Beyond the Boom
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At the 5th Award Function of Business Sphere in New Delhi on 26th July, FIEO Director General Mr. Ajay Sahai spoke about the overriding concerns of India’s booming economy as well as exports and suggested the policy framework required to sustain the momentum. Excerpts from his speech: |
Prime Minister’s Economic Advisory Council has recently projected the GDP growth at 9% for the current fiscal with an export growth at 18% and the net FDI inflow at $15 billion, the net portfolio capital inflows at $12.5 billion and the current account deficit at $17.4 billion or 1.5% of the GDP. The total capital inflows projected at more than three times of Current Account Deficit (CAD) indicates that India is fast moving on the trillion dollar economy track.
The momentum of India’s economic growth has been documented by Mr. Dick Morris, Author of "Re-writing History" as: "China has replaced the Soviet Union in our lexicon…. and the age-old American pre-occupation with the growth of this Asian giant has metastasized into full-fledged paranoia. But the truth is much more sanguine. India, not China, is the coming giant of the 21st century."
The sustained high growth rate of merchandise exports at more than 20% during 2002-03 to 2006-07 is more than twice the current growth of GDP. The share of exports (both goods and services) in our GDP virtually tripled from 7.9% in 1990-91 to 21% in 2006. At this rate, India will catch up with China’s current rate of 27% in next two-three years.
While the export growth has been consistently high in the last five years and has contributed substantially to the GDP growth of the economy, there is a need to sustain this performance in the face of appreciating rupee and higher inherent costs in the economy (including cost of credit and other transaction costs) so as to retain the competitive edge of our merchandise.
The Goldman Sachs’ Report states that the BRIC economies are destined for faster economic growth and has forecast that about two-thirds of the increase in GDP from BRICs would come from higher real growth and the balance through currency appreciation. India’s real exchange rate could appreciate by 281% over the next 45 years, giving an average appreciation of 2.5% every year. The appreciation poses a major challenge which needs to be countered by increasing productivity.
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While both manufacturing sector and export sector individually contributes approximately 15-17% to the GDP of the country, the employment provided by the manufacturing sector is about 12% as per estimates provided by National Manufacturing Competitiveness Council (NMCC), whereas the export sector is providing many times more employment than the manufacturing sector. Therefore, there is a need to enhance the contribution of exports so as to have a multiplier effect on the economy which would result in generating employment and more just and equitable distribution of wealth. |
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| Mr. Ajay Sahai, Director General, FIEO (left) with Dr. A.R. Kidwai, Governor of Haryana. |
While both manufacturing sector and export sector individually contributes approximately 15-17% to the GDP of the country, the employment provided by the manufacturing sector is about 12% as per estimates provided by National Manufacturing Competitiveness Council (NMCC), whereas the export sector is providing many times more employment than the manufacturing sector. Therefore, there is a need to enhance the contribution of exports so as to have a multiplier effect on the economy which would result in generating employment and more just and equitable distribution of wealth.
The SMEs contribute 65% to our total exports. The SMEs alongwith their ancillaries should be encouraged adequately by providing funds which will enable them to invest in technology/R&D/innovations, thereby ensuring that their products are customized to the requirements of the international market.
While the Government can help transform SMEs with a suitable policy framework (by providing direct fiscal benefits, devising schemes to reduce cost of acquiring and using factors of production, subsidizing exports, etc.), an overwhelming role can be played by venture capital which is essentially a subset of private equity and unlike bank loans does not have any requirement of collaterals or guarantees. Among the variants of this are vulture funds.
Besides providing the necessary finance to the SME sector, which it accesses through normal banking channel as well as venture capital, there is a need to provide adequate technology for product development and innovation. A tie-up with trading arms such as the Japanese "sogasoshas" to ensure adequate buyback of the produce of such SMEs and faster offtake will ensure smooth flow of working capital/regular cash flow so as to have a higher turnover in production capacities.
Further, innovations hold the key to increasing productivity, lowering production cost thereby requiring human resource and skills upgradation/reduction in transaction costs etc. The other form of innovation comes from the steady improvement in products and manufacturing processes with major technology, life cycles. Investing innovations to attain global competitiveness is extremely necessary for a viable and vibrant SME sector which can have a long-term impact.
Diversification of product lines and destination markets to ensure the most appropriate product - market matrix - is also an important aspect for enhancing the growth and competitiveness of the SME export sector.
Our global share in high and medium technology goods is about 0.41%, though this segment contributes 65% to world trade. A new beginning has been made in the Foreign Trade Policy to promote high technology goods. Increasing our share to 1% in high & medium technology goods will generate additional US$ 65 billion to exports and GDP.
In the case of exporting SMEs, export incentives do not provide the edge since these schemes either reimburse/remit or exempt exporters from the burden of customs and central excise duty while post-production service tax, octroi, electricity duty, cess on diesel and petrol and CST are required to be absorbed by the industry. (Only EOUs and units in SEZs are exempt/reimbursed central sales tax in addition to customs and central excise duty). As a result, the exporter ends up bearing many central, state & municipal taxes during export/manufacturing. Thus exporter from India exports taxes and loses his competitive edge in the global market, with an appreciating rupee, high inflation rate and high interest rate regime. Export incentives that cannot absorb such costs will only reduce the global competitiveness of the exporter.
In order to provide a facilitating environment for sustainable growth, some issues need to be addressed:
Today, in India, the logistics cost constitutes around 13% of the total product cost. These provide the cutting edge, as other costs are basically dependent on similar technology arrangements that are being used by all players in the industry. Streamlining linkages in the logistics chain is particularly important in order to avoid delays in a trade transaction. A World Bank Study suggests that each additional day in transport delays costs 0.5% of the cargo value for goods transported by ship or rail. In other words, if transporting a cargo now takes 20 days and reform can reduce transport time to 10 days, it may save the exporter 5% of the cargo’s value.
The cost of credit in India is a major factor of rampant overseas borrowing by corporates pushing up the country’s external debt to $155 billion during FY07 up $ 28 billion or 22% recording the fastest growth in recent years. The jump is largely due to 59.2% jump in the External Commercial Borrowings (ECBs) to $ 42.8 billion. However, the small and medium exporter is unable to avail finances due to the lack of having sufficient backup in terms of collaterals/inventories/other fixed and liquid assets.
It is estimated by Planning Commission that development of airports, bridges, railways, etc to keep pace with double digit economic growth would require an investment of $ 350 billion which is possible only through Public-Private-Partnership model.
Energy availability is critical to sustain industrial growth and competitiveness. Power supply remains the main physical infrastructure bottleneck to industrial growth on account of chronic shortages, high cost and unreliability. The average manufacturer in India loses 8.4 per cent a year in sales on account of power outages as opposed to less than 2 per cent in China and Brazil.
For exports in particular, e-connectivity or EDI is vital. Of India’s 324 inland and sea ports, only about 30 are linked up. This implies that most of the smaller ports are just not viable for exporters who operate on the tight delivery schedules of international markets.
As per the survey published in "Global Competitiveness Report of the World Bank," the other areas restricting growth of the SME export sector include restrictive labour regulations and tax structures. While we consider globalizing the Indian economy, a calibrated progression towards the same needs to be made with an adequate, facilitating policy framework which is possible only through public-private interface.
