Global Trade
· According to World Trade Organisation (WTO), global trade grew at a sluggish pace of 2.1% in 2013, attributed to lingering impact of the EU recession, high unemployment in euro area economies, and uncertainty about the timing of the Federal Reserve’s winding down of its monetary stimulus in the US.
· Growth in global trade for 2014 has been forecasted to pick up to 4.7% (with developed economies growing at 3.6% and developing economies advancing at 6.4%), and further to 5.3% in 2015.
India’s Exports
· Slowdown in global demand partly resulted in slower pace of growth in India’s exports though it maintained a positive growth during 2013-14. Growing at 4.1%, it stood at US$ 312.6 billion, up from US$ 300.4 billion in the previous year.
· However, cross-country comparison shows that India’s global exports growth in 2013 was higher than that of countries like South Korea (2%), Russia (-1%), Thailand (0%), Malaysia (0%), Indonesia (-3%), Singapore (0%), Mexico (3%) and Brazil (0%).
Prospects for India’s Exports
· In line with the projected pick up in global trade in 2014 and 2015, projected pick up in GDP of the US and the EU region also augurs well for India’s exports. Both the US and EU region account for over 30% of India’s exports.
· GDP of US is projected to improve from 1.9% in 2013 to 2.8% in 2014 and further to 3.0% in 2015.
· Similarly, GDP of Euro area is projected to increase from -0.5% in 2013 to 1.2% in 2014 and further to 1.5% in 2015.
· In emerging economies, which are also important trading partner for India, GPD growth is expected to pick up from 4.7% in 2013 to 4.9% in 2014 and further to 5.3% in 2015.
· Growth in exports of developing economies, including India, therefore, is expected to be supported by rising import demand on the part of developed countries, with the US economy gaining momentum, and improving economic conditions in Europe[1]. In addition, pickup in real GDP growth in developing regions such as Africa (from 4.9% in 2013 to 5.5% in 2015), and Asia (from 6.5% in 2013 to 6.8% in 2015) is also expected to provide necessary boost to India’s exports growth.
2. Sector wise break up on export potential of India
Capital Goods
· Capital Goods are considered as a strategic sector and development of domestic capabilities is essential from a national self-reliance and security perspective. Capital Goods sector has multiplier effect and has bearing on the growth of the user industries as it provides critical input, i.e., machinery and equipment to the remaining sectors covered under the manufacturing activity.
· The share of exports of capital goods industry from India remains modest at around 0.6% of global exports, while the share of India in global imports account for around 1.7 %.
· Given the huge demand domestically there is an urgent need to capitalise upon the domestic market and encourage import substitution. Hi-technology oriented capital goods are a huge opportunity for India to concentrate upon while being able to tap the overseas market. This however will entail a lot of technology know-how especially from overseas firms through knowledge sharing, JVs, acquisitions, and investments either ways.
Electronic Goods
· Impetus on increasing production of electronics becomes a win-win situation as it will satiate domestic demand which is currently met through significantly high imports and also earn foreign exchange through exports.
· India’s imports of electronic goods amounted to US$ 31.0 billion in 2013-14, indicative of the large unmet domestic demand. Exports on the other hand were a meager US$ 7.7 billion.
· Production and exports of semi-conductor equipments should increasingly be promoted given its demand. Government of India already has in place a number of fiscal incentives which envisages enhancing production of electronics.
Apparel
· This segment contributes significantly to industrial output, employment generation and exports. In 2012, while the exports from this segment amounted to US$ 12.9 billion, imports amounted to US$ 0.3 billion.
· Combined together (HS codes 61 and 62), exports of Bangladesh was lower than that of India in the year 2002, when Bangladesh started exporting apparels. However, within three years Bangladesh overtook India in apparel exports and in 2012, it was the second largest exporter of apparels with US$ 22.6 billion of exports.
· It is also pertinent to note that Vietnam has also emerged as a major exporter of apparels leveraging its low wage cost, though the country has low textile fibre base.
· Another interesting feature is that some countries, where wage rate (in textile sector) is high, such as Germany (hourly wage rate of US$ 28), Italy (US$ 22) and Turkey (US$ 5) are exporting larger value of knitted apparels than India (hourly wage rate of US$ 1).
· Diverse strategies need to be adopted to strengthen production in garmenting as well as in labour intensive segments.
Pharmaceuticals
· During 2013-14, pharmaceuticals and fine chemicals exports from India stood at US$ 15 billion, up from US$ 14.7 billion in the previous year.
· In the bulk drugs segment, India has advantage of lower manufacturing costs, as compared to other regulated markets of US and Europe. Moreover, India has an edge in manufacturing APIs and complex intermediaries as manufacturers have advanced process chemistry skills.
· Increasing pricing pressure in the generics segment of regulated markets is translating into lower realizations for bulk drug players. Players can attempt expanding into semi-regulated markets where competition will be lesser. Moreover, expanding their presence into other markets will help maintain stable revenues in case of a slowdown.
· Strong generic opportunity is also opening up in next 5 years and Indian players can look forward to expanding their market shares through options like contract manufacturing deals, JVs and acquisitions.
· Biopharmaceutical and contract research also hold immense potential for Indian pharmaceutical players. The latter will help build their all round expertise in new drug development.
3. Policy expectations from new government to enhance India’s external trade
Focus on manufacturing exports has to be one of the critical components of the strategy to stimulate exports. In the electronic goods segment, India had a trade deficit of US$ 23.3 billion in 2013-14. This is also the second largest category of imports by India. With respect to this segment, the following recommendations can be made:
Government backing for venture capital investment in electronics segment can greatly improve the prospects for the sector.
Moreover, training centres for development of a technical pool of semiconductor designers will also be helpful. A seminal effort was taken by the Brazilian government in the form of Integrated Circuits Brazil (CI Brasil) program, from which cue can be taken. Established in 2007, this program has established training centres in ICT clusters and many semiconductor designers have graduated under this program.
India is also a significant importer of capital goods with imports amounting to US$ 45 billion in 2012. Among the major reasons cited for low volume of domestic capital goods production is low greenfield FDI inflows and limited focus on R&D by Indian companies. Indian firms need to be encouraged to invest in R&D which will make them technologically strong. Some countries, such as Canada, are providing dual tax credit allowances system that rewards both incremental expenses in R&D as well as the level of spending in R&D. While India may like to consider such measures, additional tax credits for SME units engaged in R&D activities could also be considered.
Government may like to identify Hi-tech zones in consultation with state governments and investors may be encouraged through fiscal and financial instruments. Analysis of hi-tech manufacturing zones like Chengdu (China) and Colorado (USA) reveals that these regions, despite being land-locked (away from ports by about 800 kms) have increased their exports, provided additional employment and generated higher tax revenues than neighboring regions that have not adopted hi-tech manufacturing strategy.
There can be establishment of fast track ‘green channel’ single window clearance mechanism, including environmental clearances for such projects, rule-based clearances, including pre-notified clearances in such identified hi-tech / manufacturing zones, keeping in mind the parameters for Doing Business Index in which India scores relatively low.
On the lines of Shipping Funds established by Governments of China and Korea, India could also consider establishing a Shipping Fund, and encourage procurement of ships from domestic ship yards.
Source : Sachin Murdeshwar