Source: The Stitch Times
After a long winter of slowdown in Indian economy and exports, there are reports to suggest that Indian economy is looking up at least in some sectors, which would inform other sectors, too. To my mind, probably yes; or probably no.
True, some sectors are showing the first green shoots of recovery. The relatively good performance of equity markets is perhaps the main driver of this new optimism and there have been some other signs too like car and two-wheeler sales and home loan disbursements. A recent survey by the Confederation of Indian Industry (CII) has also indicated a slight revival in manufacturing during January-March quarter but the drop in Index of Industrial Production during March 2009 did pour some cold water on this optimism. What is even more distressing is the fact manufacturing sector, which comprises about 80 per cent of the index basket, declined by an even sharper 2.3 per cent. This is the largest decline in both indices since they turned negative a few months ago.
In so far as the garment export sector is concerned, there have been mixed signals: continuing world economic downturn; some late recovery, however temporary and for some people; recent Rupee appreciation and with a new Government, expected to be stable, assuming charge. I think now is the time when we can look for right kind of realistic expectations and projections of shape of things to come. What are the major issues? To my mind:
- Assessment of the world apparel export scenario during 2009-10.
- Prospects of Indian apparel exports to the US, the EU and Japan as also to other countries.
- Assessment of the impact of the stimulus packages, offered by the Government of India last fiscal, on Indian garment exports, and
- What more and specific is required or expected from the Government of India to enable Indian apparel exports to compete for adequate space in world apparel trade?
Let us take up each of these issues
Assessment of world apparel export scenario during 2009-10
The economic downturn or more appropriately recession, has taken every sector down and garment exports are no exception. There has been an overall shortfall in the import of garments both by the US and the EU, which are in the grip of recession. Similar is the case with Japan, where the garment imports have contracted. The heat of the contraction of garment imports by the developed countries like the US, the EU group of countries and Japan has been felt by almost all the developing countries, exporting to these countries, save a few exceptions.
Unfortunately, there are hardly any reliable signs of recovery. In US, the economists have downgraded their projections for a recovery from the deepest US recession in half a century, now seeing the jobless rate exceeding 8% through 2011. Unemployment will average 8.5% in 2011 and a 9.6% rate next year, which is higher than the previous forecast. Similarly the US economy will contract at a 1.9% pace this quarter, returning to a growth rate of 0.5% in July to September period and 1.8% in the final three months, according to the median forecast of 61 economists surveyed.
Similarly, the economy of the 16 countries that use the Euro shrank by a massive 2.5% in the first quarter, as the recession tightened its grip across the continent. Germany, the Euro zone's biggest economy, has been badly hit. In the first quarter, Germany's economy shrank 3.8%. During the first quarter of current fiscal, Euro zone economy contracted by 4.6%, which is over three times as bad as the 1.4% decline recorded in the fourth quarter of 2008. Japan is also in dire strait.
While on the question of "other markets", it would be pertinent to refer to the Middle East, an oasis within the desert land. According to IMF, the growth in the Middle East will fall by 50% this year. It said the economies of the world's three biggest oil producers, Saudi Arabia, the UAE and Kuwait will contract as lower energy price (a steep fall of US$90 a barrel from record high of US$147.47 a barrel in July 2008) has forced production cuts and tighter credit availability, with the result that for the region, as a whole, gross domestic product for Middle East is projected to grow at 2.6% this year, down from 5.7% in 2008.
It is, however, true that of late the orders have started trickling in, apart from some orders already in hand with a number of exporters. G.S. Madan, President, Garment Exporters Association says, "The period 2009-10 onwards may be very difficult for the garment exporters with a declining trend in growth rate as the future reveals a gloomy picture due to weak demand from importing countries. Even the International Monetary Fund (IMF) has forecast future fall in the global economic growth". A Sakhthivel, President, FIEO says, "Exports are passing through a difficult phase in view of global slowdown." Rakesh Vaid, Chairman, AEPC says, "The global recession has significantly lowered the demand from the US and the EU. The US demand has declined by more than 3% while EU imports have stagnated."
Prospects of Indian apparel exports to the US, EU and Japan as also to other countries
A study of US retail market shows that there are no lasting and sustainable trends and small surges in some companies stand countered by the slides in others; with an overall effect of the retails still far from encouraging. With no economic recovery in sight in any of the principal markets, the world garment trade will continue to be in grey zone in foreseeable future. The position of "other markets" cannot be even as good or as bad as those of advanced economies; in fact, it would be worse off. This reminds me of the comments of Commerce Secretary, G.K. Pillai, who, in the course of an interview, was asked about strategy the Government proposes to bring about for revival in export growth. He responded by saying, "We have increased the allocation for the market access and development initiatives. The exporting community has been asked to go to new markets and participate in as many fairs as they can, across the globe. We are looking at China as a major market for Indian goods and we have not tapped that market as yet." He disclosed that all Export Promotion Councils have been advised to focus more on China and start participating in most of the fairs in China in the coming six months.
