Slower, but growing

For an embattled government, cornered on the issue of rising prices, there has been little to write home about on the broader macro-economic indicators recently. The only silver lining then seems to be the surge in exports in the second half of 2007-08.

Before Union Commerce and Industry Minister Kamal Nath formally announced the trade numbers on April 11, a sanguine Commerce Secretary G.K. Pillai told BT that “exports in fiscal 2008 are unlikely to be far short of our target of $160 billion”. He was right. Exports in 2007-08 are estimated at $155 billion. “We now feel that $200 billion in 2008-09 is perfectly achievable,” Pillai added. Interestingly enough, industry body CII shares the government’s optimism. Its recent survey of top industry honchos revealed that India Inc. is confident of touching $200 billion in 2008-09 despite a strong rupee.

However, the mood at the Federation of Indian Export Organisations (FIEO) is sombre. A despondent G.K. Gupta, President, FIEO, feels that the government has not yet focussed on the bigger picture.

Says Gupta: “The strong growth in exports clocked in recent months is largely accounted for by petroleum products, engineering and gems & jewellery, which have seen a sharp spike in input prices of raw materials like crude, steel and gold. So, the value realisations have gone up, but there has been little growth in export volumes.”

What Indian exporters want Essentially, a whole lot of sops. Extension of "packing credit" in foreign currency to all exporters Enhancement of DEPB and duty drawback rates Tax exemption to more services Reintroduction of Section 80 HHC tax benefits Full refund of state government duties Moratorium on term loans for another year Cap on price rise of key commodities like steel

FIEO contends that Indian exporters are still going through a rough patch and are now being hit by the double-whammy of a dearer rupee and a US slowdown. International rating agency Moody’s, too, has predicted tough times ahead for Indian exporters. In a recent report, it has forecast that “a strong rupee will temper the expansion of India’s export sector”. It further argues that decelerating global demand, particularly from the US, India’s largest foreign market, will weigh on export growth in 2008. The economic survey also gave a similar warning. Says Sheeba Kapil, Associate Professor (Finance), Indian Institute of Foreign Trade (IIFT): “As long as the US economy is slowing down and the rupee is appreciating, the outlook will not be very bright for exporters”.

The sector worst hit by the rupee appreciation is the IT industry. From a 5 per cent share of a $33-billion total Indian exports in 1996-97, the IT sector ramped up to 25 per cent of the $120 billion total exports from India in 2006-07. This is a compounded annual growth of 35 per cent over a 10-year period, making it the fastest growing and the biggest export-oriented sector in the country. But a weakening US and its dollar meant that the IT companies were forced to lower their revenue guidance last fiscal.

In its latest report, research firm Forrester says: “The US market for technology goods and services will experience a significant slowdown in growth in 2008, to less than 3 per cent from 6 per cent in 2007.” Says Som Mittal, President, NASSCOM: “The rate of growth will be impacted and there could be reduction in new projects for Indian companies, though ongoing assignments will not be affected”. NASSCOM estimates exports growth for 2008-09 to be at least 20-22 per cent, compared to 28 per cent last year.

In merchandise exports, textiles and leather have been the most severely impacted by a stronger rupee, with exports estimated to have shrunk in the last fiscal. What really hurt exporters is the fact that currencies of other Asian countries didn’t harden as much as the rupee did against the dollar. The end result: Indian exporters lost business to countries like China, Bangladesh and Pakistan, since both their order books and margins were impacted.

Says Sudhir Dhingra, CMD, Orient Craft (a garment exporter): “Most retail stores in the US and Europe operate in highly competitive and price-sensitive markets. With the rupee appreciation making Indian goods more expensive, they have simply shifted their business to other countries.” Adds D.K. Nair, Secretary General, Confederation of Indian Textile Industry “We lost a great opportunity last year to win market share from Chinese companies, who have seen a steady rise in prices of their products with sharp wage increases in the country. But the rupee appreciation worked against us.” Things won’t change in a hurry since May to November is a lean season for exporters. To combat the slowdown, exporters are mulling new strategies like shifting to higher value-added products and tapping markets outside the US.

Bucking the trend

The leather industry, though, is insulated from a US downturn—65 per cent of the leather product exports are to Europe. But they are still hit by the rupee appreciation as almost 70 per cent of the invoicing is done in dollars. Says Mukhtarul Amin, Chairman, Council for Leather Exports: “We are now trying to increase invoicing in other currrencies. We are also trying to break into newer, underpenetrated markets like Romania and Ukraine, where there is less competition.”

While textile and leather exporters are bearing the brunt of a stronger rupee, other export-intensive sectors like engineering are also feeling the pinch. Engineering companies, for instance, have been affected by the rising costs of inputs like crude and steel. This, along with the stronger rupee (about half their invoicing is done in dollars), has hit their bottom lines hard. The Engineering Export Promotion Council (EEPC) estimates while higher value added goods like auto components, machinery parts and capital goods have recorded marginal growth of 7-8 per cent last fiscal, it’s the low value-added products like sanitary casting that have borne the brunt of high steel prices with exports down by more than 10 per cent in volumes. Says Rakesh Shah, Chairman, EEPC: “Steel prices in India have risen faster than they have elsewhere in the world, and that is making us uncompetitive.”

Even exporters from industries like gems and jewellery, which have a high import content (almost 70 per cent), and hence have a natural hedge against a rising rupee, are feeling the pinch. Reason: while the raw materials are bought against upfront payments, the business cycle till the delivery of finished goods takes about eight months to a year.

They end up paying for their input costs at much higher rupee rates and are now delivering to customers at significantly lower rates—in effect, negating the impact of cheaper imports.

Says Sanjay Kothari, Chairman, Gems and Jewellery Export Promotion Council: “The export growth in the industry is a result of trading in polished diamonds, which can now be imported dutyfree. At the manufacturing level, there has been no growth.”

Cornered exporters are now increasingly looking to the government for a lifeline—and they’ve a big wish list (see What Indian Exporters Want). Among other things, they want the government to extend credit to exporters at concessional rates and waive service tax on all export-related services. It remains to be seen whether the government will bail them out. At the moment, though, it seems they may well have to live with the adverse market conditions for a while.