The Hindu Business Line : What hurts India’s exports

Taking care of supply-side factors and the fall in the value of the rupee will enable Indian exporters to remain competitive and productive in this era of global financial crisis.

India is boxed in by logistics costs, which are among the highest in the world at 13 per cent of GDP.

Nilanjan Banik

During the beginning of the year, the Government embarked on an ambitious plan to reach an export figure of $200 billion for fiscal 2008-2009; and, further, to achieve 5 per cent of global merchandise exports market share by the year 2020. This sounds ambitious, going by the recently released trade data.

Export numbers

India’s trade balance registered a deficit of $59.77 billion in April-September 2008 up from $39 billion in April-September 2007. During September 2008, exports grew at 10.4 per cent (YoY) compared to 19.3 per cent (YoY) growth rate in September 2007. Imports in September 2008 moderated to 43.3 per cent compared to 51.2 per cent a month earlier. Although demand-side factors, such as slack demand conditions in the global market following the sub-prime crisis, protectionist policy measures in the form of non-tariff barriers, and so on may be attributed for the fall in exports growth rate on a YoY basis, there is a need to address supply-side factors, such as government regulations and inability to provide necessary logistics, that are hurting India’s exports.

In this regard, there are lessons to be learnt from China, which has so far remained relatively insulated by the sub-prime crisis. China’s exports figure of $1,218 billion is almost eight times than that of India. Considering items such as iron and steel; chemicals; machines and telecommunication equipment; textiles; and clothing — where China and India compete with each other in the international market — China’s share in world exports is much higher than that of India. For the above stated categories, China commands an export share of around 6, 3, 15,17 and 24 per cent respectively, compared to India share of around 2, 1, 1, 4, and 3 per cent, respectively.

The relative success of China lies in the availability of cheaper credits and its ability to provide a better physical infrastructure.

The one-year benchmark lending rate is 7.47 per cent for China compared to around 13 per cent for India. In a recent meeting with leading industrialists in India, the Prime Minister, Dr Manmohan Singh, emphasised the need for infusing liquidity into the system. In fact, the Reserve Bank of India has slashed both cash reserve ratio (CRR) and statutory liquidity ratio (SLR) by 100 basis points, which currently stand at 5.5 per cent and 24 per cent, respectively, of demand and time liabilities (bank deposits). However, the commercial banks are yet to cut down the loan rates in a major way to stimulate business activities.

Logistics concerns

China invests around 7 per cent of its GDP on infrastructure compared to India, which spends 4 per cent. Better infrastructure facilities by lowering transaction costs make Chinese exports more competitive. For example, it takes around 40 days to book a container for exports in India compared to a day in China. Logistics costs in India are among the highest in the world at 13 per cent of GDP. In many instances, Indian exporters of edible items, such as rice and tea find it difficult to ship their product not from the nearest port of exit but further away. For instance, exporters in eastern India transport edible items through land as far as Kakinanda — a port in Andhra Pradesh offering mid-water loading facilities — to avoid contamination.

The subsidy game

The Chinese government offers other goodies. Chinese manufacturing units not only have access to cheaper credits but also avail of cheaper power, water and lands. Besides providing these indirect subsidies, the government also provides differential subsidy. For example, production of staple fibres meant for domestic consumption attracts lesser subsidy compared to when used as inputs for making exportables, such as polyester yarn. The Special Economic Zones (attracting zero tariffs) were built with the idea of making China the assembly hub of the world — where inputs were imported from neighbouring Asia, assembled in China and thereafter exported to the rest of the world. Coupled with these, a much larger scale of operation by lowering per unit cost of production, explains China’s much higher share in world exports.

The US — largest buyers of Chinese goods — also never objected much to this subsidy game except for asking Chinese government to revalue their currency. An undervalued Chinese currency meant US multinationals footing in more dollar bills to set manufacturing activities in China. However, a greater subsidy on Chinese exports genuinely reducing their cost makes the US consumer happy. The US administration is also happy as China invested bulk of its exports proceeding in buying US Treasury bill.

Supply-side issues

Unlike China, exporters in India get little assistance from the Government. The recent star performers (read, sunshine sectors) of Indian exports such as fertilisers, steel and petrochemicals, were successful because of industry leaders in India taking initiative on their own. In terms of scale of operations, these industries are comparable to the Chinese counterparts. These were set up a few years back taking advantage of lower capital cost. Borrowing cost in India during early part of this decade hovered around 7-8 per cent compared to the present rate of around 13 percent. These sun shine sectors are also highly capital-intensive (perhaps, to get away with stringent labour laws) and coping well with the labour shortage problem that sectors such as leather and garments, are facing.

Addressing these supply-side issues, along with a fall in the value of the rupee, will definitely better India’s exports performance. Recession may be a cause of worry for exports from emerging economies such as India, but taking care of the supply-side factors will enable exporters to remain competitive and productive in this era of global financial crisis.

(The author is Associate Professor, Institute for Financial Management and Research, Chennai. The views expressed are his own. blfeedback@thehindu.co.in)

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