Exports to rescue Indian economy

As the world has witnessed the severe scenario of lockdowns and significant human cost after the arrival of the COVID-19 pandemic last year. It had drastically affected the economic as well as non-economic conditions of each country.  Interestingly, the Indian economy was rebounding smartly in the last two quarters of the fiscal year. But the second wave of the pandemic early in late February has brought the country to a pause again.

Skier Export & Import Private Limited, a micro textile unit, fabricates blankets, towels and bedsheets in a factory in Ghaziabad on the eastern edge of New Delhi, and exports them to foreign marketplaces, including the US and Europe. An international business handler of the company, Vikas Singh Chauhan has recorded annual sales in the range of ?20 crores, which is unexpectedly provoked with a problem of plenty. Chauhan said that the company has been overloaded with additional orders from foreign purchasers than it could probably meet. He added, “Last time we saw this type of orders, it was five years ago".

Because of persisting covid-induced caution and regional lockdowns, there is a limitation on indigenous demand, at the very same time emerging demands from overseas is a glimmer of hope. India’s exports raised more than 60% year-on-year to a record $34.5 billion in March and earned a robust $32 billion in April, the first month of FY22.

Although the figures for May are likely to slip a bit due to movement restrictions, the March and April shipments have given an upsurge to optimism about the short- and medium-term scenarios. The cause: worldwide demand, particularly in the West, is improving much faster. In FY20, India’s complete exports (by value) dropped by 7.3% to $291 billion. But, this year, exporters and government policymakers have the possibility of a rebound that a vertical target has been set—at least $400 billion.

Biswajit Dhar, professor at the Jawaharlal Nehru University, commented over the short run, the flow in external demand is an opportunity for the Indian economy. “Domestic demand is not going to pick up soon. So, foreign demand will be critical for the economy."

Minister of commerce and industry Piyush Goyal lately picked pharmaceuticals, engineering goods, auto components, fisheries and agricultural goods as the primary focus areas.

V-shaped vision

Most economic analysts have begun to pare India’s FY22 growth predictions, holding that the earlier presumption of a swift V-shaped economic recovery is improbable to be realized since a second covid-19 wave has shortly cut short a nascent economic recovery.

Moody’s Investors Service, for instance, has reduced its FY22 growth forecast for India to 9.3% from the previous estimate of 13.7%. S&P Global Ratings assumes India’s gross domestic product (GDP) to increase by 9.8% in a “moderate" scenario and 8.2% under a “severe" scenario.

The fast spread of the infection into the hinterland, which has basic medical care infrastructure, has added to the vulnerability of the economy's development direction in the months ahead.

In contrast, the vital export marketplaces for India – like the US and the European Union (EU) – are encountering a solid financial rebound, supported by a $1.9 trillion monetary upgrade program by the Joe Biden-led US administration and a sharp drop in Coronavirus contaminations.

A speeding up vaccination drive and the facilitating of lockdowns has prompted a bounce-back in household confidence levels in the US and Europe to well over the pre-pandemic levels. Morgan Stanley has anticipated the US and the EU to develop by 7.5% (the quickest since 1984) and 3.5%, separately, in 2021.

As per the World Trade Organization (WTO), forecasts of a rapid recovery in international trade have enhanced as merchandise trade prolonged quicker than projected in the second half of 2020.

Following the novel WTO evaluations, the volume of international merchandise trade is predicted to rise by 8% in 2021 after having fallen 5.3% in 2020. The pandemic-induced downfall had bottomed out by the second quarter of last year.

Crisil Ltd wrote in a new research note that Indian exports were above their pre-pandemic levels and the momentum continues strong. “Faster recovery in advanced economies will spur global demand in the second half of 2021, thereby supporting India’s exports (too)," it further said.

Indeed, India has a minor share of the world’s merchandise exports, at 1.7%—as in contrast to China’s 13.2%. India’s share of global services exports is 3.5%, related to China’s 4.6%.

Nevertheless, despite the limitation, India’s exports—both merchandise and services—as a share of the national GDP are around 20%, and their performance is a crucial factor in overall economic extension, predominantly at a time when other advance cylinders aren’t firing. Whereas the economy is initially led by indigenous demand, exports can counterbalance a fall in the domestic market to some extent.

Engaging trade-scenario  

The product composition of India’s export basket has not been much modified in the last five years, with petroleum and mineral products, precious stones and metals, and chemicals and textiles recompensing the largest chunk.

The stock of machinery and electrical apparatus has improved during the last five years, displaying, in part, a shift towards medium technology exports that include greater local value addition.

During the last few months, the US has developed as the main destination for Indian exports due to Britain has exited the EU, which is now the No.2 marketplace. Around a third of India’s exports are bound for different countries in Asia, where the key markets remain China, Hong Kong and Singapore. The share of India’s exports bound for the Middle East (West Asia) and Africa has been deteriorating. In the share of service trade, India has a net surplus and its core mechanism are computer, information and telecommunications services. Travel services and transportation are additional important services exports.

