Some reflections on proposed budget for FY 2014-15

All of us have a stake in the proposed national budget for fiscal year (FY) 2014-15. The business community is a major stakeholder; so is civil society, and the vast array of consumers -- rich and poor.
No doubt this budget has covered a lot of ground, in trying to address just about everything that is needed to put the economy on a path of RECOVERY, from strategies for stimulating private investment to modernisation of land market, adoption of National Social Protection Strategy, and imposing a green tax. Coming as it does after a year of strife, these measures are promising. Most important, I agree with business leaders that it is on the whole business-friendly. And what is good for business should also be good for the economy. After all, so much of the signs of prosperity that this country has is due to the thousands of entrepreneurs who proved analysts of the 1970s wrong by showing that Bangladeshis can be successful first generation entrepreneurs.
On the plus side, projections of global economic prospects by International Monetary Fund (IMF) for 2015 indicate a modest boost to our economy coming from the external sector. World trade and growth are expected to do better in 2015, compared to 2014, growing at 5.2% and 3.9%, respectively. This should help our exports, domestic economic activity, and revenue mobilisation in FY2015.
To take advantage of positive global trends, we would have liked to see the budget dwelling more on how it proposes to mainstream trade and trade policy. It should have gone further than describing strategies for expanding regional trade with India, and negotiating concessions under Asia Pacific Trade Agreement (APTA). A strategy of trade openness can extract gains from regional as well as global trade.
For the long-term, theory and historical evidence supports the contention that Bangladesh should continue on a path of export-oriented development. Going forward, export markets, rather than the limited domestic economy, will also be the main driver of employment for the vast number of labour force entering the labour market as an offshoot of the demographic transition the country is experiencing. In addition to creating jobs for two million workers entering the labour force every year, there is a huge backlog of under-employment that needs to be addressed.
The domestic economy, now about $150 billion and growing, is still miniscule in comparison to the global market of $60 trillion. Courting export markets does not mean ignoring the domestic market. It means keeping incentives equally attractive for both domestic and export markets. The budget, as a statement of public policy regarding Bangladesh's external trading relations, should have come out more comprehensively on what the short-term and long-term strategies were.
Because trade patterns are changing, creating opportunities as well as challenges for Bangladeshi exporters, there is need to change directions from the status quo. Trade in intermediate goods, that is, parts and components of final goods (e.g. auto parts, components of electronic goods like mobile phones, TVs, computers), is the fastest growing segment of international trade because of the "unbundling" of production processes across countries. East Asian countries have taken full advantage of this process but we are way behind. We have little or no growth in intermediate goods production as policies are not supportive of intermediate goods production as the entire policy spectrum is focused on promoting domestic consumer goods sector.  
We talk passionately about diversifying our exports but do little in developing effective policies. We have much to learn from the success of our readymade garment (RMG) exports. But we have not adopted the policy package that gave us RMG success. On the other hand, we seem to ignore the fact that our tariff policies that favour import substitute production create anti-export bias for the non-RMG exporters and those firms that export but also produce for the domestic market. High protective tariffs make domestic sales more profitable than exports. In those circumstances, it is a moot question why they export at all.
Having said that, it must be acknowledged that the proposed budget for the next fiscal has shown some change in direction. For the first time in about six years, we see a downward adjustment in protective tariffs; average nominal protection is down from 28.1% to 26.9%, primarily by scaling down supplementary duties (SDs) on consumer goods, which will bring some downward pressure on prices of several consumer goods.
The budget has proposed lowering of tariffs on basic raw materials for several products. It is popularly believed that a reduction of duties on basic raw materials will result in lower prices of the final good, to the benefit of consumers.
But elementary economics tells us that that is not the case. In the case of medicines, where tariffs have been lowered on imports of many active pharmaceutical ingredients, if the benefit of this measure is to go to consumers, the Drug Administration, which is supposed to control prices, will have to lower the caps on the locally manufactured medicines.
In case of other products like paper, ceramics, furniture, plastics, and baby diapers, we don't expect any price benefit to go to consumers unless tariffs on these products are also reduced. In the absence of any competitive pressure, prices of final goods will not decline due to reduced cost of raw materials.
So what is there for consumers in the proposed budget for FY2014-15? After all, they are the ones who end up paying for the high tariffs on imports. Because these tariffs not only raise the price of imports but also simultaneously raise the price of domestic products that are import substitutes. The good news is that of the 1467 tariff lines subject to SDs, over 700 have seen a reduction of rates by 5.0-10%. Since 82% of SD is imposed on consumer goods, our hope is that this will put some downward pressure on prices to the benefit of consumers.
In the coming years, more rationalisation of SD will be necessary if the government wants to implement The VAT and Supplementary Duty Act 2012 from July 2015. We argue that much of the top customs duty (CD) rate of 25%, regulatory duty (RD) and SD, are serving as protective duties and therefore constraining imports and revenues. So reducing them might not result in revenue losses but might yield revenue gains.
While maintaining existing protection, the budget has identified tyres and tubes, LPG cylinders, and diapers, among others, for giving higher protection. It would have been good policy to also specify that protection would be time-bound -- 5, or 10, or 15 years. Otherwise, they will not become competitive globally, to become exporters. It seems protection in Bangladesh is assumed to be ad infinitum. That is plain and simple bad policy. It is time to change.
One final point. At the end of the day, we are all consumers who have to bear the brunt of tariffs through higher prices. However, pre-budget consultations are not held with consumers. Who is looking after their interests? Here is a "collective action" problem.
Groups that are too large have difficulty organising for collective action. Our consumers are such a group. Under the circumstances, it is left to the government to balance out consumer and producer interests. That would be good for the economy as well as participatory policymaking in the long run.
(Dr. Sattar is Chairman, Policy Research Institute of Bangladesh.  zaidisattar@gmail.com)