However, so far as the question of garment exports from India to China is concerned, it would be more like carrying coal to New Castle. We have suffered long enough and deeply enough to entertain any such fanciful ideas of Indian garment exports to China. This, however, could be true in case of some other products like steel, but certainly not garments.
Though the assessment may vary on the question of time and rate of recovery of different countries or regions, the fact remains that the current fiscal does not offer any hope or any revival of any significance. According to Rakesh Vaid, President, Apparel Export Promotion Council, "Due to the meltdown in Western economies, there has been less buying this year and the full impact of the downturn will be witnessed later." Confirms A Sakhtivel, saying, "Recession has made buyers cost sensitive and therefore the price competitiveness has become a vexed issue for Indian exporters." Says G.S. Madan, "As the world financial crisis which started in 2007 has become worse in 2009, the textiles and clothing industries will be more adversely affected as the importing countries would reduce their imports worldwide including from India." He adds, "The overseas buyers are reducing not only their orders but also their prices due to serious liquidity problems being faced by them. The fortunes of garment exporters would therefore continue to fluctuate in rough weather in international market."
However, looking at the immediate past, the provisional figures released by AEPC showed that India exported garments worth $10.13 billion during 2008-09, as compared $9.68 billion, registering 4.6% growth over last year. The export figures in terms of Indian Rupee showed better performance, inasmuch as our exports work out to Rs.46,628 crore for 2008-09, up 19.55% from Rs.39,002 crore for 2007-08. The full year performance saw both small surges and slides, depending upon primarily the value of Indian Rupee as compared to US Dollar, which essentially decides how competitive we are in the world garment market. This further need to be read in the context of level of demand for garments in all important export destinations, have gone down.
When we make a projection or fix target for garment exports, we do need to take into consideration the serious, even savage competition from other countries, which continue to establish their lead in offering garments at much cheaper rates. This does edge us out. According to Vaid, our exports to the US in the first 10 months of 2008 were down 3.71% while Vietnam and Bangladesh posted 22.51% and 10.15% growth respectively in the US market during the same period. It must be remembered that the US and the EU together account for more than 80% of Indian garment export. This makes the prospects of export growth recovery of Indian garments somewhat difficult. Commerce Secretary, G.K. Pillai said the Government is working out a strategy to help revive all the sectors that have witnessed a massive contraction in exports. Hopefully or shall I say wishfully Indian garments exports is one sector, which could be one of the few sectors that the Government might deem fit to help.
In the course of discussions with a number of garment exporters, I learn that while most of them have a reasonable volume of export orders on hand, some fresh orders have also started trickling down. This has also been confirmed by A. Sakthivel, who says, "However, of late, orders have started trickling and situation is likely to improve in next quarter." He has, however, added a rider saying, "Recession has made buyers cost sensitive and therefore price competitiveness has become a vexed for Indian exporters."
What are "specific" requirements and expectations from the Government?
The Stitch Times had requested some of the industry representatives i.e. trade bodies representing the garment export sector to spell out what are their "specific" requirements and expectations from the Government. This is what they have to say:
A. Sakhtivel, President, FIEO expects the new Government to adopt multi-pronged strategy to address the problems concerning exports. His suggestions included:
- Introduction of GST from April 2010.
- Increase in DEPB rates by 5%.
- Exemption from Income tax for 3 years.
- Exemption of exporters from Fringe Benefit tax.
- Exemption from Service tax.
- Availability of export credit at 7% across the board and interest subvention to be extended till 31 March 2012.
- 200% deduction on investment made in plant and machinery for expansion and modernization of manufacturing facilities.
- Provision of diesel at international prices to units having captive power plants or using their own generators for export production.
- Creation of Export Development Fund (EDF) for MSME exporters with a minimum corpus of Rs.5, 000 crore to help exporters undertake detailed product and country diversification strategy to boost India's exports.
- Existing Scheme of Focus Market scheme, Focus Product scheme and market linked focus scheme should be extended for three years with additional products to be added therein.
- Sharp cut in transaction cost by simplifying procedure, introducing accountability and effective EDI among all agencies.
- Development of export-related infrastructure like ports, airports, roads, containers for facilitating export logistics.
- Constitution of "Export Facilitation Board" under chairmanship of Prime Minister with Commerce Minister, Finance Minister, Textile Minister, Surface Transport Minister, Minister for Shipping, Minister for Labour, President, FIEO, Chairmen of other export organizations as members.
According to Vaid, Chairman, AEPC increased installed capacities will require reforms in five broad areas i.e. facilitating capital investment, changes in labour laws, simplification of exim norms, fiscal incentives as provided in other countries. More specifically he identified the following action points.
- Prompt disbursal of interest compensation under the Technology Upgradation Fund (TUF) scheme.
- Reduction in import duties on textile machinery.
