Are we picking the wrong products? Chasing the wrong global markets? Targeting the wrong end of value-addition? Relying on the wrong policies? Why is India's exports ship threatening to sink mid-sea?

By Rohit Saran & Rukmini Parthasarathy

What a fall there was, my countrymen. Just 2 years ago, its exports sector was the star performer of the newly-reformed, and still-reforming, Indian economy. The bumper growth of 72 per cent between 1993-94 and 1995-96 in the dollar value of products and services shipped, flown, trucked, and even electronically transmitted to global markets inspired heady visions of an export-led blast-off into the rarefied orbit of double-digit economic growth. CEOs went to bed every night dreaming of years of exponential growth, and no one sneered when the Confederation of Indian Industry (CII) set corporate India's sights on an export target of $83 billion by 1998-99.

Today, those dreams lie shattered. Confidence has given way to crisis. And hopes have been slaughtered by hard reality. ''We will be lucky if exports cross even $36 billion in 1998-99,'' says Bibek Debroy, 43, the Director of the Delhi-based Rajiv Gandhi Institute for Contemporary Studies. Indeed, the first-quarter performance in 1998-99 has been dismal, with exports recording a fall of 5.79 per cent in the period between April and June, 1998, over the same period of 1997. Since exports account for 10 per cent of India's Gross Domestic Product (GDP), this decline of more than 5 per cent will, in a single blow, subtract 0.5 percentage points from the overall growth rate-apart from reducing the foreign exchange available to buy goods and services abroad.

Whodunit?

Who, or what, stopped India's exports machine? The apparent culprit seems to be the Great Asian Market Meltdown, which began in June, 1997, and is yet to end. The resultant mayhem in global currency markets, combined with the collapse of the East Asian economies, has garrotted global demand growth, dislocated trade flows, and dried up markets overnight. And worse may follow if China devalues the renminbi, which policy-makers now consider inevitable. With global trade on a downswing, Indian exports are bound to suffer. Besides, sharply devalued currencies will make the East Asian nations extremely price-competitive in the global marketplace once their economies recover, further throttling exports. Take away Asia, and exports should recover. Right?

Actually, the Asian crisis is more of a scapegoat. To be sure, it may account for a severe slowdown in exports growth in 1998-99. But it cannot be used to explain a slump that actually began in 1996-97. In that year, Asia was booming, global trade volumes were skyrocketing, the rupee had depreciated by 6.10 per cent against the US dollar, and inflation in manufactured products had slipped to 4.01 per cent-four factors that should have sent India's exports into overdrive. Instead, exports went into a free fall, plunging from 20.07 per cent in 1995-96 to 4.46 per cent in 1996-97.

Policy-makers have been hard-pressed to explain this decline. And that basic lack of understanding has led to muddled policies. The Atal Bihari Vajpayee Administration has announced two major export polices this year: the annual revision to the Export-Import (ExIm) Policy in April, 1998, and a package of incentives in August, 1998. Neither offers more than procedural simplifications, which should have been a routine behind-the-scenes affair. In any case, such simplifications have rarely been translated into a reduction of red-tape or harassment at the ground level. Worse, both packages continue the traditional reliance on incentives and other sops to bolster export performance. Points out T.K. Bhaumik, 48, Senior Director, CII: ''India has never had an export strategy. What we had in the name of an export policy was no more than a charter of incentives.''

Sadly, exporters are displaying the same myopia, with a majority of them clamouring for more incentives. In fact, 48 per cent of those surveyed by a BT-AIMS poll of 50 CEOs in 5 metros believe that the best way to boost exports growth is to provide more fiscal sops. Unfortunately, in today's super-competitive global marketplace, incentives are not enough for a country, or its exporters, to succeed. To explore the causes of endemic export recession and analyse why export polices have failed, BT dissected the country- and commodity-composition of India's merchandise exports. The export intensity of the country's largest corporations were also examined. The findings are grim. There are fundamental structural problems with India's exports-problems that won't be solved by the policies that have been announced. Indeed, if the current trends persist, India's export crisis will continue long after the debris from the East Asian collapse settles.

