India’s merchandise exports sector witnessed some unusual happenings in 2011.
It ranged from shipments touching an astounding high of 82 per cent growth in July (engineering sector alone grew at an eye-popping 107 per cent that month); to experts wondering how exports were soaring at a time when manufacturing and industrial production were sinking; then questions being raised about a sudden surge in exports to some tax havens; and finally the Government admitting that software problems and data entry errors had resulted in export numbers being inflated by around $9 billion during April-October this fiscal.
All these were apart from the challenges such as the wild foreign exchange rate fluctuations; sluggish demand in traditional markets such as Europe and the US; high interest rates squeezing export credit; virtual non-availability of dollar loans; rupee depreciation helping exporters in getting better returns from their buyers abroad but at the same time resulting in increased cost of imported inputs; high inflation leading to increase in wages and prices of domestic inputs, the rise in overall production costs and the consequent fall in global competitiveness of exports.
Another factor that hurt the export sector was the Government’s move to impose Minimum Alternate Tax and Dividend Distribution Tax on Special Economic Zones (that were created mainly to boost shipments). Put together with the Direct Taxes Code proposing to withdraw the profit-linked deductions for SEZs, the proposals to set up new SEZs as well as fresh investments into these tax-free enclaves nearly dried up, while many developers were forced to seek extra time to implement the SEZ projects for which they got Government approval.
Despite all these tests and withdrawal of a popular sop – the Duty Entitlement Passbook Scheme – from September 30, exporters proved to be quite resilient with shipments growing at an impressive 33.2 per cent to reach $192.7 billion during April-November. Exports are likely to end the fiscal close to the target of $300 billion, though reaching that goal is looking slightly difficult now in the wake of the Euro zone crisis.
On its part, the Commerce Ministry – the nodal agency for facilitating the growth of exports and trade in general -- can take credit for several initiatives.
The Ministry’s persistence with the market diversification strategy -- which it had consciously initiated along with many incentives in the wake of the 2008 global financial crisis and the consequent world-wide recession -- seems to have paid off with exporters taking advantage of the sops and finding a market in many untapped but growing countries in Latin America, Africa and Asia.
Encouraged by the results, the Ministry then brought out a strategy paper to double exports from $246 billion in 2010-11 to $500 billion by 2013-14. Though the emphasis continues to be on further market diversification, there is an equal stress on high value addition, development of new and high technology exports (especially in sectors such as automobiles, pharmaceuticals, electronics, chemicals, information technology, green technology, leather, textiles and aerospace), quality upgradation and brand image building, employment generation particularly in sectors such as agricultural products and gems and jewellery, and of course retaining/improving share in existing markets.
The Ministry also helped coordinate and bring out a report on reduction of transaction costs to enhance export competitiveness. Of the 32 measures agreed to be implemented, 23 alone would help in cutting transaction costs by about Rs 2,100 crore.
The year also saw the Ministry’s efforts to boost trade ties with neighbouring countries bearing fruit, the highlight of which was the Pakistan Cabinet giving a mandate to normalise trade with India. 2011 will also be remembered as the year in which India’s first Comprehensive Economic Partnership Agreement (CEPA) with a developed country – Japan -- took effect. Meanwhile, a similar comprehensive trade, investment and services pact with Malaysia also came into force this year, while such an agreement with South Korea became operational late last year.
Also, there has been progress in negotiations on such proposed trade agreements with a mix of developed and developing countries including the 27-member European Union, Canada, Australia, New Zealand, Israel, Indonesia, Thailand, European Free Trade Association countries (Iceland, Norway, Liechtenstein and Switzerland), BIMSTEC countries (Bangladesh, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal), a preferential trading arrangement with Southern African Customs Union countries (South Africa, Botswana, Lesotho, Swaziland and Namibia), Chile and with MERCOSUR countries (Argentina, Brazil, Paraguay and Uruguay) as well as a framework agreement with Gulf Cooperation Council countries (Saudi Arabia, Oman, Kuwait, Bahrain, Qatar and Yemen). In addition, after having finalised Free Trade Agreements on merchandise goods with Association of Southeast Asian Nations, Sri Lanka and Mauritius, India is now holding talks with them for making it a comprehensive pact by including trade in services and investment.
In the meantime, there has been concern regarding a huge trade deficit (of $24 billion in 2010-11 and $12.6 billion in April-July 2011-12) with China and discussions in different fora on ways to tackle it. But the main worry is the serious balance of trade problem that India is facing due to the high level of imports. The trade deficit (gap between exports and imports) for 2011-12 is expected to be in the range of $155-160 billion. This would mean the possibility of the current account deficit crossing 3 per cent of GDP, while the Government’s comfort level is 3-3.5 per cent of GDP.
With the World Trade Organisation’s Doha Development Round negotiations -- for a deal to further liberalise global trade – showing no signs of progress, Indian exporters will have to find ways to take advantage of the bilateral trade pacts to capture new markets in the coming years.
The future looks bright with leading Indian companies such as Bajaj and Hero finding a major market for their bikes in Latin American countries such as Colombia, while Mahindra learning to their surprise that the largest export market for the company’s SUVs is Peru!