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Informist, Tuesday, Nov. 26, 2024

 

By Sagar Sen and Krity Ambey

 

NEW DELHI – The government needs to address India's diminished export competitiveness relative to its Asian peers, primarily due to higher interest costs, according to Ajay Sahai, director general and chief executive officer of the Federation of Indian Export Organisations. The concern is particularly pertinent given the government's ambitious target to achieve merchandise exports of $1 trillion by 2030.

 

There is a disparity of around 6?tween the credit cost incurred by Indian exporters and that by their Asian counterparts, Sahai told Informist in an interview. While Indian exporters can avail credit at 9.5% or 10%, Chinese or Taiwanese competitors can avail it at around 4%, Sahai said.

 

"If you look into the key rates of the central bank, the repo rate in India is 6.5%, the central bank rate in China is 3.1%, in Taiwan it is 3%, in Thailand 2.25%. The spread in India is probably the largest one," Sahai said. "The 6% differential, in a number of sectors, is making the exports uncompetitive. Why not give some kind of interest subsidy for that?"

 

Sahai's remark comes at a time when the government has restricted the benefits under the interest equalisation scheme only to exporters from the micro, small and medium enterprises segment, and has lowered the fiscal support under it. Till June, merchant exporters also got an interest subvention of 2% under the scheme.

 

Under the interest subsidy scheme, which is valid till Dec 31, MSME exporters can currently avail subvention of 3% on pre- and post-shipment credit for all tariff lines. The Reserve Bank of India has cut fiscal benefits to exporters under the scheme to INR 5 million per year from INR 100 million earlier. "This kind of uncertainty is not good for exports because exporters wouldn't be able to take a call based on that," Sahai said.

 

In June, the government extended the scheme by three months but restricted it to MSME exporters, then in September again, the government extended the scheme for a quarter. The government had launched the interest equalisation scheme in 2015 to provide interest subvention on pre- and post-shipment rupee export credit to both merchant exporters and MSME exporters.

 

The government has cited budget constraints for not extending the credit scheme to exporters, Sahai said. To address this, the FIEO official suggested, "If they can provide credit to the export sector at reverse repo rate, there is no cost to the government because the bank, in any case, can recover from the RBI. They can also look into providing it at SOFR (Secured Overnight Financing Rate) plus 50 basis points more."

 

Set up in 1965 by the commerce ministry, FIEO is India's top export promotion organisation. It partners with the government and provides consultation to catalyse the growth of exports. FIEO also acts as a crucial interface between Indian exporters and various government agencies, like the Directorate General of Foreign Trade, the customs and tax departments, and the RBI.

 

"We have been told that the government is looking into some kind of roadmap to reach $1 trillion exports," Sahai said. "They (government) are saying...let us come up with a large scheme so that we can take our exports to $1 trillion." India's merchandise trade was $437 billion in 2023-24 (Apr-Mar).

 

Below are the edited excerpts from the interview:

 

Q. India's merchandise exports, with a growth of 17.3% in October, showed significant recovery. But do you think the recovery is likely to persist in the forthcoming months?

A. There is one view that a lot of shipments have been front loaded in October for New Year and Christmas. Usually this is reflected in the November figure but this time, they came in October. If November also shows that exports are increasing, then that would be an extremely positive sign. As of now, we are keeping our fingers crossed. We are hoping that this is just not because of the front-loading. Inflation is also one of the factors pushing the value of the product. But I think much will depend on November so that we can forecast where we will finally end up. So far, as exports are concerned, as of now, we hope that we will be reaching close to $800 billion.

 

Merchandise exports may be $440 billion-$450 billion by the end of FY25. Right now we are at $264 billion, and we have five months to go. Even assuming an average of $38 billion per month, last year was $39.4 billion, we will be reaching around $454 billion. If we give some discount, $440 billion-$450 billion is what we are expecting. In services (exports), we expect $350 billion-$360 billion.

 

Q. Any particular reason for this front loading in October?

A. Because of logistical challenges and high freight cost, companies are now building their inventory. They are not sure whether the shipment will arrive on time or not-- the entire voyage is taking a longer time, and there is less capacity available. Sometimes there is blank sailing. At times, when shipping lines get enough cargo at one of the trans-shipment ports because of congestion at the port, just to maintain their normal routine, ships skip some of the ports. Companies don't want to miss the market for New Year and Christmas. If the situation had been normal, there would have been no need to build the inventory. You are sure that goods will arrive in the month of November and or in early December. But in today's scenario, you can't be sure.

