Dec 7, 1998
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EXPORTS Rockbottom! With the slump in global demand forcing small and medium players to downsize operations, export growth slides into the negative.. By Shefali Rekhi with Priya Ramani and Stephen David Whoever said tough times don't last was either joking or had no idea what the Indian economy has been going through. As if a sharp drop in industrial production and a high inflation rate were not enough, the country's export growth has taken a beating in recent months. In the first six months of this year, exports have dropped from $16.82 billion to $16.27 billion. After showing some signs of recovery in July and August, export growth nosedived in September, pulling down the overall growth rate for the first half of this year to a disturbing -3.3 per cent. This is possibly the lowest growth rate since India set about liberalising on the trade front in the early '90s. Experts do not expect any significant improvement in the remaining part of the year.
When it pitched for a 20 per cent growth in exports earlier this year, the Ministry of Commerce had not expected such a gloomy situation. However, the South-east Asian crisis and the decrease in global demand coupled with a wishy-washy export policy have put paid to those lofty plans. Perhaps the financial crises that hit the Asian economies have dealt the harshest blow to Indian exports. A third of all Indian exports heads for this region. Almost overnight, major importers like Japan, Indonesia and Malaysia lost their appetite for Indian products. For instance, marine products exports grew at a healthy clip of over 13 per cent last year. But this year Japan, which buys 40 per cent of India's marine exports, has scaled down its purchases. This sudden drop in demand has caused the growth rate to plunge to 6.21 per cent. Besides, exporters from Thailand, Indonesia and South Korea are competing with Indian exporters by offering more attractive rates. Other products that have suffered because of the South-east Asian turbulence include raw cotton, finished leather, drugs, chemicals, agro-products, textiles, plastic products and machinery.
That is not to say that exports to the rest of the world have done any better. Exports of handicrafts, leather and transport equipment have suffered because of a drop in demand in developed markets like Europe. A few sectors have bucked the trend but that is hardly enough to compensate for the slide elsewhere. For instance, non-basmati rice exports have increased by over 100 per cent (compared to a 38 per cent decline last year) because of a crop failure in Bangladesh along with a food shortage in several African countries. And gems and jewellery exports have not been affected because the US continues to be a major buyer. But such items account for just 42 per cent of the export basket. To be fair, the Government did begin in right earnest to get the export growth rate back on track. A significant step was the decision to reduce the cost of credit in August. The interest rates on pre-shipment and post-shipment credit were brought down by two percentage points to 9 per cent per annum for the rest of 1998-99.
However, exporters are not enthused by such short-term measures. They want the Government to provide cheap credit in the long-term as well as funds to promote Indian products in foreign markets. The Government's response has been ambivalent to say the least. Says Rafiq Ahmed, chairman of the Leather Export Promotion Council: "With better marketing we can improve the growth rate. We had requested the commerce minister for a Rs 2 crore special fund. Initially the Government seemed in favour but now they are saying that there is no provision for such a fund." Experts feel that the export policy is also to blame for the current slowdown. "Global factors are certainly behind the current export slowdown but with a more focused export policy we would have done much better," contends Indian Institute of Foreign Trade professor B. Bhattacharya. He believes that exports would have grown by at least 5 per cent if the environment was conducive.
In the absence of cheap credit, most Indian exporters have a limited capacity to invest. It is not surprising then that most of India's exports have been either resource-based or labour-oriented. Technology-based exports are still less than a quarter of the country's total exports, though they have shown an increase in recent times. This is the third successive year in which exports have slowed down. Last year exports grew by a meagre 1.6 per cent. This year's abysmal show has raised concerns about the impact it will have on the country's fiscal balance. "I am really worried," says Rajesh Chadha, adviser in the Delhi-based National Council of Applied Economic Research (NCAER). "At best we will end the year with a 2 per cent growth. With imports growing at 5-6 per cent, the fiscal balance is going to be seriously affected." That problem is overshadowed by another more pressing concern. Small and medium exporters form the backbone of Indian exports, directly accounting for 40 per cent of all exports and indirectly for another 20 per cent. The top 500 companies in India account for only 8 per cent of the country's exports. And exports bring in only 7.5 per cent of the revenue of the top 50 companies. But the prolonged recession has stretched many small and medium exporters, forcing them to downsize operations.
One of them is Ramu Deora, president of the Federation of Indian Exporters Association. His company G. Amphray Laboratories exports drugs and pharmaceuticals worth Rs 30 crore every year. More than the slowdown, Deora is concerned about the Rs 1 crore that is stuck with different agencies of the Government on account of duty drawback, advance licence, etc. "If I put the same money in a savings account, I would earn up to Rs 50,000 a month in interest," he says. Deora isn't alone. Tired of the mercurial ways of the Government, the Bangalore-based Swan Silk Limited, a leading exporter of silk garments (1997-98 turnover Rs 25 crore), wants to explore the potential of the domestic market. Says Director K.S. Vittal: "An exporter has to do a lot of forward planning which is difficult if the government frequently changes its policy." For many such small and medium exporters, the boom that lasted up to the mid-'90s provided the perfect reason to expand at a fast pace. The Gujarat-based Chemisynth Group, which exports dye intermediates, had only one unit in 1989. Over the next four years, it bought up five units and expanded capacity from 100 tonnes to 600 tonnes even as turnover soared from Rs 18 crore in 1993-94 to Rs 30 crore by 1995-96. But global recession and stiff pollution control norms within Gujarat have hit the company. Last year, it could do no better than Rs 18 crore in sales. These days Managing Director Satish Zaveri is busy disposing of idle assets and scouting buyers for three of the five privately-owned firms. "I've learnt my lesson," says Zaveri, "my group can export worth Rs 50 crore but I want to do only Rs 14-15 crore."
Experts believe that this disillusionment with the export sector was bound to happen. They feel that the export policy has been pursued in isolation all through the '90s. "You don't really need an export policy. What you need is an appropriate policy framework that promotes efficiency and competitiveness within the domestic economy," says Bhattacharya. That clearly has not been the case. Foreign exchange needs in the early '90s dictated a thrust on exports. Fiscal incentives and sops worked to get exports sailing and by the mid-'90s growth rates were shooting at an average 20 per cent per annum. But this growth push really came from the smaller entrepreneurs, with the bigger players preferring the lure of selling in the domestic market. The Government would do well to ensure that the small and medium exporters are brought back to the fold and encourage big corporates to export as well. |
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