Indian exporters are treading cautiously amid uncertain territories. The withdrawal of preferential trade treatment for India under the GSP, talk of scrapping away incentives such as the Merchandise Exports from India Scheme (MEIS) to align with WTO compatibility and sustained exporter refund issues are all implying significant challenges in maintaining export competitiveness.

Keeping up with the changing dynamics means that exporters need to up the ante on aspects such as technology and skilling to forge ahead. Ajay Sahai, DG & CEO, Federation of Indian Export Organisations (FIEO) spoke to ET on how the path looks brighter ahead with measures such as availability of credit, research & development, manufacturing support and import substitutions likely to be high on the agenda for the government in the next Foreign Trade Policy. Excerpts:

The Economic Times (ET): MSMEs contribute around 45 per cent in India’s exports. In this context, how can their contribution be enhanced for further development of the economy?
Ajay Sahai (AS):
If you look into the labour intensive sectors, they are quite a dominant player. Their share is 45% because some other sectors, such as petroleum, which contributes to roughly 18 to 19% of the exports is totally dominated by the large industry and so are steel, automobile and other sectors. But if you come to labour intensive areas such as gems and jewellery, textiles, carpets – the exporters here largely belong to the MSME segment. That’s why we say that this segment is extremely important for us because besides providing us the foreign exchange, they help us in creating more jobs into the country and if you look into the capital employment ratio, it is quite a substantial sector.

The sector has definitely diversified but I still feel it faces some major challenges. Technological adaptation is a new challenge. The sector has huge contribution whether it is exports, GDP or creation of employment. But still we are nowhere near the potential which exists – that is true of MSMEs in India as well as of other countries. Probably MSMEs in other countries are being provided better facilities as compared to India. If you look into the public procurement, the share of MSMEs in it is pretty high. In countries like Brazil, the share is as high as 90% whereas that isn’t the case in India. Whereas I feel if we are able to address some of the basic challenges faced by the MSMEs starting with the flow of credit to marketing to technology, this sector can provide huge push both to exports and to job creation in the country.

ET: How will GSP withdrawal impact exporters and their trade? How do you view this move?
Exports to US in 2018 was to the tune of $51.4 billion out of which $6.35 billion was under the GSP. It was 12% of the total exports happening under GSP, but the net gain to India in terms of tariff advantage was only $260 million. So that is miniscule. When we talk about GSP, the total GSP benefit available to India was in respect of 1921 tariff lines. Out of that, only 611 tariff lines where India’s exports were more than a million dollars. If India’s export has been less than a million dollars, at a country level we can treat export as only insignificant export. So we are worried about the export of 611 tariff lines where export is more than a million dollar and the total export is $5.35 billion out of total export of $6.35 billion.

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In this 611 tariff line, there are tariffs where GSP gain was less than 3% and also where GSP gain is more than 3%. We did an analysis and there are 200 tariff lines where GSP advantage is less than 3%. We feel that if GSP advantage is less than 3%, the industry may be able to absorb the losses – they may cut down the prices to remain in the market. Our greater worry is in respect of 411 tariff lines where GSP gain was 3% or more and that’s why we have pitched that issue before the Commerce Ministry also and we feel there is a need to engage with the industry to understand to what extent will they be able to absorb the loss and if they are not able to absorb, in what way can the government assist them so that we don’t lose the market. The US is a very important market for India and though people say we should diversify, this process will take 5-6 years to develop elsewhere.

ET: Do you think India can build up its export competitiveness without depending on the GSP scheme provided by the US?
If you look into the broad picture, we have already crossed $3 trillion mark. We are now the sixth largest economy. These benefits were given to a developing country so that, over a period of time, they migrate to developed country or to a better status. To some extent, we have already done that. From that perspective, one view could be that let us leave the field so that other countries can get the benefit. Secondly it is equally important for us to look into the competitiveness of the economy. Why do we need such kind of support?

The Commerce Minister, Piyush Goyal, has rightly identified that we need to increase the flow of credit to the industry. That’s a huge challenge today. Banks have become extremely cautious. So unless credit is available, how do you expect industry to be competitive. He is also looking into the cost of credit. That’s why he said to see if we can move away with the government support and provide regime where market forces bring down the cost of credit itself.

If you are getting credit at a cheaper rate, you are becoming more competitive. At the same time, GST has also provided competitiveness to the industry. It is a different issue that exporters still have some issue with the refund. But if you look into the GST, it has made logistics also very efficient.

