Thoughts on HDFC chief's critique

Last Updated: Sun, Jul 22, 2012 18:40 hrs

In nearly four decades of my familiarity with the export and import policy, I cannot recall any chief of a bank call for a revamp of the trade policy. So, when the head of a very successful bank goes public with his views on a topic that bank chiefs usually stay away from, it is time to sit up and take note.

Aditya Puri, managing director of HDFC Bank, gets across four points in an article in a leading financial daily. First, temporarily ban import of gold. Second, take a more guarded approach on trade with China. Third, raise import duties on certain goods. Fourth, lift restrictions on export of certain farm products. The idea is to reign in the current account deficit, which he sees as a structural problem, rather than merely a cyclical uptick driven up by strong domestic growth.

As expected, Puri makes his arguments carefully, marshalling the facts to buttress his case and answering possible objections. Yet, I doubt if the officialdom will make any drastic changes in its present approach.

There are two aspects to gold imports. One is its impact on the current account deficit and the other is on meeting the domestic demand for gold. Tackling the first but ignoring the other can lead to distortions. There has to be a balance. This year, the government doubled the import duty on gold. That and a weaker rupee have already moderated gold imports somewhat. A recent Reuters poll says gold imports fell by more than a half in the June quarter and could slide by a third in the next quarter. Stubborn inflation, leaving less disposable income in the hands of potential buyers, might moderate the surge in demand in the festival season. So, the government might prefer to wait and, if need be, increase duties rather than go for a ban.

On redressing the trade imbalance with China, he advocates ramping up our exports and taking up with the World Trade Organisation (WTO) the issue of that country’s aggressive, anti-market practices. Few can quarrel with the broad thrust of the suggestions but it is worth noting that according to the WTO, out of 853 anti-dumping actions taken against China worldwide, the maximum, 147, were by India, followed by 107 by America. Also, Section 8A of the Customs Tariff Act, 1975, empowers the government to impose transitional product-specific safeguard duty to stem increased imports from China that cause or threaten to cause market disruption to the domestic economy but hardly any action has been taken under this provision so far.

Puri echoes the views of A M Naik, the chief of Larsen and Toubro, when he calls for raising duties on “unnecessary imports” (unnecessary, because we have adequate production capacity that we do not utilise fully, as in power generation equipment). Somebody has to bear the additional costs of a higher tariff but it appears the government has decided to raise the duty on power equipment.

On lifting the restrictions on export of surplus farm products, balancing the requirements of adequate buffer stocks and encashing export opportunities, these are a tricky political issue, where ‘safety first’ is the dominant mindset from which the government might not veer easily. All said, it is heartening to see a bank chief bat for the domestic industry.


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