Skier Export and Import Pvt. Ltd is a small textile unit that makes towels, blankets, and bedsheets in a factory in Ghaziabad on eastern edge of New Delhi, and exports them to foreign markets, including the US and Europe.
Vikas Singh Chauhan, who handles international business at the firm, which records annual sales in the range of ₹20 crore, is suddenly confronted with a problem of plenty. Skier has been flooded with more orders from overseas buyers than it can possibly meet, said Chauhan. “Last time we saw this type of orders, it was five years ago,” he added.
At a time when India’s domestic demand is muted due to persisting covid-induced caution and regional lockdowns, exports are emerging as a surprising silver lining. India’s exports grew more than 60% year-on-year to a record $34.5 billion in March and earned a robust $32 billion in April, the first month of FY22.
While the figures for May are expected to slip a bit due to movement restrictions, the March and April shipments have given rise to optimism about the short- and medium-term prospects. The reason: global demand, particularly in the West, is recovering much faster. In FY20, India’s overall exports (by value) plunged by 7.3% to $291 billion. But, this year, exporters and government policymakers have seen enough signs of a rebound that a steep target has been set—at least $400 billion.
Biswajit Dhar, professor at the Jawaharlal Nehru University, said in the short run, the surge in external demand is a window of opportunity for the Indian economy. “Domestic demand is not going to pick up soon. So, foreign demand will be critical for the economy.”
Minister of commerce and industry Piyush Goyal recently picked pharmaceuticals, engineering goods, auto components, fisheries and agricultural goods as the key focus areas.
V-shaped mirage
Most economic forecasters have begun to pare India’s FY22 growth projections, holding that the earlier presumption of a swift V-shaped economic recovery is unlikely to be realized since a second covid-19 wave has abruptly cut short a nascent economic recovery.
Moody’s Investors Service, for instance, has slashed its FY22 growth forecast for India to 9.3% from the earlier estimate of 13.7%. S&P Global Ratings expects India’s gross domestic product (GDP) to expand by 9.8% in a “moderate” scenario and 8.2% under a “severe” scenario.
The rapid spread of the virus into the hinterland, which has rudimentary healthcare infrastructure, has added to the uncertainty about the economy’s growth trajectory in the months ahead.
In sharp contrast, the key export markets for India—such as the US and the European Union (EU)—are experiencing a strong economic rebound, boosted by a $1.9 trillion fiscal stimulus programme by the Joe Biden-led US administration and a sharp drop in covid-19 infections.
An accelerating vaccination drive and the easing of lockdowns has led to a rebound in household confidence levels in the US and Europe to well above the pre-pandemic levels. Morgan Stanley has projected the US and the EU to grow by 7.5% (the fastest since 1984) and 3.5%, respectively, in 2021.
According to the World Trade Organization (WTO), prospects of a rapid recovery in global trade has improved as merchandise trade expanded quicker than expected in the second half of 2020.
According to the new WTO estimates, the volume of global merchandise trade is expected to increase by 8% in 2021 after having fallen 5.3% in 2020. The pandemic-induced collapse had clearly bottomed out by the second quarter of last year.
Crisil Ltd wrote in a recent research note that Indian exports were above their pre-pandemic levels and the momentum remains strong. “Faster recovery in advanced economies will spur global demand in the second half of 2021, thereby supporting India’s exports (too),” it added.
To be sure, India has a paltry share of the world’s merchandise exports, at 1.7%—as against China’s 13.2%. India’s share of global services exports is 3.5%, compared to China’s 4.6%. But despite this limitation, India’s exports—both merchandise and services—as a share of the domestic GDP are around 20%, and their performance is a key factor in overall economic expansion, particularly at a time when other growth cylinders aren’t firing. Although the economy is primarily driven by domestic demand, exports can offset a slump in the home market to some extent.
Demand environment
The product composition of India’s export basket has remained largely unchanged in the past five years, with petroleum and mineral products, precious stones and metals, and chemicals and textiles making up the largest chunk. The share of machinery and electrical equipment has increased during the last five years, reflecting, in part, a shift towards medium technology exports that involve greater local value addition.
Over the past few months, the US has emerged as the main destination for Indian exports after Britain exited the EU, which is now the No.2 market. Around a third of the country’s exports are destined for other nations in Asia, where the principal markets remain China, Hong Kong and Singapore. The share of India’s exports destined for the Middle East (West Asia) and Africa has been declining.
India has a net surplus in its services trade, in which the main components are computer, information and telecommunications services. Travel services and transportation are other key services exports.
