Pranbihanga Borpuzari
The second Covid wave has left the economy in tatters. Amid all the gloomy news, the country’s exports seem to have done well. But are we out of the woods yet? To understand where the country stands in global trade, ET Digital spoke to Ajay Sahai, Director General & CEO of the Federation of Indian Export Organisations (FIEO). Edited excerpts of the interview:
ET Digital (ET): The exports numbers have been looking good for the past three months. How is the future looking, according to you?
Ajay Sahai (AS): At the moment, the growth is looking spectacular. But it is on a very low base. We have to keep in mind that we were under lockdown because of the second wave of Covid from the second half of March to May this year. Therefore, these figures might look very impressive, but it is best not to draw conclusions from that. According to the data available with the government in May, India’s exports reached $50.7 billion during the first seven weeks of the fiscal year, 11% higher than the corresponding period in 2019-20.
A double-digit growth at this point is a good sign for Indian exports, considering that some states are still in the lockdown mode. We have done remarkably well in some labour-intensive sectors. Compared with 2019, the export figures are encouraging in 2020, particularly in the agriculture and processed food sectors. The latter has done very well as China’s exports in this category have taken an enormous hit. After Covid, countries are reluctant to import edible products from China. India can take its place. It is a good opportunity, but we still have a long way to go.
There will be competition from other countries, but if we focus on the processed food sector, we can make a difference. The PLI (production-linked incentive) scheme for this sector has helped India in a huge way. We are wasting around 30% of fruits and vegetables. This can change if we bring proper technology into this sector through FDI (foreign direct investment). The added advantage is that you get a new market to sell your products. So, it's a win-win situation for both the countries. I'm very bullish about the PLI scheme in the food processing sector.
ET: Commodity prices are soaring. What effect is it having on Indian exports?
AS: The soaring prices have resulted in around 10% growth in exports. We have done particularly well in exports of iron and steel, copper and various other metals. The same goes for cereals as well. But it's a very delicate situation. On the one hand, we see exports booming, on the other, it creates problems for the downstream processor because high steel prices have hit the engineering sector. We should have a strategy where we can focus on value-added exports and attract investment. A medium- to long-term process is required here.
As an immediate step, we need to look into what we can do to encourage raw material exporters to supply to the non-value added exporters. There are many cases where the same product is being exported and imported to and from India by different units. In this process, we are not only putting pressure on the logistics sector, which is facing its own challenges, but we are unnecessarily spending foreign exchange in freight, both ways. A change in the policy will help us address that.
I take little satisfaction from the export of raw material scenario at present. I understand that exporting raw material is needed, otherwise it will suppress prices in the domestic market, but if we go overboard, then it will create a problem. A competitor in another country can get the raw material and if they have economies of scale, they can produce the final product at a much more competitive price and then beat us in the third market.
ET: How does the order-book situation look at the moment for India?
AS: The order book position is very good. We were apprehensive because there have been several delays in rolling out some government schemes, including the RoDTEP (Remission of Duties and Taxes on Export Products) scheme, which would affect exports in a big way. But most MSMEs are flush with orders. That has helped us to offset the disadvantage of the uncertainty of this scheme. The problem is not of the order, but two-fold in nature. One is on the supply side where there are logistical challenges and then we have a problem where profitability is at a record low. SMEs are getting good orders but the crucial question remains, if they have the logistics support to execute the order, and at what price? Many sectors where we are seeing exports in very narrow margins may start looking at the domestic market. Let’s take the case of the apparel industry. If they are exporting at a very narrow margin, they will look at the domestic market once the lockdowns are removed and sales go up.
ET: What is squeezing the margins? Is it competition?
AS: There has been an abnormal increase in the prices of raw material; that does not match a corresponding increase in the prices of finished products. If my raw material prices have gone up 15%, and finished product prices have risen by 5-7%, then there is more pressure on profitability. I am hopeful things will look up by early 2022. One of the positive points is that if people are looking for an alternative to China, then India is a natural choice. That's why many countries are focusing on us.
"There will be competition from other countries, but if we focus on the processed food sector, we can make a difference. I'm very bullish about the PLI scheme in the food processing sector."
— Ajay Sahai, Director General & CEO, FIEOET: Trade is also suffering due to rising shipping costs and a shortage of containers. What is your take on this matter?
AS: Freight costs have really gone up but that is a global phenomenon. Shipping lines are bringing more containers to India from the Middle East and other parts of the world to help ease the pressure. The Indian Railways have also provided free movement of containers from gateway ports to the interiors and to the ICDs (inland container depots). The situation is much better now than five months ago. But challenges exist.
If India concentrates on Atmanirbhar Bharat, we will compress imports and boost exports. In such a scenario, there may be a container shortage. To bridge the gap, we need to build containers, and the good thing is that many public sector undertakings and some private companies have already entered this field. The government is looking at developing Bhavnagar as a cluster for container manufacturing.
