Searching for a Silver Lining

The current global slowdown will have a silver lining for India if this opportunity to enhance competitiveness is fully utilised by the industry and exportable products and export markets are diversified, says Abhijit Das

Riding on the back of brisk growth in the global economy since 2002, India’s exports have witnessed a phenomenal three-fold rise during the period 2002-03 and 2007-08. This powerful dynamo for employment generation is now threatened by the liquidity crunch and declining global demand. India needs to properly manage the fallout from the current global slowdown on its export sector in order to limit adverse consequences for the employment situation.

A quick analysis by Unctad-India shows that a 10% decline in overall exports of goods from the 2006-07 level would result in a direct and indirect loss in employment of 2.2 million man-years. Sectors which are likely to witness job losses include traditional export sectors such textiles and clothing, metal and metal products and miscellaneous manufacturing.

Two additional noteworthy points emerge from this analysis. First, the agriculture sector would not remain unaffected. In particular, the food crops sector is likely to see sharp loss in employment as it has a high employment multiplier and provides crucial inputs to exports of the processed food industry, which has emerged as a dynamic sector. Second, employment in certain sectors such as minerals may take a severe hit — although these sectors may not contribute directly to India’s export share. The lesson is clear — sectors which provide inputs to the exporting sectors and have high employment multipliers would also be adversely affected.

In order to sustain the export momentum and contain job losses, the central government has finalised an economic stimulus package comprising measures aimed at easing the liquidity crunch and providing enhanced incentives to exporters. While these measures may provide some relief to the exporters, the present crisis should be used as an opportunity to address more deep-seated problems by adopting suitable mitigation strategies for sustaining the export growth in the long term. Following suggestions could be considered.

Despite targeted efforts by the government for seeking new markets for India’s exports, the EU and US continue to be the main destination of India’s exports. These two main markets account for nearly onethird of India’s exports, although the share of the US in India’s exports has reduced gradually over the years. China, Japan, West Asia and Asean provide viable and sustainable alternate markets for reducing India’s overwhelming reliance on the EU and US for its exports. Early conclusion and implementation of free trade agreement negotiations with some of these countries could provide India with attractive markets for reducing the risk of overall exports being adversely affected by developments in a few big markets.

Although the composition of India’s export basket has shown some changes over the past five years, this has been mainly due to the rise in exports of petroproducts. Given the sector’s capital-intensive nature, increased exports of petroproducts may not result in significant employment generation. Textiles and apparel, leather products, gems and jewellery and handicrafts continue to be the significant export-oriented and employment-intensive sectors. A more focused effort is required for diversifying India’s export basket to other employment-intensive sectors. As a preliminary exercise, industry could identify products and seek markets in which India is globally competitive. As an illustration, exporting organic chemical and pharmaceutical products could be explored in Chinese and Asean markets.

Indian industry needs to formulate and implement appropriate strategies for becoming part of global supply chains. While the auto part sector provides success stories, there is a need to have a hard look at sectors such as electronic components so that India can gain from the increasingly fragmented nature of global supply chains. With profit margins shrinking globally, competitiveness would be the most important determinant for acquiring a share in export markets abroad. Experts feel India should take advantage of its strength in IT and use it extensively to upgrade manufacturing and thereby increase the competitiveness of India’s exports. While some of the industries are actively engaged in this effort on a regular basis, innovative solutions are required in sectors such as handicrafts for harnessing IT for improving product designs and enhancing exportability of the products.

The race for access to raw materials at competitive price has picked pace and would accelerate in the coming years. This would be an important determinant of cost competitiveness of exports. In India, the prices of some raw materials and industrial inputs such as copper and aluminium have been significantly higher than the London Metal Exchange price. For example, during the period 2000–06 the difference between the price of copper in India and the LME price was in the range of 34% to 83%. However access to natural resources at competitive prices is often stymied by a myriad of complex rules and dual pricing endowed with the natural resource. Not much headway has been made on this issue in the Doha trade negotiations. As an alternative to direct imports of natural resources, some of the Indian enterprises could explore the possibility of outward FDI for accessing natural resources in foreign markets.

During periods of economic downturn many countries adopt protectionist trade measures such as imposing anti-dumping or countervailing duties on imports. Experience on this issue during the current economic downturn is not likely to be any different from the past. It needs to be recognised that India’s export incentives could be easily offset by the importing countries by imposing countervailing duties, as has happened in the past. This might render the new export incentives ineffective.

In order to sustain India’s export growth the need to preserve the existing market access in big economies becomes extremely important. While an early and satisfactory conclusion of the Doha Round would help in this regard, it is also essential to be vigilant that non-tariff measures do not act as a disguised trade restriction. India’s economic stimulus package might offer an immediate succour to the exporters. However, there is a need to develop and implement longterm measures that would ensure sustained export growth, which is not impeded by adverse developments in big foreign markets. The current global slowdown will have a silver lining if the opportunity offered to diversify exportable products and markets as also enhance competitiveness is fully utilised by the Indian industry.