The Real Exports Story

It has been more than a year since India’s merchandise exports began a downhill journey. Come 2015- end and it turned out to be the biggest collapse in India’s merchandise exports in a generation – the worst since 1957. While many blame increasing global headwinds for this downward spiral, there are several who believe that structural factors have taken a toll on India’s export-oriented sectors. Agreed! But remember, when you're talking about art on a large canvas, you tend to overlook the finer details. So, if you glance through the cumulative numbers, Indian exports have failed to defy gravity at large. However, a closer look at the numbers reveals more. The Dollar Business conducted a dissection of India’s exports numbers for CY2015 (January to September). Results showed that not everything was ugly. There were many sectors that did not only held ground, but continued to surprise critics by their stellar performances in these tough times. 

TDB categorised the country’s merchandise exports into 17 broad industry baskets and compared their performance during the January-September 2015 period to that of the corresponding period in CY2014. Based on their performances they were grouped as either GODS, GUILTY or FALLEN ANGELS. 

'Gods' are sectors that despite global headwinds continued to perform and reported a year-on-year growth in outbound shipments.

'Guilty', as understood are those that proved a drag on the country’s exports. There were 10 sectors that reported a degrowth in exports and were actually responsible for India’s dismal performance in exports.

Then there are 'Fallen Angels' – though these didn't contribute positively to India’s exports growth, but they did some good in some respects. In petrochemicals, while exports fell, imports fell by a bigger value. As such the trade deficit shrunk by over 33%. In apparels & textiles, while exports remained stagnant in rupee terms, the sector continued its run as a trade surplus agent for the nation!

What is perhaps the biggest lesson from this exclusive coverage is that generalising India's exports is wrong. You would have read many-a-report about India's shrinking value of exports – but all that's incomplete without real analyses of what went wrong and across which sectors. The Dollar Business give you a chance to learn precisely that. Flip on to read our nation's 'real' exports story…

9 Months Into History

When India's exports shrunk in December 2015, it made history. For the first time in 59 years, the nation had returned 12 straight months of year-on-year drop in exports in a calendar year. As early as in September 2015, TDB could see the record coming India's way. What followed was a quarter-long analyses spanning sectors. 

TDB Intelligence Unit | February 2016 Issue | The Dollar Business

Glass & Ceramics - Shining Yet Very Delicate Still

At a time when most Indian industries are struggling to win greater attention overseas, Made-in-India glassware and ceramics are selling like hotcakes across international markets. So, how are they steering their unique paths to success? And do they require a little push from the government still?

Neha Dewan | February 2016 Issue | The Dollar Business

Priyank Gupta of Firozabad’s Gupta Glass House, who faced immense slackness in business in 2014 has, for quite some time now, been more optimistic about the days ahead. Courtesy, the overseas shipments of the glass and glassware which picked up a good, steady pace during 2015. Incidentally, the impact of the positive trend in the sector's export performance is felt the most in Firozabad, also known as ‘Kanch Nagri’ or ‘The City of Bangles’.

Glass and glassware exports, during January-September 2015 jumped by 8.48% (in rupee terms) to reach Rs.35.65 billion from Rs.32.86 billion during the same period the previous year. While this seems to be a good turnaround for a sector that has been grappling with issues that have impeded its growth, have the numbers really translated to improvements at the ground level?

So far, so good

Talk to the glassware makers of Firozabad and you can gauge how times have changed for good, in their industry. “Europe and US markets have seen a good revival of demand this time. We expect a 50% increase from the time of 2014 this year… after the lean season, people have the urge to buy. We are seeing a great pick up in our handmade product categories of lamps and chandeliers,” Gupta tells The Dollar Business. 

Going by industry players, export growth in the industry has been fuelled by a revival in demand of glass handicrafts from markets in the West and innovation through adaptation to technological changes. A Firozabad-based glass products exporter M. K. Bansal agrees that the trade has improved on the back of a better offtake in western economies. “We have seen a better season this time. 2015 has been better than 2014. There were 20% more orders in the July-September 2015 period versus the same period the previous year. But that is also because we have innovated and explored new markets. We have ventured into new regions such as Europe and new categories such as thermas refills to meet the gap,” Bansal tells The Dollar Business.

Increased demand from US, Bangladesh, UAE, UK and Netherlands made 2015 a time to remember for Indian glass and glassware industry. “There has been at least a 25-30% increase in business as compared to 2014 and we expect this to get better by the end of this fiscal,” says a confident Gupta.

A Different Shine

Amidst India's overall export shakeup, it would be no exaggeration to say that the ceramic industry too, has stood the test of time. A 25% export growth in rupee terms reflects how well the sector fared in 2015. In the nine months leading to September 2015, exports totaled Rs.44.68 billion as against Rs.35.74 billion for the same time interval in 2014.

Growing popularity of Indian ceramics can also be judged from the fact that growth of exports to all the top five export markets of India (Saudi Arabia, UAE, Oman, Brazil and US) rose by double digits y-o-y in the first nine months of 2015. 

Amongst Indian ceramics, the tile industry (comprising floor tiles, wall and porcelain tiles and industrial tiles) has captured a lot of attention in the past few years. It's another matter that buyers around the world seem to have little idea of the magnitude of fragmentation of tile manufacturing industry in India. In this regard, SMEs rule the roost. The industrial cluster of Morbi in Gujarat commands about 70% production of ceramics produced in India with an estimated annual turnover of over Rs.15,500 crore in FY2015, of which exports constituted Rs.2,800 crore. One of the main reasons for Morbi’s relevance growing by leaps and bounds over the years is that manufacturers there have always adapted to changes in technology. “We use premium quality products like Italian ink and German machines while manufacturing tiles, while in China, they still use their own machines and locally made ink. In the last few years, this trend is more visible in the wall tiles segment, where we have a clear edge vis-à-vis our Chinese counterparts," says Vipul Kundariya, Director, Antiqua Ceramics.

All Is Not Well

Despite all these positives, all is not hunky-dory in these two industries. India's demand in these sectors is still fulfilled by imports from China, US and Germany. And that's precisely why a lot still needs to be done. Factors such as cut-throat competition from China and Vietnam and increases in gas and soda ash prices are just two issues that the Indian glass manufacturing industry faces. Similarly for ceramics, China is a threat. And not a mild one. India's inability problem with achieving economies of scale in ceramics is probably one reason why India will need another decade at the least to match up to China in this regard (at present, India's exports are an insignificant 3.5% of that of China's in ceramics!). Another common problem is the fact that both these industries are highly interconnected with real estate industry globally – and the recent lull in realty sector has not been very encouraging for the two industries. 

More than half of exporters that TDB spoke to in this industry actually complained that their respective industry’s competitiveness is suffering at the global level due to poor connectivity to ports within India, which escalates costs, damages, time to delivery and eventually makes the business not worth their time.

'Incentives' is the need of the hour for these industries. The government has either reduced Drawback rates from 5-7% to under 2% (or 2%) or has kept the rates unchanged under 2% in most glass, glassware and ceramics items. As such, industry participants are unanimous on the take that government incentives and support is lacking at present and is an absolute must if growth has to be back on track. They even complain that MEIS rate should at least be 5% or more (as compared to the current 2-3%). 

While government support to encourage SME units in the glass and ceramics sectors will undoubtedly prove a motivation pill, a concerted effort within the industry to innovate, explore new markets and play up one’s main strengths will be key to how two of India's fragmented export-stars fare in export-manufacturing in future.  

 

 

Pharmaceuticals - Going Steady… But Miles To Go!

India’s pharma sector has weathered the global slowdown and the country’s flailing exports, sustaining & retaining – if not robust – a healthy growth rate. But, a crucial factor that has emerged from The Dollar Business analysis is that the sector has still miles to travel to capitalise on its existing but untapped resources.

Satyapal Menon | February 2016 Issue | The Dollar Business

India’s tested and proven expertise of catering to the most stringent global quality and efficacy standards in pharmaceuticals has consolidated the country’s credentials and reputation as the most trusted destination for bulk drugs and formulations. With a commendable export CAGR of around 12% over the last five years in both formulation and API (active pharma ingredient) segments and around 5-6% share in India’s cumulative exports of all commodities, India’s pharma sector is in a dynamic state of progression. The sheer size of Indian generics marketed over the counter in the fastidious and hard-to-convince US market and even harder-to-satiate consumer conscience, points to the credibility that the country has established in the American mindset. To India’s credit, pharma manufacturers have effectively maintained high quality standards in production practices – except for a few aberrations by some of the companies – to pass the acid test and stringent scrutiny of the US Food and Drug Administration (USFDA).

Striking Gold

In a scenario where most of India’s commodities’ exports are experiencing a trough, pharma has been cruising steady on a crest which explains why the international markets just cannot do without that dose of the India-made medicine. Sample this for instance, India’s total pharma exports (HS code 30), during CY2015 (Jan-Sept) was valued at $9.34 billion – a 5.1% growth over the corresponding period in CY2014, during which India exported pharmaceuticals worth $8.88 billion. 

That India’s strength is in generics or formulations in finished dosage is reflected in the fact that medicament mixtures under HS code 3004, apart from registering a CAGR of 15% over the five year period 2011-2015, accounted for almost 90% of the total pharma exports from the country during CY2015 (Jan-Sept). The current fiscal also experienced an upswing in generics which scaled up by about 7% with exports valued at $8.39 billion during Jan-Sept 2015 compared to $7.84 billion during the corresponding period last year. Considering that same average percentage growth is maintained, total pharma exports value can touch a little over $12 billion by the end of the current fiscal. India’s exports under HS code 3004 are spread across 137 categories of prophylactics and therapeutics valued at $10.32 billion, with the best-selling five being antihypertensive drugs (medications taken to prevent dangers posed by high BP, such as strokes and heart attacks) valued at $490 million, non-steroidal anti-inflammatory and antipyretic drugs (taken to reduce fever) at $355 million, Cephalosporins (antibiotics) and their derivatives at $354 million, anti-cancer drugs at $340 million, and medicines containing penicillin/derivatives at $333 million.

Deficiency Syndrome

Though growth rates indicate a healthy trend, some conspicuously missing factors identified by The Dollar Business Intelligence Unit point to India’s lack of focus in diversifying and expanding its export basket. First, maximum contribution to exports comes from products under just one sub-chapter level – HS Code 3004 (prophylactics and therapeutics medicaments). Second, a scrutiny of the pharma products exported substantiates the fact that over the years, except for a few additions to the basket here and there, the mix has continued to remain the same. Another revelation that emerged was that India's pharma dynamics on the foreign trade front is being driven by just one country – the United States – which currently accounts for a bulk of the India’s exports (around 30-35% share), with the rest being shared among other countries in minute values and percentages. Interestingly, despite these impressive figures, India’s share in total world exports of pharma products under HS code 30 and HS code 3004 was a mere 2% and 3% respectively. All this adds up to one truth – India has to traverse miles to achieve its inherent potential.

Should India revel in a growth narrative churned out from a limited repertoire and get ensconced in the belief that no stone has been left unturned in terms of performance of the pharma sector? The pharma sector continues to be confined to conventional and off-the-shelf patent offerings and marketing them as semi-finished or finished products. Does it mean that India’s pharma sector is only looking at short-term gains and does not envision futuristic possibilities of losing out to innovations and new drug discoveries. S. V. Veerramani, President, Indian Drug Manufacturers Association (IDMA) is of the view that MNCs would have a sway over the markets in the future and that India also needs to be in the race through patent applications. “Having become a signatory of the TRIPS agreement of WTO, India has signaled the acceptance of Product Patents. As of now, there is no big MNC domination of the pharma sector due to the same. But, the sales of patented drugs are likely to go up from the current 2% to 5-10% in the next 10 years. This can result in MNC domination with respect to patented products. It is true that majority of the product patents have been filed by MNCs. It is important that Indian companies also make more patents' application for products and processes, and not lose the opportunity,” says Veerramani.

Discovery is Key

One fact that has clearly emerged is that major pharma players in India are averse to the long periods involved in going through the process of drug discovery. Another contention of the majors is that they just cannot afford the R&D spend. Coming from the biggies, which have been raking in the spinoffs over the decade, should not this be taken with a pinch of salt? The obsession with readymade recipes can be gauged from the number of DMFs (Drug Master Files) and ANDAs (Abbreviated New Drug Applications) filed by the pharma players with original patents applications too insignificant to even qualify mention. Of course, with many more patents up for grabs – an outcome of global brands looking to prune their production activities – India’s propensity to capitalise on them is being viewed as a positive. Expectations are that the near future will witness exports from the country rising some notches. But to be realistic, it will fall way short of the levels it would have scaled, had Indian pharma giants tuned into the channel of path-breaking new drug discoveries or adapted to new-age technologies a decade or so ago. The situation is such that India has today become synonymous with bulk drugs or active pharma ingredients (APIs) and formulations or generics. Seldom has there been any evidence of India’s policymakers or pharma stakeholders looking beyond this point. Of the total units in the pharma sector, formulations or generics constitute 77% and APIs 23%. 

Forget about discoveries, India though a big exporter of APIs – a little over Rs.24,000 crore – does not even have the technologies to produce cost-effective solutions in this segment. It is being given a run for its money by the Chinese who are dumping – as usual – cheaper products. Quite disturbing is the fact that India also depends on China for APIs that go into the making of many essential drugs listed in the National List of Essential Medicines (NLEM). “In the case of bulk drugs (or APIs), which is mostly exported to regulated markets, there is a negative growth. We are really worried about this trend,” Dr. P. V. Appaji, Director General, Pharmaceuticals Export Promotion Council (PHARMEXCIL) tells The Dollar Business. “The API segment may be losing the export markets since they do not have the facility to convert APIs into formulations," he further warns.

Despite this problem of scarcity, API imports from China are often subjected to anti-dumping duties. “Imposing of anti-dumping measures can be selectively used to protect certain products. But, frequent use of the same is not likely to solve issues,” says Veerramani of IDMA. Clearly, industry participants understand that the only way Indian pharma industry can reduce its dependence on China and scale greater heights is by encouraging the API sector and stepping-up its production. 

The Indian government seemed to have woken up to the fact and recently there were some indications of a policy in the pipeline for APIs. It is definitely quite late in coming and one can well imagine the considerable losses during the time lost.

It was always evident that India requires technologically-enabled API segment to expand its range of offerings. Assuming that India is equipped with the technologies for producing all APIs that are now being imported, the advantages would cascade not only across bulk drugs and intermediaries but also formulations. This would enable manufacturing of a more extensive bouquet of APIs for exports and also facilitate expansion of India’s generic offerings. 
The pharma sector needs to break out of the cloistered confines of conventional thinking and minimise its overdependence on a few markets and make forays into fresh frontiers with a broader spectrum of drugs. Once that is done, exports of pharmaceuticals from India are destined to take a quantum leap.

 

Handicrafts - A Strand Of Hope

India has almost always been happy when it comes to handicrafts; call it business, call it an emotional connect. Even during a year when the world had seemingly cut down on goods beyond essentials, the sector did India proud. The Dollar Business explores reasons that won the sector appreciation in 2015.

Aparna Singh | February 2016 Issue | The Dollar Business

Threads of traditions, culture and creativity are slowly weaving changes, across India, which are far reaching – changes that are bringing the Indian handicrafts industry back on the road to success after being forced off the road by the Great Financial Crisis of 2008!

Handcrafted Growth

Standing at the threshold of crossing Rs.17,000-crore mark in exports by this fiscal end, the handicraft sector in India is poised for a big leap. A closer look at the numbers for the first nine months of CY2015 and it becomes all clear. While the outbound shipments increased, imports dipped, thus narrowing the trade deficit. In rupee terms, exports during January-September in 2015 grew by 6.21% y-o-y to Rs.117.04 billion. What’s more? Handicrafts imports dropped to Rs.128.64 billion during January-September in 2015, marking a fall of 4.95% y-o-y. Result: the industry's trade deficit fell by about 54% y-o-y to Rs.11.60 billion during January-September 2015. Good news everywhere!

A Come Back

The industry is being applauded for its spectacular comeback after the massive slip during the great recession period. Once a cynosure of all eyes, the handicrafts sectors lost its Midas Touch in the immediate aftermath of the global financial crisis of 2008. But that was for a brief period of time. Soon, the sector sustained its export growth trajectory in markets like US and Europe – which account for more than half of India’s handicraft exports – despite the recovery in these nations being flimsy. Now this is what you call a comeback!

Blessing In Disguise

Talking about the past year, what helped the handicrafts industry to pull itself back, revive and stay afloat during the gloom? Going by industry sources, the depreciation of rupee against the dollar proved to be a ‘blessing in disguise’ for Indian handicraft exporters. Understood, the rupee depreciation increased raw material cost and also resulted in costlier imports across several industries. But, for an industry like handicrafts where raw materials are sourced from within the country, the rupee depreciation turned out to be an advantage. Further, while export incentives have been increased for a number of handicraft items, the government has also added several new handicraft product lines to the MEIS schedule. All this has worked towards boosting exports of handicrafts from India. Rakesh Kumar, Executive Director of Export Promotion Council for Handicrafts feels that “exploring non-traditional markets like Latin America, the Middle East and East European nations, along with brand promotion through international handicraft fairs also helped in boosting exports in the first nine months of 2015.” 

