Global Trade Scenario and Indian Exports

Global trade is facing headwinds more so after the Russia Ukraine war having a huge impact on global crude and food prices. The WTO has already revised its forecast for the global trade from 4.7% to 3% in April,2022 and we expect a further downward revision in October, 2022.

The contraction in global trade is also visible from the sharp decline in the freight rates which have reduced by about 50% on major trade routes. The freight from Asia to North Europe and the US (West Coast) dropped from US$ 14,000 to US$ 4,000 and US$ 8,000 respectively.

With inflation plaguing all economies, inventories are very high globally in all economies as the purchasing power has dwindled which has affected the offtake and thus the demand is slowing. However, the demand for low value products is increasing by leaps and bounds. Therefore, while we expect volumes to remain intact, the value may take a hit. This is also because the prices of most commodities: steel, ferro alloys, plastic polymers, cotton yarn, etc. have declined significantly. This will affect our exports in two ways: (i) the value of raw materials exports will come down and (ii) the value of the final product manufactured out of such raw material will also be lowered since the input prices have declined.

However, we also have various opportunities coming in our way. Buyers are moving from China both as China is becoming costlier and less reliable with a zero covid tolerance policy and anti – China sentiments are gaining ground day by day.  Lot of orders for low value products, which were a virtual monopoly of China, are now coming to India.

While the Russia Ukraine war is a setback to our exports in the short run, we are looking to increase our exports to Russia once the Rupee payment mechanism gets operationalised. As per our study, we can add about US$ 5 billion in exports to Russia. With Europe maintaining sanctions on Russia, we expect the trade to divert from Russia to India. This has already happened in respect of petroleum products, iron & steel and food products and likely to be further accentuated in times to come.

  1. Rupee depreciation viz a viz Other Currencies

Contrary to general perception Rupee depreciation is not providing much competitiveness as currencies of most of the countries are depreciating more steeply. Rupee has depreciated by 8.1% as on 7th September, 2022 from a year ago. However, a fairly large number of currencies have depreciated more steeply over the same period as can be seen in the table below:-

Currency %age of depreciation as on 7.9.2022 over previous year
Japanese Yen 16.1
Euro 16.8
British Pound 16.1
Turkish Lira 54.2
Pakistan Rupiah 25
Philippine Peso 12.5
South Korean Won 16.4
Thai Bhat 11
Argentina Peso 30.4
South African Rand 17.5
Chinese Yuan 7.3

Today, Rupee is one of the best performing currencies in Asia meaning thereby that the competitiveness provided by the exchange rate is no longer with us. Therefore, there is a need to provide some other fiscal or non-fiscal support to help exports in this scenario.

  1.  Liquidity and Interest Rates

The demand for liquidity has gone up as buyers are delaying the payments and asking exporters to withhold further shipments or release small quantities of such shipments. There is a need to extend further credit to the export sector by automatically enhancing the limits by 20% or so as given under the Gold Card scheme, at least to the established exporters.

Moreover, with interest rates firming up, the MSMEs are getting credit at not less than 10-11%. This is likely to go up further as RBI is expected to increase the same again in October. The subvention for the Interest Equalization Scheme (IES) was reduced, when the scheme was extended from 30th September,2021 to 31st March, 2024 as interest rates were then coming down. However, with complete change in the situation, there is an urgent need to restore the interest equalization benefit of 5% to manufacturer MSMEs and 3% for all tariff lines as cost of credit is equally hurting all exporters.  

  1. Indian Rupee Trade Mechanism

The exporters are very much encouraged by the RBI Notification allowing exports-imports in Indian Rupee. This will help us to increase our exports to countries facing acute foreign exchange shortage or those covered by sanctions. However, to do costing for exports under Indian Rupee, exporters require clarity with regard to (i)applicability of export benefits which we feel may be extended on the analogy of Iran for which such a facility has been provided. (ii)Moreover, a lot of exporters who have imported under various schemes also require clarification regarding acceptance of export obligation in Indian Rupee against imports made in free foreign currency. (iii)In this context, ECGC should also revisit its coverage for Russia which has moved from open to restricted cover and exporters are flagging the issue that ECGC is generally reluctant/delays to provide such cover.

A related issue is the logistics for exports to Russia. We are very happy that the Government is considering using the INSTC route to reach Russia. The route reduces the voyage time and the cost. Unfortunately, the Indian banks are reluctant to negotiate any document when goods touch Iran, being a sanctioned country. Therefore, some clear instructions need to be given to the banks to negotiate the documents for goods routed through Iran with ultimate destination as Russia or CIS which is clearly available in the combined transport bill of lading.

