FIEO interacts with Forum of Financial Writers
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On the dais, from left, are Mr. Ashok Dasgupta, Vice President, Forum of Financial Writers; Mr. Gurdip Singh, Vice President, Forum of Financial Writers; Mr. Nitya Chakraborty, President, Forum of Financial Writers; Mr. Ganesh Kumar Gupta, President, FIEO; and Mr. Ajay Sahai, Director General, FIEO. |
In an interaction with Forum of Financial Writers held at New Delhi on 21st January, FIEO President Mr. Ganesh Kumar Gupta said that exporters were not able to march along with the rupee which was appreciating sharply and rapidly. He requested the Government to come out with some sops to rescue the exporters from the current situation. He suggested that the Government should create a sort of exchange rate neutralization fund. Meanwhile, Mr. Gupta advised the exporters to move up the value chain in order to insulate their products from fluctuations in exchange rates.
Responding to a query on the adverse impact of FTAs on the economy, Mr. Gupta said the FTA are always welcome for the exporters who get greater market access for their products, yet he conceded that such agreements might cause some concerns for the domestic industries.
On why Indian exporters were shifting their production bases to other countries, Mr. Gupta said exporters, for example, garment exporters were shifting their production bases to countries like Bangladesh for reasons such as cheap labour, income tax benefits and reduced import duty levied on exports from LDCs.
Paper presented by FIEO to the Forum
"As we move towards a market driven economy, several issues come to the fore such as relative stagnation in manufacturing sector at around 17% of the GDP for the last two decades, rupee appreciation and its impact on exports and the larger dimension of providing employment to the masses. In this context, sustainable employment to a workforce of 10 million annually for a period between 2005 and 2015 (as per National Sample Survey), would require a consistent GDP growth of 8%. For sustaining such a growth rate, the NMCC suggests a 12% growth in the manufacturing sector which in turn would require "appropriate conditions whereby there is a consistent level of investment both domestic and foreign, in manufacturing and in infrastructure." Appropriate conditions essentially imply macro-economic stability, cost competitiveness for industry and trade to facilitate growth.
Export growth is yet another crucial contributor to the GDP growth in the country and is showing a downtrend due to the appreciating rupee vis-ŕ-vis dollar while imports on the other hand have recorded a fair increase.
Export Performance
Exports during November, 2007 were valued at US $ 12425.11 million which was 26.82% higher than the level of US $ 9797.67 million during November, 2006. In rupee terms, exports touched Rs. 49000.16 crore, which was 11.51 % higher than the value of exports during November 2006. Cumulative value of exports for the period April-November, 2007 was US$ 98386.06 million (Rs. 398385.78 crore) as against US$ 80590.19 million (Rs. 368807.15 crore), registering a growth of 22.08% in Dollar terms and 8.02% in Rupee terms during the same period last year.
The trade deficit for April-November, 2007 was estimated at US $ 52804.31 million which was higher than the deficit at US $ 38488.04 million during April-November, 2006.
Region wise Export
An analysis of the region wise export shows USA, UAE, China, Singapore and UK were the top 5 destination for India’s exports during 2006-07 respectively accounting for 15.85%, 9.51%, 6.56%, 4.77% and 4.39% share in the country’s total export during the year. Total exports during the year were Rs. 5,71,641.88 crore up by 25.25% as compared to exports in the preceding year. The percentage growth in exports in April-March’07 vis-ŕ-vis the preceding year is 18.67% for Europe, 57.78% for Africa, 16.23% for America (11.39% for North America) and 28.86% for Asia & ASEAN.
Export Market Diversification
Exports to North America (in value terms) in 2006-07 were Rs.90,616.76 crore which is a major chunk of exports going to one single country that is reeling under the sub-prime crisis at present (the Federal Reserve recently revealed that the US economy cannot grow beyond 2.5% in the coming years). There is, therefore, a need to tap markets elsewhere, possibly, make an assessment of the product-country matrix for the Asia & ASEAN region, particularly ‘the Arc of Advantage’ for which the Government has targeted an export of $50 billion by 2010. An adequate policy framework may be required to give support to the export sector to diversify and expand into these markets.
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Some efforts towards market diversification are already afoot, for example, in textiles several players offset their losses in traditional markets by finding buyers in the Netherlands, South Africa, Belgium, Iran, Pakistan and even China. Readymade product exports to these markets rose to nearly three fold taking up their share from 7 to 22% even though the overall fall was by 17%. |
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A view of mediapersons |
Policy initiatives to encourage diversification of trade destinations could be considered. For example, RBI may consider issuing guidelines for ‘entrepot trade’ since many of the South East Asian countries like Singapore are important transit routes where value addition could be made on Indian products and merchandise for further export. Flexibilities could be introduced in merchanting trade and third country exports.
