhappy about his department’s revenue losses due to incentives. Could have been a Freudian slip, but should he really be so upset?

In my view, export incentives and subsidies have been criticised enough. Armchair economists who probably need more Visa-triggered business tours, have even gone a step further to establish how a country’s consumers lose when the exporter community is subsidised and incentivised. But isn’t it true that in a globalised world, a country is only as strong as it is connected through trade and policy relations. Just like you are on Facebook and Twitter? And if incentives make India bigger, more powerful, even though the policy of incentives may have a fallout or two, the minuses can be overlooked.

The other charge against incentives is that they weaken the earning capacity of the customs department. That’s a thought classified as “penny wise, pound foolish”! Here’s why: In FY2014, the amount forgone by DoR on account of export promotion and remission schemes was Rs.60,168 crore. This number is misleadingly bloated. Pure export incentives that year (if we include just “incentive” schemes) amounted to just Rs.24,662 crore – meaning, export incentives were accountable for only 7% of revenues forgone by Customs. [Reflect on your school days: If your parent or guardian made a promise to reimburse your pocket money spent on buying pencils, examboards and erasers if you passed the examination with flying colours, would you have considered that an “incentive”? Logically, that’s a “reimbursement” that was anyway due to you. But a gift valuable enough, over and above the remission, would be the real “incentive”!] Conclusion: the lion’s share of the loss was on account of FTAs/RTAs that India signed with various countries over the years. So if the Customs is concerned about revenue losses, it should convince the government to doctor the bleed by working out a zero loss alternative to financially unsound trade agreements! For India, revenues forgone amount to just a paltry 0.7-0.9% of total exports value. Incentives, this economy deserves and more.

Next, quick analyses. The correlation coefficient of export incentives offered and exports (by value) for India during the past six years is 0.6. Even those against incentives will agree that it’s a good indicative sign that exports work better with incentives. While this is so, correlation between exports incentives and trade deficit is 0.1 (so weak that incentives cannot be tagged “guilty” for fueling India’s trade deficit!).

Studies confirm that incentives can boost a nation’s export. A research paper titled, ‘China’s Pure Exporter Subsidies’ by Prof. Defever of the LSE and Prof. Riaño of the University of Nottingham concluded thus, “Our research finds that as a direct consequence of these [export] subsidies, over a third of Chinese manufacturing exporters sell more than 90% of their produce abroad. Encouraging firms to export most of their production effectively shields domestic producers from tougher international competition. Pure exporter subsidies boost exports while protecting China’s local industry.” Today, China’s expenditure on various export incentives exceed 1.5% of its GDP (that’s $138.6 billion-plus in 2013). That of India is just about 0.02% – give this number a thought.

Moving on to Singapore, an empirical study titled, ‘Singapore’s export promotion strategy and economic growth,’ reports how “parallel to Singapore’s miraculous growth was an even more spectacular increase in exports. Countries applying outward-oriented development strategies had a superior performance in terms of exports, economic growth and employment.” With a dual focus on FDI and exports, despite not having produced a single computer component until 1980, Singapore became the #1 exporter of disk drives by 1983. Contest that!

South Korea is a similar experience. Popular developmental economist Alice H. Amsden, in her book titled, “Asia’s next giant: South Korea and late industrialisation” argues that “the architect behind the emergence of this new ‘Asian tiger’ is a strong, interventionist State, which has wilfully and abundantly provided tariff protection and subsidies.” From consumer durables to automobiles, Korean brands have today flooded the world market! And as an interesting case, another story, that of Philippines proves how even “mature industries” perform better when export incentives are given.

Researchers have conducted studies on the impact of these incentives on economies, and have found the proactive government intervention working wonders across the Middle East, South America, Asia and Africa; Columbia, Ethiopia, Iran, Tunisia, South Africa, are just a few names that come to mind.

A World Bank report titled, ‘The Impact of Export Tax Incentives on Export Performance’ brings to the fore evidence from the automobile sector in South Africa. It analyses the impact of export incentives (through a program called MIDP) on the industry’s exports, and concludes, “…the impact of the program on automotive exports in South Africa is positive and significant. The largest response in terms of improved manufacturing exports occurs with a delay after the adoption of the law, suggesting that exports need time to fully react to the incentives.” The second line is lesson enough for India, where incentive rates offered are sometimes more volatile than the weather.

There is another reason why higher incentives need to be doled out sooner than later. WTO member nations that are developing markets (read: India) are allowed a maximum of eight years to phase out all export subsidies from the year their GNI per capita crosses the $1000 mark. India achieved that in 2008. Which means, beyond 2017, WTO pressure on India will mount. Of course, India can explain to WTO how its GNI per capita is spurious (India suffers from a high Gini Index – wealth disparity is therefore higher in India than across Iraq, Ethiopia, Kazakhstan, Kyrgyz Rep., Lithuania, Niger, etc.). And even if there is pressure from WTO, the Centre will have to stand for the export community. Indian policymakers don’t have to feel guilty. Nations have never paid real heed to the $1000 cut-off. South Africa, Singapore, Argentina, Tunisia, Australia and many others crossed this figure even before WTO was born in its current form. And incentives are still being given to their exporters. As a case of flouting WTO norms, China has gone a step ahead. All WTO members are bound by the condition that they will present a report on incentives offered to exporters each year. China joined WTO in 2001, the year its GNI per capita crossed the $1000 mark. So it shouldn’t have been allowed to give subsidies beyond 2009. Welcome to 2015. Chinese export subsidies continue to grow. And in the past 14 years of its WTO Membership, China has submitted only two subsidy notifications, with nothing after 2008. I’m not saying India should salute China’s obstinacy and break hearts in WTO. What I say is, rather than being submissive, India can stand up for its most precious of global ambassadors – the exporter community.

Questioning the magnitude and longevity of incentives is not what will fulfil India’s foreign trade dream of crossing the $900 billion in exports by FY2020. We need to have our exports growth equaling that of China’s between 2009 and 2014. And for that, we can’t remain tight-fisted to the point of being miserly when it comes to incentivising exports. Export incentives aren’t crutches – they’re shock absorbing sneakers that will have India dash past the finish line in the foreign trade marathon. And let’s not worry about loss of fame like Woods experienced and China is just beginning to; it’s too early for India to worry about a slip. Let’s not miss the woods for the trees. Being awesome comes first.

On page 54 of The Dollar Business September 2015 issue, we give you an opportunity to read the mind of a senior official at a leading technology brand – Dell – who complained to us that his company has stopped exporting from India because export incentives for his product were lowered recently. Can there be a louder slap on the face of any “anti-incentive” activist?