Typically, the policy documents that are keenly awaited in financial markets are the annual Budget for the country as well as the RBI’s calendarised credit policy pronouncements.
In recent times, as India’s current account deficit (CAD) has steadily widened from 2.6 per cent of GDP in FY2011 to an estimated 5 per cent of GDP in FY2013, it becomes increasingly important to pay good attention to the Foreign Trade Policy as well, as it is a key determinant of this number.
Focus on deficit
First, let us look at the significance of the current account balance. One way of looking at it would be the excess investment in the country over the available savings pool. This,
However, if it is driven primarily by consumption or non-productive investments, then the increasing CAD could be a cause of serious concern as it would eventually result in significant dependence on foreign investors (whose contributions could be volatile and pro-cyclical) as well as result in a burgeoning deficit due to ensuing interest payments, etc.
The last print of CAD saw the number at a record high of 6.7 per cent of GDP. This was well above the RBI’s articulated view of 2.4-2.8 per cent being a sustainable range.
The country has to pay significant attention to ways in which exports can be increased and imports reduced — as that is the only way to protect the economy from volatile shifts in capital flows and markets.
key pillars
Given this context, the Foreign Trade Policy announced by the Commerce Minister rightly focuses on three key pillars.
Firstly, in terms of increasing competitiveness, the scope of the 2 per cent interest subsidy scheme has been expanded to include textiles and engineering and the zero duty export promotion capital goods scheme has been extended to all sectors. Given the fact that global growth is still at a 3 per cent level, both of these would help exporters, especially in labour-intensive sectors such as textiles as well as the value added capital goods space.
Secondly, the FTP attempts to stay with the largely successful diversification path taken by Indian exporters: It extends the incentives made available to an additional 53 countries in Latin America and Africa even as it extends the scope of products that are listed in the Focus Product Scheme. Under this scheme exporters get a transferable duty credit at 2.0 per cent of FoB value of exports.
Thirdly, to curtail capital goods imports, it allows exporters to fulfil their export obligation by locally procuring capital goods even as it allows utilisation of duty credit for payment of service tax.
The FTP also lists measures for reviving Special Economic Zones to give continued momentum to exports from these zones.
In short, given the urgent need to revive exports at a time of slowing global growth, the FTP is a well-structured document trying to increase the export momentum, especially in sectors that are labour-intensive or those that are in the value added space.
It also tries to ensure that India’s exports stay diversified, a critical part of an export strategy, given the differential speeds of recovery in most countries.
(The author is Senior General Manager, ICICI Bank)