Trade off

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Our export dream is souring; it needn’t have. What holds us back and where are we headed

Trade off
India has achieved a tenfold increase in exports to $300 billion a year in the two decades of reforms. Yet, the question arises: have we missed the exports bus? May be, may be not.

What we certainly are not is a global manufacturing hub -- essential to drive exports -- which China has been for quite a while.

A pity, really, because there was a time not so remote when India could have taken at least the initial steps towards becoming a centre of manufacture of all kinds of goods for the global market.

Technology was cheap and easily available through the second half of the millennium’s first decade. Technology crucibles Europe and the US were willing to part with knowhow.

India could have, but did not seize the opportunity. Companies, including ones in the public sector, that had the cash pile but sat tight on them remained inward looking, unwilling to take risks. One or two, like the Tatas, ventured out to grab technology-driven firms (as in the takeover of Jaguar-Land Rover), but the swallows were to few to make India’s technology summer.

“Between 2006 and 2011 technology was available at rock bottom prices in Europe and the US. We should have gone and acquired it,” regrets IIFT director Surajit Mitra, who nevertheless believes that the technology is still available, but not at those “unimaginably low costs” and India should get aggressive and “do it.”

Clearly, India cannot be a China, but the point is the residual global demand that China cannot meet itself is so great as to make India, should it try hard, another export powerhouse. Moreover, China is gradually but surely losing its cheap labour edge and Indian labour costs are turning commensurately competitive.

China has a 9.8 per cent share of global merchandise exports, five times more than India’s 1.8 per cent. There is no stopping the Chinese juggernaut: by the year 2030 its chare will rise to 15 per cent; India will still be way behind even with a five per cent slice. But see what India has done with IT and auto sector, which underscores the fact that whenever we invested in technology, it has paid rich dividends in exports.

How India moves much depends on its trade policy, specially in a fast-changing global scenario. Our trade policy needs to identify sectors where we can build global competitiveness and move up the value chain. “For instance, small cars, steel products and apparels,” says T S Vishwanath, principal advisor of APJ-SLG. If we ignore these areas, other countries will quickly occupy the space. Technology is of essence, says he.

And technology is what we have ignored. India is still is the middle ages in terms of technology in manufacturing. There was a time when technology was easily available, for instance, in transportation. BHEL, with its huge infrastructure, could have gone into this line of business had it acquired technology for metro rail, high-speed and heavy duty engines, signalling equipment and so on. But it did not.

The commerce ministry does not agree that the government did not understand the criticality of acquiring technology. For example, instead of importing technology we imported whole machines for upgradation of textile mills, a sector that brings in $50 billion in export income every year. That technology import for the sector could have had a beneficial effect on technology development needed for future upgrades is denied.

Anup Puri, director-general of foreign trade, cites studies to say that most of the machines imported are technologically advanced and not available in India. He also claims the government’s focus on technology upgrade is intact.

If that is so, why are we so behind China in exports despite the limited modernisation of manufacturing that has taken place in India? Why is it that India’s share of global trade has actually regressed from 2.2 per cent at the time of independence to 1.5-1.8 now?

Two decades of liberalisation hasn’t really done much to our share.

How we failed to grab opportunities is well illustrated in silk tie exports: some years ago China was nowhere; today it is No 1. How did China do it? The country was already rich in sericulture. But the big difference was that it got the world’s best designers and technology from France and Italy to make ties.

India has an equally hoary history of silk production, but today we are reduced to importing huge quantities of fine silk; letting coarse silk have the run of the industry.

For giving silk exports a leg up China bought in technology for the front-end and improved quality at the back-end with intensive and widespread research. India just basked in its old glory and designs and did not bring in technology for modern designs.

The furniture story is too similar to warrant detailing here.

Some analysts believe the answer to our technology quest lies in FDI – it means not only capital flowing but technology too. Without technology, India’s chances of becoming globally competitive in manufactured goods are as good as zilch.

No technology is equal to global quality or standards, which China has achieved in most of its manufacturing products. FDI in retail is seen as a sure shot way of improving everything.

“Best thing that FDI in retail would do is that farmers will get better price; so he will have an incentive to improve his products; food processing and cold chains will grow; and consumers will have a wider choice,” says Mitra repeating an argument heard zillion times.

No surprise the Federation of Indian Export Organisation (Fieo) agrees. Its director general Ajay Sahai says FDI brings technology and marketing tieups for exports. More importantly, companies with foreign investment have the best manufacturing practices. “Over time these practices percolate to local companies and results in overall better labour productivity,” says he.

FDI acted as a catalyst in China’s emergence as a global manufacturing hub. Along with huge investments it got technology too. India is handicapped by comparison. In the last two decades, China had FDI of $70-90 billion a year, whereas India had to be content with $30 billion annually. Accompanying technology flows would have been that much less.

Nearly 40 per cent of China’s GDP comes through exports. India’s economy may is domestic demand driven. But if we were to cut the current account gap of $78.2 billion (4.2 per cent of GDP), exports must rise fast.

Technology alone is not enough; we must have people who can use it. Regrettably, we don’t have, despite an over 500 million youth. We could become the global reservoir for skilled manpower but, unlike China, we invested very little in education and health. So, our youth don’t have the skill set so direly needed to raise share of manufacturing in our GDP from 16 per cent to 25 per cent in 10 years, which, in turn, will help raise exports.

