Loss of export subsidies: A blessing in disguise

The Central Government has recently improved the export enabling environment by rationalising GST procedures for refunds as well as provided a package of higher subsidy rates for exports in the mid-term review which will go a long way in maintaining our export competitiveness in the short run.

However, if we have to substantially increase our share of world trade from present 1.6% (China’s share is 14%) to 5% as government has targeted, we must look at the structural issues which are plaguing our exports and build our export strategy based on our globally competitive strengths.

The Union Commerce Minister has recently stated that the Union govt will soon come out with a comprehensive strategy to increase the share of global trade to 40% of $5 trillion GDP by 2025, that is $2000bn. which is currently 18% of $2.7 trillion GDP.  In reality, export share of GDP has gone down to 11.7% compared to 17% earlier and should have been 25% by now, as projected in the past.

Therefore, the forecast breakdown among the sectors of the economy are:

This is a massive task but not impossible if we look at our export strategy in a new light.

The Minister stressed that higher export growth should come from New Markets and New Products.  But how?

The time is favourable as after almost eight years, both World Bank and WTO have upgraded the global economy forecast to 3-4% and this trend is likely to continue. The growth is forecasted for all regions and major countries. This is a good sign for increasing India’s exports substantially.

Indian exports had either declined or grown in single digits in the past five years, i.e. since 2012-13. In contrast, during 2017-18, our exports grew by a promising 12.1 per cent. reaching $315bn. This is largely due to external factors such as rising commodity prices and buoyancy in global markets such as US, Korea and Japan. The performance is impressive as it comes in the background of a strengthening rupee. However, riding the headwinds will just about maintain India’s global export share.

Therefore, to raise India’ merchandise exports, we must look at export facilitation support from both central and state governments, from two perspectives. I will call these hygiene and motivator factors. Hygiene factors are those which are holding up our exports but do not have the capacity to increase exports share substantially. These are retarders or brakes but not accelerators. GST & MEIS come in these categories.  Motivators factors are those which can create capacity for global export competitiveness and can substantially increase our share of the global market from present 1.6% to at least 5%. within 10 years.

Refund of GST, one of the hygiene factors, the backlog of which has been estimated currently as $3.8bn., is the biggest problem facing exporters today. This blocks their working capital and prevents them from looking into the future.  I hope that this irritant will be solved within this year as government agencies are working overtime to stabilise their processes and systems.

Looking at MEIS (and other direct export subsidies), increasing MEIS support has not helped the growth of India’s garment export when support was raised from 2 to 4 percent. Theoretically, even if the support is increased by another two percentage, from present 4 to 6%, the growth will still remain flat (if not decline) as the price difference with

countries like Bangladesh is between 14-20%. Bangladesh and Vietnam garment exports are projected to rise by 20 percent in the current year. At whose cost?

In FY 17 - Total expenditure on export subsidies was $9bn., a major portion on MEIS. The growth in budgetary provision over previous year was 28%. This growth in subsidy is not visible in commensurate increase in exports. We continue to export commodities and low-value added products, which are at the mercy of volatile global demand.

Some more hygiene factors which retard exports are our high cost of logistics. Increase in ports productivity, simplifying customs procedures etc. can help in decreasing cost for the exporter.

Future of export is bright for India as reported in HSBC India Report (April 2018) provided we can focus our attention and efforts in diverting our strategy of backing value-added product and develop new markets, the principal motivators. We must put our money behind motivators while continuing to reduce the effect of hygiene factors.

We are unable to add high value to our products basket as we are not focusing on knowledge-based products which are insulated from low labour cost countries. We have several sectors where we can be globally competitive but due to lack of knowledge and physical infrastructure, are unable to realise higher value which can be 4-6 times than what we export.

A glaring example is castor oil. Gujarat alone supplies 70 percent of the world market. Castor oil is a raw material of the future with over 100 applications when it is converted to valuable chemical derivatives. We are not a world leader in any on of these which have a value addition of up to six times compared to castor oil. Even if 50 percent of castor oil is converted into its derivatives locally, our exports will go up from $600mn. to $1.5bn. Why we cannot do it? Because, there is not a single research centre in Gujarat working on castor oil derivatives. An investment of $100mn. (Rs.680 crores) can get an annual return of 10-20 times.

