TOO AM­BI­TIOUS?

The gov­ern­ment plans to bol­ster non-oil ex­ports. But for that it needs to act on a war foot­ing to ar­rest the fall in some of In­dia's big­gest ex­port­ing sec­tors.

Business Today - - THE HUB - @joec­mathew

Thou­sands of work­ers in di­a­mond cut­ting and pol­ish­ing units of Su­rat and Bhav­na­gar, Gu­jarat, got about 45 days leave for Di­wali this year in­stead of the 10-15 days that used to be the norm dur­ing the fes­ti­val sea­son. The ma­jor­ity of the 20,000-plus units in these ex­port hubs shut op­er­a­tions a month be­fore Di­wali and are yet to start op­er­at­ing at full scale.

The ex­tended hol­i­day in the gems and jew­ellery sec­tor could prove to be a night­mare for In­dia’s Com­merce Min­is­ter Suresh Prabhu as it shows slug­gish growth, a headache for his min­istry, which over­sees the coun­try’s ex­ter­nal trade. “It was a longer hol­i­day this time, but if the sit­u­a­tion wors­ens, some of the SMEs may close down,” says Praveen Shankar Pandya, pro­moter of Mum­baibased Revashankar Gems Ltd.

Such pes­simism is not spe­cific to the gems and jew­ellery in­dus­try. In fact, sev­eral ex­port-fo­cused sec­tors such as ready­made gar­ments, leather and meat prod­ucts and ma­rine prod­ucts con­tinue to reg­is­ter tepid or neg­a­tive growth. These gaps in In­dia’s ex­port story are so glar­ing that they take the sheen off one of the big­gest claims of the Naren­dra Modi gov­ern­ment — re­cov­ery of ex­ports.

Sta­tis­ti­cally, there is merit in its claim that In­dia’s mer­chan­dise ex­ports have re­versed years of fall. Mer­chan­dise ex­ports, af­ter all, ex­panded 10 per cent in 2017/18. But one of the key driv­ers of this growth was rise in global oil prices, as a ma­jor seg­ment that grew well above the av­er­age at 8.6 per cent was value-added petroleum prod­ucts. Petroleum prod­uct ex­ports, at $38.4 bil­lion, ac­counted for 12.7 per cent of In­dia’s to­tal goods ex­ports worth $303.5 bil­lion. The con­tin­u­ing rise in petroleum prices has seen the share of petroleum prod­uct ex­ports (worth $20.6 bil­lion) in­crease fur­ther to 15.2 per cent dur­ing April-Au­gust 2018. Other sec­tors like chem­i­cals and en­gi­neer­ing goods also con­trib­uted, though its per­for­mance looks bet­ter due to the low base of the pre­vi­ous year and ru­pee fall, which in­creased the price com­pet­i­tive­ness of some prod­ucts. Struc­tural is­sues con­tinue to plague even sec­tors that are seem­ingly go­ing strong.

Ravi Seghal, Chair­man of the En­gi­neer­ing Ex­ports Pro­mo­tion Coun­cil of In­dia, at­tributes the growth in In­dian ex­ports (in Oc­to­ber, ex­ports grew about 18 per cent to $26.98 bil­lion) to low base and cau­tions that the global eco­nomic land­scape is fac­ing sev­eral head­winds, in­clud­ing

pro­tec­tion­ism by some ma­jor economies and an un­cer­tain and com­pli­cated Brexit be­ing ne­go­ti­ated be­tween the UK and the EU. “De­spite the sharp drop in crude oil prices, there is no sta­bil­ity in en­ergy prices. The key lies in im­prov­ing our do­mes­tic turf by re­duc­ing our cost of man­u­fac­tur­ing and ship­ping as well as in­ter­est rates,” he says.

In­creas­ing pro­tec­tion­ism in key ex­port mar­kets like the US, loom­ing trade war be­tween coun­tries and trade blocks, trade sanc­tions and tar­iff re­stric­tions an­nounced by the US against China, Iran and oth­ers, and pro­jected weak growth in world econ­omy are all neg­a­tive for In­dia's ex­port growth. So are the coun­try’s own in­fra­struc­ture bot­tle­necks, pol­icy gaps, reg­u­la­tory hur­dles, teething trou­bles of the Goods and Ser­vices Tax (GST) and the (now fad­ing) im­pact of de­mon­eti­sa­tion. These fac­tors have en­sured that even with ru­pee de­pre­ci­at­ing against the dol­lar in re­cent times, mer­chan­dise ex­port earn­ings are yet to cross the $313 bil­lion mark they had clocked in 2013/14 dur­ing the pre­vi­ous gov­ern­ment's ten­ure. To his credit, Prabhu’s min­istry has un­der­taken a se­ries of mea­sures, in­clud­ing im­ple­ment­ing coun­try- and prod­uct-spe­cific strate­gies. “We have a dash board. We mon­i­tor it (progress of ex­port-friendly mea­sures taken by each depart­ment or min­istry) on a day-to-day ba­sis,” he says. But are his plans work­ing?