MADE IN INDIA

In fact, 'Made in India' handicrafts like the terracotta products, silk and zari embroidered fabrics, Kashmiri shawls or Bhadoi carpets rightfully capture the imagination of PM Modi’s ‘Make in India’ initiative. But then there are other issues. Lack of skilled human resource and innovation, unavailability of easy financing schemes, dominance of unorganised players, lack of market intelligence, long-drawn-out processes, lack of R&D and poor infrastructure act as major deterrents to growth for the sector. 

While demand in international markets is not something that the Indian government can influence directly, including the handicrafts industry under NREGA, removing VAT, giving added benefits in the form of increased export incentives and remissions (wholeheartedly, we mean!), and solving logistical issues are things that are doable. 

Given that India’s competitors like China and Indonesia are putting in all their might to attract the country's traditional fans, the least the government can and should do, for an industry which has the potential to earn truckloads of forex for the country! An Indian in the 1980s couldn't have imagined buying 'Made in China' idols of Lord Ganesha from the local market. [Now China has started selling us our very own gods!] 

If religion be what put the brakes on meat exports, let religion be what will step on the gas for the country's handicrafts exports! 

 

 

Gems & jewellery - In need of Some Shine & Glitter

Precious metals have always been amongst largest contributors to India’s export basket. And the year gone by was no different. But what stole some shine from the sector were surging imports and a widening trade deficit. Can the sector narrow this trade gap? Or, will it continue to weigh heavy on India's import bill?

Vanita Peter D'souza| February 2016 Issue | The Dollar Business

As a sector that has enjoyed the status of being a leading foreign exchange earner for the country, one would assume that the gems & jewellery sector has had one of the smoothest runs towards generating foreign revenues for the country in 2015. But the journey of precious metals comprising gold, silver, diamonds, pearls etc., was not that easy going. No surprise, though, the sector yet again added some sheen to the dull business and a few billion dollars to country’s foreign reserves. However, overall, the 2015 tale of the industry was stymied by rising imports, declining gold prices and, of course, lack of government support.

Adding Sparkle?

A closer look at the trade figures and one can gauge how the precious metals sector put a brave front amid rising imports. In the nine months leading to September 2015, exports (in rupee terms) of precious metals (Chapter 71) from India increased 2.35% to Rs.1,965.53 billion as against Rs.1,920.46 billion during the same time interval ending September 2014. Categories such as cut and polished diamonds, gold medallions and coins, coloured gemstones and silver jewellery were the major drivers of the exports growth. But, there's a catch! If one considers the value of exports in dollar terms, then shipments of gems & jewellery from India during the aforesaid period went down 3.6% (to $29.98 billion) over the corresponding period last year. It was the depreciating rupee (against US dollar) that actually came to the rescue of Indian exporters and prevented exports from the sector from sliding into the red zone. So, is there something that doesn't meet the eye? What if the rupee even slightly recovers against the dollar? “We are expecting some global recovery. Our major export destination is US and its economy is going through swift recovery. We are hopeful that our gems and jewellery exports will pick up in a month or two,” Bachhraj Bamalwa, Director of the All India Gemsand Jewellery Trade Federation (GJF), tells The Dollar Business.

Industry reports too point out towards a brighter future. According to a report by Research & Markets, the jewellery market in India is expected to grow at a CAGR of 15.95% over the period 2014-2019. A report by World Gold Council too states that “India’s gold jewellery exports can multiply by 400% to $40 billion in the next five years by winning consumers’ confidence through credible hallmarking standards.” What’s more? Given the sector’s share in country's foreign exchange earnings, the government has declared the sector as a thrust area for export promotion. Now this will surely add some glitter to the country’s dull economic scenario. Isn’t it?

…Really?

So far, so good! But then, despite these rosy projections about the sector, there are factors like swelling gold imports which remain a threat to the country's current-account balance. During January-September 2015, the precious metals imports in rupee terms grew by 13.82% to reach Rs.2,941.32 billion as compared to Rs.2,584.26 billion in the same period in 2014. As a fallout of the swelling imports, the trade deficit during the mentioned period increased by 47% to total Rs.975.92 billion. The real culprit of the surging imports is the yellow metal – Gold, India's second-biggest expense on the import bill after oil.

As the world's largest importer, the country consumes massive quantities of the yellow metal, the demand for which mostly comes from the jewellery industry. If the industry players are to be believed, India imported 850 tonne of gold during January-September 2015 as against 650 tonne in the year-ago period. Interestingly, the industry has been requesting the government to cut gold import duty (rising imports had forced the government to raise import duty on gold to 10% two years ago), in order to ensure adequate supply of the yellow metal and help meet exports demand.

Glittering Future

Industry body Assocham has urged the government to grant an industry status to the gems and jewellery sector to provide impetus to the sector and boost exports of gems and jewellery from the country. “Granting industry status can give a fillip to investments and bring down costs of operation in gems and jewellery sector, besides it will help build trust and faith in Indian brands in the global markets and in achieving goals of Make in India,” says D. S. Rawat, National secretary General, Assocham.

While growth in gems and jewellery sector can be a panacea various problems of Indian economy (according to an Assocham study, an increase of Rs.1 in final demand in gems and jewellery can lead to an increase of overall output of the economy by about three times), all that the sector wants to become one is some more help from the government in form of incentives. If it happens, the sector can surely add some glitter to India's overall exports story!

 

 

Automobiles (And Auto Components) - ON An Uneven Path To Growth

The Indian automobile and auto components industry has always charted its own growth trajectory. And the year gone by was no different. Surging overseas volumes of commercial and utility vehicles, generous foreign investments and global auto majors hinting at making India an export hub were some signs of great times ahead for the industry.

Vanita Peter D'souza| February 2016 Issue | The Dollar Business

It’s not easy to talk about growth at a time when the year gone by has proved to be one of the slowest in terms of India’s exports. Not so in the case of auto and auto components. We don’t say it; numbers do. 

A quick analysis of how the Indian auto and auto components industry fared on the exports front in the year gone paints a rosy picture. In the nine months leading to September 2015, exports (in rupee terms) of the automobile sector (under ITC HS chapter 87) was Rs.689.87 billion – a jump of 3.8% as compared to the same time interval ending September 2014. How good is that? Let us give you a perspective of the nation that has over the past few decades championed the cause of automobiles: Germany. This world's largest auto and auto parts exporting nation accounts for about one-fifth of the world's total exports in the segment; in fact, auto and auto parts exports account for over 17% of its overall exports (CY2014). What happened to it in the three quarters leading to September 2015 however made it appear a lesser champion. Germany's exports in period fell 8% y-o-y. Now ask yourself again whether India's 3.8% rise in auto and auto components exports is worth writing home about!

India's rising exports also ensured  that its surplus grows (albeit marginally by 0.14% y-o-y). But again, in a less exciting 2015, in a country that feeds on trade deficit, the sector's performance is like it running a marathon, crippled from the start and winning the gold! Even better, the growing numbers have made India the world's 7th largest producer of automobiles with an average annual production of 23.36 million vehicles.

There is more evidence that India’s automobile industry is in the top gear. Going by data provided by the Society of India Automobile Manufacturers (SIAM), exports of automobile almost doubled to 3.57 million in FY2014-15 from 1.8 million in FY2009-10.

Prosperity In Parts

Since an automobile is the sum of its parts, the growing export numbers of parts clearly reflect that Indian components are gaining acceptance worldwide. In fact, India has been a textbook example of how to create buzz through wheeling and dealing in auto components. Today Indian auto components are exported to more than 160 countries.

Despite the not-so-rosy new automobile market predictions globally, the automobile aftermarket (including replacement parts and accessories) is all set for a boom. Having grown at a CAGR of 11% in the last five years, turnover for Indian auto component manufacturers is expected to increase two-fold to $115 billion by FY2021 (as per Automotive Component Manufacturers Association of India, ACMA). In terms of exports too, the auto component story is one that’s spirit lifting.

Although all major component categories have shown a healthy growth in exports in the nine-month period CY2015, categories such as transmission shaft and cranks, brakes and servo-brakes and their parts, drive axles, radiators, et al, have been the real value drivers for exporters. In fact, transmissions and brakes have been front-runners when it comes to exports of auto components from India in terms of value. With a revival in demand for OEM products across CV and PV segments around the world, exports of auto components from India are projected to rise from $12 billion in FY2016 to $30 billion by FY2021 and $40 billion by FY2025, making India the world’s third-largest supplier in this segment!

Many SPEED BREAKERS Ahead...