If we continue to sell castor oil and claim credit as largest producer in the world, we must remember that castor oil is an important bio-chemical raw material of the future and at least 30 countries are either going in for new acreage or expanding cultivation, including China and Brazil.  If we do not see the writing on the wall we will continue to position ourselves as competitors to Bangladesh, Vietnam even Ethiopia rather than China, US and Korea.

We must learn from the decline of Kerala’s cashew industry. We were the first to export cashew in the world and for decades, had a comfortable 60 percent share of  this plantation crop. We got complacent, did not increase yield or replace old trees, rather increasingly relied upon the import of raw cashews to cover the gap in demand and supply.  First Vietnam and later many countries in Africa such as Ghana started cashew production. Vietnamese entrepreneurs, under directions from the government developed cashew mechanisation.  When Indian exporters wanted to import these machines, the state government did not allow it to protect the livelihood of lakhs of unionized workers. Today, cashew is grown in many African countries and Indian entrepreneurs are setting up factories there to export direct from farm. In a few years, there would be no stock of raw cashew to import as we have created many new competitors. Over 60 percent of the factories in Kerala have closed down with loss of thousands of jobs as our processing costs are 70-80 percent higher than other countries. If our cashew industry is surviving it is due to our large domestic market and our universal love for “kaju katli”.

I offer following motivators to increase the share of India’s merchandising exports.

Overall support to industry irrespective of export or domestic

50 percent of Indian exports are executed by SMEs and any support extended to industry improves their competitiveness. These financial support from existing product based, should be transferred to cluster-based support. For example, Gujarat itself has nearly 70 clusters which are also significant exporters. This support can be in the form of electricity subsidy, subsidy in working capital loan, common effluent treatment plants, common product development, R&D and skills enhancements, modern management and operational skills, modernising machinery etc.

Knowledge Support for sectors which are globally competitive

There are many sectors which are globally competitive or can enhance competitiveness with focused support. Some of these sectors along with suggestions for government support is provided below:

The above is only a few of the examples which suffer from lack of knowledge-based support infrastructure to produce products for export markets. For example, every year many chemical compounds move out of patent protection. These can be formulated in our laboratories and licensed out to entrepreneurs. The State government can identify specific projects such as Centers of Excellence, in consultation with stakeholders and obtain funds from Central Government.

All clusters must have product/prototype development centers. The Central government has opened some such research centers such as COEs for technical textiles. This should be extended to clusters such as Rajkot, Coimbatore & Kolhapur casting clusters. As development time is getting shorter, casting companies in SME sector cannot afford die & prototype development for new products. Similar COE at Vapi for plastics etc. Central Government has part funded a forging center at Coimbatore and an electronics centre at Vellore, Tamilnadu.

The capital cost of each COE is approximately $25mn. and should be funded to the extent of $5mn. for five years, after which it should aim to become self-sustaining by generating enough revenue from the target user groups to meet operational expenses and recover capital investment.

Build common warehouses in global Free Trade Zones at strategic locations

Markets are scaling up in Asia, Africa and Latin America due to signing of Regional Trade Agreements, especially customs union. This provides larger markets for products like pharmaceuticals, tiles, auto components etc. Common warehouses will assist exporters in fast delivery of products where needed.

Build skilling centers in advanced technology

Manufacturing is entering advanced technology phase such as 3D manufacturing, Robotics, Industry 4.0 etc. Both entrepreneurs and workers should be skilled in advanced manufacturing equipment, processes and systems.

Common branding and market research support

Exporters in SME sector cannot create or sustain international branding for the products. The central government should consider a common brand backed by stringent quality and traceability. For example, a common YOG brand for organic processed food, cosmetics etc.

In addition, market research is a vital function to spot opportunities in fast emerging and changing trends. There can be a centrally funded knowledge centre which can disseminate timely information on a regular & consistent basis at a nominal cost to users.

Development of value added products will fill a much-needed gap in attaining global competitiveness. Another motivator for increasing exports is developing new markets which we will discuss in Part II.