‘Withdrawing export sops will make us uncompetitive’

Font Size

Print

Feedback

Email

Discuss

Related Articles

Gold the most preferred investment

: The current year has seen a sharp improvement in Indian exports, and growth has surged much faster than expected, putting an end to the pessimism that reigned in the first half of the last fiscal year. Though a depreciation of the rupee is one reason why exports have picked up, buoyancy in shipments to regions like Africa and Latin America has also contributed to the turnaround. In an email interview with FE’s P Raghavan, Federation of India Export Organisations (FIEO) president Ganesh Kumar Gupta discusses India’s export recovery. Excerpts:

Indian exports have picked up sharply from the lows of the beginning of last year. Was this sharp turnaround expected or was it a pleasant surprise?

The rupee appreciated by over 12% in 2007, but in the last six months or so, it has depreciated by about 10%. Exporters, who have adjusted to the appreciating rupee are now in a comfortable situation and have become more competitive. Frankly, none of us expected the dollar to breach the Rs 44 mark. We have all been advised to live with a strong rupee and, therefore, the turnaround has come as a pleasant surprise.

How much of the export recovery is due to global trends and how much is due to India-specific reasons?

The world trade outlook is not very encouraging. The growth forecast for 2008 and 2009 point to a slowdown in world trade growth. The IMF has continuously updated its forecasts on various economies and now projects a growth rate of about 1% in the US and about 2% in the EU. Fortunately, our exports to other destinations like Asean, Latin America and Africa is showing much better growth.

I should admit that the export recovery is primarily due to India’s specific reasons, including exchange rate movements, but high inflationary pressure at home and infrastructure bottlenecks are the twin factors that we need to address quickly to maintain this buoyancy.

How much has the recovery got to do with price and exchange rate movements and how much can be explained by volume growth? Give us some examples?

Unfortunately, trade data only reflects the value of exports. Volume-wise export growth, which is a indicator of increasing employment in this sector, is not readily available. However, I can safely say that much of the export growth is due to higher per unit realisation on account of an increase in the price of raw materials. Prices of steel and metals have gone up by over 30% in the last one year. Crude touched a high of about $145 a barrel before coming down.

Which are the major products leading the export surge, and which markets have registered gains?

Sectors such as engineering, gems & jewellery, chemicals & allied products and petroleum products are showing remarkable growth, leading to an overall growth in exports. As far as export markets are concerned, our exports to GCC, Asia and Oceania, Africa, Latin America and Russia are showing rapid growth. We are increasing our trade with China as well, but the balance of trade is heavily in its favour.

Which are the export products that continue to lag behind despite overall growth?

Traditional export sectors like textiles, leather, marine, agro & allied sectors, handicrafts, and sports goods, which are basically dependent on domestic inputs, are not showing much growth primarily due to an increase in raw material costs as well as recession in some of the major importing nations like the US and EU. I have, therefore, requested the government to continue with the assistance extended to the export sector last year to these sectors at least until March 31, 2009.

How would the free trade agreement with Asean affect the prospects of exporters?

As president of FIEO, I am all for the free trade agreement, which is a win-win situation for exporters. On the one hand, it provides greater access to exports, and on the other, it enables us to import inputs at lower rates to increase our export competitiveness.

How do you react to the view in certain quarters that the government should now withdraw some of the export sops provided last year?

The depreciation of the Indian rupee has prompted the demand to withdraw export sops. Whether the sops should be withdrawn or not should be based on a fair assessment of the rupee’s movement in next six months. If it can be fairly concluded that the rupee will continue to be over 43 or 43.50 against the dollar in next six months, the government may consider withdrawing export sops.

However, I would also like to add that if government wishes to withdraw the subvention of interest scheme, it has to be ensured that export credit in foreign currency is made available to all exporters, particularly in the micro, small & medium enterprise category. The inflation control strategy has resulted in an increase in the PLR of banks. The PLR has gone up to as high as 16%. If export credit is given at 2.5% below PLR, most exporters are getting it at 12-13.5%.

Such a high interest rate would not make them competitive when our rival nations are getting export credit at less than 5%. However, if the government can ensure export credit in foreign currency at Libor-plus-100 basis points, we will not object to withdrawal of the subvention scheme.

What are the prospects for exports for the rest of the year, and will the annual export target be met?