China accorded top priority to education and health right from early on, according to Planning Commission principal advisor Pranob Sen. In India it is only in the current 12th Plan, which began this year, that a new serious thrust on these two social sectors has been given.

Coming in the way of higher exports is non-existent labour reforms. China has moved closer to hire-and-fire policies. Admittedly, it helps that China has a totalitarian regime and can thrust any decision down people’s throat; India cannot do that.

We could not reform the labour sector and keep cost downs. This, says Mitra, is another reason why Chinese products are so competitive.

A Sakthivel, chairman of the Apparel Export Promotion Council, wants export friendly labour reforms so that our exporters compete with other countries.

India’s textile industry is a case in point. Its focus has always been on cotton. So, countries with an edge in blended fabric and processing have overtaken India.

Back to the China example: that country has strength in all kinds of fabrics which sort of obliges India to diversify to polyester and blended fabrics to keep pace with the changing global demand.

The small-scale sector, accounting for 40 per cent of our exports, has serious quality problems. Developed countries won’t brook such quality.

Behind the European Union’s ambassador to India, Joao Cravinho’s warning that Indian exporters must gear up to meeting more stringent economic conditions worldwide, the actual message was that India must be more competitive. And that cannot only be in terms of price but also quality.

Like China, India should have infused technology both into its cottage industry and high-end manufacturing. Quality suffered because we did not do this; and there was no standardisation. No global buyer will make repeat buys if he is not sure he gets what he has ordered.

Though small and cottage industries generate huge revenue and employment, they stagnate in terms of technology. However, the cluster concept, as in the case of brassware makers and leather units, has helped some degree of modernisation. This also helped attain economies of scale and quality goods at cheap prices.

A stumbling block to our exports is infrastructure, rather the lack of it. Our economic growth has not been matched by commensurate growth in infrastructure. Power outages are an old story; the railways are choked and slow; roads are in adequate, and ports outgrow themselves fast.

Given our track record, how much of the government’s planned $1 trillion infrastructure push in the 12th Plan comes true is anybody’s guess.

Then, of course, to top it all is the land acquisition problem. It holds back scaling up by export manufacturers. Scaling up to big level is difficult because large land plots are simply not available or when they are get quickly embroiled in political, environmental and legal storms.

Our special economic zones (SEZs) do not compare with those in China. The commerce ministry is in talks with the finance ministry to make these zones more attractive. The idea, according to Pujari, is to change certain laws and rules that come in the in the way of expansion.

Fingers crossed here, since changing laws is not such an easy thing any more in the coalition era.

In the current scenario inflation is what’s gripping everyone’s attention. Credit is still expensive; but mostly banks decide to err on the side of caution and withhold credit altogether.

The moderating non-food credit and stagnant export credit are causes of grave concern, says one exporter who declines to be identified in this report. RBI data actually indicate a contraction in export credit.

Among all exporters, the small and medium enterprises bear the brunt of the credit squeeze. These enterprises contribute over 22 per cent to GDP and give livelihood to most millions after agriculture, the biggest employment generator.

All hopes are pinned on a revival in the US and EU economies. But what if things get worse there? It will leave India with no option but to fix the situation internally. And that’s why credit must flow liberally from banks. And it isn’t. This is what rankles Rafeeque Ahmed, Fieo chairman, unhappy over the RBI decision to keep policy interest rates unchanged.

The commerce ministry is trying to fix things with a special export thrust in five sectors: engineering goods, electronics, textiles, chemicals and pharmaceuticals, and gems and jewellery. The objective is to increase their collective share in India’s exports from 70 per cent now to 80 per cent by 2020.

Fingers crossed again. Take the case of drugs. Manufacturers still face almost insurmountable trade barriers and drug regulations. As it is, most foreign drug manufacturers believe India makes fakes – not because quality is bad but because patents have been violated.

Indian drug makers have been crying from rooftops that India is involved only in legitimate production procedures. “We have been looking at promoting Brand India and introduced barcoding, we submit analyticals to the drug authorities in customs, and provide finance for drug registration charges among others,” says P V Appaji, director- general of Pharmexcil.

Abhijit Mukherjee, president (global generics) of Dr Reddy’s, emphasises product differentiation: “There has to be a differentiating factor in products; else it will be difficult to succeed.”

The Indian auto components industry, accepted worldwide despite its frugal engineering, is starved of two crucial things that have gone into its early success: cheap capital and skilled workers. Managing the volatility of demand, currency and commodity prices is getting increasing complicated, according to Vinnie Mehta, executive director of the Auto Component Manufacturers Association.

One line of thinking is to push high-value products. In fact, this is considered an absolute imperative to stall and reverse the slowdown in goods exports.

Sooner this is done the better, because the general export trend does not give hope. In April-September exports shrank by 6.79 per cent to $143.6 billion from $154.1 billion in the corresponding period last year. The target of $360 billion by March-end next year looks ever receding.

To make matters worse, imports show no sign of slowing. On the contrary, imports rose by 20 per cent last year to $303 billion from $254 billion in the preceding year.

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