A closer look at some sec­tors that con­trib­ute close to half of In­dia’s mer­chan­dise ex­ports — en­gi­neer­ing goods (26 per cent), gems & jew­ellery (14 per cent), ap­par­els and

“When there is dis­rup­tion in global or­der, a coun­try like In­dia should take ad­van­tage of it and move ahead”

Suresh Prabhu Union Com­merce Min­is­ter

cloth­ing (6 per cent), live­stock and hide (2 per cent) — will shed more light on is­sues wor­ry­ing busi­nesses.

GEM OF A PROB­LEM

Call it the Ni­rav Modi/Me­hul Choksi ef­fect. The al­leged frauds com­mit­ted by these fugi­tive di­a­mond busi­ness­men have left a trail of dis­trust that is haunt­ing the gems and jew­ellery sec­tor, a pre­dom­i­nantly small and medium scale in­dus­try that con­trib­uted $41.7 bil­lion, or close to 14 per cent, to In­dia’s mer­chan­dise ex­ports in 2017/18. The sec­tor, which em­ploys over 4.64 mil­lion work­ers, is fac­ing one of its big­gest liq­uid­ity cri­sis af­ter banks started tight­en­ing fi­nanc­ing more than a year ago. Ex­ports from the sec­tor shrunk 4.3 per cent in 2017/18. They fur­ther fell 2.82 per cent in the April-Sep­tem­ber pe­riod of the cur­rent fi­nan­cial year. “The di­a­mond in­dus­try grew largely be­cause of the fi­nanc­ing the gov­ern­ment of In­dia pro­vided from 1970s & 80s. We de­vel­oped a hub of small di­a­mond pol­ish­ing. From nowhere, we grew to $22 bil­lion in di­a­monds alone. Un­for­tu­nately, we have been los­ing ground lately,” says Pandya.

What is trou­bling the in­dus­try is the Re­serve Bank of In­dia’s di­rec­tive for tight­en­ing of lend­ing norms to re­duce the risk of non-per­form­ing as­sets. SME credit rat­ings are not of­ten the high­est and the need for 150 per cent col­lat­eral is more than what SMEs can af­ford. Banks are even re­fus­ing to dis­count bills if the re­pay­ment date ex­ceeds the 30-day dead­line stip­u­lated as part of the fresh RBI di­rec­tives. “Busi­ness hap­pens in its own way. If my cus­tomer is buy­ing $4 mil­lion worth of stuff from me and says he can­not pay now and needs time, you have to give him time. Oth­er­wise, he will go to my com­pe­ti­tion,” says Pandya. The new guide­lines have ended this flex­i­bil­ity. In­dus­try play­ers are opt­ing to re­duce trans­ac­tion vol­umes than go­ing for fi­nanc­ing to keep pace. "We es­ti­mate that the in­dus­try has lost 25-30 per cent of its fi­nances al­ready. In an­other year, it will lose 10-15 per cent more. It is hap­pen­ing at a time when com­pe­ti­tion is build­ing up, mar­kets are slow­ing down and the need to have a big­ger in­ven­tory is at its peak," says Pandya. In­dia does not have ei­ther raw ma­te­rial or mar­ket when it comes to di­a­monds. Only 5 per cent of the stones pol­ished here are sold in In­dia. The rest are ex­ported to over 80 coun­tries. In­dia can ill af­ford to cede its lead­er­ship po­si­tion.

DEATH RAT­TLE FOR LIVE­STOCK

If the di­a­mond in­dus­try is about imported raw ma­te­rial be­ing ex­ported af­ter value ad­di­tion, In­dia’s leather and leather prod­uct and meat ex­port sec­tors find strength in the coun­try’s live­stock pop­u­la­tion. But

