The 20 Per Cent Mirage

IS India’s export miracle a mirage? The euphoria after 1995’s record 21 per cent is fading fast as the country clocks a mere 9.9 per cent average growth in the first five months of ’96-97. While the commerce ministry has yet to officially scale down its target of 20 per cent, secretary Tejendra Khanna admitted to Outlook (see interview) a 15 per cent growth looks more real at this juncture.

Exporters, however, feel they’d be lucky to notch up a decent 14-15 per cent at yearend. Laments R.K. Dhawan, secretary-general, Federation of Indian Export Organisations: "With credit cost so high, poor infrastructure, procedural bottlenecks and an indifferent government, exports will probably grow around 12 per cent." Agrees Dr B. Bhatacharya, dean, Indian Institute of Foreign Trade: "Actual growth is most likely to be around 15 per cent in dollar terms, which is pretty good." Says Dr Pranab Sen, consultant in the Planning Commission: "The fall in growth isn’t something to be terribly worked up about—a 20 per cent target was highly improbable, I’d settle for 13 per cent." 

The overall slowdown has been brought about mainly by a sharp fall in traditionally strong areas of the export basket which also have a high base. Says Khanna: "Gems and jewellery, textiles and clothing, and leather, which account for half the export basket, have seen prices falling over 9-15 per cent." Tea showed a negative 9.9 per cent growth in April-August; leather goods exports have fallen by 19.8 per cent, gems and jewellery by 8.8 per cent, carpets 8.8 per cent, handicrafts 9.8 per cent, readymade garments 2.4 per cent, and—the most shocking—computer software by 37 per cent. Engineering goods, however, have grown 5.7 per cent and electronics 19.5 per cent.

Individual factors have been important: economic slowdown in developed countries has ensured low offtake of carpets, jewellery, leather and textile; less demand from the CIS has affected tea and low raw material prices have hit realisation. There’s also the slowdown in world trade growth, from 8 per cent last year to 5 per cent, but this may not have affected India much with its 0.6 per cent share. The real reasons go far beyond the obvious and into the deep-seated problems of the economy.

Primarily, infrastructure and export credit. Port facilities are woefully inadequate, container costs are steep, customs clearance is slow, thorny and tough. Rues Dhawan: "The customs authorities treat exporters as thieves. One has to wait in long queues for the smallest thing. For instance, big cargoes are sidelined for a 24-hour cooling-off period as the department doesn’t have jumbo X-ray machines." Since infrastructure problems can be solved only over the medium term, Bhattacharya suggests a shift in focus to less infrastructure-intensive items for the short run. For instance, minimising bulk-volume items to those which can use the airport, or emphasising export of services. One reason for the customs bottlenecks, he says, is the strategy of using the import policy as an incentive to exports.

Credit is another acute problem. Says Bhattacharya: "Unless the credit cost for exporters is brought down from the present minimum of 13 per cent for 90 days, there won’t be any takers. If Libor (London Inter-bank Offered Rate) is the effective cost for our competitors, we need a Libor-linked shipment rate, say Libor plus 1-2 points". Asks Dhawan: "When Singapore and Indonesia can give their exporters credit at 4. 5 to 5.5 per cent, less than Libor, why can’t we?" Unfortunately, with Libor ruling around 6-7 per cent now, government borrowing high and banks’ health poor, a 8-9 per cent floor rate may be beyond the comprehension of the RBI and the finance ministry right now.

With domestic debt markets illiquid and credit cheaper abroad, exporters have gone in for $1.08 billion of external commercial borrowings in June-September. Says Sen: "A 13 per cent floor rate is harsh when the rupee is so stable." Which is why Bhattacharya suggests a short-term course of 3-4 per cent devaluation of the rupee (up to Rs 37 a dollar) to offset the high cost.

In such a scenario, how feasible was a 20 per cent target? First, it’s difficult to sustain such a high base. The World Bank expects "real merchandise export growth to improve only mildly to 10 per cent from 8.6 per cent in the pre-reform years, supported by garment, textile and agricultural export growth over 1996-2005 with flat trade gains." The reasons are "the remaining anti-export bias imparted by high trade protection and the loss of competitiveness due to poor infrastructure". While Sen expects average Ninth Five-year Plan export growth of 12 per cent, Bhattacharya feels a 10-15 per cent figure is consistent with a GDP growth of 6-7 per cent and import growth of 10 per cent.

More interesting is what the export debate has helped highlight: whether the growth is as big as it’s made out to be. Says Sen: "Out of last year’s 20 per cent, 12 per cent was accounted for by volumes. This could be for three reasons: liberalisation is helping us get a better price, exports were underpriced earlier, or large-scale over-invoicing, the safest way of money-laundering as exports are tax-free. The last two seem more likely." Which is why the government brought exporters under the minimum alternate tax (MAT), now cited by most exporters as the worst dampener on exports. Khanna is a diehard anti-MATter. Says Dhawan: "Of 45 exemptions, only income-tax was left. Now, even that’s gone."

 Volume growth has averaged 12 per cent in the past three years, compared to 8 per cent in the Seventh Plan, and only 2.7 per cent in the Sixth. Showing clearly that our export growth has been more volume-driven than value-driven. Says Bhattacharya: "We’re not getting better prices because of quality or improved unit value realisation. There’s not much value addition, branding hasn’t been much of a success." Thankfully, the commerce ministry has discarded the 15-product/15-country matrix announced by P. Chidambaram when he was commerce minister, which was more historical than realistic, feels Khanna. "We have to explore new markets, a 35/40 matrix is more correct," he says.

Khanna is trying hard to remove the procedural bottlenecks, cracking down if necessary on errant officials. But commerce ministry proposals have traditionally faced tough going through the finance ministry. Says Bhattacharya: "We need to create a totally transparent export regime, and reduce tariffs to the minimum." Till such time, with oil imports zooming, the government is probably relieved that non-oil imports have slumped along with exports. The trade balance is still safe.