Look Beyond
The transition to an export-led economy holds immense promise, says Ajay Sahai

Profile
Ajay Sahai is the Director General & CEO of the Federation of Indian Export Organisations (FIEO). Mr Sahai was earlier Joint DGFT in the Policy Division of the Directorate General of Foreign Trade where he played a key role in the formulation of India's Foreign Trade Policy from 1996 to 2003. He was a member of the Government of India’s High-Level Task Force on Exim Policy. Besides his expertise in foreign trade policy, Mr Sahai brings to his position considerable experience in the area of Customs and Excise. He specialises in the Agreement on Subsidies and Countervailing Measures (ASCM) field of the WTO. He has also defended numerous anti-subsidy cases against Indian exports to the EU, USA, South Africa, Brazil, and Canada. Mr Sahai is also is a member of the Ministry of Commerce’s task force for a review of transaction cost and time.

FIEO
Jointly set up in 1965 by the Ministry of Commerce, and trade and industry for promoting India’s exports, FIEO is an ISO 9001: 2008 certified organisation. The management of FIEO comprises Chairmen of all Export Promotion Councils, Export Development Authorities/Commodity Boards, and representatives of Government-recognised status holders. FIEO is the apex export promotion organisation in India with a direct membership of more than 13,000 exporters from all the country - contributing to about 70% of India’s total exports.

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india is not an exports-driven economy even though the share of merchandise trade in country’s GDP has been constantly on the rise since 1991, when the first series of economic reforms were taken. The situation showed a marked improvement from 2002-03 onwards: Exports have exhibited a compound annual rate of growth of over 20% in the last decade barring 2009-10, a year when the financial crisis impacted world trade. Today, merchandise exports account for about 17% of our GDP, and will definitely cross the 20% mark by 2014 if we are able to achieve the 2013-14 export target of $500 billion Being a country where the Balance of Payments is under stress, India has to promote exports to see this does not go out of hand and remains within manageable limits. Exports are important for employment generation as well. However, from a company’s perspective, when domestic economic is booming thanks to a rising middle class and better purchasing power in the hand of rural population, a question which crops in our mind is why a company should focus on exports - which are a high risk activity as compared to domestic sales.

A company focuses on exports to achieve any or all of the following objectives:

• Increase sales and profits through exports
  
• Create market diversification to offset sales fluctuations in the local market
  
• Contribute to increasing production
  
• Create economies of scale that should lead to lower cost and boost competitiveness.

CHANGING FOCUS
India’s exports have grown by about 365% to $246 billion between 2002-03 and 2010-11. Greater integration within the so-called global South - comprising developing and less developed countries - has helped India register this robust export growth at a time when the global North - which includes the European Union and North America - has been struggling. The direction of India’s merchandise trade with the rest of the world has changed dramatically in the past ten years. While the share of the US and the EU as destinations of Indian exports declined to 30% in 2010-11 from 40% in 2004-05, the share of shipments to Asian economies jumped from 47% to 54%. Exports to Latin America and Africa also increased to 12% of the total from 10% in the same period. The Ministry of Commerce hopes to double exports to $500 billion by 2013-14 from $246 billion in 2010-11. In May 2011, it outlined a three-pronged strategy to achieve this goal:

• Retain presence and market share in the existing market
  
• Move up the value chain in providing products in existing markets
  
• Explore diversification, both in terms of markets and new products.

The government has also set sector-wise targets, giving greater thrust to high technology exports such as engineering, electronics, automobiles, drugs and pharmaceuticals, computer and software-based smart engineering, green technology products, and aerospace.

The overall strategy being employed to realise this goal is:

• Build on our strength in sectors with great growth potential
  
• Encourage high employment generating sectors
  
• Focus on markets in Asia (including ASEAN), Africa, and Latin America:
  
• Move up the value chain
  
• Brand India promotion campaign for key export products.