am­ple raw ma­te­rial avail­abil­ity is not re­sult­ing in cor­re­spond­ing ex­port growth. In­dia’s leather and leather prod­uct ex­ports, worth about $7 bil­lion in 2017/18, and meat ex­ports of an­other $3.5 bil­lion, are both strug­gling to grow. “Any cam­paign against slaugh­ter, hides is go­ing to af­fect the im­age of the leather in­dus­try. There is no ban on use of an­i­mal hides, but once panic sets in, it will have an ad­verse im­pact on growth,” says Rafeeque Ahmed, Chair­per­son of Farida Group, a Chen­nai-based leather shoe maker. How­ever, sen­si­tive anti-slaugh­ter slo­gans are just one of the sev­eral fac­tors that are pulling down leather ex­ports. “In­ter­na­tion­ally, there is a slow­down. Fierce global com­pe­ti­tion is also a rea­son. While the largest In­dian com­pany can pro­duce 7,000 to 10,000 pairs of leather shoes a day, in Viet­nam or China, it is 70,000 to 100,000 pairs. Economies of scale mat­ters. We have to build ca­pac­i­ties,” says Ahmed. In­dia’s leather prod­uct ex­ports de­clined 2.96 per cent dur­ing the April- Sep­tem­ber 2018 pe­riod. They had grown 2.4 per cent last year. Ahmed says re­cent sops to in­cen­tivise open­ing of new fac­to­ries and buy­ing of ma­chines will have a pos­i­tive im­pact on the sec­tor but over a long term.

Fauzan Alavi, spokesper­son for the All In­dia Live­stock Ex­porters As­so­ci­a­tion and a di­rec­tor of In­dia’s largest meat ex­porter, Al­lana­sons, says gov­ern­ment pol­icy to in­cen­tivise leather ex­porters by dis­cour­ag­ing hide ex­ports (there is 60 per cent duty on ex­port of raw salted buf­falo hide) is mak­ing the meat ex­port in­dus­try non- com­pet­i­tive. Neg­a­tive cam­paigns within the coun­try, mar­ket ac­cess is­sues and de­val­u­a­tion of cur­ren­cies of key com­peti­tors are adding to its woes. “Aus­tralia and Brazil are our big­gest com­peti­tors. Their cur­ren­cies have fallen sharply over a pe­riod. Ear­lier, the dif­fer­ence be­tween In­dian and their meat used to be at least $500 to $700 per tonne. Now, it is $150 to $200 a tonne. Fur­ther, we can­not ex­port raw hide as steep ex­port duty makes it non- com­pet­i­tive,” says Alavi. Ac­cord­ing to him, the in­dus­try was not keen on ex­port of byprod­ucts ear­lier as the core meat busi­ness was sta­ble. “In the last two three years, our busi­ness has been re­ally sink­ing, and cur­rency de­val­u­a­tion is play­ing a ma­jor role in our sur­vival in­ter­na­tion­ally. We have been run­ning from pil­lar to post right from the com­merce min­is­ter to the fi­nance min­is­ter to re­move this duty. Noth­ing has hap­pened,” he adds.

NOT READY MADE FOR GAR­MENTS

If there is one area where ex­port growth has been on a con­tin­u­ous de­cline, it is the ap­par­els and gar­ment ex­port sec­tor. The fall was 3.81 per cent in 2017/18 and 15.9 per cent in the first half of the cur­rent year. “We are not as com­pet­i­tive as Bangladesh, Cam­bo­dia, Viet­nam. China is get­ting ex­pen­sive of late, but it has mas­sive ca­pac­i­ties and very high pro­duc­tiv­ity. We are los­ing mar­kets. Buy­ers shift to other coun­tries even if they lose a few cents,” says H.K.L. Magu, Manag­ing Part­ner of Delhi-based Jy­oti Ap­par­els and Chair­man of the Ap­parel Ex­port Pro­mo­tion Coun­cil. "The main is­sue is price. Our in­fra­struc­ture is also poor. Buy­ers look for­ward to fast de­liv­er­ies. If I place an or­der for 1,00,000 me­tres with any mill, first it will in­crease the price, and de­liv­ery will hap­pen in 30 days or 45 days. In China, if some­body places an or­der for even one mil­lion pieces, they have that much pro­duc­tiv­ity and stocks that the mills are ready to de­liver."

An­other rea­son for fall in tex­tile ex-

“Even ar­eas such as en­gi­neer­ing where ex­ports are grow­ing need sup­port”

San­jay Bud­hia Manag­ing Di­rec­tor, Pat­ton Group

ports is that com­pet­ing coun­tries have bet­ter mar­ket ac­cess due to free trade agree­ments, or FTAs, with key mar­kets like the Euro­pean Union. Magu says is­sues of de­lay in GST re­funds have been sorted out but re­duced rate of duty draw­back is an is­sue. He adds the in­dus­try is un­able to gain from ru­pee de­val­u­a­tion as the mar­ket fac­tors in these cor­rec­tions in­stantly. “The de­mand is not slow­ing down. The terms are al­ter­ing. World over you see changes in what buy­ers are ask­ing and at what prices. Who­ever is trans­form­ing faster is do­ing well,”