Free trade agreements and regional trade agreements could facilitate market access and market diversification. In this context, some of the issues which need to be considered are the lowering of tariff barriers and duties and their impact on the Indian masses.
In November 2007, India offered the ASEAN side at Singapore that by the year 2018, it would bring down the import duty on crude palm oil from 80 to 50%, on refined palm oil from 90 to 60%, on tea and coffee from 100 to 50%, and on pepper from 70 to 50%. In contrast, Malaysia and Indonesia insisted upon India to bring down duties on crude and refined palm oils to 40 and 30% respectively. While India does not produce much palm oil, its concern is that edible oils of other varieties produced in the country might become uncompetitive if a high volume of cheap palm oil flows in from ASEAN (Palm oil accounts for over a third of the exports by Malaysia and Indonesia to India).
Vietnam added to the pressure by pressing up a 20% tariff rate for tea and coffee imported by India. Such aggressive insistence springs from the fact that in many cases, a single commodity accounts for a high proportion of a particular member country’s export to India. (Of the entire exports from Vietnam to India, just over 26% is comprised of pepper, tea and coffee).
These issues need to be considered in the larger context of protecting the interest of millions of subsistence farmers within the country. (There are about 20 million marginal farmers and agricultural labourers working on palm, tea and coffee plantations in the country and many million more oil seed cultivators who would be effected).
Impact of Rupee Appreciation
While the appreciating rupee has reduced significantly the operating profit margins and net profit margins of companies which are export oriented thereby having an adverse impact on their balance sheets due to loss of export orders; downtrend in employment/retrenchment of existing staff; freezing of expansion plans; etc the import dependent companies with a higher net import to sales ratio have registered a significant growth in sales and Profit After Tax (PAT).
Balance sheets of listed companies with a higher net import/sales ratio have registered a better sales growth and Profit after Tax (PAT). (A study indicates that if the net import/sales ratio is more than 20 than PAT is more than 60%). This, most necessarily would have an adverse impact on domestic industry and the belief that India would emerge as a manufacturing hub (alongwith other countries as per the Goldman Sachs Report - Brazil, Russia & China). This would also imply loss of stable livelihood for workers on the production floor/shop floor. (Data released by the Government shows a slump in manufacturing growth bringing down the overall economic growth rate to 8.9%).
Future Trend
Looking at the impending sub-prime cut in US, appreciation of rupee will continue. Indication suggests that sub-prime cut may be to the extent of 75 basis points which might lead to massive inflow of dollar in our country causing further appreciation of rupee. All forecasts point in this direction.
ISSUES
The sharp and sudden appreciation of Indian Rupee has already eroded the profitability of our exporters and has started threatening the competitiveness of our exports as well as manufacturing. The situation is forcing companies not to enter into fresh contracts. This seems to be a dangerous trend as our aggressive competitors are just sitting on the fence to occupy the space vacated by our exporters. Therefore, something needs to be done urgently to restore competitiveness of our exports.
This may include the following:
Reimbursement of State Taxes and Levies
Zero rating of exports and rebating of indirect taxes are international trends and also objectives of the Government. Different kinds of state taxes and local levies like central sales tax, electricity duty, sales tax on petroleum and diesel, turnover tax, entry tax, octroi, mandi tax, wherever applicable, add 5 to 6% to export price. Reimbursement of such taxes will provide that much margin to exporters adding to their competitiveness. Since reimbursement from the states may take long time (looking at implementation of VAT), so central government may provide the re-imbursement from the 4% special additional duty collected on imports. The aforesaid duty has been levied in lieu of state taxes and therefore can be used for reimbursement of such taxes on exports.
Exemption from Service Tax on all services used during the course of exports
The service tax refund is provided for only 11 identified output services leaving important services like commission to foreign agents, overseas travel, fee to professionals used by exporters. Moreover, reimbursement of service tax on intangible services is beset with problems and simply adds to transaction cost and time. Exemption from service tax on all services would add to competitiveness of exports. The tax authorities can randomly verify the records maintained by exporters while claiming exemption.