However, despite such strong prospects, the fear that the surplus capacity of China’s auto components industry would find its way into India is haunting the Indian automotive industry. “The impact of the slowdown in the Chinese economy is of concern to Indian auto component manufacturers. Imports of auto components from China are one of the highest today, and with the Chinese automotive industry’s surplus capacity, there is a likelihood that these products will find their way into the Indian market as India continues to be the most attractive amongst the emerging economies,” ACMA’s President Arvind Balaji tells The Dollar Business. He is quick to add that the Indian auto component industry also suffers from higher import duty on input raw materials compared to its global competitors.

To top this, the inverted duty structure in the industry has made domestic components less competitive, and the industry keeps waiting for some reforms and pitching for stable policies budget after budget. This apart, Customs duty and transfer pricing issues are plaguing the automotive industry.

...But The Foot's Still On The Right Pedal

Amidst challenges engulfing the sector, PM Modi’s ‘Make in India’ campaign has been able to make a positive impact on the sentiments of foreign investors in the sector. According to a recent

Deloitte report, India has already established itself as a manufacturing hub for small-vehicle production, and entry of more OEMs could make India one of the top ten production sites in future.

In fact, if the trend of FDI in the automobile industry continues in the manner in which it has during the first quarter of FY2016, we will close the year at Rs.27,656 crore of foreign investment in asset building in the auto sector – 75% higher than in FY2015 and 207% higher than in FY2014. Progress? Yes it'll be.

Judging by the downpour of investments in the auto component sector since the Make in India campaign was announced a year back, this less glamorous cousin of the automobile industry seems to be as much discussed across boardrooms of multi-million dollar businesses. To quote an example, as per a PwC report, just tyre companies have invested over Rs.7,300 crore in capacity building in India in the past 12 months. Talking about other OEMs, names like Bharat Forge, Motherson Sumi, Sundram Fasteners, Bosch India, etc., don’t just have their crores of rupees in investments planned to expand their respective component manufacturing capacities, they are forging newer relationships with global OEMs besides exploiting ‘Advantage India’ to make cost-effective, high-quality, conventional products to be exported to markets like Latin America, South Korea, etc., to boost exports.

According to the Automotive Mission Plan 2016-26, "The Indian automotive sector has the potential to generate up to $300 billion in annual revenue by 2026, create 65 million additional jobs and contribute over 12% to India’s GDP." The 'Make in India' programme too predicts that India will become the third-largest automotive market by volume, by 2016. Recent growth numbers are nothing but a testimony to the fact that we are on the right highway to glory.

Construction Materials - Unfinished Business

A cursory look at India’s construction materials exports shows that the country has not been able to capitalise on global opportunities. Construction materials exports have fallen in most categories with very few segments showing promise of growth in the near future. Is there scope for a rebound?

Deepak Kumar | February 2016 Issue | The Dollar Business

To begin with, India is positioned fifth in exports of salt, sulphur, earth, stone, plaster, lime and cement, eighth in exports of stone, plaster, cement, asbestos, mica. To add to this, India's construction materials have established their presence in the most discerning markets like US, Germany and UK. All these pointers will lead to the inevitable questions on why India has not been able to consolidate and build on its foundation on overseas terrain in the construction material sector. Why is it that the momentum in exports continues to have much left to desire? Moreover, why is India unable to outperform its nearest competitors and move up the ladder in exports? On the contrary, India showed symptoms of slipping down the incline. Inexplicable, considering that despite its robust and incredible contribution to India's infrastructure growth narrative, which provides ample proof of its competence, the country is yet to expand its footprint in international markets.

One reason attributed to the lack of growth or the prevailing de-growth is that construction segment is more oriented inwards since the domestic market is huge enough to warrant any interest on exports. Moreover, it has to contend with a domestic market which is outward oriented for its requirements – read fixation for foreign products from interiors to tiles to technologies. This could perhaps be one of the reasons for the rather indifferent performance in exports. Another factor could be that India is yet to develop self-reliance in appropriate and latest technologies for value-addition. A case in point could be India's export of raw granites instead of value-added finished and polished granite despite it being one of the biggest producers of the stone.            

Numbers Talk

While exports of construction and related materials were down by 6.4% (in dollar terms) during the nine-month period ending September 30, 2015, over the corresponding period last year, its imports shot up by 4%. The story was no different even in rupee terms, though the dent was not that bad as exports in rupee terms went down slightly by 0.6% year-on-year during the January-September 2015 period. Exports of construction articles, such as granite fell by 12.60%, building stone by 9.71%, cement by 24.66%, and asbestos by 19.94% during the first nine months of CY2015 compared to that

of last year. The only major construction materials category that registered positive exports during the January-September 2015 period included furniture, lighting, and prefabricated buildings and was up 5.4% y-o-y. Speaking to The Dollar Business, E. D. Khatri, Chairman of Leela Export House, a Rajasthan-based furniture exporter said, “Barring EU, our exports have been fairly reasonable in other parts of the world. We have seen this decline in the past 18 months, and it is likely to continue in future. Though, it is too early to make any prediction.”

Down But Not Out

The narrative can yet be transformed into a exports success story, if India cerebrally and judiciously exploits its strengths in the construction segment to foray into the huge international market space awaiting to be tapped. The cumulative world exports of all three HS codes: 25, 68 and 94 is valued at over $342 billion with India's exports contributing about $5 billion, which means a microscopic 1% share. This reflects the fact that there are no dearth of opportunities. There is enough room for optimism.

Constructive Forays

India doesn’t just export construction materials – it also exports projects. On an average, the country exports about Rs.280 billion worth of projects annually. During January-September 2015, the cumulative exports were worth Rs.219.46 billion, a marginal decline from the nearly Rs.220.80 billion during the corresponding period of last year. But, what has projects to do with export of construction materials. The EXIM Bank initiative to extend financial and credit support to those not only involved in project constructions but also construction material supplies related to project is a classic case in point. Another initiative of the Bank to focus on African countries – which has become a destination for infrastructure projects has started fructifying. This means more opportunities for exporters of construction materials.

Further, with China making desperate attempts to re-balance its economy, US on a way to steady recovery, and Asia and Africa, at large, showing signs of growth, the Indian construction industry will find myriad opportunities in the overseas market. In fact, several Indian granite exporters have already been shipping supplies for architectural works across the globe. “We did an American Consulate building in Indonesia and we have been supplying our product for the Hilton and Hyatt hotels in Chicago and New York,” says Gautam Chand Jain, CMD, Pokarna Ltd., one of India’s leading exporters of granite. No doubt, India’s stone exports have the potential to grow, and all they need is little push from the government. "We expect a lot of synergy from the government. If the government supports us, there is a huge scope to garner more revenues," Puneet Soni, Director – Exports of Granite Zone India, tells The Dollar Business.

Fertile For FDI

Driven by a quest to make India an indigenous manufacturer and exporter, the NDA-led government has taken a slew of initiatives. In the past two years – once in October 2014 and then in November 2015 – the government has stepped up to liberalise the FDI policy in the real estate sector, thereby making it easier for the foreign investors to explore India’s construction industry. These are good signs for the industry, and past performance also shows that it is not impossible to beat the odds.

The Way Forward

 Until now, India’s construction material exports remain limited due to several domestic and global issues, and most notably due to a limited support provided by the government. These issues are impediments and unless worked upon, there will remain legitimate doubts about the industry realising its full potential in the foreign markets.

However, now with the government's 'Make in India' initiative, there is a definite push towards making India a manufacturing hub. Upgradation in technology through these initiatives as well as through technology transfer collaborations with foreign partners should help the industry produce more value-added products which should find acceptance across developed markets.

While the government has definitely been successful in attracting FDI across sectors, more needs to be done to allow foreign companies to set up bases in India in the construction materials segment. Mining leases and environmental clearances also remain a hurdle for the sector. While there is a need for fairplay and transparency, there is also a need for speed in reducing hurdles.

How fast the industry will grow depends on how fast the government keeps up with reforms. And what will help the industry, is a combination of growth oriented initiatives and streamlined policies. As the government and the industry strategise to explore opportunities, we continue to build hope that exports of construction materials will soon see a spurt of growth. Hope as they say, can help build a tall future too.  

Engineering Goods - A Flawed Architecture?

Lack of depth in technology is one of the biggest factors affecting the growth of exports of engineering goods from India. It is imperative to strengthen the indigenous production base, if we want it to remain competitive and viable.

Himanshu Vatsa | February 2016 Issue | The Dollar Business

Recognised as a key driver of the nation-building process, the engineering sector too could not remain insulated from the country’s export slump as the outbound shipments of majority categories ground the sector to almost a halt in 2015. The sector appeared trapped in the no man’s land, battling the double whammy of global slowdown leading to sluggish demand of engineering products and capital goods; and the increased imports into the country.

