To Which Markets Have India's Exports Been The Worst Hit?

Almost all of them. The share of India's exports in world trade shrank in 1997-98: the first time in 6 years that the country has lost marketshare. The source of the biggest loss: East Asia. In the 1 year since a series of financial busts in Thailand spread to engulf the entire region in unprecedented economic turmoil, India's exports to East Asia have shrivelled by 8.79 per cent. Dramatic as it is, the fall obscures a more worrying deceleration in export traffic elsewhere. At a time when India's single-largest market-the US-was growing rapidly, exports growth to that country dropped sharply from 18.88 per cent in 1996-97 to 1.15 per cent in 1997-98. And exports to Western Europe had already slumped in 1996-97, with growth falling to a paltry 0.20 per cent from 19.51 per cent in 1995-96.

Clearly, India's grip over its major markets had been loosening well before the Great Asian Market Meltdown. But the continental catastrophe is blocking a recovery. First, because the massive depreciation in East Asian currency values could trigger off price-wars, even if fears of large-scale dumping by these countries are exaggerated. Second, because a growth centre has suddenly been wiped out, at least for the next 2 years. Indonesia's economy will contract by 10 per cent this year, Thailand's by 5.50 per cent, and South Korea's by 0.80 per cent. And Japan will not grow at all.

More bad news: other markets aren't likely to fare better. The US' 8-year economic boom is finally showing signs of wearing thin. With output expansion in the second quarter braking to an anaemic 1.40 per cent, the American economy is not likely to grow by more than 2.40 per cent in 1998, a significant drop from the 3.80 per cent growth clocked in 1997. And since Europe's recovery remains sluggish, growth in world output is decelerating, dropping from 4.10 per cent in 1997 to 3.10 per cent in 1998. In fact, the World Bank reckons that the market for India's exports, as measured by a weighted average of GDP of the country's major trading partners, will grow only by 2.50 per cent in 1998-99, after averaging a growth rate of 5.7 per cent in each of the past 6 years. Worse, as market growth slows, price competition in these markets will intensify. With dollar realisation per unit of exports from developing countries expected to shrink by 4.20 per cent in 1998, India's low-value-dominated exports cannot but suffer.

THE POLICY POSITION. The looming global slowdown is an external constraint. But there is still plenty that the Union Commerce Ministry can do to mitigate its impact. For starters, it can help identify new growth centres for Indian exports, an exercise that successive ExIm policies have consistently overlooked. The sole attempt to study our major markets, in the form of the 15 country-15 commodity matrix devised in December, 1995, was more statistical than analytical. For, instead of calibrating the export prospects in markets with high growth potential, Commerce Ministry mandarins simply pored over existing export data to pick out major markets. As a result, several possible candidates, such as South Africa, Australia, the East European nations-notably Poland and Hungary-some Latin American nations, and, closer home, China, for the new growth matrix were ignored. Agrees Rajat Kathuria, 35, a trade expert and the Director of Telecom Regulatory Authority Of India: ''Although the exports basket is fairly diversified, we have to keep searching for new markets.''

While the actual destination must always be the exporter's prerogative, proactive provision of information on market opportunities will make for better decision-making at the company level. Besides, there are questions of market access which only the government can resolve. For instance, joining a trade bloc-whose members offer increased market access to one another while raising barriers to outsiders-is essential if Indian exports are not to face the kind of anti-dumping duties and other non-tariff barriers that they do in the European Union. Yet, apart from the South Asian Association for Regional Co-operation, and dialogue-partner status with the Association of South East Asian Nations-which confers no economic benefits-India is not a member of any major trading bloc. So long as relatively high tariff walls and quantitative restrictions block trade flows, prospects of an invitation for membership are remote.

Why Aren't India's Megacorps Becoming Mega-Exporters?

Largely because of the legacy of an autarchic past. For over four decades, the domestic market was shuttered from the global marketplace. Tariff walls have come down since 1991, but so have internal barriers which existed in the form of an elaborate licensing regime. As corporates rushed to satisfy years of pent-up domestic demand, sales and profitability growth rocketed. It is difficult to compare export profitability with the profitability of selling in the domestic market because of the lack of disaggregated profit data. However, if the unit value realisation of exports in rupees is used as a proxy for export profitability, then, except for 1992-93 and 1993-94, corporate profits have grown faster than export values-suggesting that producing for the rapidly-expanding domestic market was far more lucrative than exporting low value-added commodities to fiercely competitive global markets.