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Extension of subvention scheme of RBI for exports credit RBI has provided 2 to 4% subvention (for textile sector leaving MMF, Leather, Marine and Handicraft) in two stages for export credits for SMEs and identified large scale industries. The subvention is currently available only up to 31st March 2008. There is a need to extend the scheme up to 31st March 2009 and cover sectors like gems & jewellery and pharmaceuticals for this benefit. |
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A view of mediapersons |
Marketing Support
Marketing has been a weak link, particularly for MSME sector. The appreciation of rupee has further discouraged exporters to go for aggressive marketing. The present Marketing Development Assistance (MDA) scheme of the Commerce Ministry needs to be modified so that the benefit of the scheme is extended to all exporters without any threshold limit (currently it is available only for exporters up to turnover of Rs. 15 crore). Moreover, the restriction on buyer seller meet may be withdrawn so that exporters can avail the scheme for directly marketing of their products to the seller. Since for many products focus countries are still not the major market, MDA assistance may be provided for a total of five visits (as presently prescribed) irrespective of the fact whether visit is to focus areas or outside the focus areas. The small budget available for the scheme leaves no scope for such liberalisation and therefore we require higher allocation of fund for the scheme.
Exchange Neutralisation Fund
The main problem confronting the MSME export sector is the stability of the currency. In the wake of high volatility of Indian Rupee, exporters are not inclined to enter into long term contracts or negotiate new contracts. While little fluctuation in currency is inevitable in a market determined exchange rate, sudden and sharp fluctuation in currency is not desirable for any segment of industry. With a view to providing exporters some comfort level, the Government may consider fixing the value of Dollar for the purpose of exports only. The exporters may be credited with the exchange rate as determined in this regard and the gain due to Rupee depreciation may be pooled in an exchange neutralisation fund which can be used when there is appreciation of Rupee. In case, there is no balance in the fund, the same may be met by the Government. The Government may also make an initial contribution to start the fund. The fixed rate for exports may be announced on quarterly basis. Such a system will provide the much needed relief to the MSME exporting community and ensure desirable export growth.
Additional incentive of 5% through a separate transferable instrument or through (DEPB)
DEPB & Drawback rates may be increased by 5% to offset the losses due to currency appreciation and the rates may be effective for a period of one year so that exporters may do their costing on most competitive basis. Those, not dealing under DEPB/DBK (including those exporting under Advance authorisation, DFIA, Free shipping bill, EOUs and SEZs units) scheme, may be given additional incentive of 5% to offset the losses on exchange front through a separate transferable instrument (or through DEPB).
Tax incentives to the manufacturing export sector to move up the value chain (as in the erstwhile Sec 35 (B)) or creating an ‘export profit reserve’ for expansion/R&D
With the appreciation of the rupee, the cost of export merchandise has increased substantially reducing export margins further. As a result, no fund is available for moving up the value chain/expansion/modernization of manufacturing which will give a blow to exports in years to come. Therefore, there is a need to consider the following:
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In the past, under Section 35 (B) of Income Tax, a weighted deduction of 133% was allowed against export promotion expenses such as product development, quality upgradation, and market development. Alternatively, the earlier scheme of ‘export profit reserve’ maybe considered for reintroduction in addition to the above to encourage the exporters to broaden their capital base for further expansion of export business. Exporters should have the option of maintaining export profit reserve upto 50% of their annual gross profit.
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Sec 35(B) or the scheme of export profit reserve may be considered for offsetting the additional dual burden of rupee appreciation and hardening interest rates.
Brand Promotion: orientation from commodities to brands
There is a need for new orientation - away from commodities to brands. While commodities have their prices set for them by market forces, brands can actually command premiums for the fulfillment of intangible consumer needs and preferences. This will serve the purpose of price sensitivity and create a price buffer to cushion the export sector against adverse market conditions such as rupee appreciation. This would involve strategic policy initiatives to move to a high margin brand market overseas from the existing low margin suppliers.
These are some of the issues which need to be addressed and considered as we move forward to achieve the larger objectives of globalization and integration with the more developed economies of the world.
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Workshop on SME issues in Kolkata |
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| FIEO and ICICI Bank together organized a workshop on the financial issues confronting small and medium enterprises in Kolkata on 11th January. The Workshop was inaugurated by the Zonal Joint DGFT Mr. P.K. Halder and was presided over by Mr. S.K. Patwari, FIEO Managing Committee Member. The workshop was attended by about 40 participants. | |
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At the workshop, an ICICI Bank official made a presentation on various services offered by the bank for small and medium enterprises and also enlightened the participants on how to hedge their foreign exchange against appreciating rupee. Later, a Google representative spoke about how SMEs could publicise and sell their products in international markets at costs substantially lesser than that of conventional methods of publicity. A FIEO official explored with the Google representative the possibility of publishing member’s products on a cost-sharing basis. |
| Mr. Indranil Dutta, Reg. Mktg. Manager(East), ICCI Bank Ltd addressing . Sitting on the dais are, from left, Mr. Prashant Gupta, AGM & Zonal Head SEG, ICICI Bank; Mr. P K Halder; and Mr. S K Patwari | |