A Downhill Trip

Engineering exports basket, which includes transport equipment,  nuclear reactors, boilers, medical apparatus, light engineering products like castings, forgings and fasteners and other capital goods witnessed a noticeable de-growth with overseas shipments declining by 1.3% to Rs.1,197.55 billion during Jan-Sept 2015 from Rs.1,213.09 billion in the corresponding period last year. 

The level of crisis in engineering exports, which account for almost a quarter of India’s total merchandise exports, can be gauged from the fact that exports to 20 out of the top 25 countries to which India supplies to, recorded negative growth in the first nine months of CY2015. The situation is so grim that Engineering Export Promotion Council expects that India’s engineering exports in FY2016 might even fail to reach last year’s $70-billion level. Now that's a real big reason to worry considering the sector's contribution to India's exports.

The Biggest Loser

The biggest loser in the engineering goods segment was the electrical and electronic equipment category which saw its exports from India plummeting to $5.92 billion during the nine month period ending September 30, 2015 from $6.99 billion during the same period last year, registering a massive decline of 14.9% year-on-year. The flagship products made in India under this category include electrical capacitors, fixed, dielectric of paper or plastics, fixed capacitors designed for use in 50/60 Hz circuits, gramophone records, etc. A key reason for the decline is the “adverse change in Foreign Trade Policy 2015-2020,” Rajoo Goel, Secretary-General, ELCINA (Electronic Industries Association of India) tells The Dollar Business. But then, there are other reasons too.

What Went Wrong

So, what was behind this free fall? According to industry players, with whom The Dollar Business interacted, while currency fluctuations were responsible for a part of the export decline, a major chunk of the fall has been due to sluggish global demand. Weak global demand and falling commodity prices also derailed the overseas shipments of engineering goods. As majority of India's exports are headed to EU, troubles in western Europe too had a biting impact on India’s shipments of the engineering goods. “Engineering goods, one of India's main export commodities, have been the most disappointing. Soft global growth is largely to blame, but a slow domestic investment cycle isn't helping bring production on line. Capacity utilization across India remains low. India is also suffering from painstakingly slow economic recovery in the eurozone, which is one of the country's major trade partners,” states a recent report by  Moody’s Analytics.

And not to say, the ripple effects of sluggish growth in China were instrumental in pulling down demand of engineering goods and thus affecting exports. Both manufacturers and exporters believe that the steep devaluation of the Chinese currency is one of the major reasons that dealt a blow to the shipments of engineering goods which are battling a slowdown in most markets of the world, as shipments from the country further lost competitiveness against Chinese goods.

Dissent Voices

While exporters blame loss of competitiveness due to reduction in government incentives to exporters through various schemes, the trade body has claimed that the crisis has deepened because of excessive protection given by the government to domestic large-scale steel firms by way of safeguard and anti-dumping duties. Further, the government’s plan to impose a minimum import price (MIP) for about a dozen steel products – a move aimed at checking imports from China, Japan and South Korea – is yet another cause of worry for the manufacturing community. Manufacturers feel imposing of MIP will completely destroy the medium & small scale enterprises (MSEs) operating in the sector. This apart, the exporters have been seeking an increase in the duty drawback rates since the rate hike in the recent past has been quite marginal for most of the products. Non-uniformity in taxes across states  is also hindering the sector’s growth.

Worry Or Not To Be…

Technology intensive manufacturing has the ability to not only enhance revenue generation (through exports), but also the potential to have a multiplier effect on the overall economic growth. Although the government has already set up electronic hardware technology parks, special economic zones and allowed 100% FDI in the electronics and electrical hardware manufacturing under the automatic route, there is a lot more that still needs to be done. In fact, the focus should now be on design-led growth instead of demand-led growth. This implies that investments in R&D, technology incubation centres needs to be increased. Building a world class infrastructure, restructuring duty tariffs and positioning the ‘Made in India’ tag at par with global brands are all efforts that can pace up growth for this sector. 

 

Chemicals - A Chemical Imbalance?

Numbers reported by Indian chemical industry exporters in the past year lacked explosion. The Dollar Business investigates factors that ruined 2015 for the sector and if there is any respite from the pain.

Jasleen Kaur | February 2016 Issue | The Dollar Business

India’s economic development may be on the rise but if there’s one industry that’s at the risk of missing out on this boom, it’s the chemical industry. This despite that chemicals constitute about 6.4% of India’s total exports, about 2.1% of its GDP and the industry is the 3rd largest in Asia (by value). 

Looking at exports figures reported by the industry – month after month, quarter after quarter – experts aren’t convinced about its growth story. The value of chemicals exported from India in the first three quarters of 2015 was 2.8% lower than that during the corresponding period in 2014. Segments like tanning and dyeing extracts (including tannins and pigments), inorganic chemicals, soaps and lubricants (including waxes, modelling pastes), and explosives (including pyrotechnics, matches, pyrophorics, etc.) – each witnessed a double-digit collapse in exports. So much so that even the inclusion of a high growth segment like fertilisers (that demonstrated a 49% growth y-o-y) couldn't prevent an 8.4% overall contraction of the "chemicals" super-segment. Although the figures are not so surprising considering that overall exports from India has taken quite a beating (month after month, in the past year and more), a degrowth in exports of almost all elements that comprise the chemicals category means the blemish in this business is due to more factors than just "plain business" from foregin markets. Perhaps, structural issues.

Roadblocks

High prices of raw materials which are difficult to procure, lack of access to funds, environmental clearances and lack of adequate energy to pump life into their factories are some issues the industry is grappling with. Agrees B. R. Gaikwad, Chairman, Chemexcil, as he tells The Dollar Business, “Environmental clearances are a major issue. Major industrial estates in Gujarat have been declared critically polluted and are facing issues on account of stringent pollution controls imposed by Central Pollution Control Board (CPCB)." Truth is that CPCB – for all reasons right and wrong – is indeed one of the factors at play which has led to a flu-struck performance of the chemicals sector. Exports growth is hampered as exporters are unable to take advantage of cyclic market demands of specific products due to lack of flexibility of production of different product mix due to tougher stands by CPCB.

India’s key markets like EU, China, Latin American Countries, Japan, etc., are facing recessionary conditions which have resulted in decline in demand and steep fall in prices of various chemicals. Then, there are also market-specific challenges. For instance, while on one hand, Indian chemical exporters are facing intense competition from their Chinese counterparts, on the other, in a big market for Indian chemical exporters like China, intolerable entry barriers – like a high VAT upto 17% – make survival an unknown phenomenon. In another lucrative market like EU, withdrawl of Generalised Scheme of Preferences (GSP) benefit by EU on Indian exports [due to which Indian exports to EU are now subject to full Customs duties] has made Indian chemicals expensive.

What's more? Export incentives under Merchandise Exports from India Scheme (MEIS) have also been reduced from 2-5% for chemicals to 2-3%. Besides, 2% benefit under Incremental Exports Incentivisation Scheme is also now unavailable. When a policy change to kill competitiveness of Indian chemical exporters is enacted, where else but southwards would you expect the growth chart to be headed?

The Right Steps

A policy course correction appears to be on its way though. The government is expected to come out with a national policy on chemicals in a few months from now. It will cover aspects like a national substance improvement center to promote innovation. Apart from this, the government is continually reducing the list of reserved chemical items for production in the small scale sector, thereby encouraging greater investment in technology upgradation. One bright spot for the Indian chemical industry going forward could be speciality chemicals – a segment which has been growing at a CAGR of 14% over the last five years. The segment could be a big forex earner for the industry in future considering that India’s share in the global speciality chemical market is expected to rise to 6-7% by 2023 from the current 2.8%.

Continued Tumble

Despite optimism, the going will not be easy for Indian chemical exporters in the coming year, especially considering how aggressive China will get with the yuan devaluation in vogue and the country promising not to repeat a 2015-like show in exports in 2016. And with consumption of chemicals expected to rise in India in the coming year and beyond (with manufacturing activity rising, of course), exports of chemicals may actually continue to roll downhill. That's not too bad a future for the sector. Or is it?

 

 

Leather - Caught On The Wrong Foot

Declining export order books, negative growth, and contracting profits across industry segments are a few signs of gloom which is rapidly engulfing the Indian leather industry. What is behind the great fall in leather exports from the country? And is there a way out for an industry which, in the past, has been known for its consistency in high exports earnings? The Dollar Business deliberates.

Shivani Kapoor | February 2016 Issue | The Dollar Business

For Kanpur-based upholstery and processed leather exporter Faisal Akbar, the year 2015 was more bad than good. The export orders from his rich clients in Europe and US plummeted, the beef controversy left him with no raw material, and a slowdown in demand for his products sucked out a lot of profit from his business.

“We have stopped getting orders from our buyers in Europe and China. As a result, our business has come down by 50%. Our major export markets like Europe, China and US are down. It was only last month that the business saw some recovery. The global slump has sucked profits from the leather business,” rues Akbar, who has been exporting processed leather and upholstery to Europe and China for the past 15 years.

It isn’t only Akbar who is hurt. Hundreds of leather exporters across the country are fast losing business. The sector which was once synonymous with luxury goods and was popularly talked about for bringing billions of dollars into the country was caught unawares by the turn of events in some of the world`s biggest markets.

Result?

The $6 billion Indian leather trade revolving around exports to EU and US posted a negative growth for the sixth consecutive month in November 2015.

Slippery Slope

India’s overall exports have been showing a declining trend for 13 months in a row now (until December 2015), and the leather sector is no exception. According to an analysis by The Dollar Business Intelligence Unit, India’s leather exports between January and September 2015 contracted while imports expanded. From January to September 2015, export of leather and leather products in rupee terms stood at Rs.177.82 billion against Rs.184.07 billion registered for the corresponding period in 2014, marking a drop of 3.4%. However, in the same period the imports of leather and leather products reached Rs.49.74 billion from Rs.46.13 billion, registering a growth of 7.8%. Overall, the leather industry's book looked worse with export surplus coming down by 7.2% to Rs.128.07 billion during the nine month period in CY2015 from Rs.137.93 billion during same period last year.

The Biggest Loser

The sharp decline in exports of finished leather was instrumental in dragging down the sector’s growth. As per DGCI&S data, finished leather exports totaled $736.12 million in the first eight months of FY2016, plunging by 22.03% y-o-y. “The decline in exports of finished leather and saddlery and harness contributed significantly to the negative export growth,” M. Rafeeque Ahmed, Chairman, Council for Leather Exports tells The Dollar Business. In fact, he is quick to add that “in finished leather, there has been a fall in both prices and volume, following slow global demand generated by recessionary trends, particularly in Europe. As the recessionary trends are continuing, finished leather segment will take some time to recover.”

Footwear, which forms the biggest piece of Indian leather exports pie, too saw exports coming down by 5.54%. With India being the second-largest producer of footwear and leather garments in the world, a negative growth as high as 5% in leather footwear and garment exports is like a knock-out punch.

Stiff Competition

While India’s leather exports rode downhill, its competitors managed to fare well. Industry sources put the Chinese leather exports during January-August 2015 at $31.50 billion – 0.2% down y-o-y. According to industry experts, the Dragon could survive the tidal wave since it has been catering to volume-based demand.

Similarly, ASEAN countries like Vietnam surged ahead due to a high inflow  of FDI. According to data released by the General Department of Vietnam Customs, the leather and footwear industry fetched exports of $5.84 billion in the first five months of CY2015, registering a y-o-y increase of 16.8%, of which footwear and handbags exports brought in $4.6 billion and $1.21 billion of forex respectively into the country.

The only solace for India was a sharp fall in Brazil’s leather exports. According to data released by the Department of Foreign Trade of Brazil, the exports value of Brazilian leather from January to November 2015 fell 23.2% year-on-year.

What Went Wrong

Talk to those in the trade and you would know that the drop in exports is a direct result of the global slowdown and the crash in commodity prices. Khurshid Jamal of AK Leather explains this: “Economic slowdown in India’s major export markets – Europe and US – has led to people cutting back on spending in relatively luxurious items such as leather garments. Result: Lesser demand from our European and American clients. The sudden drop in demand has resulted in accumulation of stocks as buyers are postponing their shipments.”

Currency fluctuations and devaluations too have hit exports. Many industrialists feel that the Europe-bound export scenario has also been unconducive with the euro falling against the rupee, leading to decreased margins. And not to forget Maharashtra and Haryana governments’ ban on cow slaughtering and sale of beef that dealt a hiding to the leather industry. The vicious rhetoric sent jitters to those involved in the trade and severely affected the availability of raw material, hitting the business hard.

Infrastructural bottlenecks, political unwillingness to push trade agreements and “unthoughtful” policy reforms too are to be blamed for the disappointing performance of leather exports. For instance, trade arrangements haven’t yet been concluded with countries except Russia, leaving no choice but to continue to bank on markets like US and Japan which are already flooded with leather products from China, Vietnam and Brazil. And the consequences are obvious – cracks on the export ledger books, falling profitability, slowdown in investments and large-scale lay-offs. And as expected, those in the trade are losing business.

What Now?

There’s no doubt that the leather industry has a huge potential to earn truckloads of precious forex for the country. All it requires is a little push from the policymakers – in form of right polices and an infrastructure which is at par with competition. Revival of leather exports in CY2016 requires focus on productivity enhancement, availability of raw materials, overseas market development and re-orientation of policymaking process to boost India’s image as a dependable and reliable supplier of leather and leather products. Considering the importance of the eurozone as a buyer market, India also needs to accelerate its trade engagements with EU and push to conclude the FTA at the earliest.

Unless these factors are addressed, the $27 billion planned turnover (set by the Council of Leather Exports), will remain just a target. And that won't prove a luxurious outcome for Indian exports! 

 

 

Ships, Railway & Aircraft-Making - Ships, Trains, Planes & A Tale of No Gains

Often considered to be the wheels of India’s growth story – transport manufacturing sector appears off-track as of now when it comes to overseas shipments. While railway is losing steam, the ship-making segment is leaking fuel and the aerospace segment is finding acceleration hard on the runway.

Sai Nikesh | February 2016 Issue | The Dollar Business

Hit by the global economic slowdown, last year, India’s hi-tech 'transport manufacturing' exports comprising railway, tramway locomotives, ships, boats, aircraft, etc., got the biggest of beatings in recent years. Exports in these segments, put together, fell by 15.8% y-o-y to Rs.449.88 billion for the nine-month period ending September 2015. In the aftermath, trade surplus showed a big drop of 45.2% over the last year.

While India's exports of ships, boats and floating structures during January-September 2015 fell 7.50% as compared to the same period last year, overseas consignments of railway, tramway locomotives, rolling stock, equipment saw a big fall of 34.97% y-o-y for the nine-month period ending September 30, 2015. Exports of aircraft, spacecraft and components too, nosedived 23.13%  y-o-y with shipments falling to Rs.208.56 billion during Jan-Sept 2015 period.

Awaiting Take-Off

So, what's stopping the industry from taking off? Problems are aplenty – delays in projects, congestion and obsolete technology, lack of interest amongst foreign investors, and inefficiencies in many respects have slowed the growth story of the exports. “Within the country, issues like lack of technology upgradation in the Indian engineering industry and small and medium enterprises (SMEs) facing infrastructural bottlenecks have hampered the production and thus the exports," T. S. Bhasin, Chairman, Engineering Export Promotion Council Chairman tells The Dollar Business.

Efforts from the government like permission of 100% FDI in segments like suburban corridors, permission to foreign private players to undertake trial runs of faster trains on Indian tracks, tie-ups with foreign governments to modernise railways stations across India, major collaborations between foreign and Indian entities in the aviation sector, etc., demonstrate that the government is serious about reinventing these sectors. But for now though, it’s all about intent but little action and result.

Stuck In A Rut

Although “Make in India” campaign has been successful in creating some buzz for the industry, lack of depth in technology is one of the biggest factors that is impeding these sectors from taking that big leap. Most Indian manufacturers are still stuck at the basic or intermediate level of technological capabilities, which places them way below their global counterparts in the manufacturing value chain. In all these categories, India is still looked upon as just a sub-contract-hungry, tier III supplier of components. The reason is simple. The current level of investment in R&D infrastructure in India is still way below global benchmarks. India’s R&D spend, as a percentage of GDP, is just 0.76% as compared to countries that have proven hi-tech manufacturing capabilities (Japan – 3.39%; Singapore – 2.23%; Germany – 2.88%; China – 1.84; and US – 2.85%; data source: US National Science Foundation). Even within the current R&D spend, the share of industry and business R&D for India is a miniscule 36% as against 68.5%, 75.7%, 77%, 67.3% and 76.5% in US, China, Japan, Germany and South Korea respectively. What’s most alarming is that the proportion of government R&D that goes towards industry is a paltry 6% (source: BCG). This really calls for an immediate action on the part of policymakers. Infrastructure and policies need to be worked on if this perception has to change. Incentivising innovation and promoting R&D will not only help encourage exports from these hi-tech sectors.