 

Q. You had highlighted to the commerce ministry in April that the exchange rate has been eroding India's export competitiveness relative to other South Asian nations. Have there been further discussions or developments with the ministry regarding this specific concern?

A. We did an analysis of exchange rate fluctuations among all the competing countries in the last one year, from April 2023 to April 2024. We were the best performing currency and, even today, we are the best performing currency in Asia. Secondly, the rupee is not near its real effective exchange rate. The World Bank says rupee is undervalued by around 8%. The RBI says it is undervalued by around 4.8%. It may not be possible for the government to allow rupee to be floated freely because it has huge implications for other segments of the economy, but something needs to be done for the losses happening in exports. Had the rupee been allowed to have its real value, exporters might have got 5-8% more. So the government should look to offset this in some way.

 

Q. Could you give an example of how support can be provided?

A. The point is that option is not something which will be permitted within the realm of the World Trade Organization. But when Trump (Donald Trump) is there (as US president), we should not be unduly worried about the WTO. He will not play by the rules of the WTO, nor will he allow the WTO to function. So we can take our call. If our funds permit, we should look into providing. I'm not saying to all the sector, but wherever the government may feel that the sector is not competitive, and exchange rate can provide competitiveness, like the labour-intensive sector. The government can look into supporting the sectors that are constantly losing market share. You are not letting the rupee reach its real value because of the implications on the economy, at least provide some support to those sectors which are adversely impacted.

 

Support can be through direct credit to the exporters' bank account. For example, in the labour-intensive sector, assuming there are 200 tariff lines where the government can provide support. On those 200 tariff lines, at whatever dollar value they are getting, add $3-$4 to give it to the exporters as credit.

 

Q. But wouldn't this add to the credit cost of the exporters?

A. We have to look into the cost disability of exports. For example, in India, if you look into the key rates of the bank, the repo rate in India is 6.5%, the central bank rate in China is 3.1%, in Taiwan it is 3%, in Thailand 2.25%. The spread in India is probably the largest one. If 6.5% is the repo rate, you would not be able to get credit at 9.5% or 10%. Whereas in China it is 3.1% or in Taiwan it is 3%, you will get it at 4%. So, look into the cost difference. They are getting at 4%, I'm getting at 10%. The 6% differential in a number of sectors is making exports uncompetitive. Why not give some kind of interest subsidy for that?

 

We had the interest equalisation scheme, when suddenly the fiscal benefit was reduced to INR 5 million, and it is only valid up to 31st of December. This kind of uncertainty is not good for exports, because exporters wouldn't be able to take a call based on that. So look into the cost-disability. For example, you have come up with ROTEP (Remission of Duties and Taxes on Exported Products) scheme, where you are saying that un-rebated taxes will be rebated to you, then you say that you don't have funds. If you are rebating, if you are refunding a tax, then I think there is no issue of a budget for that. You have admitted that you have collected it and you are refunding it. So if you are refunding it, why is there constraint on the budget on that? So look into all these disabilities. For example, logistics costs are very high. My view is that the government should not look into the profitability of exporters. The government's job is to provide competitiveness for exports. So look into all those factors which are blunting the competitive edge of exports and address those factors.

 

Q. The commerce ministry plans to put in place a standard operating procedure for the negotiation of free trade agreements. Why is this necessary and how do you think it can help?

A. The SOP (standard operating procedure) is required because there has to be a standard template across agreements, then you can fine tune. The unfortunate part is, on the Indian negotiating team, because you have a very limited duration of the negotiator, most of the negotiators are new to the team. So they hardly have an institutional memory. If you don't have institutional memory, you should have an SOP in place as a reference point.

 

In SOP, they will decide everything. Like, when looking into aggressive interests or defensive interests, how we have to consult the industry. Probably, the SOP will be what could be the objective of a particular free trade agreement, what do we want to achieve from this particular agreement, what we are going to offer to the country, what are the areas which are not vulnerable, where we can offer to the country, what we can get from those countries, what can be other areas beside trade whether we are looking into investment we are looking into government procurement. I think when you are talking about templates, it will be on all these aspects.

