FROM BUSINESS WORLD OF 2 JULY 2006
The high cost of delays
The Reserve Bank has just released the results of a survey
of transaction costs incurred by exporters on account of delays and obstruction
by government agencies. The contrast between banks and government departments
in this respect is striking.
If we take a delay of more than a
week as unacceptable and a department that makes more than 10 per cent of
exporters wait longer than a week inefficient, the only activity in which
banks’ performance is substandard is in giving preshipment credit; 11 per cent
of the exporters took over a week to get it. For other banking services, the
comparable figure was under 5 per cent.
The only apparent exception was
the issue of the bank realization certificate, which was delayed in the case of
17 per cent of exporters. In this latter case, it is clear that the delay
largely arises abroad – in the giving of instructions to his bank by the foreign buyer, and in the trasmission of funds by that bank. As a matter of
fact, 34 per cent of exporters reported delays exceeding a week in realizing
export proceeds; so it is clear that Indian banks are not the responsible.
The performance of ports and
customs is comparable to that of banks. Port clearance as formalities took over
a week in the case of 4 per cent of exporters, as also customs clearance.
That leaves only one culprit,
namely directorate general of foreign trade (DGFT): it took over 30 days to
give duty drawback to 25 per cent, and over 7 days to give it to 70 per cent of
exporters. The inefficiency may not be entirely that of DGFT, for it has to
await a certification of exports from the customs; but between the two, they
take an unconscionably long time to part with the money that is exporters’.
It is no surprise that a fifth of
the exporters listed duty drawback realization as the greatest obstruction.
Another sixth listed getting the bank realization certificate. The two are
related, for the latter certificate has to be submitted before duty drawback
can be obtained. It is not simply that these activities took longer; they also
wasted more of exporters’ time; realization of duty drawback required more than
five visits from 17 per cent and more than 3 visits from 42 per cent of
exporters.
Another eighth listed port
clearance, and a ninth listed customs as the worst causes of delay. It would
appear, therefore, that the departments under the ministries of finance,
commerce and shipping are ones that most adversely affect exports. It would be
some consolation if their inefficiency were going down; but in fact, the
highest proportion of exporters reported increased delays in respect of duty
drawback realization (26 per cent) and customs formalities (15 per cent).
However, delays should not be
taken to be the prime cause of higher costs. When asked which of their costs
are above international levels, 17 per cent listed interest rates, 16 per cent
listed bank charges, 9 per cent listed costs relating to getting preshipment
credit and 6 per cent listed swift charges. Whilst banks may have improved
their performance in terms of timeliness, their costs are out of line with
international standards. This is very much in the Reserve Bank’s bailiwick.
Although it has brought down interest rates considerably in the past five
years, it has some way to go. Most of the banking system continues to be owned
by the government, is overmanned and pays excessive wages; unless the Reserve
Bank allows more competition, Indian banks will continue to be inefficient and
a drag on all economic activity, and not just exports.
Apart from costs related to banks
and government, the most important contributors to higher costs are power,
mentioned by 12 per cent of exporters, and freight, mentioned by 9 per cent.
India’s power system is notoriously inefficient, so much so that most manufacturers
at least supplement supplies from the utilities if they do not produce all
their requirements; the small-scale power generators they use are not much more
efficient. Power is perhaps the most important single explanation for India’s
lagging manufacturing performance.
But the exporters’ mention of
transport as a contributor to higher costs also needs to be taken seriously.
Inland transport is notoriously slow, thanks to inadequate roads; it is slowed
down even further by police checkposts and octroi posts on highways. The
government has poured money into highways in the past five years; but that
money has been spent on a small proportion of the roads, and has not removed
administrative imposts and checkblocks. One consequence of poor roads and
fractured administration is that industry has moved closer to the ports, and
the south, which has most of them, has developed faster than the north. Apart
from the regional inequity that this has engendered, the political risks of
uneven development cannot be ignored. After a nationwide value-added tax, the
finance minister should take up the mission of removing obstacles to interstate
movement of goods.