OP­TI­MIS­ING STRENGTHS

says Ra­jin­der Gupta, Chair­man of TRI­DENT Group, a ma­jor ex­porter of home tex­tiles. Kolkata-based San­jay Bud­hia, Manag­ing Di­rec­tor of Pat­ton Group, says even ar­eas such as en­gi­neer­ing from where are ex­ports are grow­ing need sup­port. En­gi­neer­ing ex­ports had grown 16.8 per cent last year and ac­counted for 26 per cent of the to­tal. With about 12 per cent growth from April till Sep­tem­ber this year, the sec­tor is go­ing strong even now. “How­ever, in the last one year, prices of steel have risen al­most 36 per cent. This has made en­gi­neer­ing ex­ports un­com­pet­i­tive,” says Bud­hia. Ac­cord­ing to him, mills ex­port steel at much less than do­mes­tic prices. “En­gi­neer­ing ex­porters buy steel do­mes­ti­cally at high prices. En­gi­neer­ing ex­porters should be pro­vided steel at com­pet­i­tive or ex­port prices that are of­fered to in­ter­na­tional buy­ers,” he says. Bud­hia, also the chair­man of in­dus­try cham­ber CII’s Na­tional Com­mit­tee on Ex­ports and Im­ports, wants the gov­ern­ment to con­tinue the in­cen­tives it of­fers to ex­ist­ing spe­cial eco­nomic zones, or SEZs, as mid-term pol­icy changes have turned many units in SEZs un­vi­able. “A lot of in­fra­struc­ture de­vel­op­ment and in­vest­ments ini­tially planned for SEZs have ei­ther been aban­doned or sus­pended. The gov­ern­ment should use this in­fra­struc­ture for ex­ports," he says.

CHAM­PION SEC­TORS

Alok Chaturvedi, Direc­torate Gen­eral of For­eign Trade (DGFT), would want us to be­lieve that the do­mes­tic sit­u­a­tion is not that bad. The prob­lems ex­porters are fac­ing are mostly ex­ter­nal, he says. Even for the do­mes­tic is­sues, the gov­ern­ment has done its best, he says. “In the first six months of 2018/19, mer­chan­dise ex­ports have risen 12.54 per cent to $164 bil­lion. If petroleum prices re­main high, we can hope to achieve $330-340 bil­lion this year,” he says.

In a re­cent pre­sen­ta­tion to ex­porters, Chaturvedi said the com­merce min­istry had al­ready taken the ini­tia­tive for for­ma­tion of a sec­toral ex­port strat­egy. “Three meet­ings have been held by the min­is­ter with sec­re­taries of key ex­port­ing min­istries. Sec­toral strate­gies have been fi­nalised, a ma­trix of spe­cific ac­tion points, sec­tor wise, has been made and is be­ing mon­i­tored for re­sults in a very short time,” he says. The min­istry has also fi­nalised a strat­egy to gen­er­ate $114.8 bil­lion worth of ad­di­tional rev­enues from ex­port of 685 prod­ucts in the next twoand-a-half years. The gov­ern­ment is also plan­ning to in­cen­tivise ex­porters who are at a dis­ad­van­tage with re­spect to com­pet­ing coun­tries though some FTA-type ar­range­ments with des­ti­na­tion mar­kets. “We are also try­ing to find so­lu­tions for spe­cific prod­ucts in spe­cific mar­kets to par­tially com­pen­sate the disad­van­tages the ex­porters are fac­ing,” says Chaturvedi. In­ci­den­tally, com­mod­ity spe­cific strate­gies are in place for sec­tors like gems and jew­ellery, leather, tex­tile & ap­parel, en­gi­neer­ing, elec­tron­ics, chem­i­cals and petrochemicals, phar­ma­ceu­ti­cals, agri and al­lied prod­ucts and ma­rine prod­ucts.

Com­merce Min­is­ter Suresh Prabhu calls the rise in In­dia's ex­ports in the last one year ex­cep­tional and says it should be seen in the light of a huge de­cline in the pre­vi­ous years as well as a global slow­down in ex­ports. “I want In­dia’s ex­ports to drive its growth story. And for that to hap­pen, there has to be a part­ner­ship. I am ready to build part­ner­ships with line min­istries, state gov­ern­ments and in­dus­try. I must be talk­ing to 10 to 15 im­por­tant peo­ple glob­ally ev­ery day on this is­sue. I be­lieve this is the best op­por­tu­nity, be­cause when there is dis­rup­tion in es­tab­lished global or­der, a coun­try like In­dia should take ad­van­tage of it and move ahead,” he says.

In­dus­try is also await­ing such a part­ner­ship.

Source: Com­merce Min­istry

In $ bil­lion; data is for April- Sept pe­riod

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