Why Have India's Exports Collapsed Dramatically?

Because depreciation-driven growth has ended-as was inevitable. The revival of 1992-93, when exports recovered from an absolute fall of 1.08 per cent in 1991-92 to a growth of 3.28 per cent, was powered by massive devaluation of the rupee: of 36.60 per cent in 1991-92, and of 18.11 per cent in 1992-93. Since each dollar now fetched more rupees, earnings per unit soared by 26.32 per cent and 14.07 per cent, respectively, in those 2 years. Gleeful exporters undercut the prices of their global competitors, none of whom had the luxury of a currency that had depreciated as much. Of course, these were the years that saw the most spectacular trade reforms: average Customs duties were slashed from 127.70 per cent in 1991-92 to 71 per cent in 1993-94, and a host of quantitative restrictions was dismantled, helping exporters. The momentum generated in the process propelled exports growth to a phenomenal 19.56 per cent per annum between 1993-94 and 1995-96.

By 1995-96, however, there were ominous signs of the boom ending. Although export volumes had surged by an astounding 31.29 per cent over 1994-95, earnings per unit of exports fell by 2.10 per cent in rupee terms, and by 7.01 per cent in dollar terms. Obviously, price-competitiveness had peaked. The virtually unchanged commodity composition of the exports basket, not to mention the absence of any perceptible improvements in quality, ushered in the inevitable fall in exports growth in 1996-97, even though world trade growth was still healthy at 6.60 per cent in volume terms. However, since the still-to-slacken demand in the domestic market secured an industrial growth rate of 8.60 per cent in 1996-97, the fall in exports growth did not pinch.

However, by 1997-98, both the internal and external environments had changed dramatically. East Asia imploded, global trade expansion slowed down, and demand at home sagged. Exports growth contracted further to a meagre 2.66 per cent in 1997-98, from where it has now slipped into a recession. Tellingly, even the 15.07 per cent depreciation of the rupee against the dollar between March, 1996, and March, 1998, did not stave off the decline.

The lesson? Depreciation-induced growth is inherently temporary. It is also misleading, because gains from such growth accrue only in rupee terms, whose intrinsic value has fallen anyway. For instance, in 1993-94, rupee earnings per unit of exports rose by 12.48 per cent, but in dollar terms the growth was only 3.52 per cent. By contrast, in 1994-95, rupee earnings per unit of exports rose by 4.32 per cent while dollar earnings rose by 8.17 per cent. Clearly, in dollar terms, 1994-95 was the most rewarding year of the 1990s for exporters. Not coincidentally, the rupee depreciated by only 0.13 per cent that year.

THE POLICY POSITION. Rightly, Union Commerce Minister Ramakrishna Hegde has refused to force a more-than-gradual depreciation of rupee to buoy exports. In a floating exchange rate regime, it is difficult for governments to engineer orderly depreciation. In any case, with the continuing turmoil in global currency markets and the seemingly never-ending political uncertainty at home, there may be no need for the government to engineer what the market will achieve naturally. The rupee has already slipped past Rs 43, a depreciation of 8.71 per cent since April, 1998. But this is unlikely to provide more than a temporary fillip to exports growth. As past experience demonstrates, a sliding currency discourages exporters from making the quality improvements necessary to build long-term competitiveness. Concurs Rajesh Chadha, 43, Reader (Economics), Hindu College and Advisor, National Council of Applied Economic Research: ''When you are not inherently competitive, artificial pump-priming of exports, using more than market-dictated depreciation, will not yield sustainable growth.'' Even in the short run, a depreciation-powered boost to price-competitiveness may be marginal, since the value of most East Asian currencies has been eroded between 50 and 175 per cent in the past 12 months.

