2018-CGS-29: Mains Revision-17: Secondary Sector of Economy

The immediate proximate factors affecting exports are as follows

  • The lingering effects of demonetisation.  Due to last year’s cash disruption, orders were lost, and these can’t be regained easily from competitor countries. There is a kind of hysteresis as lost orders and jobs are not fully reversible.
  • Delay in getting goods and services tax (GST) refunds, and the burden of the cost of locked capital. The delayed refund does not include the interest cost.
  • Overvalued exchange rate, which makes India’s exports relatively expensive.
  • Continuing unreliability of electricity and other infrastructure facilities. Small and medium enterprises need a common plug and play, seamless hard and soft infrastructure—whether it’s effluent treatment or inspection or logistics.

In 2014, the trade policy announced by the Union commerce minister envisaged total exports worth $900 billion by 2020. That looks almost impossible, unless exports grow by 40% per annum from now on.

Revisiting the Strategy:

India needs to move from merely focusing to becoming obsessed with rejuvenating our exports. The following principles would be useful

  • Focusing on labour-intensive exports such as agriculture, textiles, footwear and tourism.
  • Having a zero GST rate for all exports.
  • Shun product- and market-specific incentives (which run afoul of World Trade Organization rules), but focus on regional or cluster subsidies, which benefit all producers, small or large, domestic or export oriented.
  • Reduce and further reduce inspector raj.
  • Actively and aggressively promote participation in global value chains by insisting on large on large job creation.
  • Be committed to open borders, notwithstanding the pressure to raise trade barriers. It is not by protection that domestic industry will become world leaders in competitiveness. [Mint]

 Challenges before Indian Garment Sector

India’s huge $100 billion-plus textiles and apparels industry employs more than 45 million people. It accounts for almost 14% of exports and over a quarter of foreign exchange earnings. It is the second-largest employment sector after agriculture. Of this, the apparel sector alone accounts for more than 12 million jobs and a chunk of the exports.

Crisis in the apparel sector

  • Apparel exports in February stood at $1.44 billion, a decline of 10.25% compared to the year before.
  • In fiscal 2017-18 overall apparel production declined 10.4%
  • Garment exports fell 4%.
  • The trend is clearly downwards. Garment exports have fallen for six months in a row now and, except for a spike in a couple of months, have been mostly negative.
  • The sector got hit with a double whammy: demonetisation and the goods and services tax (GST).
  • The rupee has also been appreciating, gaining 6.4% against the dollar through 2017.

Challenges before the sector

  • The industry simply does not have the margin to take this 6% hit and still stay competitive with countries like Bangladesh and Vietnam which are eyeing India’s already shrinking share of the pie.
  • Both Vietnam and Bangladesh enjoy the same advantage that India does — an abundance of cheap, skilled labour. In addition, they also enjoy favoured access through treaties to major markets like the U.S. and the European Union, while India is under intense pressure from the World Trade Organisation to phase out subsidies and incentives given to the textiles sector as the sector has already achieved ‘export competitiveness’.
  • India’s garments sector is large in the aggregate, it is comprised mostly of tiny units. Almost 90% of India’s garment manufacturing units are in the unregistered sector. About 78% of the firms employ less than 50 workers and only 10% more than 500 workers. This means that individual entrepreneurs have severe limitations on the kind of capital they can invest in capacity and technology. So, most Indian garment exporters tend to compete at the bottom end of the market where competition is toughest.
  • Logistics costs are also high: around $7/km by road transport, while it is just $2.5/km in China and $3/km in Sri Lanka. Add onerous tax issues and huge difficulties in even claiming one’s legitimate dues.
  • The biggest impact of GST has been that refunds due to exporters have been stuck for months, leading to locking up of working capital.

Addressing these challenges

  • India needs holistic policy response rather than temporary band-aids and piecemeal incentives.
  • The tax policy needs to be aligned with global trends, while the scale problem needs to be met through aggregation of individual units in large clusters, preferably with quick access to export points, thus curbing logistics costs. [The Hindu]
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