The Hindu Business Line : Merchandise exports: Bracing for new challenges

Over the past few months, exporters have been worried at a few unfavourable developments, such as the continuing appreciation of the rupee against the dollar, firming up of domestic interest rates and slowdown in the US economy. Exporters will need special policy support from the Government and the RBI, says S. D. NAIK.

The Annual Supplement to the Foreign Trade Policy (2004-09), unveiled recently by the Commerce and Industry Minister, Mr Kamal Nath, has set a target of $160 billion for merchandise exports during 2007-08 and $200 billion for 2008-09. The ambitious target of $125 billion for 2006-07 has almost been achieved, with the actual value of exports during the year at $124.6 billion.

It is indeed creditable that the compounded annual growth in country's exports has averaged 25 per cent over the past three years, compared with 12.73 per cent in the preceding three.

It may be recalled that when Mr Kamal Nath had announced the five-year trade policy in 2004, he had set the goal of doubling India's share in world trade by 2009. This target has been achieved two years ahead of schedule, and the share in world trade has now crossed the 1 per cent mark from 0.76 per cent three years ago.

A NEW THRUST

The thrust of trade policy announcements in recent years has been to link foreign trade with the larger objectives of economic growth and employment generation. In earlier years, the accent was mostly on earning foreign exchange. It is estimated that incremental exports over the last three years not only helped the country achieve a higher GDP growth but also generated some 7.5 million additional jobs.

Since the launch of economic reforms in 1991 and more so after 2000-01, the role of foreign trade in India's GDP growth has gradually increased. Merchandise exports and imports as a percentage of GDP, went up from 14.6 per cent in 1990-91 to 22.5 per cent in 2000-01 and further to 32.6 per cent in 2005-06. In 2005-06, merchandise exports contributed to 13.1 per cent of GDP, compared with 5.8 per cent in 1990-91 and 9.9 per cent in 2000-01.

However, employment growth from exports is still much below its potential, and the reasons are not far to seek. Trade policy has not paid adequate attention to labour-intensive exports and, consequently, the share of these exports has gone down from 26 per cent in 2000-01 to 21 per cent in 2005-06. An important sector where the country seems to have failed to leverage the benefits of the opening up of trade is textiles and garments, following the dismantling of the Multi-Fibre Agreement in 2005.

According to experts, it is possible to increase the share of labour-intensive exports significantly and generate greater employment opportunities. To achieve this, it is necessary to scrap the reservation of the remaining labour-intensive sectors for the SSI sector and undertake major labour market reforms.

FAVOURABLE FACTORS

The robust growth in the country's merchandise exports in recent years was driven by a number of favourable factors, both domestic and external. The gradual opening up of the economy and corporate restructuring helped improve the competitiveness of industry significantly.

Today, there is a far greater export-orientation of domestic manufacturers, and the corporate sector has been pursuing new growth strategies, including mergers and overseas acquisitions.

In recent years there has been a substantial increase in the share of technology and knowledge-based exports, their contribution to total exports going up from 24 per cent in 2000-01 to 29 per cent in 2005-06. These value-added products have been driving the incremental exports.

The chemical sector is the star performer, with a share of 14 per cent in 2005-06. Of late, India has also started exporting petroleum products to a number of countries, including Singapore, the UAE, the UK and the US.

At the same time, improved growth in world trade and firming up of international commodity prices have also aided the growth in exports considerably. The world economy achieved a four-year run of sustained growth beginning from 2003. More important, global growth was fairly broad-based and continued to remain firm in the emerging market economies (EMEs) on account of easy availability of financial resources and strong commodity prices.

NEW CHALLENGES

With a view to maintaining the momentum in export growth, the latest trade policy supplement has extended quite a few incentives to sectors such as agriculture, gems and jewellery, handloom and handicrafts as also the high-tech products. The most important provision of this policy is the abolition of service tax on all exports. Accordingly, all services rendered abroad or those delivered to exporters in India will henceforth be exempt from the 12.24 per cent service tax.

However, over the past few months, the exporters have become a worried lot because of quite a few unfavourable developments. The important factors that have contributed to the change in sentiment are the continuing appreciation of the rupee against the dollar, firming up of domestic interest rates and the slowdown in the US economy.

Moreover, capacity shortages have emerged across all sectors that contribute significantly to exports.

The fears about the impending slowdown in export growth are real since exports registered single-digit growth for three successive months (January to March) of 2007. In other words, exports during the last quarter of 2006-07 witnessed a significant slowdown, decelerating to 5.52 per cent in January, 7.8 per cent in February and 8.84 per cent in March 2007. The sharp appreciation of the rupee over the past year, and more so in recent months, appears to be the main reason for the slowdown in exports during the last quarter of 2006-07.

WAY FORWARD

Since there is a limit to the RBI's intervening in the currency market to prevent the rupee from appreciating vis-à-vis the dollar, exporters will have to make efforts to adjust to the new situation. There is a need to diversify the export markets as also the basket of exports. Above all, there should be a continuous effort to improve productivity levels to ensure that our exports remain competitive even when the rupee appreciates against the dollar.

Of course, the various export segments would need adequate policy support from the Central and State Governments by way of improvement in infrastructure support and reduction in transaction costs. In this context, sorting out of differences between the Commerce and Finance Ministries over the removal of service tax for exporters and those relating to the Special Economic Zones (SEZs) assumes importance and a new urgency.

Small and medium enterprises (SMEs), which constitute the majority of exporters in India, have been particularly hit hard by the appreciating rupee and the hardening of interest rates. They will need special policy support from the Government and the RBI as they are unable to go for the cheaper option of external commercial borrowings or use hedging devices as in the case of larger business houses.

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