The Government can do more to improve the productivity and competitiveness of manufacturing.
Our exports have not done well in the first seven months of the current fiscal. But the arrest of the decline in October to minus 1.63 per cent is a good sign.
Such a negative trend is visible in most countries, with some exceptions such as China, which clocked 11 per cent growth in exports in October. Growth in China’s exports is largely dependent on industrial output, which exhibited a 9.6 per cent increase in October, surpassing 9.2 per cent in September, a month in which exports also showed 9.9 per cent growth.
The Chinese authorities quickly responded to the exports slowdown by accelerating the process of export VAT refund and improving customs procedures, reducing clearance cost and facilitating a sustainable environment for the export sector.
China’s State Administration of Taxation and General Administration of Customs released two sets of regulations in September, to mitigate the cash flow burden on exporting companies through efficient VAT refund, and waived certain costs of imports and exports. Few Governments have acted so quickly and effectively. The results are there for all to see.
The slowdown in exports is primarily on account of the global economic slowdown and crisis in the European Union. Recent data shows that the EU has entered into a recession.
With contraction in demand, price holds the key. Export competitiveness would be particularly relevant in today’s scenario. While the Government continues to play a pro-active role, the onus equally lies on industry to increase productivity by cutting cost, increasing efficiency, introducing IT in all areas of operation, and applying new concepts such as cloud computing, advanced analytics, etc.
The export diversification policy pursued by the Government needs to be accelerated by expanding both the range of products and number of countries. Indian exports should move up the value chain. Export of branded goods needs to be encouraged by promoting individual brands.
The brand promotion strategy should be on the basis of individual initiatives. Since developing a brand involves huge expenditure, the Government should unveil a brand promotion scheme to support brands already registered in India, with a certain threshold value of exports or domestic turnover.
Africa, Latin America, CIS and Asia would be the emerging markets for Indian exports. There has been gradual shift in India’s exports from advanced economies of EU and North America to the emerging economies of Asia, Latin America and Africa. The share of EU in India’s exports declined from about 25 per cent (April-March 2002) to 19 per cent (April-March 2012), while North America witnessed further sharp decline from 21 per cent to about 12 per cent during the same period.
The loss of advanced economies was a major gain for Asia which accounted for 51.5 per cent of India’s exports, up from 40 per cent a decade before. India doubled its exports to Latin America. Exports to the region moved from 2.2 per cent (April-March 2002) to 4.5 per cent (April-March 2012), while exports to Africa went up from about 5 per cent to 6.6 per cent in the corresponding periods.
This trend will continue in the next 10 years. However, we cannot ignore advanced countries as they still account for a major share of our imports. Out of 13 countries (excluding India) with imports of over $200 billion, 11 are advanced economies. Doubling India’s share in global trade by 2020 would require a right mix of policies aiming to retain market share in advanced economies, while simultaneously increasing it in emerging markets. We should also step up domestic manufacturing as the share of manufactured goods in exports is increasing on an annualised basis. However, industrial production varies from month to month and is nowhere near the comfort zone. If China has been able to increase its exports in September and October, it is largely on account of growth in industrial output during these months.
Rising inflation has increased the manufacturing cost of inputs, and rupee depreciation has added to the cost of imports. The cost of credit has moved up substantially in the last two years. These have adversely impacted domestic manufacturing.
The availability and cost of credit is important for competitive manufacturing. Choosing between inflation and growth, the Reserve Bank of India has favoured the former. Therefore, the flow of credit to the manufacturing sector has slowed down. While tackling inflation is important, we have to ascertain whether excess demand or supply constraints are driving inflation. The Government as well as the RBI need to ensure that there is adequate flow of credit to the manufacturing sector at competitive cost.
While large companies should be given the freedom to raise capital from abroad at competitive rates, for small companies the Government can provide a helping hand by extending them interest subvention, so as to bring the cost of credit to about 10 per cent. Merchant exporters may also be given interest subvention, which hitherto is confined to manufacturers in the small-and-medium-enterprises (SMEs) category and some in labour-intensive sectors.
Direct and indirect tax reforms should be our immediate concern. While introduction of the Direct Taxes Code would help in direct taxes, we need to introduce GST as early as possible for adequate reforms in indirect tax structure.
The finalisation of the negative list in services is a step in that direction, but we have to move quickly towards aligning our rate of excise, services, and VAT to meet this objective. The revenue of the Government could increase through proper tax reforms, as a result of which we can broaden our base and rationalise our tax structure. The withdrawal of exemptions for various categories has been welcomed by industry but that should also lead to lower rates of taxation.
A number of countries provide huge marketing support to SMEs on the export front. In India, the budget for the Market Access Initiative and Market Development Assistance Scheme, put together is only Rs. 200 crore. How can exports of over $300 billion be supported with such a small financial outlay?
The Department of Commerce set aside a corpus of about 0.5 per cent of exports so that sizeable funds are available for marketing of micro-, small and medium enterprises.
It is very important that we maintain our interaction with buyers in these difficult times. These may not immediately result in orders, but once situation improves, we will benefit.
We need to bring foreign direct investment (FDI) to push exports. FDI gives rise to technology and marketing tie-ups, and introduction of best practices in manufacturing. We have seen that with special economic zones. These practices percolate to local companies, resulting in higher labour productivity.
Finally, infrastructure bottlenecks need to be addressed quickly to boost exports. An investment of $1.7 trillion in infrastructure by 2020, under a public-private-partnership model, is what the economy needs.
(The author is President, Federation of Indian Export Organisations.)