The signing of various FTAs has further boosted exports thanks to better market access. India is engaged with its neighbours through the South Asian Free Trade Area (SAFTA). Its trade agreement with the Association of South East Asian Nations (ASEAN) in 2009 has helped bolster economic ties with nations further east. We also signed the CECA with Malaysia and CEPA with Japan recently. Forums such as BRICS (Brazil, Russia, India, China, and South Africa) and IBSA (India, Brazil, and South Africa) are also becoming important platforms for developing bilateral trade and investments. To give fresh impetus to talks on a free trade agreement involving India, the Southern Africa Customs Union (SACU) and Mercosur (comprising Argentina, Brazil, Paraguay, and Uruguay), the recent IBSA summit held in Pretoria has decided to hold an annual meeting of trade ministers from the three countries - beginning March 2012.

CHALLENGES
Exports face numerous challenges - both overseas and on the domestic front. Global economic recovery has entered a renewed phase of fragility because a process of self-sustaining growth through private spending and employment is not assured, especially in developed countries. Many of these countries have shifted their fiscal policy stance from stimulus to retrenchment, which risks leading to prolonged stagnation, or even to a contraction of their economies. Given the lack of growth in employment and wages in Europe, Japan and the United States, their policies should aim at continued stimulation of their economies instead of trying to regain the confidence of the financial markets by prematurely cutting government spending. The emerging economies, particularly of South East Asia, which believe in export-led growth and are dependent on advanced economies, will see their exports down in 2012.This will have an effect on the exports of every country - including India. The trend has already started and exports grew by just 4.2% in November 2011.

Our exports also face domestic challenges. Apart from high inflation, the high cost of credit, volatility in exchange rates, un-rebated taxes and duties, high transaction cost, and infrastructure bottlenecks adversely impinge on exports competitiveness.

Volatility in Exchange Rates: Many countries attempting to grab a bit of extra demand for themselves by weakening their currencies. However, in the Indian context, the depreciation is not going to significantly benefit exports as it is expected to be short lived. Most exporters have already hedged their exports at Rs46-49 to a dollar. On the contrary, depreciation of the rupee will make imports costlier and thereby, fuel inflation.

Cost of Credit: With the adoption of base rate, dispensing with concessionary export credit, and the frequent increase in base rates, the cost of export credit has gone up substantially in last one year. The Rate of Interest for Rupee Export credit has already crossed over 12% and many banks are charging as high as 13%. For exporters who are eligible for 2% interest subvention on exports, the cost of credit has moved from 7% in July 2010 to 10-11%, an increase of about 50% on average basis; those who are not eligible for interest subvention have witnessed over 70% increase in export credit in the last 16 months. On the other hand, Foreign Currency Credit (PCFC), which should be made available at LIBOR +350 basis points, is not being extended by banks.

State Taxes and Duties: Exports are burdened with the incidence of various levies. These levies are making our exports uncompetitive.

High Transaction Cost: India’s trade facilitation index, a combination of three variables - procedures to exports, days to exports and costs to exports - is not comparable even with other developing countries. As per the Doing Business Report (2010), it takes 17 days to export a container from India - at a cost of $945. This includes time and cost elements for document preparation, customs clearance, ports and terminal handling, and inland transportation and handling. Comparing it with other economies, it costs $450 and $500 to export a container in Malaysia and China respectively. Denmark, Brazil, Mexico, and China take 5 days, 12 days, 14 days, and 21 days respectively to export a container from their countries. A Task Force constituted by Department of Commerce estimates the transaction cost of Indian exports to be approximately 7-10% of the export value, or approximately US$ 13- 18 billion.

Infrastructure Bottlenecks: Export infrastructure is in bad shape and will not be able to sustain export targets set up by the government. This includes inland roads/railway lines, power, warehousing and cold storage facilities, port/airport capacity, etc. A study by FIEO suggests an investment of $537 billion in export infrastructure is required to meet the short-term target and long-term objective (doubling our share in global trade).