Thursday, December 17, 2015

[Editorial # 16] Cautionary signals from the export slump : The Hindu

The protracted slump in merchandise exports, which rounded out a 12th straight drop in November, is a cause for serious concern. The sharp, almost 25 per cent, contraction in the overseas shipment of goods from a year earlier to $20 billion signals there is more to this extended contraction than just the global economic weakness that has cast its shadow across trade worldwide. While the slide in commodity prices, including that of oil and petroleum products, has contributed to the decline in the value of exports in dollar terms, of greater worry is the continuing fall in demand for Indian engineering goods, and leather and leather goods. The leather sector has been hurt by a combination of economic weakness in Europe, increased competition and poor infrastructure. The theme of infrastructure hobbling the country’s trade competitiveness has been an enduring one with the problems of power availability and inadequate road and port connectivity still continuing to dog exporters, especially the micro, small and medium enterprises (MSME) that together accounted for more than 44 per cent of India’s exports in the last fiscal year. The MSME sector also provides employment on a sizeable scale, including in semi-urban and rural areas, and the export slowdown is sure to result in widespread labour distress that can only weigh on savings and consumption in the broader economy. The slowdown also reflects on the low level of value-addition being achieved by India’s exporters, as is evident in the widening trade deficit with China — itself coping with declines in both exports and imports. While the main exports to the northern neighbour are low value-added commodities such as cotton, copper alloys and iron ore, the imports include machinery, electrical equipment and electronics that have resulted in the trade gap surging 32-fold to $48.5 billion in the decade through March 2015.
The export slowdown is at the same time both a symptom and a potential trigger for domestic economic weakness. Any effort to improve business competitiveness through reforms, including in areas such as labour and credit markets, especially for the MSME segment, can surely give a fillip to the overall environment. The Make in India programme, if pursued cogently, can also serve as a springboard for enhancing skills and technologies that can over time help reverse and possibly boost both volumes and the value of overseas shipments. Also, the monetary and fiscal authorities need to be mindful of the fact that the rupee — while having weakened against the dollar, thus appearing to offer a price advantage to exporters — has actually appreciated in real terms against a trade-weighted basket of 36 currencies, making India’s exports less competitive. For this reason, the Reserve Bank of India needs to continue its close vigil over inflation. Finally, even the pharmaceuticals sector, where exports have grown, can ill afford to be complacent as the U.S. and Europe tighten regulatory oversight of generics and manufacturing processes in India.

1. What do you mean by exports? What is the value of exports from India in FY 2014-15?

2. What all items does India export?

3. What are India's major export destinations?

4. Why is there a decline in exports from India over last few months?

5. What are the challenges being faced by Indian exporters?

6. What is MSME sector? What is its share in India's GDP and exports?

7. What is understood by trade gap? Why is India facing a huge trade gap with China?

8. What are the major items exported to and imported from China?

9. Is valuation of rupee against dollar a factor influencing the exports? If yes then how?

10. Suggest a few measures to boost exports from India?


  1. 1. Exports is the basically the act of selling goods and services abroad. The value of exports from India in FY 2014-15 is estimated to be around 20001 USD million.
    2. The top ten I items India exports are coal and mineral oil which accounted for 16.92% of the total share of India's exports, natural or cultured pearls, jewellery, precious and semi precious stones, precious metals and coins accounted for 15.95% of total exports, vehicles, their parts and accessories accounted for 4.5%, electrical equipment and products such as TVs and sound systems accounted for 4.31%, iron and steel accounted for 3.76%, organic chemicals such as fertilizers accounted for 3.64%, Nuclear reactors, boilers, machinery and mechanical appliances constituted 3.57% of India’s total exports, Copper and its products accounted for 3.23%, Products made of iron and steel accounted for 3.05% of India’s total exports and Cotton exports accounted for 2.67%.

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  4. 2  Exports
    A publication on India's trade and investment by Exim bank highlights the trend in exports moving towards southern countries, particularly in the Asia and Africa regions. Asia is a key destination of India's exports - in 2001-02 Asia's share stood at 40.2% but in 2011-12 it grew to to 51.6%. Europe however has seen a decline in its share, down to 19% in 2011-12 from 24.8% in 2001-02.
    India's key exports in 2012 were petroleum products which generated $56bn; followed by gems and jewellery with $47bn. Pharma products, transport equipment, machinery and readymade garments are also big exports for India.
    The 2012 data shows that the United Arab Emirates (UAE) was India's biggest export market, closely followed by the USA. The latest data available from the Indian Government's Ministry of Commerce and Industry covering April-September 2012 shows the US to have slightly overtaken the UAE. The UK is the eighth biggest export market for India

  5. Imports
    Crude petroleum is India's biggest import with $155bn spent on it in 2012. Imports of gold and silver amounted to $62bn and electronic goods and pearls and precious stones are also top import items for the country.
    India's top import source is China followed by the UAE, Switzerland and Saudi Arabia. The UK came in at 21st place in 2011-12 with India importing a total of $7.7bn. In the six months recorded so far for 2012-13, the UK has dropped a place and has a 1.4% share of the India's import sources.