So if these things are put into place and flow of credit is offered at a competitive rate, I think the issue of GSP becomes redundant. In the US market also, we have graduated in number of products also. Over a period of time, our exports have increased. It is not that we can’t live without the GSP. There are products where we have crossed the threshold limit, we have graduated out. The only difference is that now we are graduating out in terms of number of tariff lines. I am with the government on the broad issue that if we look at the bigger picture, it is totally miniscule.

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ET: In your view, has India really been able to capitalise amid the current China-US trade war? What more can be done to have an India advantage?
It is still early to say. The trade war started in May last year. These kinds of investment decisions won’t be taken in a short period of time. Even if countries want to relocate to India, they will take their own time to relocate. But going by the success of mobile companies in India, you have a huge opportunity to attract the rest of the companies. It is easier to get investment from the countries who have already invested because then the companies can give proper feedback to others as well. From that perspective we have seen that investment from Japan and Korea have gone up by leaps and bounds.

If China is exiting a particular sector, it is because of various reasons. First is that the cost of labour has gone up, second is the environmental norms have become stricter, thirdly because of the population pressure, the industry has been asked to move away from the coastal area which is making them less competitive. So Chinese companies are looking at investment elsewhere – their investment has flown to Vietnam, Cambodia etc… that is why people say that the biggest gainer in the US-China war is Vietnam. It is not that the Vietnam investment is resulting in export, rather it is the Chinese investment which is taking place from Vietnam and is exporting to US. If China is vacating a sector, it is only in terms of geographical location. Those companies will continue to produce from elsewhere and export. But if you can attract those companies in India, it will be exports and job creation in India.

I think a trade war has created an opportunity for countries that are looking more closely to India. In a globally competitive environment, you have to be competitive vis-a-vis the other. So if the others are providing much faster clearances, much lesser time from approval to operations, then we have to benchmark with them.

ET: How do you foresee the impact on exports of removing certain incentive schemes to be in sync with WTO compliances?
If the extension of Rebate of State and Central Taxes and Levies which has been extended for apparel and made up sectors is an indicator, I think we are moving away from a non-compatible scheme like MEIS to a more WTO compatible scheme like Rebate of State and Central Taxes and Levies. WTO allows refund of any indirect tax used in export production. There are still taxes that have not been integrated into GST, for instance electricity duty, turnover tax.

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There may be a small number of exporters who may be impacted but if the scheme is countervailed, that means the benefit accruing is actually going to a foreign country. So whatever support the government is offering, it is collected by the foreign country. So hence it is better to provide support within the WTO compatible schemes. There are challenges but it has to be this way for a long term roadmap.

ET: Do you think the current environment is an especially challenging one for Indian exporters in the light of the recent trade developments?
I think the WTO forecast clearly says that we are set for a very difficult time. We contracted in the fourth quarter of 2018. The WTO has revised its forecast for 2019 from 3.7 % to 2.6 %, which shows that we are set for a difficult time. We feel that the tariff war will not vanish. Its speed may be controlled by the two partners because there are some fundamental differences in the two sides that are engaged in the tariff war. That’s why we have to live with the situation where trade destructive measures go up.

We are not a major player who commands 10% of the global trade. Therefore little downfall in trade will affect. We are talking about 15K tariff lines at 8 digit and our problem is confined to 411 tariff lines. So if you fit things in perspective, it is 3% of the tariff line where there will be a problem for a particular market. I feel GSP is not something where we should be unduly worried.

My advice to exporters is that we have to maintain our current competitiveness and, for that, I think induction of technology is very crucial. Skilling of worker also needs to be seen because we are always very confident that our wages are half that of China but if labour is one third less productive, then cost per unit of production is very high.

ET: What are the expectations that you have from the Budget for the MSME sector and exports?
In the Budget, we feel there is some support that may be needed. If exports have to be sustained, manufacturing has to be on track. Both for manufacturing and export, I want innovation to happen, for which R&D needs to be supported. In a country where R&D investment is very low, we have to provide some encouragement for the industry.

We are also looking at a large number of companies looking for investment in India. We are also looking at corporate tax rate. In the US, corporate tax rate has been reduced from 35% to 21%. So US companies that are looking for investment in India, the tax rate may come as a deterrent.

Whatever little instance of inverted duty structure is present needs to be corrected. This should be high on the agenda of the government. Duty on capital goods and machinery should also be brought down further.



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