Export vulnerabilities

Govt should take steps in the nature of long-term reform to aid ailing exporters

Exporters are amongst the worst hit Indian businesspersons in the current global scenario. Their problems go back to 2007, when in the midst of a booming global economy, large capital inflows into India contributed to a sharp appreciation of the rupee, which eroded their profitability and even competitiveness. Just as they were coming to terms with this unexpected development, the situation changed dramatically. As the world’s major markets slipped into recession, export volumes began to decelerate, with absolute year-on-year declines becoming visible in October. The subsequent sharp depreciation of the rupee helped shore up margins, but could not obviously offset the continuing drop in volumes. The early numbers for December provided some relief, with the year-on-year decline showing up as a mild 1.2 per cent, compared with declines of 12.4 per cent and 9.8 per cent in October and November, respectively. However, the outlook for both the US and European economies points to GDP declines during 2009; so exporters should not expect any turnaround in their fortunes for several months. To the extent that a recovery is expected in the Indian economy in 2009, it will be driven by domestic demand in response to falling interest rates and fiscal stimuli. And so, for the first time in a decade, exports may have a zero- or low-growth year.

 

In this situation, the concerns expressed by the Federation of Indian Export Organisations (FIEO) are completely understandable. Its recent statement that job losses could touch the 10 million mark may border on alarmism, but does not detract from the virtual certainty of large numbers of establishments having to shut shop. However, the measures that they suggest to the government are unlikely to solve the problem. To a large extent, the measures that the government announced in its December fiscal stimulus package also suffer from the same limitations. Lowering interest rates and duty exemptions will make little difference if consumers are not buying the product. Besides, every other country that exports to the US and Europe is doing the same things. The one thing that is absolutely critical for the survival of viable establishments is that all cash entitlements which are due to exporters but held back by procedural inefficiencies must be disbursed as soon as possible. But, beyond this, all the steps that the government can and should take are more in the nature of long-term reform rather than short-term measures that can be announced overnight. For instance, India’s restrictive labour laws prevent exporters from operating in a flexible labour market. The inefficiencies of the transport system mean that they suffer delays and also have to pay higher freight charges than their principal competitors, including China. The high cost of electricity is a function of the domestic power shortage and the inefficiencies of the generation and distribution systems. All these have been well documented, and add to input costs—which the government cannot neutralise through fiscal or other measures.

The extreme specialisation of exporters, to the extent that many of them supply to only one buyer, does not help. It is not easy to find new buyers in a depressed market; switching quickly to cater to domestic consumers is also not easy. The situation underlines the need to institutionalise the mitigation of risks inherent in such narrow specialisation. The National Rural Employment Guarantee Scheme is touted by the UPA government as one of its greatest achievements. The safety net that it provides poor rural households will mean the difference between life and death for many of them. A similar safety net for millions of workers in the manufacturing and service sectors might have made the impact of the global meltdown a little easier to bear. A realistic and immediate objective should be to find ways to provide relief to workers who are displaced; a financially viable, comprehensive safety net must be made a priority by the government.