Need A Helping Hand

Other factors which hinder the growth of exports from the industry include lack of a proper incentive system and  transparency in processes involved. Duty Drawbacks do exist but they are not meaningful. EPCG schemes also do exist in both the pre-and-post formats, but the troubles involved are umpteen. So much that most export-manufacturers don’t even want to think along those lines. "Direct tax benefits and clear cut information on sector-wise incentives on exports is required in addition to chapter-wise elaboration in our foreign trade policy. Also, some laws have to be made transparent. I still don’t know whether I need a licence to manufacture defence aircraft equipment," G. Raj Narayan, Managing Director, Radel Advanced Technology told The Dollar Business in an exclusive interaction a few months ago.

The Road Ahead

So, what’s the way out? Infrastructure and policies need to be worked on. Indian policymakers need to bridge the technology divide that exists between Indian manufacturers and their global peers. Greater incentives for R&D, investments in building technology infrastructure and promoting strategic joint ventures (JVs) and an assurance about protecting patents and IPRs – for which India has a dicey record – of JV partners is all what is required if policymakers really want exports from these sectors to take off. Further, there is also a need to harmonise taxation laws, which deter many foreign players from entering India. Delays in projects, lack of interest amongst foreign investors, operations at levels below capacity, and inefficiencies in many respects, India has much to ‘make infrastructure’ before it can 'Make in India' and Export from India in these categories.

It's one thing to imagine that we are increasingly exporting aircraft and ships to the world; it's another to actually do that. A bigger problem is, exports of capital goods depend as much on the mood swings of other economies. If exports of  Dhruv and Cheetal helicopters to Nepal and Afghanistan matter to India greatly, it is worth considering how excited these economies are or how they are faring politically and economically in a given time window. Sadly, aircraft and ships, and railway wagons aren't sold in as many quantities or to as many people as chewing gums and mobile phones.

 

Metals & Minerals - No Longer Mines Of Big Profit

Despite being a cradle of many-a-mineral resource, there is a huge chasm between potential and exploitation in India. And due to meltdown in commodity prices that has hurt the entire world, both production and exports-wise, the sector is currently living a nightmare!

Ahmad Shariq Khan | February 2016 Issue | The Dollar Business

India has long been recognised as a nation well endowed with mineral resources. The country ranks 4th amongst mineral producers in the world and produces as many as 87 minerals, which include 4 fuel, 10 metallic, 47 non-metallic, 3 atomic and 23 minor minerals. A recent strategy paper by McKinsey states that the sector has the potential to add $210-250 billion to the Indian GDP by 2025. However, looking at numbers recently reported by the industry, particularly exports, this looks like a distant dream.

Gloomy Performance

Recent times have been tough for the metals and minerals industry in the country. Even the latest exports figures from the industry tell a dismal story. Exports of minerals and metals from the country was down 12.1% (in dollar terms) and 7.1% (in rupee terms) y-o-y for the nine-month period ending September 30, 2015. Iron & steel, ores, slag and ash of various metals, and tin and its articles saw the biggest fall in exports (in percentage terms) during the said period, with their overseas shipments going down by 25.8%, 55.5% and 56.5% respectively over the same period  last year. Value-wise, it was iron & steel that reported the biggest loss with its overseas shipments nosediving from $6.97 billion in January-September 2015 period to $5.15 billion during the corresponding period last year. 

So, what triggered this fall?

Commodity markets across the globe have been trending pretty consistently – on a downward movement since the second half of 2011. A closer look at numbers and you can gauge the seriousness of the situation. The Bloomberg Commodity Index, a benchmark index of 22 exchange-traded futures on physical commodities, is on track for a fifth consecutive annual loss, the longest slide since the data began in 1991. What’s more? The Index is already down about 26.53% over the last 12 months. Even the CRB (Commodity Research Bureau) Raw Industrials Spot Price Index is down to its lowest level since November 2009. And well India is no exception!

Bottlenecks Persist

Global trends apart, there are also other factors that are roadblocks to the growth of the mining sector. As per the Indian Bureau of Mines (IBM) Vision 2020, India would need to produce 200 million tonne steel by 2020. Under the present circumstances, this additional 119 million tonne in next six years cannot be produced entirely from conventional Blast Furnace-Basic Oxygen Furnace route due to limited availability of coking coal in India, high capital cost and long gestation period. Hence, despite the 'Make in India' buzz, the ground reality is that upto 60-65 % of our country’s domestic coking coal requirements are currently being met through imports.

This high dependence on imports further makes domestic steelmakers profitability dependent on international coking coal prices. Raw material security across the Indian metals industry is probably the largest differentiator. “Each year, a substantial portion of minerals, when not sold in domestic market or exported, is washed away in the rainy season,” highlights R. K. Sharma, Secretary-General, Federation of Indian Mineral Industries.

Hesitant Investors      

A nearly consistent increase in production values during the last three fiscals and a declining production growth rate indicate that 'Make in India' is yet to percolate the sector. Going by FDI trends, it becomes quite clear that foreign investors continue to shy away from the mining sector. Figuratively speaking, FDI inflows into the sector were down 20.33% y-o-y to $472 million in FY2015 from $568 million in FY2014. Now the fact of the matter is that mineral exploration is a scientific knowledge driven process of searching deposits involving high-risk capital and in the present gloomy situation in commodity market, investment dollars are in short supply.

Time, Running Out

In a nutshell, it can be said that unless India focusses on the key issues plaguing the sector – including dependence of input materials from foreign shores and lack of connectivity between mining sites and destination ports – private players are unlikely to be interested in exploring and capitalising on our vast resources. The status-quo in such an integral industry will remain unchallenged and generating positive foreign exchange flow will remain just a dream. 

 

 

Agriculture - Cropped Harvest

India has always been amongst the leading exporters of agri-commodities in the world. But what is truly upsetting is that despite being amongst the top three exporters in most agricultural and horticultural products, exports from India have been falling for quite some time now. Will this trend continue, or is there a magic harvest that can arrest the decline?

Manisha choudhari | February 2016 Issue | The Dollar Business

As a sector that employs a majority of the Indian population, and one that has played a huge part in the economic development of the country, one would assume it would do well in every aspect, but that is not the case. Agriculture sector is having a rather bad run in the international market place. India’s overall exports of agricultural and horticultural commodities have been continuously falling for the last twelve months and agri-commodities have been one of the major contributors for the tailspin in India's overall exports. During the first nine months of 2015, agricultural and horticultural products exports recorded a cumulative y-o-y degrowth of 18%.  

In Need For Change

From the perspective of values, cereals suffered the biggest setback among agriculture and horticulture exports, plummeting to $5.53 billion – a y-o-y degrowth of 30.5% – during January-September 2015. Cereals, which constituted a major share of the total agriculture exports, was down to 31% from 36% during the last fiscal in total. While the cumulative decrease of agri-products exports stood at $3.92 billion, i.e., -18%, during the 9-month period (Jan-Sept) in 2015, cereals' decline valued at $2.43 billion accounted for 62% of the total decline in agriculture exports! Exports of world's most favoured cereal – Basmati rice – also slid by 17%, with two of the major importers Saudi Arabia and Iran, which usually contribute to a little over 30% of the India's exports, pruning their procurements. Among the other big losers during the periods under evaluation were rubber, lac, gums, resins, vegetable saps and extracts, sugar & sugar confectioneries, oil seed, oleagic fruits, grains, edible fruits, nuts, etc. The only silver lining amidst all these negatives was the positive growth of coffee, tea, mate and spices which was up 6%.

The prime reason behind India's agricultural exports falling was the general fall in prices of agri-commodities. As per UN's Food and Agricultural Organisation's (FAO), on average, agri-commodities experienced a 19% fall in prices! In a January 2016 report, FAO stated that during 2015, while average cereal prices across the world fell by 15.4%, those of sugar and vegetable oils fell by 21% and 19% respectively. Reason? Excess supplies in the face of a weakened world demand, coupled with an ever-appreciating US dollar.

There were other factors at play too. Climatic vagaries and lack of proper post-harvest practices continued to prove a big impediment to India's agri exports. In fact, 30% of agricultural products are wasted every year due to this reason. G. V. K. Naidu, MD, Sam Agri Group explains how proper post-harvest could be beneficial: "We are the largest producers of mangoes, but we have not been able to tap into its export potential. The reason is that India has yet to perfect post-harvest systems. Pakistan is exporting containers of mangoes to the UK as it has invested in it, and perfected the post harvest know-how to sustain the long-distance shipping."

India needs to spruce up logistics and infrastructure facilities, apart from implementing appropriate policy initiatives, closing the lab-to-land technology  gap and providing market accessibility for revving up the fortunes of the agriculture sector. 

 

 

Plastics - The Case Against Plastic Smiles

India’s plastics industry is currently witnessing a reversal in its fortune with contracting exports, rising imports and the resultant widening trade deficits. Despite its own share of ups and downs, the industry has weathered crises in the past. Will it ever return to the growth trajectory?

