Indian economy needs the world’s 6.5 bln people

As India stares at a 5% contraction in the economy, the Covid-19 pandemic has hammered India's domestic demand, resulting in significant pain for the country's small businesses. Any hopes of an early revival are also quickly fading as the virus gathers strength across different parts of the country and many cities seeing re-imposition of lockdown. According to Crisil, for MSMEs, the fall in revenue will be very steep at 17-21%, while Ebitda margin will shrink 200-300 basis points to 4-5% as weak demand gnaws away gains from lower commodity prices. In such a scenario, when domestic demand is subdued, can exports help bolster the dwindling fortunes? It is understood that one cannot tart exporting immediately if you are not doing it already, but what would be interesting to figure out is if a small business is already trading across the world, can recovery be faster?There are takers of a view among industry experts who increasingly hold that given the existing domestic business condition, it may be a wise move on the part of hard-pressed firms to look at business opportunities outside of the country. For Indian MSMEs, taking a plunge in exports and trying their luck in uncharted territories, the move can open up vistas to thousands of opportunities, affirm industry experts. For those already into exports, their suggestion, for now, is to revisit their global strategies, keeping into account the fast-changing implications of the pandemic on their operations. More importantly, experts do believe global operations can today compensate for Indian MSMEs' humongous losses piling up on home turf.If recent data is anything to go by, going global has surely worked in the case of Indian MSMEs. Consider this - the share of MSME related products in the total export from India during 2018-19 stood at 48.10%, states Directorate General of Commercial Intelligence and Statistics (DGCIS). This makes it amply evident that tapping new markets abroad has traditionally been fruitful for Indian MSMEs. "MSMEs contribute to 40% of the country's exports, and with a liberal and pragmatic new definition, their share is likely to cross 50%. In many employment-intensive sectors like gems and jewellery, handicrafts, textiles, leather, sports goods, marine and agriculture, 90% of exports are attributable to them. Therefore, exports are crucial for the survival of a significantly large number of them as it provides scalability, diversification, branding and profits in such units," asserts Ajay Sahai, DG at the industry body Federation of Indian Export Organisations (FIEO). On the flip side, there are people who think such a move may not be of much help. Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME) isn't very optimistic about the efficacy of exports in effectively turning around the fortunes of Indian MSMEs anytime soon."Global markets are in turmoil. Western countries have suffered immense collateral damage due to Corona pandemic and widespread loss of income. In such a situation, I do not think exports could be a major saviour for Indian MSMEs", Bhardwaj contends. 77120215He, however, adds that following the pandemic, the global value chains (GVCs) in many sectors are under transformations and there lies "a chance" for India. "We can still make a move in a few sectors, for example, pharmaceuticals and medical supplies, in developing countries and emerging markets. We need to initiate serious dialogue with industry leaders of GVCs in electronics, home decor, textiles and apparel and leather and develop policies that are needed by them to move to India," he stresses. Speed breakersWhat is clear is that in a situation like the one we are currently in, diversity of the business plays an important part. The more you place your bets on a particular product or market, the more risks you face.While it is obvious that exports can lead to significant increase in business, the growth in the number of small businesses going global has been stunted. The domestic market, which is a boon given its size, has actually made many businesses myopic. In an interview with PTI last year, Hans Timmer, World Bank Chief Economist for the South Asia Region said in the last five years, India's overall growth was "too much" driven by domestic demand, which resulted in double digit growth of imports, and four to five percent growth in exports. According to Timmer, if you look at the experience of other countries, India's share of exports in GDP should have been about 30 percent, but is only about 10 percent. For Indian exporters, the current situation is challenging because of the skewed nature of our trade. According to India Ratings, India's exports have dual concentration - in terms of geography as well as the category of goods. India-Ra say the top 10 export partner countries constitute more than 50% of the total merchandise exports and a substantial portion of which comprises discretionary goods such as gems and jewellery, textiles, automobiles and parts. "In light of COVID-19, the agency analysed the exports of the top 35 commodities bucketed across four categories essential to discretionary and the importing countries into three zones viz. Red, Amber and Yellow. Ind-Ra notes that exports are largely concentrated in the red zone countries (over 500 cases per million) which could inherently a take longer time to return to normalcy, delaying domestic exports," said the agency. 