Unsurprisingly, therefore, corporate involvement in exports remains limited. A study by the Federation of Indian Exporters estimates that the country's 500 largest corporates ship out less than 8 per cent of the country's exports. By global standards, export intensity levels are abysmally low. The top 50 Indian corporates export an average of 7.50 per cent of their total turnover. By contrast, US corporations, who also supply to a huge domestic market, export close to 15 per cent of their output in value terms. Just why does the low level of corporate participation matter? For starters, it means that the economies of scale reaped from domestic operations are not being leveraged for export, further blunting price-competitiveness. Worse, exports remain trapped in the low-tech, low value-added and, hence, low growth segment. Migrating up the value chain requires investment in packaging, technology, branding, and retailing-investments that the majority of the country's 3-lakh-and-odd small exporters cannot afford. The clinching evidence: the fastest-growing export industries in the last 5 years-software and pharmaceuticals-are the ones with the strongest corporate presence.

THE POLICY POSITION. Fortunately, the government has recognised that greater corporate participation is essential. Unfortunately, the methods are, again, more statistics- than analysis-oriented. Companies achieving specified exports turnovers have been dubbed star or superstar trading houses, and provided with a battery of incentives. That has done little to lower high-cost structures. Nor has it promoted greater corporate commitment-as demonstrated by the government's abortive attempt to raise the eligibility criteria for these companies last year. More recently, the Union Commerce Ministry has been trying to identify 500 large potential mega-exporters on the basis of sales and production data, which scarcely constitute a basis for determining competitive advantage in global markets.

Such flawed schemes are the direct result of a policy regime that looks at trade policy in isolation from the rest of the economy. Trade policy has to be integrated with overall investment policy. It makes little sense to ask corporates to compete globally while affording them greater protection at home. After Budget 98, average tariff rates have climbed to 40.2 per cent, providing a further disincentive to exports. Says Chadha: ''The high tariff rates have affected the competitiveness of Indian exports in terms of both quality and cost.''

Nor does it make sense to plead for greater involvement by large industrial houses while simultaneously reserving garment and leather goods production, which together account for 11 per cent of total exports, for the small-scale sector. Complains the rgics's Debroy: ''Sector by sector, the policy of small-scale reservation has murdered Indian exports.'' Not only is reservation stymieing corporate participation, it is also discouraging Foreign Direct Investment (FDI), which is crucial because trade follows investment. Intra-transnational trade accounts for over a third of total global trade and is still growing-a phenomenon that China has exploited very successfully to rack up huge trade surpluses.

A more liberal, less bureaucratic FDI policy would enable foreign investors to use India as an export platform. If the distinctions between production for the global market and for the domestic market vanished, Indian corporates would be forced to move into the high-quality low-cost spectrum, thereby equipping themselves to compete in export markets. Agrees Surjeet Bhalla, 50, President, Oxus Research: ''The best way for the government to encourage high value-added exports is to completely throw open the domestic market.''

In the first 50 years of Independence, India's exports have stalled as a growth engine because policy-makers failed. Their policies created a huge community of small exporters nourished on a steady diet of sops to ship out low-tech, low-value-added products. Unfortunately, the failure of this experiment has still not changed the basic policy thrust. India's first Export Policy in 1949 enshrined the use of incentives as a means to boost exports. So does the recent rescue package offered by the Union Commerce Minister.

What has changed, however, is the government's ability to influence trade patterns. In the freer trading regime that is being catalysed by the World Trade Organisation (WTO), the government's ability to block imports as well as subsidise exports will both be increasingly limited. After all, quantitative restrictions on imports will have to go by 2004. And by 2003, subsidies for exports that account for more than 3.25 per cent of the world trade in that product will have to be phased out. The WTO's rationale: a share of 3.25 per cent or more implies competitiveness, making further subsidies unnecessary.

By this definition, India is export-competitive in only gems and jewellery at present. But, operationally, it will be difficult for the government to phase out concessions only for this sector. A blanket withdrawal is more likely. Against this backdrop, exports will become increasingly critical for business survival, not just to attain the status of a global player. It's time both policy-makers as well as corporates realised, once and for all-and suited their action to their realisation-that India Ltd has no choice but to metamorphose into India Inc..

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