We need to look into the bigger issue of shipping lines. India doesn’t have one of global repute. We had
Shipping Corporation of India(SCI), which is now being disinvested. If some large players enter the field, it will benefit the Indian economy to a large extent. We're spending around $65 billion a year as remittance on account of freight. If we are looking to increase our exports to $1 trillion a year, then this can go up to $100 billion. If we have a shipping line that captures even 25% of the total market, then a $25 billion market will be available to us. So that should be our focus when we are disinvesting SCI. We should get a large player and the best technology when we are doing disinvestment so that we can take on the world, and ensure that the market available in India helps us
sailthrough in the initial phases.
Tariff war between US-China helped India: FIEO’s Ajay Sahai
Strong commodity prices have fuelled India’s exports, especially when it comes to farm products like rice and wheat. What is helping exports is that the world is increasingly wary of doing business with China. As demand for Indian products rises, the country is benefitting from the US-China trade war, says Ajay Sahai, DG & CEO, Federation of Indian Export Organisations.ET: India and the UK recently pledged a quantum leap in trade. How will this help us?
AS: We have to first look at the UK’s agreement with the EU. According to that deal, the UK will continue to have free movement of goods with no tariff. For services, the same agreement is not applicable to immigration. So I'm looking at greater opportunities in the services sector. If we enter into an agreement with the UK, we will have a level playing field with the EU. For goods, the EU has a favourable playing field.
The UK is extremely important for India as far as some of the traditional export sectors are concerned. India heavily depends on the UK for export of apparel, footwear, handicrafts and carpets. We need to work out a free trade agreement that will help our labour-intensive sectors. We also see that the exports of machinery, electrical and electronic components and pharma are improving. So when we compete with the EU on different platforms, with the agreement, there will be an advantage for us. With a free trade agreement, we can get facilitation.
With the UK, India has the advantage of having a British English-speaking population and also being a part of the Commonwealth. So the UK will attract a lot of services sector talent from India. In IT and other sectors, the UK is opening immigration for professionals. We need to look into the investment prospects too. Despite the pandemic, India has got a good growth rate. Total FDI, including equity, reinvested earnings and capital, rose 10 per cent to $81.72 billion during 2020-21 as against $74.39 billion in 2019-20. Our Sensex has crossed 51,000, and that is why the India growth story is intact. If we provide facilitation to investors from the UK, a lot of companies will be ready to invest.
ET: How do you see our negotiations with the EU panning out?
AS: We started the negotiation with the EU in 2007, which came to a standstill in 2014. But things are looking up again. What is good is that this time the talks are happening on goods, services and investments simultaneously. The EU is our second largest trading partner so far as goods and services are concerned. We have around $80 billion of goods trade with the EU and around $38 billion in services. They are next to the US when it comes to bilateral trade.
When looking at the EU, we have to keep another aspect in mind. Vietnam has emerged as a huge competitor to India in textiles, footwear, furniture, electronics products and agricultural products. Vietnam has also worked out a free trade agreement with the EU. We need to have an agreement with the EU, otherwise we will concede more grounds to such countries. A lot of investment from China has gone into Vietnam. So, when we are talking about the free trade agreement with them, let us also look into the companies that have moved from China to Vietnam. If we work out an agreement with the EU, it will give a level playing field for Indian exporters. We also depend on the EU for technology, sophisticated goods, pharmaceuticals and diagnostics equipment. Now it is a two-way process as we have become the vaccination capital of the world and are supplying a lot of vaccines in the last one year. This has gained us goodwill from the entire world. An FTA with the EU will work for both parties.
ET: Many believe that India is working on much of the bilateral trade relations with the EU, the US and Australia to offset the loss of opting out of the RCEP (Regional Comprehensive Economic Partnership). The trade between western nations and India has to mature. What is your take on this?
AS: Not joining the RCEP was a conscious call taken by the country looking into national interests. But we are working on a strategic relationship which can be cemented for economic activities with the US, Japan, Australia, on the one side, and many other countries, on the other side. We need to look into what extent we can now leverage the anti-China sentiment. We can look at changing the entire gamut of trade.The production-linked incentives the government has provided to 13 sectors can definitely be a game changer. Although, it is too early to say the electronics sector has made a difference. Even without the PLI, when we brought mobile manufacturing to India, we could reduce our bill by around $25 billion. We can make a production base in India, which will not only cater to our market by suppressing imports but also provide a market for exports. Today, Indian mobile companies are exporting to the Middle East, Europe and North America. Competition will intensify in the future. At this point, everything is looking good. I am looking at a healthy growth of over 20%. If there is no third Covid wave, we will be able to achieve it.
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