Policy Watch: India's Exports: In Shallow Waters

POLICY WATCH: INDIA'S EXPORTS
In Shallow Waters

In a bid to shore up exports, the government is looking at new products and new markets. The bad news? It's still blind to the core problem: infrastructure.

By Ashish Gupta

At New Delhi's Udyog Bhavan, home to the Union commerce and industry ministries, Commerce Secretary Prabir Sengputa and Director-General of Foreign Trade N.L. Lakhanpal are busy poring over several volumes of trade wishlist. Sent in by 17 export promotion councils at the behest of the former, the stack of files is stuff that the two bureaucrats hope to draw upon to create the blueprint for India's export strategy for the next five years.

They couldn't have picked a better time to kickstart exports. The world economy is booming; in the past three months, the rupee has depreciated by a favourable 25 per cent versus the US dollar; and after three straight years of slowdown, Indian exports are surging once again. Between April and August, 2000, overseas sales rose by 23.7 per cent in dollar terms-a record for the decade.

Buoyed by the numbers, an upbeat Commerce Minister Murasoli Maran declared to participants at the Economic Editors' Conference held in the capital: ''We had set an ambitious target of 18 per cent growth in dollar terms during 2000-2001; we are confident of exceeding the target.''

Problems With The Push

To step up India's minuscule 0.6 per cent share in world trade, the Commerce Ministry has asked the export promotion councils to identify new markets and products. The idea is to pry open new markets, even as the presence in existing markets is consolidated. Says a senior ministry official: ''The new product-cum-country strategy will not only focus on the comparative advantages that India has over its rivals, but also identify the non-tariff barriers that are plaguing Indian exports today.''

No doubt, the plan is well-intentioned. But the problem is that the government has tried similar strategies in the past without much success. For example, in 1991, the then Commerce Minister P. Chidambaram first initiated an 'extreme focus' strategy to push exports of 34 products, ranging from textiles to drugs and pharmaceuticals.

Then again in 1995, he tweaked the plan and came up with a 15x15 product-country matrix. Both times, exports of the targeted items jumped in the short-term. But there was little in these plans to ensure long-term competitiveness. Some trade experts believe that the new initiative may yield no different results. Says R.K. Dhawan, former Additional Director-General, DGFT: ''There's nothing new about the new product-specific export strategy. No real effort is being made to make our products competitive.''

Dhawan has a point. Here's why: The two biggest export markets are the US and Japan. And India's bitter rival in both the markets is just one: China. None of what the government now plans to do really addresses the reasons why China is more competitive than India: better infrastructure and lower cost of funds, thanks to government subsidies.

Worse for the exporters, the government is phasing out by 2003 the duty-free import of capital goods. Special import permits are also to be phased out by April, 2001. Points out Lakhanpal: ''The days when we could give preferential treatment to specific products for exports are over. These days we can only try to improve the macro-economic conditions to facilitate exports.'' But bemoans a Delhi-based exporter: ''Once these credit facilities go, we'll find it extremely difficult to compete with other countries.''

Already, India's abysmal infrastructure is retarding export growth. Erratic and expensive electricity, poor roads, multiple state tolls, and congested ports blunt whatever edge products have when they leave factory. For instance, it takes a ship just eight hours to turnaround at the Singapore port; in contrast, the same thing takes nearly eight days in a port like Mumbai or Kandla. Notes Rajesh Adani, Managing Director, Adani Exports, India's largest export house: ''India's single-biggest disadvantage as an exporting nation is its poor infrastructure.''

Long Way To Go

Intrinsic problems like poor infrastructure and high cost of capital mean that India will need to focus on a handful of high-value added products and target new markets, apart from the traditional destinations of the US and Japan. Currently, India's exports basket is dominated by a handful of items including gems and jewellery, and chemicals (See India's Breadwinners).

None of these, with the exception of software and garments, has any significant value-addition. For instance, the value-addition in diamonds is a piffling 1-3 per cent. Says Yogendra Durlabji, Partner, K.S. Durlabji, one of the top gems and jewellery exporters in the country: ''It's a high-volume, low-margin game, since India only exports 'melees' (ornaments embedded with small diamonds).''

Exports of value-added products like cars, petro-products, and steel has recently begun. But it will take a while for the markets to get established. The government knows that only too well, which is why it has no special plans for high-end items. The good news? The various export promotion councils are taking initiatives on their own. The idea is to tap newer markets like Latin America and Africa, which have an appetite for value-for-money goods rather than high-quality, high-cost items.

Currently, North America, and the European Union account for more than half of India's exports, and the Asia-Pacific region, more than a third. Latin America and Africa, on the other hand, account for 1.25 per cent and 5.07 per cent of world trade, respectively. However, their share is growing rapidly. For instance, Latin America's imports soared from $144.20 billion in 1991 to $340.30 billion in 1998. But India hasn't been able to cash in on the boom, and accounts for a negligible 0.2 per cent.

Ministry officials contend that this is the right time to step up the Latin American thrust. For one, countries in the region are trying to lower their reliance on the US, partly because of their high trade deficits. Apparently, the potential is huge for exports of textiles, ready-made garments, light engineering goods, drugs, and pharma to LatAm nations like Argentina, Brazil, Chile, Mexico, Peru, and Venezuela. Says a senior commerce ministry official: ''Our low share promises limitless possibilities for exports.''

At least three of the big export promotion councils-chemicals, software, and leather products-are making a concerted effort to tap Latin America. Chemexil, the apex body for chemical exports, wants to export high-end life-saving drugs to the well-to-do markets such as Argentina, Brazil, Chile, and Venezuela, while targeting African nations such as Nigeria, Uganda, Zimbabwe, and Madagascar for cheaper medicines. Drugs and pharma accounted for nearly half of Chemexil's exports of $3.2 billion last year. Says Ramu S. Deora, Chairman, Chemexil: ''We expect to touch the $10-billion export figure by 2004 by adopting a double-pronged strategy of increasing marketshare in existing markets like the US and also tapping virgin markets like Latin America and Africa."

Floriculture-which earned Rs 96 crore last year-is another area of focus. Says D. Rajagopalan, Chairman of APEDA, the agro-export council: ''There are a lot of new markets we can tap.'' But India's big hopes clearly rest on software, which is projected to rake in $50 billion by 2008. Of course, that assumes the US market-the largest software importer from India-continues to do well. In fact, as B. Bhattacharya, Dean, Indian Institute of Foreign Trade, says: ''Indian exports in general will depend on the US economy's health.''

The thrust on new markets could help spread India's export risks by creating fresh avenues of growth. Encouragingly, the emphasis this time is on Indian exporters fighting in global markets without government sops. For, the writing on the wall is clear: eventually, export strategies will have to be penned in the boardrooms of India's export houses, not in Udyog Bhavan.

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