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In July, gems and jewellery exports declined by 50% year-on-year and leather and man-made yarn by about a quarter (Photo: Bloomberg)
In July, gems and jewellery exports declined by 50% year-on-year and leather and man-made yarn by about a quarter (Photo: Bloomberg)

India’s exporters are on the edge

  • Stung by muscular trade policy and the global slowdown, smaller exporters are hurting. Many jobs are at stake.
  • The Modi government’s push for a self-reliant India is potentially the most complicated new problem. Changing import tariffs would effectively push up the price of imported inputs

When Sunit Jain heard about a virus ravaging Wuhan in late January, he booked a ticket to see potential clients in the US, Chile and Peru. The Jaipur-based exporter of home linens, garments and paper products sensed an opportunity as Chinese factories closed due to a strict lockdown. “I was hopeful that the pandemic would benefit us in India, but that is not how it panned out," Jain said.

He is glad he didn’t go as he would have been stranded in Latin America, but that is the only good fortune his business has had in 2020. US retailers such as Neiman Marcus, Saks Fifth Avenue and Pier 1 Imports have all filed for bankruptcy. Jain’s Ratan Textiles now finds itself competing against deeply discounted prices—set at liquidation sales—of such companies. For Jain, it sometimes feels as if the skies have fallen in. Speaking the day after a huge downpour brought Jaipur to a standstill, he said, “It’s been quite an unfortunate year. My personal goal is to keep the team intact. And to survive till March."

Businesses worldwide are reeling from the collateral damage of the covid-19 pandemic, but for export-oriented firms reliant on a narrow band of commodities—ranging from jewellery to garments and leather—these are the worst of times. These goods also happen to be primarily produced by India’s labour-intensive small and medium-sized industries.

In textiles and apparel, which has been among India’s top 10 export items, the dwindling number of large retailers in the US has left domestic firms heavily dependent on contracts from discount stores and the exacting demands of fast fashion companies. Unexpected local challenges have amplified the pain. Freight containers have been in short supply because the huge drop in imports has meant fewer containers are arriving at Indian ports. Production costs have also gone up as factories grapple with a shortage of skilled migrant workers.

The larger problem is that for the past five years or so, the country’s most labour-intensive export industries have either not grown appreciably or have actually declined. Capital-intensive exports, from engineering goods to electronics to refined petroleum products, have done somewhat better. The Reserve Bank of India recently estimated that gems and jewellery and real estate are the sectors with the highest quantum of bad loans, about 25%.

Self-reliant India

Against this backdrop, the Narendra Modi-led government’s push for a self-reliant India is potentially the most complicated problem of all for small and mid-sized exporters. Changing import regulations and tariffs effectively push up the price of imported inputs, often needed for export items. From 21 September, just as firms complete shipping crucial Christmas orders in this calamity of a year, they will start facing the compliance nightmare of having to certify the origin of imported inputs.

The new rules are similar to those of the Trump White House. They may be legitimately aimed at preventing Chinese goods from being routed in via Asean countries, but India’s companies could face sourcing problems. The combination of a Modi government focused on import substitution and the continual rethink of the strategy on free trade agreements, while the rupee remains overvalued, could result in the liquidation of many labour-intensive export firms this year. In the past five years, leather exports have declined from $6.2 billion to $4.8 billion, textiles and garments from $34.8 billion to $32.3 billion and gems and jewellery from $41.2 billion to $35.8 billion.

These trends remained broadly in place in July, the most recent month. Gems and jewellery exports declined by 50% year-on-year and leather and man-made yarn by about a quarter, though cotton yarn and handloom products grew by 7%. The irony is that India desperately needs these industries to flourish, along with construction and tourism. These industries use much more labour than a chemical plant or a machine manufacturer.

In a 2018 article, former NITI Aayog chairman Arvind Panagariya compared Reliance Industries Ltd.’s employees and total assets with those of Shahi Exports, India’s largest apparel manufacturer. He found that for an equivalent investment, Shahi created 252 times as many jobs as RIL did. India needs to create jobs at a record pace to arrest the growth of what is already the largest cohort of under-employed labour in the world; according to a McKinsey & Co. report released last week, India needs as many as 90 million to 145 million additional non-farm jobs by 2030.

“One of the salient characteristics of Indian economic policy is that while Reliance may enjoy a terms-of-trade advantage, labour-intensive industries are ‘dis-protected’," said Sebastian Morris, a professor of economics at the Indian Institute of Management in Ahmedabad.

Bleak outlook
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Bleak outlook

The FTA puzzle

For Rajendra Gupta, a supplier of glass vases and platters to retailers such as Armani’s home division and Crate & Barrel, the good news has been the return of US buyers who had been lost to Chinese manufacturers six years ago. A US buyer told him recently that glassware from India is more “creative". Yet, the win over China is tempered by having to deal with the higher cost of compressed natural gas needed for his Firozabad factory as well as the high cost of soda ash, a principal ingredient for glass-making.

“Soda ash is much cheaper in other countries. The US is a major producer," said Gupta. “But the government wants to boost the domestic market (for soda ash). That is the only thing the government is thinking of." In a classic example of small, labour-intensive factories being disadvantaged in order to protect large companies, the major producers of soda ash in India happen to be Tata Chemicals, Gujarat Heavy Chemicals Ltd. and Nirma. In March, the commerce ministry launched an investigation into whether Turkey had been subsidising its soda ash exports to India.

