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India needs to accelerate domestic manufacturing and search for new destinations

Indian exports have not done well in the first six months of this financial year. However, a similar trend is discernible in most countries with a few exceptions like China, which clocked 9.9 per cent growth in exports in September. The slowdown in exports has primarily been due to the global economic slowdown and the crisis in European Union, both of which are beyond our control.

However, with the dip in demand, prices of products become the key and, thus, competitiveness of exports would be more relevant in today’s scenario. While the government would definitely play a proactive role, the onus squarely lies on the industry to increase productivity by cutting cost, increasing efficiency, introducing IT in every area of operations by taking recourse to new concepts like cloud computing and advanced analytics. The diversification policy pursued by the government needs to be accelerated by expanding the scope of both products and countries under it.

Indian exports have to move up the value chain and export of branded goods need to be encouraged by promoting individual brands. The brand promotion strategy should be an individual initiative, but since developing brand involves huge expenditure, the government should unveil a promotion scheme to support brands already registered in India with certain threshold limits of exports or domestic tur­nover. New and less explored markets need to be tapped for utilisation of the export potential. Africa, Latin America, CIS and Asia would be emerging markets for Indian exports. The trend over the past 10 years clearly points to the same. There has been a gradual shift in India’s exports from advance economies of the EU and North America to emerging economies of Asia, Latin America and Africa. The share of EU in India’s exports has declined from about 25 per cent (April-March 2002) to 19 per cent (April-March 2012) while that of North America saw an even sharper decline from 20.75 per cent to about 12 per cent during this period.

The loss of share by advance economies was a major gain for Asia, which accounted for 51.5 per cent of India’s exports recently, up from 40 per cent a decade back. India doubled its exports to Latin America from 2.2 per cent in April-March 2002 to 4.5 per cent in April-March 2012, while exports to Africa went up from about five per cent to 6.6 per cent during the corresponding period. This trend will further accentuate over the next 10 years. However, we cannot ignore advanced countries, as they still account for major imports.

Out of the 13 countries (excluding India) with imports of over $200 billion, 11 are advanced economies. Doubling India’s share in global trade by 2020 would require the right mix of policies aimed at retaining market share in advanced economies while simultaneously increasing it in emerging markets.

We should also accelerate domestic manufacturing, as the share of manufactured goods in exports is increasing on a year-on-year basis. However, the growth in industrial production varies on a month-to-month basis and it has yet not reached a level of comfort. Rising inflation has increased the cost of inputs and the depreciation of the rupee has added to the cost of imports. We have seen that the cost of credit has moved up substantially over the past one-and-a-half years. These have taken their toll on domestic manufacturing. Fortunately, the ru­pee depreciation has made imports costlier, thereby reducing them. It has provided an opportunity to domestic manufacturers to cover up for imports. Focus on manufacturing will give a push to exports as well.

The availability as well as the cost of credit is very important for competitive manufacturing. While choosing between inflation and growth, RBI has opted for the former. Therefore, the flow of credit to the manufacturing sector and other important sectors has slowed down. Data on credit flow to the manufacturing sector would further substantiate our point of view. While tackling inflation is important, we have to first ascertain whether the inflation is being pushed primarily by demand or supply. We need to prescribe the right dosage for the ailment to get cured. The government as well as RBI has to ensure that there is adequate credit flow to the manufacturing sector at a competitive cost. While large companies should be given the freedom to raise capital from abroad at competitive rates, for smaller companies, the government may provide a helping hand by extending interest subvention so as to bring the cost of credit to about 10 per cent.

Tax reforms should be our immediate concern, both on direct and indirect taxes fronts. While introduction of DTC would help simplify direct taxes, we need to introduce GST as early as possible for adequate reforms in the indirect tax structure. The finalisation of the negative list for services tax is a step in that direction, but we have to move quickly towards aligning our rate of central excise, services and VAT to meet this objective. We have a long distance to cover from the two-tier GST to a unified GST, which all exporters are desperately waiting for.

Countries are providing huge marketing support to SMEs to push them to export. In India, the budget for the market access initiate and market development assistance scheme put together is only Rs 200 crore. How can such a small financial outlay support an exports target of over $300 billion? The department of commerce sh­ould frame a plan with a corpus of about 0.5 per cent of total exports, so that sizable funds are available for marketing of MSMEs.

Finally, we need to attract foreign direct investment (FDI) to push exports. FDI can bring in technology and marketing tie-ups for exports. More importantly, foreign-invested enterprises can infuse best practices into manufacturing. Over time, these practices will percolate down to local level as well and results in overall growth in productivity.


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