  1. GSP loss in EU particularly for Machineries and electrical equipment and Plastics

India would be losing out GSP benefit in respect of Plastics, Articles of Leather, Articles of Stones and Machinery & Electrical Appliances with effect from 1.1.2023. While our exports of Article of Leather under Chapter 43 and Article of Stone under Chapter 68 are not significant, we need to evaluate its impact on plastics and machineries as they together have an export of about US$ 7.2 Bn in EU accounting for over 20% of our exports of these products. The Government may engage with the industry to understand how the withdrawal of GSP is going to affect them and what strategy may be adopted so that we maintain our share in the EU market.  

  1.  Services

With headwinds clearly visible in merchandise trade, we need to push our Services exports in the current fiscal so that we have the necessary cushion both on trade deficit and current account deficit. With economies opening up, we expect that the travel & tourism and aviation industry would help us to increase our services exports significantly besides other sectors.

 (i)         Mode-II of services require little more support as lack of international travel in 2020-21 and 2021-22 has affected a large number of travel & tourism sector exporters besides hotels. A scheme like SEIS may be considered for these sectors besides some others.

 (ii)       We may also consider to operate the IGST refund to foreign tourists for which a provision was incorporated in the Act about 5 years back but still not operationalised. This will not only benefit the tourism sector but also carpets, handicrafts, apparel, leather, handloom and gems & jewellery besides e-commerce.  

 (iii) The Interest Equalisation Scheme (IES) should be extended to the services sector as well since the cost of credit is equally affecting them.

 (iv)      It is equally important to showcase our various services in thrust or focused countries. Government may create a corpus for marketing of services globally through different organisations/ associations with a target to reach US$ 1,000 billion by 2030.

  1. E-Commerce

The e-commerce retail exports, which has a potential of 10x multiplier in 3 years, needs to be encouraged by addressing various regulatory issues and providing them at least the same benefits which are available to the merchandise sector. We have already submitted our papers in this regard (attached as Annexure-A) and would like the New Foreign Trade Policy to recognise the potential of the sector which can be a game changer to show results in a very short time for some of the Government initiatives like GI products or One District One Product. 

  1. Foreign Trade Policy  

The new Foreign Trade Policy is expected by the end of the month to provide a roadmap for reaching US$ 1 trillion each in goods as well as services exports by 2030.

 (i)         While the existing schemes are likely to continue, we are expecting remodelling of the Special Economic Zone scheme by the DESH. The DESH will provide the plug & play facility to the industry to attract FDI as well as the domestic investment encouraging companies to invest more in technologies.

 (ii)       Besides e-Commerce, certain services like R&D services can be a game changer as R&D and Innovation are required in every country. Recognition to R&D services and strategy to promote the same can help Indian exports in the longer run.

 (iii)     The new Foreign Trade Policy should focus on promoting exports under Indian brands which will not only fetch more value for the product but will also take the country from the price sensitive segment of exports. Associations and EPCs may be given the mandate to promote individual products and services while exporters may be provided liberal funding, at competitive cost, to promote their brands.

 (iv)      The Foreign Trade Policy should have an increasing focus on digitization so that various facilities and benefits may be made available online to the exporting community. As a further step in the process, a faceless method for issuance of authorizations, amendments and closure of the cases may be pursued. The current system restricts the exporters with the DGFT offices having jurisdiction over their entities. In electronic processing, such jurisdiction is not relevant. The application for authorisations, amendment and EODC may be marked by the system to any officer based on the workload, in a faceless manner, for optimum utilisation of manpower and giving the advantage of faceless processing to exporters.

 (v)    India is targeting US$ 1 trillion of goods and services exports each by 2030. This would require new entrepreneurs, start-ups in exports and re-orientation of domestic companies including MSMEs towards exports. We also expect lack of trained manpower in the exim segment, as a constraint, to take us towards such an ambitious but achievable target. To exclusively focus on the skill requirement of the foreign Trade, a Foreign Trade Sector Skill Development Council may be set up. FIEO is willing to provide all secretarial assistance for the formation of such Council.

(vi) In many cases, due to slowdown in global trade and problem of liquidity, exporters have not been able to complete their export obligation within the time allocated. Such exporters are saddled with the responsibility of payment of customs duty with 15% interest. This heavy burden is affecting exporters’ export efforts having a serious impact on export growth and employment. It is, therefore, proposed that the Government may provide a one-time extension of six months to allow such companies to complete export obligations under Advance Authorisation and EPCG Scheme. This will not only push the country’s exports but will also generate additional jobs emanating from such exports.

Source: FIEO