The trade liberalisation that started in the 1990s ushered in 25 years of steady reduction in tariffs and regulations. India, it seemed, had turned its back on the export pessimism of the 1950s and 1960s, which had painted the global environment as one stacked against exports from developing nations. But over the past couple of decades, India signed a number of free trade agreements (FTAs), including with Asean. However, India’s tariffs still remain the highest among major economies in Asia.

Over the past year or so, the Modi government has questioned whether regional free trade agreements work at all. In November, India abruptly decided it would not join the Regional Comprehensive Economic Partnership, a grouping that will account for 40% of global trade. Japan and Australia, seeking to balance China, reportedly sought to draw India back into the RCEP discussion this year, but without success. Commerce minister Piyush Goyal recently criticised many of the FTAs reached between 2009 and 2011 as having left India open to foreign goods but “without reciprocal entry". According to a global database on trade actions, in the past two years, India has made 233 protectionist interventions in the form of licensing rules, tariffs or other barriers.

Muscular mercantilism

This muscular mercantilism creates problems for most exporters who need imported components or inputs. Furniture makers, for instance, rely on China for adhesives and sanding paper. Furniture maker Jaswant Meel says, “We are confused." But Meel reports better than expected demand for end tables and writing desks in the US as more people are starting to work from home. A shortage of trucks has meant that freight carriers have hiked charges from 28,000 to 34,000 per truckload to get his firm’s products from Rajasthan to the port in Mudra. His negotiations with US buyers have been difficult because they know “the domestic Indian market is asleep. Exports are the only game in town."

Across the country in Tirupur, garment factories are struggling to substitute imported textiles made of man-made fibre, labels and lace trimmings with local variations. “China’s are definitely cheaper and the quality is better," reports V. Elangovan, a buyer based in Tamil Nadu.

“I don’t know if we can manage without (imports) when we are already being hammered by Bangladesh." In June, China allowed tariff exemption for 97% of goods from Bangladesh, drawing the two countries closer together. Elangovan cites a South Korean garment manufacturer with 50,000 workers in Bangladesh as an example of the economies of scale its gigantic factories offer relative to India’s much smaller units. Bangladesh’s FTA with the European Union and lower wage costs are also an advantage. In India, meanwhile, garment exporters are facing delays in routine reimbursements from New Delhi to compensate for fuel taxes and other central and state government levies. “Bangladesh will only get stronger," predicts Elangovan, who is opening a buying office in Dhaka.

Even though the Modi government is alert to the challenge that exports need to increase at a time when domestic consumption is anaemic, the belief that governments can micromanage industrial development never goes out of fashion in India. On 26 August, the Centre released a report that assesses the export preparedness of different states. This month, the government said smartphone giants Foxconn, Winstron and Samsung as well as component makers are likely to shift about a tenth of global production to India over the next five years with about 60% slated for exports. Electronics products such as computers and phones often have components that cross borders multiple times, however. This could prove a challenge for customs clearances and ports in India.

Still, such government-led industrial policy initiatives succeeded in South Korea and Singapore a few decades ago because incentives and tariff protection were “conditional and time-bound" and were withdrawn if companies missed the prescribed goals, says Anu Madgavkar, a partner at McKinsey & Company and co-author of a study on outperformers in per capita income growth over 50 years. The top seven were all from East Asia. India belonged to the next cohort of countries where per capita GDP growth had grown rapidly over a shorter time period—between 1995 and 2015. Those two decades coincided with a period of trade liberalisation in India.

The problem for labour-intensive exporters in India is that their relatively small size means they are overlooked by successive Indian governments when decisions are made on the merits of, for example, a free trade agreement with the European Union, which, along with the US, is India’s largest trading partner. An FTA with the EU, a work-in-progress from 2007 till discussions stalled in 2013, would benefit garment exporters competing against Bangladesh, but is deadlocked in part because it would hurt automotive companies and, absurdly, wine producers in India.

“The government has to map why business is going to other countries," says Ratan Textile’s Jain. Panagariya, a renowned trade economist, told BOOM last week that India should pursue an FTA with the EU.

IIM’s Morris is more pessimistic. He believes the lacklustre export performance over the past few years is because India’s smaller exporters have been squeezed between China and Asia’s new export-led economies. This daunting challenge has been made worse by a succession of tariff increases in the past four budgets and new non-tariff barriers.

In Surat, jewellery manufacturer Dinesh Navadia, buoyed by a pick-up in demand in August for products priced between $300 and $500, dismisses the huge drop in India’s gems and jewellery exports in July as an aberration, but reports that production costs have gone up by 20-25%.

Perennially struggling with ever-changing Indian government regulations, inflation and an overvalued rupee as well as severe competition from Vietnam and Bangladesh means that “medium and small businesses are always firefighting; they have little money to upgrade," worries IIM’s Morris. He credits them with resilience, but his conclusion is sombre. “They are on the decline," he says.

Rahul Jacob is a former Hong Kong bureau chief for the Financial Times

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