    According to the Ministry of Commerce, the fifteen largest trading partners of India represent 60% of total trade by India and 80% of its trade deficit. These figures do not include services or foreign direct investment, but only trade in goods. The two largest goods traded by India are Mineral fuels (refined / unrefined) and gold (finished gold ware or gold metal). Mineral fuels (HS code 27) are the largest traded item re-exports after refining. UAE, China, US, Saudi Arabia, Switzerland, Singapore are the top most priority of India as its trading partners. This list does not include the Gulf Cooperation Council (GCC), which includes two (UAE and Saudi Arabia) of the above states in a single economic entity. As a single economy the Gulf Cooperation Council (GCC) is the largest trading partner of India. This list also does not include the European Union (EU), which includes two (Germany and Belgium) of the above states in a single economic entity. As a single economy, the EU is the second largest trading partner of India.
    4  the last ten months have seen a series of contractions in India’s merchandise shipments, the last nine months by double-digit percentage points. Most analysts offer three explanations for the drops:
    • the adverse effect of fall in crude prices
    • the relative appreciation of rupee against dollar vis-à-vis other currencies like the euro, real, rouble, or yuan
    • Slower growth in world trade.
    Doubtless, the fall in crude prices has affected the dollar earnings from exports of refined petroleum products like diesel and petrol. Slower growth in world trade is an irrefutable reality that is bound to affect India’s exports.
    Similarly, India’s top competitor in its key exports such as steel, chemicals and textiles is China, and the yuan has fallen just 3 percent against dollar (compared to the rupee’s 10 percent depreciation).
    It’s not that only exports of petroleum products are declining, exports of other items have also trended lower. For example, shipments of engineering goods were down and gems and jewellery. Thus, the declines in India’s exports are quite broad-based.
    The roots of India’s declining exports are deeper, and have no short-term fix, such as letting the rupee depreciate against the dollar, simply because India’s export basket is no longer as price elastic as it once was. Hence, currency depreciation would have to be truly dramatic to give a meaningful push to India’s exports. That may not work, as other countries are trying to do the same thing to capture an increasing share of sluggish global demand.
    Despite all attempts at diversification, India’s merchandise exports have a narrow base, with the top 20 categories accounting for 78 percent of the total. Even in top export categories like textiles, India is exporting low value commodities such as cotton yarn or apparel rather than technical textiles.

  7. India’s manufacturing exports are fast losing price competiveness, primarily because of poor logistics infrastructure compounded by a weak trade facilitation regime. India’s over-dependence on road freight means that the cost of logistics as a percentage of GDP remains as high as 13-14 percent, compared with 7-8 percent in developed countries. Exports incentives in the range of 2 to 3 percent of export value can’t fully compensate for the additional cost incurred on account of an inefficient trade infrastructure. In developed markets, where import tariffs are lower, India’s exports are subject to all kinds of non-tariff barriers.
    India has signed many trade pacts, more for geo-political reasons than commercial ones. The best example is the South Asian Free Trade Agreement, which has not resulted in any significant export gains despite the obvious logistical advantage and similar consumer preferences of the South Asian population.
    The conclusion of an ASEAN-China FTA prompted India to hastily sign its on FTA with ASEAN, to protect its existing tariff advantages. Further, most of India’s preferential trade agreements (PTAs) are shallow in terms of product coverage. For example, the India-Mercosur PTA doesn’t include textiles and apparel items, which face prohibitive import duties of up to 35 percent.
    India’s pharmaceutical exports have not benefited from tariff reductions under the India-Japan CEPA, mainly because it’s too cumbersome to deal with Japan’s drug regulator. Japan allows the duty free import of apparel from India only if all of the raw materials used are of either Indian or Japanese origin. Strangely, India itself has not imposed any sourcing restrictions, even for sensitive items like textiles, granting unilateral duty free market access to countries like Bangladesh when restrictions would have helped its export of textile intermediates.
    India’s ill-conceived trade pacts have also resulted in inverted duty structure – high import duties on raw materials and intermediates, and lower duties on finished goods – that discourage the production and export of value-added items. Thus, apparel can be imported into India duty free while its raw material –manmade fibres attract an import duty of 10 percent. That makes no sense. Similarly, finished products such as laptops or cell phones can be imported more cheaply than all their parts (imported) separately because of duty inversion.
    Fixing the trade regime should be the top priority for the government. However, that first calls for an admission that there is a problem with the way India has negotiated its trade deals. India is also going slow on trade pacts that could be immensely beneficial. Vietnam has already concluded an FTA with the largely untapped Eurasian Customs Union comprising Russia, Belarus and Kazakhstan, while India has been slow to move ahead with negotiations. Meanwhile, India has been unable to bridge differences blocking a free trade deal with EU, its biggest trading partner. Worse, in a move that revealed its immaturity in trade negotiation, India recently called off the trade talks with EU.
    The recently concluded Trans-Pacific Partnership (TPP) – a trade bloc that has apparently held no interest for India – could be highly damaging for its exports. A tighter intellectual property regime may adversely affect India’s export of generic medicines to TPP countries, the U.S. in particular. Given the high applied duties for apparel items in the U.S., the TPP will create a direct tariff disadvantage for India’s apparel exporters, which operate on margins as low as 6 percent.
    The imposition of yarn forward (a highly restrictive sourcing rule) will not let India benefit indirectly from supplying textile intermediates to Vietnam. Moreover, TPP may lead to investment moving out of India to TPP countries, dealing another blow to India’s future exports.

  8. 5  Major hurdles
    • Delay in clearances at manual ports. A 10 day detention translates into an expence of worth Rs. 8,000 per consignment.
    • Delay in disbursement – of drawback and rebate claims. This hurdle led to harm the working capital of the exporter.
    • Lack of clarity – on which products need to be scrutinizing by which agencies. No clarity on products from which samples have to be drawn.
    • No strict adherence to rules under customs officers can skip examining cargo imported and exported by EOU’s and SEZ’s.
    • Difficult to get export licences in case of restricted items such as live horses and wooden pianos.