September 23, 2010

life in financial markets: can't have cake & eat it too, at least not for long!

Can't have cake & eat it too!

Time and again, the government ministries and industry bodies forget that they can not sustain the attitude of having the cake and wanting to eat it too. It might be easy to manoeuvre the system in our country but not when you trade with other countries. This is particularly in the area of imports and exports where India trades with the world at large.

The commerce ministry is seriously concerned about the widening gap between a fast-rising imports and stagnating exports. This is the same ministry that had gone to almost obscene level to create the Special Economic Zones Act (SEZ Act) and provide SEZs  with massive tax waivers. So, despite the large amount of cash saved in the form of tax waiver, the SEZs have not been able to increase the total exports of the country.

The government statistics tell us that India's imports is expected to shoot up by 16.20 per cent from $288.3 billion in FY 2009-10 to $335 billion in FY 2010-11 while exports will likely grow by a lesser quantum, 11.92 per cent, from $178.7 billion to $200 billion. This will raise the trade deficit (imports minus exports) from $109.6 billion to $135 billion. A
sharp rise in crude oil imports is the reason behind the total import increase in the above figures.

So, lets come back to SEZs that are supposed to be export hubs and particularly those which use imported raw material in their production. The classic example is that of Reliance Industries (RIL). Its super-large petroleum refinery in Jamnagar, Gujarat is a SEZ and income earned from the sales from this SEZ is perhaps not taxed. This SEZ processes crude oil most of which is imported. We do not know the exact import and export figures of this SEZ but we do know the total raw material imports by RIL and its total exports of refined petroleum products.

In FY 2009-10, the company imported raw materials worth Rs 152,083 crore \, or in US dollar terms roughly around $33 billion But its total exports of refined products was lower, at $20.9 billion as per its annual report for FY 2009-10. Exports don't match imports. Unsold inventory might be the reason.

This is just for one company which though contributes to about 10 per cent of the country's total imports and total exports. The commerce ministry not only worries about the deficit but along with the finance ministry it also worries about a stronger rupee hurting exporters or a weaker rupee hurting importers. They have to realise that they can not have it both ways. Someone will benefit, someone will hurt. But in the long term the market forces will even things out.

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