Making a case for higher engineering exports

Written by Sushim Banerjee | Sushim Banerjee | Updated: Jul 24 2014, 08:03am hrs
Export coverage is one of the standard methods of measuring the level of openness of a country. The weakness of such a method lies in creating capacities with an eye on the export market only, and if the global market exhibits signs of poor demand and low realisation, the impact is revealed by lower capacity utilisation and consequential hardship to the domestic industry.

The classic example is China and if limited to steel, the examples of Japan, Turkey and Ukraine are also there. All these countries are big net exporters of steel. However, China has emerged as a big indirect net exporter of steel. In 2012, as per WSA data, China became the net direct and indirect exporter of steel by 110.6 mt, followed by Japan (61 mt) and South Korea (34 mt).

India was a net direct importer of steel by 1.1 mt and net indirect importer of steel by 0.08 mt, although by the end of FY14, India became a marginal net exporter of steel. Looking from this angle, it appears prudent and quite logical that steel capacities in the country are created with an eye on indirect aspects of steel trade which would ensure the credibility of a country of being a prominent exporter of engineering goods, machinery and equipment in the global market.

India exported engineering goods worth $65 bn in 2012-13 which reached marginally higher at $67 bn in 2013-14, but as a component of total export basket, the share of engineering exports have fallen from 26% in FY09 to 22% in FY14.

While in heavy engineering, established global players like China, Germany, the Netherlands, US, Russia and a few others have created massive capacities, Indias attempts to enter into this sector (HEC, BHPVL, MAMC) had limited success in catering to domestic demand in the initial period.

With change in economic policy in subsequent plans, all these units suffered due to lack of investment and poor order position, the export capability being limited.

The Indian steel industry, in the process, suffered on two counts. While it hit hard the indirect export of steel, the industrys own requirement of plant machinery and equipment during the phase of capacity creation in the 1990s and early 2000s could only be met by net indirect import of steel.

For the last few years, Indian steel producers have undertaken massive expansion in the brownfield route and requirements of plant M&E are almost fully met through imports.

Credit goes to the light engineering sector in the country, predominated by medium and small enterprises that have created a niche market for their products in developed countries as well as in some emerging countries.

We have been talking of a stagnant share of the manufacturing sector at 15% of GDP for the last few years.

The National Manufacturing Competition Council envisages to take this share to 25% of GDP by the next decade which will put India comparable/ahead of China (32%), South Korea (31%), Turkey (18%) and Russia (15%).

It is also a fact that protectionism in all trades has raised its head, be it tariff or non-tariff barriers, thereby severely restricting the flow of goods. Fair and free trade is currently being attempted through a number of free trade agreements and under comprehensive economic partnership agreements. But this development has added more worries for Indian industries such as steel.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal