Textiles minister Dayanidhi Maran announced on Friday the government would strive to reduce interest rates on pre- and post-shipment credit and facilitate faster clearance of arrears for the sector. The move, though welcome, still raises questions on whether it will be enough to spur demand and check falling exports in a demand-driven global order.

The recent Unctad study paints an equally dismal picture of the exports sector. The study estimates 1.3 million job losses in Indian export units in the current financial year due to the slowdown in developed countries. The global downturn has taken the wind out of India?s exports growth , which fell for the seventh consecutive month in April, touching a 14-year low of 33.2%, to $10.7 billion from $16.1 billion in the corresponding month last year.

The pinch is no different for China. The country which grew by an average 11% a year in 2003-07 is expected to see an 8.7% fall in export volumes in 2009. Yashika Singh, head (economic analysis), Dun & Bradstreet, points out, ?Despite the depreciation of the rupee against the dollar, exports recorded a marked decline. The revised export target for FY09, revised downwards from $200 billion to $170-175 billion, also could not be achieved and we ended the financial year with total exports of $168 billion.?

If the numbers are glaring enough, the consequences are even detrimental. According to Federation of Indian Export Organisations president and chairman A Sakthivel, ?In the textiles industry, almost one-third of apparel production is exported and if survival itself is in question, these units have to reduce production or else shut down, especially SME enterprises. Special machines installed to specifically cater to the particular global market will be useless and capital assets will be wasted. Non-performing assets with banks will balloon in due course.? Sectors such as handicrafts, apparel, garment, gems & jewellery and diamond polishing will be the worst hit. As a result, a vicious cycle will emerge and the market slump may be much deeper than expected.

Can domestic markets compensate?

Given that China and India have the second and the third largest markets in the world, some might think they have the potential to compensate for the export loss through domestic consumption. However, experts think this is far fetched. Dennis Rajakumar, IBS, Bangalore reasons, ?The per capita income in both countries is far lower than in those countries to which they export. Purchasing power differentials do not make their domestic market a substitute for the export market.?

Nevertheless, both countries have a large enough domestic market and this provides a strong cushion against adverse movement in the export market. According to KK Modi, former Ficci president and India-China Joint Business Council chairman, ?For China, domestic consumption as a proportion of GDP stands at 40%. For India, this figure is much higher and stands at around 60%. While exports account for a little over 40% of the GDP for China, in case of India it is just 17%. India is in a more comfortable position as compared to China in dealing with adverse external market developments.?

The fact is also corroborated by Dharmakirti Joshi, director and principal economist, Crisil. ?Compared to India, China is hugely dependent on exports. This makes it more vulnerable to the global slowdown. Indian exports are more diversified than China, which is primarily an exporter of merchandise goods, where as India has a healthy mix of merchandise goods and services (IT-ITES). As service exports are more resilient than goods exports, India is relatively less hurt.?

Renminbi remedy?

Owing to weak exports, experts opine that the Chinese government will intervene in foreign exchange markets to limit the renminbi?s rise against the dollar, causing the pace of appreciation to slow dramatically in 2009-10. However, there is a flipside too. Economist Intelligence Unit director Manoj Vohra warns, ?The renminbi will rise sharply against the euro, presenting challenges for exports to Europe.?

As Chinese government researchers have already begun to advocate weakening the yuan against the dollar to spur exports, the viability of the option is being questioned from all quarters. ?If the Chinese government follows such an approach, it is tantamount to providing ?implicit? subsidy to its exporters. There are many countries opposing such practices and they can retaliate too, especially under the WTO framework,? cautions Rajakumar.

The sentiment is echoed by Modi, who advocates not much can be achieved by simply devaluing the yuan. ?There are distortions that are felt across segments of the economy. This has wider macroeconomic implications. With a weak currency the price of imports goes up and this can lead to high inflation in due course. For India, which is heavily dependent on imports to meet its energy requirements, a weak currency policy can hurt badly.?

Seeking answers?

Given that in the long run only cost competitiveness and quality can assure good export performance, there are measures that can help reduce the pain of the pinch. Experts say seeking newer markets could be a viable option. As IIFT chairperson Rakesh Mohan Joshi affirms, ?The problem is that most developing and least developed countries are heavily dependent for their exports on a handful of products and a few markets. About 88% of Mexico?s exports is to the US, which makes the country highly vulnerable on economic upheavals in the target market.? He adds, ?It is advantageous to explore new markets. India is taking initiatives to promote exports to Latin America, Africa and CIS countries, which needs to be accelerated.?

However, long-term measures will only go on to determine the future course. Export performance is highly dependent on infrastructure provisions. ?As transport cost is an important determinant of commodity?s price in the world market, it turns out to be significant for competitiveness. And India urgently needs to reduce the cost of transport services,? Singh reasons.

Sakthivel wants the textile sector to be treated as a sunrise industry and to be offered credit facilities without any restrictions. ?Duty drawbacks given to garment export have to be increased from 8.8% to 5%. Credit facilities to exporters should be at the rate of 7% without linking PLR. There should also be an income tax holiday for 5 years.?

The big question now is how the government responds to the demands and gives the much-needed boost to the sector.