77120247India's largest trading partner is the US, which continues to be the worst hit country by the Covid-19 pandemic. On the other hand, European countries that have relatively opened up, like the Netherlands and Germany, stand about seventh and eighth in terms of being our top trading partner. This means even if we want to export, the prevailing domestic situation in the countries we predominantly trade with may prove to be a hurdle. Strengthening domestic demand is important, but to prevent the adverse impact of economic shocks, our policy measures need a recalibration towards an export-led growth strategy that focuses on export diversification.Lessons from the last recessionThe scale and nature of the current crisis is unprecedented, but if we look at the last big global economic disruption of 2008-09, we may see some interesting markers. 77120287According to an UNCTAD report, the Asian countries are the most export-dependent region, but also the one with the most diversified export portfolio, which means it trades across a large number of products and across different nations. On the other hand nations in the CIS, Africa and Middle East show greater concentration of export, which is they trade in less products or fewer countries. When the financial crisis hit, the Asian countries lost the least amount in export revenues compared to regions like Africa that, despite being relatively less exposed, had an export basket that was highly concentrated. The result was reflected in the GDP numbers. "In Asia, for instance, growth rates for the East Asia region declined slightly by 1.4 percent between 2008 and 2009 and, in fact, growth increased in South Asia. On the other hand, regions that lost over 30 percent of their growth revenues in 2009 experienced plummeting economic growth rates. In the CIS region, for example, economic growth plummeted from a growth rate of 4.1 percent in 2008 to a contraction of 5.3 percent in 2009. Likewise, in sub-Saharan Africa, growth decreased from 5 percent in 2008 to 1.6 percent in 2009," says the UNCTAD report. 77120294It is clear that a broader base of exports and having different trading partners can prevent export shocks and India needs to do better on both counts. Cost of exportHowever, to reduce export concentration, there are significant hurdles. There are structural issues that have continued to plague Indian exports for decades. Nitin Kunkolienker, President, Manufacturers' Association for Information Technology (MAIT), in a recent interview with ETRise said India has a very poor port to manufacturing hub connectivity. "We are slow and not very efficient. Port economics is something which we should work on very aggressively. SagarMala project is a good step, but it's slow," said Kunkolienker. He adds that India doesn't have a transshipment point today and that's one of the major deficiencies in driving export- led growth. When it comes to electronic hardware export, Kunkolienker says we need to find ways to access the European and African markets. "China is doing the same; they're trying to access Africa when it was much easier for India to do it. We need to have a dedicated shipping line operating from Mumbai to the African countries," he said.According to Ajay Kela, President and CEO of Wadhwani Foundation, the lack of ease of doing business continues to be a major problem. "Despite an improvement in India's position in the World Bank Ease of Doing Business rankings, much more needs to be done for the MSME sector as the burden of compliance severely impacts them," he argues. 77120229Sanjay Layek, Executive Secretary of World Association for Small and Medium Enterprises (WASME), says in addition to a lack of government support, a red-tapism-led mindset still prevails across government offices, where exports-related documentation is still lengthy and cumbersome. "There are many clearances and procurement of certifications required for starting exports and all these factors are discouraging firms from looking at global trade," says Layek. According to Sahai, three key challenges for exporting firms today relate to finance, technology and marketing. "With the reduction in interest rates and Emergency Credit Line Guarantee Scheme (ECLGS), the finance part is being addressed by the government," Sahai believes. "While the enhanced criteria of investment in plant and technology will encourage its infusion, similar enhancement is required in Credit Linked Capital Subsidy Scheme (CLCSS)." The industry representative further suggests that for marketing, the government's Marketing Access Assistance (MAI) and Market Development Assistance (MDA) funds require immediate substantial revision and a corpus equivalent to 0.5% of export value may be created as the Export Development Fund (EDF) for aggressive exports marketing.For many exporting firms, trading across borders offers many tangible benefits that are absent when firms restrict themselves within the confines of national boundaries. According to Parag Jhaveri, CMD at Yasho Industries, one must have a sizeable export market for better growth even if local demand is robust. "A businesses' ultimate aim is to scale up. Hence, even if you are doing very well in the domestic market, then too, as an alternative, one must invest in creating opportunities in the overseas market", he recommends. Jhaveri adds that in a crisis situation such as the one today, exports can help companies sustain themselves, as it pushes them to improve their capacity utilisation, which in turn, helps firms become more cost effective and leaner.

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