- Labour laws should be made flexible and stringent laws like Prohibition of Contract Labour and Industrial Disputes Act should be modified.
- Infrastructural bottlenecks need to be removed.
- Those exporting 100% of their products should be treated at par with 100% export-oriented units, irrespective of their location.
- Increase in cash assistance from 2% to 4% of FOB value under Market Linked focus Products Scheme.
- Full reimbursement of all Excise, Customs duties, Service tax, education cess and various State-level taxes and the duty drawback rates should be determined accordingly and
- 100% exemption for export earnings under Section 80 HCC of Income Tax Act as also there should be moratorium of at least two years for repayment of principal amount against term loans and the banks should pay interest for delay beyond one month in reimbursements under schemes like DEPB, duty drawback, terminal Excise duty rebates and assistance under TUF scheme.
G.S. Madan, President GEA says, "The first Budget of the new UPA Government may provide some relief to the textile industry. I hope that necessary fiscal relief will be granted to the textile industry in general and garment export sector in particular to help the exporters to overcome the present crisis being faced by them because of worldwide recession resulting in slowing down of export orders from overseas markets. The Government should give top priority to the textile industry as it provides large employment to rural poor and weaker sections of the society particularly women." He hopes, or shall we say expects:
- Hike in duty drawback rates by 4% to ensure full reimbursement of Excise and Customs duties and various state level taxes.
- Provision of bank finance at not more than 7%.
- Restoration of 4% interest subvention on export credit upto March 2020.
- Reducing transaction cost by simplifying administrative procedures by avoiding delays at Customs clearance of goods; improving loading and unloading of cargo and infrastructure at ports to avoid congestion at ports.
- Provision of diesel at international prices and exemption from Excise duty and local levies to encourage captive power.
- Exemption of all export related services from Service tax and Fringe Benefit Tax.
- Implementation of GST (Goods and Services tax) at the earliest.
- Treating exporters undertaking 100% exports of their goods at par with EOUs.
- Provision of 100% risk coverage through cheaper ECGC scheme to encourage exporters to take risks with new markets and customers.
- Allowing duty-free import of fabrics and trimmings used for garment exports upto 25% of FOB value of their exports, without any licensing procedures to exporters, who export 100% of their products.
- Extension of Focus Market Scheme to all markets for export of garments to further broaden market base in these difficult times of worldwide recession.
- Introduction of labour reforms to meet the requirement of seasonal work with exporters.
Straws in the wind
The emergence of a stable Government by the UPA has rightly fuelled the expectations of the exporters who have been generally left to fend for themselves. The textile and garment exporters have been particularly feeling like being left out in the cold of fierce international garment export business. As was pointed out repeatedly by me, year after year after year, in The Stitch Times every time a Budget or National Foreign Trade Policy was announced that the words "textiles" and "garments" were virtually banned in these announcements. I personally strongly feel that this treatment was not forced by compulsions and that happened could not be treated as "beyond the control of the Government." To my mind, and as all of us know, there was a steady flow of foreign money, from FIIS which had nearly caused a balloon in so far as our foreign exchange reserves were concerned. This did contribute in Government ignoring the sectors that supported the foreign exchange earnings before the massive inflow of FII money.
But what is in the offing?
An Emerging Rainbow
As I said in the beginning that one very important new factor has emerged i.e. a comparatively stable Government without communist strings attached thereto. The Chairperson of UPA has rather sternly warned the new Council of Ministers to either "Perform or Perish" and that the various ministries are busy in charting out their courses, to start with, for 100 days. The need to perform is pulpable and the people in general have huge expectations. We now have a sauve Commerce Minister in Anand Sharma, who is faced with the stupendous task of reviving Indian exports that have touched low ebb with six months of continuous contraction. It is, indeed quite hopeful that he would mean business and results which is reflected in his first press conference, where he declared, "We shall be talking to the chambers of industry and trade bodies and look at possibilities for more incentives. I will be discussing with Finance Minister what more measures can be taken in the Budget." He also assured that measures to boost exports will be incorporated in the Foreign Trade policy, which is scheduled to be released in August, 2009. "These will include measures to reduce transaction costs," he added.
However, an inkling of what is brewing up in the mind of the Finance Minister was available in his first press conference. Putting forward the broad economic agenda for the next five years, the veteran Finance Minister Pranab Mukherjee said, "The next round of stimulus for growth would be in the form of economic reforms and the Government has already identified the plan of action. Sustained stimulus to growth can be harnessed by the next round of economic reforms. We have a broad plan of action in mind." He, however, declined to spell out details of the package.
The moot point is how much fiscal help the Finance Minister with all his good intensions, but very severe financial constraints, can render.
The sliding physical direction of Indian garment exports is expected to be countered by strong policy directions of a new, comparative stable, and no nonsense Govt. with a commitment to higher. Hopefully, we would move forward.
Originally published in The Stitch Times; June 2009