India’s exports have a long way to go and the curbs are not helping

• India should not become complacent on the export front. Total export by all nations is about 28-30% of the world GDP.
  
• Indirect taxes such as mineral taxes, excise duty, export duty etc., must be levied in a rational manner to remove the cascading effect.
  
• Ban on the export of agro produce shall immediately affect the income of about 45-50% of the population employed in the farming sector.
  

During 2021-22, India exported goods and services worth $669.7 billion (22.8% of GDP) as against $538.6 billion which was at about 20% of GDP during 2017-18. This calls for a sincere applause.

However, India should not become complacent on the export front. Total export by all nations is about 28-30% of the world GDP. In 2012-13, India exported goods and services to the tune of 25.4% of GDP. Therefore, India must boost exports up to 28-30% of its GDP. That will recover the loss of GDP during Covid years and ensure consistent growth in the years to come.

For this, the cost of basic inputs such as capital, energy, minerals and logistics must be reduced to become globally competitive. More so, indirect taxes such as mineral taxes, excise duty, export duty etc., must be levied in a rational manner to remove the cascading effect. That will boost exports and also arrest ‘cost push’ inflation.

Recently, to control inflation, India has banned exports of few agro products and levied 50% export duty on iron ore, 45% on iron ore pellets and 15% on steel. However, current inflation in India is not due to shortage in supply but due to ‘cost push factor’. The export curbs need review since; it will impact GDP growth. Yes, in case of shortage in supply, curbing of exports in a calibrated manner may be chosen as a last option.
Ban on the export of agro produce shall immediately affect the income of about 45-50% of the population employed in the farming sector. That will aggravate the unemployment problem. Advance estimate of production and consumption with predictable export policy shall enhance agro production without causing high inflation.

India’s steel capacity utilization will be affected by the duty

In India, steel production capacity is much higher than the domestic demand. More so, the addition of new capacities is in the pipeline. Sudden levy of 15% export duty shall adversely affect capacity utilization and on-going investment in new capacity. The growth of public income (GDP) and investment rate shall decline; that India can’t afford.

It is agreed that; in the past one or two years, steel prices have sky-rocketed and its impact is felt by the entire economy. But such inflated prices are due to high jumps in the price of coal and iron ore; that should be resolved. This will be the right choice over curbing exports by imposing taxes.

Thermal coal prices must be brought back to 2019 levels

The price of thermal coal must be restored almost to near to 2019-20 level which has now increased by almost three times, mainly due to stagnant production in past years clubbed with the high price of imported coal. Its major impact is on the core sector such as power, steel, metal and cements which travels to the entire economy. For this, India must immediately increase coal production by minimum 20% through regulatory easements. Incremental production may be incentivised through fiscal tools.

India has sufficient reserves of non-coking thermal coal but has limited reserves of coking coal. Steel industry uses both types of coal. For reducing import dependency, future capacity in steel may be diverted to the non-coking coal based technology on the best effort basis.

The sales of sub-grade iron ore

Iron ore is the principal raw material for steel making. For reducing its price, the mineral taxes in the shape of royalty and auction premium should be levied on the basic price (excluding mineral taxes) instead of IBM price (including mineral taxes).

More so, IBM price is not consistent with actual sale price in most cases. Hence, mineral taxes should be levied on the actual and basic sale price instead of IBM price similar to GST and excise duty. Prevailing system is causing a compounding effect of the mineral taxes. The price of iron ore has inflated to record high levels. Same is the case with other minerals including coal.

The aforementioned method of taxation is a great impediment in selling low/sub-grade iron ore in particular. After paying mineral taxes, the basic sale price comes to below production cost and at times, to a negative sale price. Hence, the miners are reluctant in selling low/sub-grade iron ore. As a consequence, new beneficiation plants are not coming up as per economic needs of the nation. Hence, more than 300 million tons of low/sub-grade iron ore is accumulated in the mines causing wastage of precious mineral resources.

By and large, India must choose appropriate policy tools for controlling inflation without sacrificing exports and GDP. For intermediate products like iron ore, a calibrated curb in export may be chosen keeping a balance between the exports, GDP and inflation.
The writer is an economist and the author of the book’ ‘Turn Around India: 2020- Surmounting Past Legacy’

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