May 11, 2012

Thinking export subsidies. A suddenly something argument...

There was a news item on Exports sops  in economic times recently. It's about boosting exports by providing  discounted interest rates and product and market linked incentives. Chapter 3 of Foreign Trade Policy covers product and market linked incentives. 
ET goes about criticizing the idea in the following words:

"The government’s plan to bring back subsidies such as cheap loans to prop up exports makes no sense. Instead, the government should open up trade in farm products, which are severely restricted now. A record 75 million tonnes of grain will pile up by next month and much will be lost in the monsoons that will follow. Instead of allowing grain to rot, the government should allow exports. Beefing up storage, marketing and transport infrastructure will also increase the competitiveness of manufactured exports. A weak rupee, which inflates import costs, actually improves export competitiveness. Competitiveness is the answer, not sops."

The criticism caught my eye. It was on first page. So some research should have gone into it, I supposed. But then, I realized that it is not so. It was random babble. From the number one business daily. Do they really think this one off farm export measure will do the trick? Or have they forgotten as to why some farm export restrictions are there in the first place? Of course, the concern for rotting grain is genuine, but the solution is misplaced. (e.g. why not distribute it to local population?)
The last thing about weak rupee 'actually' improving export competitiveness shows the lack of depth of understanding of international economics. How much of currency depreciation would actually improve BOP situation, is generally given by Marshall-Lerner condition. In fact, the J curve effect might worsen the situation in the short run. Even otherwise, a currency depreciation doesn't do anything to sagging global demand, the prime reason as to why exports are not increasing in recent months. Add to it the domestic inflation that eats away on the advantage of currency depreciation. Overall, the situation doesn't improve much for exporters even with some sops and depreciation.  

Yours truly feels, the point to ponder shouldn't be what ET says. The bigger issue is about understanding the process of export promotion through subsidies. Do these measures actually work? The question is, is there a causal link (supported by data/research) between subsidies given and export performance at sectoral levels. If yes, do we know the marginal effects and where to stop the sops. Rather, how much should be given before the export performance starts saturating. And how do these things interact when the demand is sagging. 

That, dear friends, I think, is the right question to ask.