The Hindu Business Line : Merchandise exports

The time has come for evolving a new strategy to promote the country’s merchandise exports. Given the stronger rupee and slowing global trade, competitive strengths and outsourcing capabilities should drive the export promotion effort rather than financial incentives and sops doled out to exporters, says S. D. NAIK.

Special efforts are needed to promote exports from labour-intensive sectors such as textiles.

The last annual supplement to the Foreign Trade Policy (FTP) 2004-09 was released by the Commerce Minister, Mr Kamal Nath, against the backdrop of an unacceptably high rate of inflation, the ban on exports of non-basmati rice, edible oils and pulses, and withdrawal of incentives on export of cement and primary steel in a bid to keep domestic prices under check.

The Finance Minister, Mr P. Chidambaram, has also indicated that the Government is prepared to ban exports in more industries in a bid to staunch rising inflation.

Already, with the appreciating rupee and the impending slowdown in world trade, the outlook for India’s merchandise exports has turned somewhat bearish and, over the past few months, the Government had to announce three relief packages worth over Rs 8,000 crore even as the RBI continued to sterilise the dollar inflows during the last fiscal to keep the exchange value of the rupee within a reasonable limit.

CHANGED SCENARIO

Now the Finance Ministry has rightly argued against more sops for exporters in the changed situation despite the signs of imminent slowdown in exports after four years of robust growth. Though exports have grown from $63.84 billion in 2003-04 to $155 billion in 2007-08, registering an annual growth rate of 23 per cent, the export target of $200 billion fixed by the FTP for 2008-09 seems overambitious in the changed trade scenario.

Not surprisingly, the latest annual supplement to the FTP is on expected lines without anything new. The Duty Entitlement Pass Book (DEPB) Scheme has been extended by one year till March 2009, and the Income-Tax exemption available to 100 per cent export-oriented units (EoUs) has been extended till March 2010. The ambit of the product and focus market scheme has been extended by including more products and more markets.

The other changes include the reduction of import duty on capital goods under EPCG (Export Promotion Capital Goods) Scheme from 5 per cent to 3 per cent, extension of cheap loans at six per cent to certain sectors and the usual promise of reducing procedural delays with the extension of facilities for online processing of documents.

NEED FOR NEW STRATEGY

In the changed scenario, the annual trade policies and the plethora of sops and export promotion schemes have lost much of their significance and the time has come for evolving a new strategy to promote the country’s merchandise exports.

Competitive strengths and outsourcing capabilities should drive the export promotion effort rather than financial incentives and sops doled out to exporters. In any case there is a rampant misuse of some of the prevailing export promotion schemes.

The prevailing barriers to export competitiveness, such as power shortages, infrastructure bottlenecks, outdated labour laws, and so on, lie beyond the domain of the Commerce Ministry. Now the Government has announced the setting up of a Joint Task Force to address the problems faced by the exporting community and ensure co-ordination between the Centre and the States in tackling them. It will have representatives of the Central and State Governments, local bodies, industry and exporters. Let us hope it will make a difference. To overcome the problem of appreciating rupee and provide a new thrust to merchandise exports, there is an imperative need to further improve productivity, and diversify export markets as also the basket of exports.

The appreciating rupee is an opportunity for Indian companies to vigorously pursue overseas acquisitions and shift some of the production bases to the US or Europe to fetch better returns. Incidentally, the Exim Bank of India has come forward to help Indian mid-sized companies to go for overseas acquisitions. As part of the new strategy, two areas would need special attention and adequate policy support from the government: (i) using innovation to improve export competitiveness, and (ii) promoting exports of labour-intensive sectors.

USING INNOVATION

Making better use of the potential for innovation, it is possible to provide a big thrust to the country’s exports.

This has already been demonstrated by a few knowledge-based and skill-intensive sectors such as pharmaceuticals, automobiles and auto-components, where Indian manufacturers have focussed on delivering low-cost products to previously untapped markets by innovating to lower costs and create new delivery mechanisms.

However, the untapped potential in this area is huge. A World Bank Report (“Unleashing India’s Innovation”) released last October had looked at thousands of Indian enterprises — makers of drugs, foods, carpets and textiles, as well as metal-bashers, and garment-weavers. In each of these industries, it found a large number of unproductive companies operating far behind the industry’s vanguard.

In garment-making, for example, the bank found a few highly productive companies where the value-added per worker was over Rs 600,000 in 2004.

But in over 60 per cent of the industry, this figure was less than Rs 100,000. Even ignoring the very best firms, the Bank still found that a leading group in each industry was about five times as productive as the average firm.

It says that India’s national output could be 4.8 times bigger if only enterprises were to absorb the use of knowledge that already exists in the economy.

In-house staff training and higher R&D spending could help increase productivity significantly. Perhaps the government could also think of setting up of Technology Upgradation Funds for more industries, particularly those saddled with obsolete technologies, on the lines of the one currently in operation for the textile industry.

LABOUR-INTENSIVE SECTORS

In recent years, one of the important objectives of trade policy has been to integrate it with the process of economic development and creation of more employment opportunities.

However, in recent years, the employment-intensive exports have not been doing well and their share in the country’s exports has been declining.

According to a report prepared by RIS, New Delhi (‘Towards Employment-oriented Export Strategies’), this share has declined by 18 per cent from 76 per cent of total exports in 1995-96 to 58 per cent by 2003-04.

The Report has identified 12 export sectors as employment-intensive: textiles and garments, leather goods, gems and jewellery, cereals, horticulture, flowers, fruits and vegetables, dairy products, processed foods, toys and sports goods, pharmaceuticals, automobiles and auto-components, consumer electronics and electronic hardware.

Special efforts are needed to promote exports from these labour-intensive sectors. According to experts, if only the cumbersome labour laws are made flexible, it should be possible to provide the much-needed boost to labour-intensive exports.

Also the small and medium enterprises (SMEs), which account for over 50 per cent of our total exports and which are also relatively more labour-intensive, deserve much greater financial and marketing support, testing facilities and better infrastructure, to enable them to increase their exports.