Although the use of depreciation as a policy lever has been ruled out, policy attention remains fixated on price. The recently announced rescue package for exports comprises incentives like a 2 percentage point reduction in pre-shipment credit and the extension of tax-holidays for export-oriented units from 5 to 10 years. Argues B. Bhattacharyya, 55, Dean (Research), Indian Institute of Foreign Trade: ''Price concessions will ensure that Indian exporters remain stuck at the low end of the market spectrum. They will provide little stimulus for tackling problems of quality and delivery, which are endemic to Indian exports.'' A better course of policy action would be to chart out a strategy for changing the commodity composition of exports, which are highly skewed towards low-technology and traditional products.

Which of India's Exports Have Been Affected the Most?

Those with the largest share in India's exports basket. While the growth rates of virtually all big-ticket export items decelerated sharply between 1994-95 and 1997-98, the decline was most catastrophic for leather products and electronics goods, where exports fell by 8.46 and 10.83 per cent, respectively, in 1997-98. Textiles and fabrics, which account for 11.59 per cent of the country's total exports, also collapsed, with growth plummeting from 26.24 per cent in 1994-95 to 0.59 per cent in 1997-98. The world didn't buy less, however: textile exports from China shot up by 25 per cent, proving that the country's decline came from a lower marketshare.

Even more ominous was the erosion in the unit value realisation from key exports. A commodity-wise study of exports between 1987-88 and 1996-97 reveals that the products with the fastest growth in export volumes were those with the maximum fall in dollar realisation per unit. For instance, the volume of rice exports rose by 22.81 per cent during the 9-year period, even as its unit value realisation tumbled by 6.74 per cent. A host of other primary exports, including spices and cashews, exhibits the same trend. Manufactured products fared no better. Exports of engineering goods, for instance, grew by 18.94 per cent in volume, but unit value realisation fell by 1.27 per cent in the same period.

The wide wedge between volume growth and unit realisation reflects both the extent of price competition that the majority of Indian exports face, and the low rung of the value chain that they occupy. Take gems and jewellery, the single-largest item in the exports basket. Despite commanding a 12.60 per cent share of the market for a product that is inherently high-priced, exporters have been unable to extract better prices. Unit value realisations have remained virtually stagnant over the last decade. Clearly, the absence of even a single Indian brand in the global market has relegated products from the country to the low margin-low value segment.

THE POLICY POSITION. Trade policies have perpetuated the dominance of low-value, traditional items in the trade basket. In December, 1995, the Union Commerce Ministry had identified 15 products as priority items for export promotion. But 11 of them were either primary products or traditional manufactured goods. Software, India's fastest growing category of exports, did not even figure in the list of priority items. Complains CII's Bhaumik: ''The biggest hurdle to exports growth are not the non-tariff barriers but the non-technology barriers, an issue that export policy has consistently failed to address.''

In fact, Commerce Minister Hegde's vision, as unveiled in the ExIm Policy revision in April, 1998, attempts no radical departure from the past. Agriculture and textiles remain thrust areas, although electronics and engineering goods-and, for the first time, branded jewellery-are also to be accorded priority. But the concurrent promotion of agriculture and hi-tech manufactured products will run into an inherent problem of conflicting interests. For, while depreciation is an unmixed blessing for traditional exports, given their low import content, it will hurt high-value-added manufactured products, as their import intensities are climbing. The real requirement: product-specific, market-focused strategies, the lack of which is evident in the fall of India's exports of textiles and readymade garments just when the US and Europe have been phasing out the Multi-Fibre Agreement (MFA) quotas. Quantitative restrictions prevent the makers of readymade garments from importing better quality textiles, thus inhibiting quality upgradation of the kind that has enabled South Korea to build a global market in pret-a-porter clothes made from imported fabrics.

More

Issue Contents  Write to us   Subscriptions   Syndication 

INDIA TODAY |  INDIA TODAY PLUS | COMPUTERS TODAY
TEENS TODAY | NEWS TODAY | MUSIC TODAY | ART TODAY

© Living Media India Ltd