A spokesperson for the National Association of Software and Service Companies (Nasscom) commented while the industry body has halted making growth projections for the information technology (IT) segment, the demand environment appears very healthy for FY22. Of course, the healthcare condition in key Western markets would be a key factor, the spokesperson said. In FY21, the IT segment grew by 2.3% to reach $194 billion of revenue in an illustration of its resilience amidst the first wave of the pandemic.

Trade withdrawn

Nevertheless, despite the vastly effective IT sector, Indian industry has been largely disinclined to consider opportunities outside the shores, often content with helping the large national market.

This contradicts the developing model of China and other East Asian economies. India’s liberal foreign direct investment (FDI) policy has also not flourished in placing overseas inflows towards enhancing exports.

After a deceptive start through Make In India in September 2014, the Narendra Modi government understood in its second term that without financial incentives enhancement of manufacturing and exports sectors are close to impossible.

The government first offered a massive corporate tax rate cut in September 2019 and monitored it with sector-specific production allied incentives worth ?2 trillion for 13 segments under the Atmanirbhar Abhiyan past year. It has also rambled tariffs on one-third of its tradable commodities in the past five years to defend the local industry and to condense import dependence.

India’s average tariff risen to 14.3% in FY21 from 13% in FY15, with policymakers regularly using trade policy measures to boost domestic production and curb inflation. That may now contradict India’s strategies to begin negotiations on free trade pacts with the EU and the UK, which may involve tariff exclusion on up to 90% of product lines.

Because of the integrated approach, India’s external posture remains incomprehensible and seemingly uneven, wrote Suman Bery, a global fellow at the Woodrow Wilson International Center for Scholars, in a recent report published by the Hinrich Foundation.

“But it does appear that India is reducing its bets on integration with its East Asian neighbours and (is) investing greater energy in links with Europe and the US. The deeper message is that in its post-covid recovery, India’s pursuit of strategic trade and industrial policy means it prefers the flexibility offered by bilateral trade agreements over more ambitious regional structures (in Asia)," he further stated.

Instant encounters

Throughout the second wave, states have restricted manufacturing activity, many have put strict circumstances in place—like restraining the workforce to 50% (West Bengal) and making it compulsory to house workers within the factory properties (Karnataka).

“Luckily, we have not gone for a national lockdown. Also, the Centre has not restricted the inter-state movement of goods and most export-related services are in the exempt category” stated Federation of Indian Export Organizations (FIEO) chief executive Ajay Sahai.

“So, this time we are not facing many challenges with logistics as was the case in the first wave. But one cannot deny that when you are facing such a virulent second wave, there is bound to be some impact," he further said.

Consequently, several workers have gone back to their villages, bringing on a shortage of local workers. Oxygen supply has also been insufficient. It is a significant input both in the steel and automobile industry. The prohibition on the supply of industrial oxygen is taking steps to carry the metal works industry to a halt as pre-heated metal cannot be cut without oxygen, told the former chairman of the Engineering Export Promotion Council of India Anupam Shah, who is worried about how that would affect engineering exporters who are flush with orders from abroad. “If the oxygen ban is not lifted soon, there will be long-term damage because our customers from developed countries are going back to China and Brazil, and getting a customer back once you lose them is very difficult," he stated.

Small and medium enterprises (SMEs) that articulate roughly 40% of India’s exports are, in the meantime, battling liquidity obligations. After losing a case at the WTO, the commerce ministry has halted the Merchandise Export Incentive Scheme (MEIS) that used to offer sops to exporters. The government substituted it with the WTO-compatible Remission of Duties and Taxes on Exported Products (RoDTEP) scheme beginning 1 January but is yet to decide the incentive rates for exports, making it unproductive.

Exporters assert that ?10,000 crores are still unsettled with the government under the MEIS for FY21 and around ?4,000 crores on account of the RoDTEP for the first four months of 2021. The Centre has also not yet informed the Service Exports from India Scheme (SEIS) since FY20, disagreeing incentives to segments like travel and tourism, healthcare, and education.

“We understand the Centre’s concern that at this point of time, providing health and creating health infrastructure should be the priority. We are not looking at new incentives or fiscal support. But we expect the money that is stuck with the government to be released on a priority basis. Then, the liquidity situation would ease significantly," Sahai stated.

In the meantime, at the Skier textile factory, Chauhan is cautiously hopeful that the order influx would remain. “We have a duty disadvantage of around 8% as against our competitors in Pakistan, Vietnam, and Bangladesh," he stated. But the high freight cost of the previous few months is curbing and yarn prices are also easing. “Our Christmas orders will start arriving from May-end. If cases fall and if the government supports us, our exports can double."

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