A spokesperson for the National Association of Software and Service Companies (Nasscom) said although the industry body has stopped making growth projections for the information technology (IT) sector, the demand environment looks very healthy for FY22. Of course, the healthcare situation in key Western markets will be a key determinant, the spokesperson said. In FY21, the IT sector grew by 2.3% to touch $194 billion of revenue in a demonstration of its resilience amid the first wave of the pandemic.
Trade shy
However, apart from the highly successful IT sector, Indian industry has been largely reluctant to look at opportunities beyond the shores, often content with serving the large domestic market. This is in sharp contrast to the growth model of China and other East Asian economies. India’s liberal foreign direct investment (FDI) policy has also not succeeded in orienting overseas inflows towards boosting exports.
After a false start through Make In India in September 2014, the Narendra Modi government realized in its second term that without fiscal incentives, it is difficult to boost manufacturing and exports.
It first offered a massive corporate tax rate cut in September 2019 and followed it up with sector-specific production linked incentives worth ₹2 trillion for 13 sectors under the Atmanirbhar Abhiyan last year. It has also hiked tariffs on one-third of its tradable goods in the last five years in order to protect domestic industry and to reduce import dependence.
India’s average tariff increased to 14.3% in FY21 from 13% in FY15, with policymakers frequently using trade policy measures to encourage domestic production and curb inflation. That may now conflict with India’s plans to start negotiations on free trade agreements with the EU and the UK, which may require tariff elimination on up to 90% of product lines.
Due to this mix-and-match approach, India’s external posture remains obscure and seemingly inconsistent, wrote Suman Bery, a global fellow at the Woodrow Wilson International Center for Scholars, in a recent report published by the Hinrich Foundation.
“But it does appear that India is reducing its bets on integration with its East Asian neighbours and (is) investing greater energy in links with Europe and the US. The deeper message is that in its post-covid recovery, India’s pursuit of strategic trade and industrial policy means it prefers the flexibility offered by bilateral trade agreements over more ambitious regional structures (in Asia),” he added.
Immediate challenges
Although states have not completely halted manufacturing activity during the second wave, many have put stringent conditions in place—like limiting the workforce to 50% (West Bengal) and making it mandatory to house workers within the factory premises (Karnataka).
“Luckily, we have not gone for a national lockdown. Also, the Centre has not restricted the inter-state movement of goods and most export-related services are in the exempt category, said Federation of Indian Export Organizations (FIEO) chief executive Ajay Sahai.
“So, this time we are not facing many challenges with logistics as was the case in the first wave. But one cannot deny that when you are facing such a virulent second wave, there is bound to be some impact,” he added.
Many workers, for instance, have returned to their villages, resulting in localized labour shortages. Oxygen has also been in short supply. It is a key input both in the steel and automobile industry.
The ban on the supply of industrial oxygen is threatening to bring the metal works industry to a standstill because pre-heated metal cannot be cut without oxygen, said former chairman of the Engineering Export Promotion Council of India Anupam Shah, who is concerned about how that will affect engineering exporters who are flush with orders from overseas. “If the oxygen ban is not lifted soon, there will be a long-term damage because our customers from developed countries are going back to China and Brazil, and getting a customer back once you lose them is very difficult,” he said.
Small and medium enterprises (SMEs) that contribute roughly 40% to India’s exports are, meanwhile, battling liquidity challenges. After losing a case at the WTO, the commerce ministry has stopped the Merchandise Export Incentive Scheme (MEIS) that used to offer sops to exporters. The government replaced it with the WTO-compatible Remission of Duties and Taxes on Exported Products (RoDTEP) scheme starting 1 January, but is yet to finalize the incentive rates for exports, making it ineffective.
Exporters claim that ₹10,000 crore is still pending with the government under the MEIS for FY21 and around ₹4,000 crore on account of the RoDTEP for the first four months of the calendar year 2021. The Centre has also not yet notified the Service Exports from India Scheme (SEIS) since FY20, denying incentives to sectors like travel and tourism, healthcare, and education.
“We understand the Centre’s concern that at this point of time, providing health and creating health infrastructure should be the priority. We are not looking at new incentives or fiscal support. But we expect the money that is stuck with the government to be released on a priority basis. Then, the liquidity situation would ease significantly,” Sahai said.
Meanwhile, at the Skier textile factory, Chauhan is cautiously optimistic that the order influx would last. “We have a duty disadvantage of around 8% as against our competitors in Pakistan, Vietnam, and Bangladesh,” he said. But the high freight cost of the past few months is moderating and yarn prices are also easing. “Our Christmas orders will start arriving from May-end. If cases fall and if the government supports us, our exports can double.”
Source : Hellenic Shipping