 

Q. With Donald Trump returning to office in the US, what challenges do you anticipate for Indian exporters, given his past statements labelling India as a 'tariff abuser'?

A. Personally, I don't expect any change to happen with respect to any initiative the US takes which will fall within this financial year. I personally feel that the US, while using the tariff, has to be a little careful. They won't be able to apply tariffs on all products, or they have to be conscious of the inflation rate in the country. They may raise tariffs in sectors where they want to strengthen the manufacturing or attract manufacturing. Maybe a 60% tariff on China and a 10% to 20% tariff on other countries. They may roll out some kind of tax proposition for domestic manufacturing so that it is attracted there.

 

Q. Which are the sectors where the US may raise tariffs to promote manufacturing?

A. I don't think there are many. To some extent, automobile may be one of those sectors. But the US has moved to electric vehicles, and we are not a major producer of EVs. If the US tomorrow decides that they want to revive Ford Motors, then that may hit us because we are an exporter of auto components. But if it is the issue of the EV sector, we are probably not producing enough EVs to meet our domestic demand. So that should not be a challenge. But I'm pretty sure that he will be raising the issue of tariffs and market access a number of times. There may not exactly be a concession on tariffs, maybe a concession somewhere else, maybe a concession on the free satellite policy or allowing something else. So matching of trade need not be with trade only. It could be with something else.

 

For a country like India, they may negotiate. Like India exports apparel to the US, so they may ask for market access for something else in return. So probably their idea would not be to increase the tariff on Indian apparel because they don't manufacture apparel. But probably that will be the kind of bargaining tool which they may use. For India, I don't think there is much challenge as far as the tariff war is concerned. With China, definitely, because there are a number of sectors where the US may be interested in strengthening manufacturing. These sectors are those where China is a dominant player.

 

Q. What would be your recommendations to the government for the next Budget?

A. Budget recommendations will be for sustaining export in the long run. So, I would require that the Budget should incentivise research and development in the country. If you look into OECD (Organisation for Economic Co-operation and Development) countries, 34 out of 38 OECD countries either have tax deductions for research and development investment, or they have tax concessions. In India also, we had a 200% tax deduction long back. Now it is 100%, that is as good as a business expense. Research and development has a long gestation period with a lot of uncertainty, therefore you have to incentivise it. The government should come up with a tax deduction of 200-300% to encourage investment in research and development. Today, except for pharmaceuticals and some other sectors where you have no other choice but to go for research and development, industry investment in it is not much.

 

Secondly, we have to draw up a roadmap to develop an Indian shipping line of trade route. In 2022, our transport remittance was close to $120 billion, and roughly around $80 billion will be shipping freight only. If we develop an Indian shipping line which gets a quarter of the business, we can save $20 billion-$25 billion annually and the advantage will be that we will not be at the sole mercy of a foreign shipping line. A lot of charges that they levy may not be levied if they know there is an Indian entity also in the play.

 

Thirdly, I think there have to be schemes for skilling. We have to see how we can bring a very close relationship between the private sector and the government in all the skilling schemes. The government is willing to support skilling, but probably industry has not come forward with what kind of skilling is required. Skilling, at times, happens but it may not be serving the purpose of the industry and probably the onus lies on the industry. They should come forward -- they know what kind of scheme is needed, what skill is required. It has to be in coordination between the industry and the government.

 

Q. What are your expectations from the INR 1 trillion fund that the government announced in July to foster research and development in the country?

A. The point is what will be the cost at which the funds will be available. When a company develops research and development, the country indirectly also gets benefits. So there has to be some sharing of this cost between the country and the company. It establishes the country as a brand. If they use the corpus to provide funds at a very competitive cost, let us say 4-6%, fine, but if it is 8-10% then it hardly makes any sense. You have to make this lucrative, so either you make it lucrative by providing it at a very low cost of interest or you share it so it will be a kind of tax deduction. In this scheme, the interest rate should be attractive enough to encourage people to go for research and development, then they will do that.  End

 

Edited by Ashish Shirke

 

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