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Why aren’t Indian exports growing?

Stagnant exports can be partially explained by the relative loss of Indian competitiveness
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First Published: Wed, Dec 19 2012. 08 39 PM IST
The rupee has depreciated against the dollar by at least 22% in the last 18 months and by at least 65% against Chinese renminbi since 2008. But this large-scale depreciation is neither boosting our exports nor reducing imports. Our trade deficit till 12 November at $130 billion (Rs.7.09 trillion) is a little higher than in the corresponding period last year when it was $123 billion. Year-to-date (YTD) exports fell by 6% to $189 billion and imports fell by 2% to $319 billion showing no benefit of the massive rupee depreciation against the US dollar or renminbi.
Where does India lack?
Stagnant exports can be partially explained by the relative loss of Indian competitiveness.
High costs: Raw material, power, labour, interest and overheads form bulk of the cost for any product. A lot of raw materials are priced on import parity leaving limited scope for competitiveness. The only advantage Indian manufacturers can have is when the raw materials are provided at a concessional rate, such as coal or iron ore for select industries.
Power cost in India (in spite of cheaper coal) is on a par or expensive as compared with global peers. High power cost is a function of free power to agriculture, concessional power to households and huge theft and dacoity (T&D) losses. Irregular supply of power increases dependence on alternatives such as diesel generator sets, which ends up enhancing the average cost of power.
Low labour productivity: Indian labour is cheap in absolute terms versus global peers. However, in the absence of training, appropriate tools and equipment and supporting work environment, their productivity is low, which restricts the benefit of absolute cheap labour cost to some extent in manufacturing industries.
High interest rates: Indian interest rates are nominally on the higher side in the peer group. There is no denying the fact that real interest rates are more important. However, for an entrepreneur, nominal interest rates matter to prepare a profit and loss account. A reasonable part of trade and industry relies upon the unorganized market for borrowing at exceptionally higher interest rates. Lack of quick remedy in judicial process increases the cost and the security of borrowing. Higher nominal interest rates, tighter liquidity, large size of the unorganized market and lack of timely judicial remedies for recovery makes Indian industries uncompetitive against global peers on finance cost.
Infrastructure constraints: The time taken to set up a project is multiple times the peer average. Costs (including higher interest rates) capitalized during the setting-up period makes our products unattractive in the exports markets. The time taken to move cargo from one place to another, higher costs due to involvement of manual process at various points enhances the ultimate cost of goods in the export markets.
Law and paperwork: Outdated and multitude of laws and endless paperwork ends up delaying the source to consumer cycle. It enhances working capital requirement, increases time to respond to the market and makes Indian goods non-competitive in global markets.
What supports exports?
The only way to enhance exports is through “jugad” entrepreneurship or currency depreciation.
Indian entrepreneurs have shown remarkable ability on design, process and reverse engineering side to become competitive. However, there is also a dark side in terms of poor work environment, exploited labour, unauthorized power connection, short cuts to outsmart laws and scant regard for pollution. The export industry, too, has to extract concessions from the government to survive or prosper.
Rupee depreciation then becomes the order of the day for Indian exports to gain competitiveness. Despite consistent depreciation of rupee (except for a brief period of appreciation), the J curve or hockey stick effect has never been felt on Indian exports. Our exports are largely due to the TINA (there is no alternative) factor or jugad entrepreneurship.
Exports consist of arbitrage of human intelligence (software, BPO, drugs and pharmaceuticals) or human efforts (handicraft, leather, ready-made garments) or polluting parts (chemicals) or natural resources (iron ore).
Due to lack of competitiveness (owing to costlier land, power, interest charges coupled with infrastructure bottlenecks, low labour productivity and multitude of laws), exports are not growing despite rupee depreciation and jugad enterpreneurship and our share in global trade remains below historical standards.
Nilesh Shah is director, Axis Direct.
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First Published: Wed, Dec 19 2012. 08 39 PM IST
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