Exports declining in labour intensive sectors
Experts say that exports from sectors like gems and jewellery, leather products and readymade garments, are key to generating foreign revenue and such sectors need a boost.
Despite the Centre’s focus on promotion of exports and creation of jobs, the country’s exports, mainly from the labour intensive sectors, have been on a declining path in the last decade and there is a need for some rapid structural changes for revival, say experts.
The slowdown has been pointed out by many rating agencies, including Crisil, but successive governments have not paid heed to such red flags. Rating agency Crisil had recently pointed out the lack of competitiveness which is leading to slow growth of exports from the country’s labour intensive sectors.
The labour intensive export sectors include gems and jewellery, raw leather, leather products and readymade garments. Sachin Bhatia, chief executive officer of Metro Infrasys, a trade consultancy firm, told The Sunday Guardian. “It is a worrying fact that India’s exports are not picking up, that too at a time when the global environment is becoming more conducive for trade. The reason is not weak currency, but the lack of competitiveness. Exports from the labour intensive sectors are not only important for the generation of foreign revenue, but the sectors need a boost for creating more jobs.”
“As per IMF data, while global merchandise trade is expected to grow stronger at 4.2%, India’s exports have not been able to take advantage from a stronger trade environment, unlike many of its Asian counterparts like Vietnam, South Korea and Indonesia. India’s export growth was 9.5% in last fiscal, but for Vietnam, South Korea, and Indonesia, it was way higher at 23.8%, 18.4% and 17.8%, respectively,” Bhatia said.
Between 2006 and 2016, the competitiveness of the gems and jewellery sector has declined from 6.38 points to 3.96, leather and leather products from 3.12 to 1.79 and the readymade garments sector from 2.43 to 2.22 points, according to Economic Survey 2017-18.
“The national competitiveness of manufacturing has not made great pace, reflected in the declining manu- facturing export-GDP ratio and manufacturing trade balance. For the immediate future, addressing exporters’ concerns is imperative,” the Economic Survey 201718 reads.
A few experts, however, claim that despite the demonetisation drive that slowed down domestic economic activity since November 2016, India’s exports grew at the fastest pace in five years by 4.7% in 2016-17. However, various analyses have revealed that the competitiveness of the labour intensive sectors had already been on the decline since 2006, and was further impacted by demonetisation and goods and services tax (GST).
According to World Bank data, an increase in the out- ward remittances has failed to fill the gap in the current account deficit (CAD) in the recent past. India’s CAD doubled to 1.2% of GDP or $7.2 billion, throughout 2016-17.
Paramjeet Singh, a former Export Promotion Council member, told The Sunday Guardian: “The problem of the country’s widening CAD on year-on-year basis is difficult to fill in the current scenario when India’s basket of exports (engineering goods, gems and jewellery, chemicals and readymade garments) have been registering negative or near zero growth rates since many years. Also, a commodity group like drugs and pharmaceuticals, that was earlier showing export dynamism, has been indifferent or poor during recent times.”
“High exports growth, particularly in the labour-intensive sectors, is vital for economic sustainability. There are combinations of factors that are leading to the slowdown in this sector, including lack of diversification, dynamism and low level of competiveness,” Singh said. The slow growth of the labour intensive sectors is also caused by domestic developments such as the ham-handed implementation of the GST.
“The implementation of GST and the associated glitches have hit the small and medium- scale enterprises the hardest, derailing growth in sectors such as textiles, gems and jewellery, and leather, where such enterprises dominate the supply chain,” Singh added. Ashok Leyland is the flagship company of the Hinduja Group in the country and is the second largest commercial vehicle manufacturer after Tata Motors. The company has a strong presence in the domestic MHCV segment, with a 35% market share. It enjoys a dominant position in Southern India, but has been recently focusing on expanding its footprint in the Western and Northern Indian markets. Ashok Leyland has been growing by leaps and bounds in the last couple of years and posting excellent financial results, year after year. Sales turnover has advanced from Rs 12,481 crore in 2013 to Rs 20,019 crore in 2017, while net profit has shot up from Rs 434 crore to a whopping Rs 1,223 crore in the same period. The company’s financial position as of 2017 is quite strong, with reserves standing at Rs 5,841 crore, which is more than 20 times its equity capital of Rs 284.59 crore. Most equity research analysts have been bullish of the Ashok Leyland stock and expect FY18 to be good for the company, as the industry has been witnessing strong recovery growth. This is on the back of pick-up in mining and infrastructure investment by the government and strict implementation of overloading in trucks in the Northern Indian markets. While the India truck business of the company is currently nearly 70% of its revenue, it is planning to increase the share in other segments like LCV, exports and defence. This will not only reduce dependence on domestic truck business, but drive strong revenue growth in the future. In the short term, Ashok Leyland expects good demand and improved growth numbers on the back of new focus areas being identified and various cost reduction measures being implemented. On the other hand, in the longer term the company management expects significant higher contribution from Non India CV segment viz. defence and exports. Hence, the Ashok Leyland stock is an excellent buy with an accumulated rating from the present levels, with a 20% price appreciation in nine months’ time horizon. RAJIv KAPOOr Is A sHArE BrOKEr, CErtIfiED MutuAL FuND ExPErt AND MDRT insurance agent.