Shivani Kapoor | February 2016 Issue | The Dollar Business

When crude oil prices depreciated through much of the third and fourth quarter of 2015, they not only became the fodder of debate but also an issue of concern across major economies – no surprise, as nations like Saudi Arabia and Russia consider oil their bread & butter. The impact of the fall in oil prices was not confined to industries like energy, but also extended to other related and dependent industries. And one such industry that perhaps felt the maximum heat was plastics.

The Numbers Game

A closer look at the numbers and you can see a mixed picture of trade performance of the plastics industry in the year gone by. Although 2015 started on a sour note for India’s plastics sector that saw exports in value terms falling in the first three months, shipments were back on track in April 2015, touching $338.6 million. Thereafter, exports rose for four months following a rebound in crude oil prices. The fall however began again in August. On a cumulative basis, exports of plastics for the nine-month period ending September 30, 2015 was down by 11.8% (in dollar terms) over the same period last year. Even the depreciating rupee (against US dollar) could not support Indian plastics exports enough. In rupee terms, India’s overseas shipments of plastics and plastics articles too tumbled 6.3% to Rs.239.78 billion in January-September 2015 period from Rs.256.01 billion in the corresponding period of previous year. What's more? Imports jumped 1.48% y-o-y to Rs.557.19 billion during the first nine months of CY2015.

The Real Culprit

While the total value of exports of plastics and plastics products from the country went down during the said period, there was no change in shipped volumes, claimed a few industry participants to The Dollar Business. So the curplrit for India's fall in total exported value really was price. Confirms Pradip Thakkar, Chairman, Plastics Export Promotion Council (PLEXCONCIL), “The fall in exports in value terms was driven by the plummeting commodity prices, especially crude oil prices. And, not to say, low demand following the global slowdown and increasing supplies from global competitors that played a role in the slide.”

Besides supply-demand mismatch, falling crude oil price also gave exporters around the world temporary muscles to experiment with lowered prices. Insiders feel the unfortunate fall is also because of policy reasons: "Although the Indian Government has introduced a 2-3% reward under Merchandise Exports from India Scheme (MEIS) on FOB value for exporting most products under Chapter 39 of ITC HS to all countries [which are India's major export destinations in this category], it is not enough as cost of fund is very high in India for Capex as well as Opex compared to other competing countries," says Pathik Shah, Managing Director, Atlantis Products Pvt. Ltd.

China Again. [Sigh!]

What China did for the past three decades by not allowing Western media to penetrate its hinterlands is prevent the world from knowing what it was becoming. It also managed to keep under covers what it was making with the ease of a whistle. Clearly, plastics was one such product. Exports of cheap finished products from China are harming India’s plastics exports in the global market. Chinese manufacturers enjoy various advantages like cheap raw materials, government support for land and infrastructure, domestic availability of machinery and capital goods at low price, cheap electricity, etc. "In fact, China has devalued its currency and become more competitive in last six months," adds Shah. With China becoming the preferred choice for sourcing plastic products, India is finding the battle a difficult one.

The scarcity of polymer production facilities in India has led to the dearth of raw material for finished plastic products. This further explains why India relies heavily on imports.

All this has resulted in a negative business sentiment across players in the industry. "Industry players are quite upset. In the light of the sagging overseas shipments, the export promotion council is devising new export strategies and plans to tap new markets with a newer and wider product base so as to make up for the reduced exports due to the global economic slowdown," says Thakkar. 

The Way Out?

As far as FDI is concerned, the industry's records aren't very encouraging. But announcements like RIL commissioning a plant to produce polyethylene terephthalate (PET) resin in Gujarat and ONGC planning to manufacture raw material for the plastic industry bring some hope for the Indian plastics sector.

The government too has announced several industry-friendly policy measures including a scheme for setting up need-based plastic parks to encourage the domestic plastic processing industry. In addition, a total of 23 Central Institute of Plastics Engineering & Technology (CIPET) have been approved to facilitate technology and financial collaboration for imparting employability skills in chemicals, petrochemicals and allied sector. Deregulation of the petrochemical sector and allowing 100% FDI under the automatic route are two other policy measures worth mentioning here.

With technology advancements being an everyday affair, and natural elements being used lesser each day ('Save the Earth', remember?), demand for plastics will only rise in times to come. But all such optimism will only mean junk if oil prices continue to lick the ground. 

 

 

Meat, Poultry & Seafood - Between The Devil and The Deep Sea

The world has been savouring servings of juicy meat and crispy crustaceans from India. Of late however, India's exports of both marine products as well as bovine meat has fallen. And there are indications that the trend will continue. What is behind this free fall?

Sisir Pradhan | February 2016 Issue | The Dollar Business

For a country which has one of the largest vegetarian population in the world, being a major exporter of meat poultry and seafood products doesn't seem a big surprise. With a low per capita consumption, there is a significant amount of surplus for exports. But while India remains a leading exporter of meat, poultry and seafood, the last year has seen exports slip significantly in most of the meat and marine product sub-categories.

Double Whammy

From the market demand perspective, Indian shrimps and crabs, in particular, are a global gastronomic favourite, contributing to about 70% of the total seafood exports from the country. In fact, in the international seafood trade, India is reckoned as one of the major exporters and the country’s seafood basket is largely dominated by crustaceans (HS Code: 0306), particularly frozen crabs (HS Code: 030614), and frozen shrimps and prawns (HS Code: 030617).

While in value terms, India exported $6.73 million worth of frozen crabs to US during January to September 2014, exports of the product during the same period in 2015 was $7.25 million – a growth  of 7.78%. It's hard to believe that despite an improved performance in a market that accounts for more than 52% of your imports in a certain product, you could be in for bad news when you talk about the world. Translation: US is the biggest importer of frozen crabs from India. And despite India's exports to US rising y-o-y, India’s total exports of the product to the world between January and September 2015 fell 20.86% y-o-y to $13.87 million. So, what triggered this fall in exports? The reason was simple. India’s export performance for the product is not just dependent on US. It's the other 48% that saw India take the whip! The demand for frozen crabs fell shockingly across markets like Singapore (y-o-y change of -40%), Malaysia (-25%), Thailand (-43%), South Korea (-69%), Maldives (-68%), Italy (-59%),  Israel (-95%), etc.

If the case with crabs was a surprise, for frozen shrimps and prawns, the story was heartbreaking! And this is a more significant development considering that this sub-category contributed to 95.4% of exports of Crustaceans and over 68% of total aquatic exports (in all possible forms) in CY2014. While the world imported 17% less of prawns and shrimps from India in the first nine months of 2015 (Q1-Q3, 2015 exports of $2.3 billion), the top five importing nations that account for over 72% of India's imports in this category (US, Vietnam, Japan, Belgium and UK) reported a double digit fall in demand!

“Mostly large restaurant and retail chains import shrimps in US. But, the demand has dipped by 20-30% over the last year. There is also a downtrend in the pricing. While the price of shrimps of 16-20 grade has slipped from $16 a kg to $12, the same for 31-40 grade shrimps has gone down to $8.5 a kg from $11 in recent times. There is also a likelihood of a further decline of 20% in prices in near future,” is how Gora Chand Mohanty, CEO, Seagold Overseas Pvt. Ltd. and Regional President – Seafood Exporters Association of India explains the fall in India's shrimps exports to The Dollar Business.

The reason for India's marine exports falling in the first three quarters of 2015 is two-fold: Fall in demand, which resulted in a fall in price; a double-whammy!

Of Blame and Hope

Some market players who The Dollar Business spoke to also attribute the fall in exports to lack of action by Marine Products Exports Development Authority (MPEDA) to stall the decline. However, there are some like Tara Ranjan Patnaik, Chairman, Falcon Marine Exports Ltd., who feel that seafood exports from India will be back on the growth trajectory very soon. "There is good potential for shrimps in the global markets. Further, due to disease factors contributing to decline in exports from countries like Indonesia, Vietnam, Thailand and China, Indian shrimps are in demand in international markets,” says Patnaik.

Although India plans to take its seafood exports to $10 billion by 2020, it still has a long way to go. In fact, despite being one of the leading exporters of seafood, India does not have a consisten Deep Sea Fishing policy and as such faces increasing phytosanitary scrutiny in importing countries. Further, concerns of over-fishing and climate change are forcing a change in production and exports of seafood products across the world and India is not unaffected. Addressing these gaps and encouraging aquaculture will be crucial to help achieve the target.

A Mixed Platter

Frozen and fresh meat of bovine animals, sheep and goat are some of the major export items in the animal product category from India. For January to September 2015 period India registered a dip of 14.03% in exports of this category (HS Code 02). Frozen meat of bovine animals (HS Code: 0202), that accounts for about 93% of the total meat and edible offal exports from India, saw a dip of 14.43% during the same period. Quite clearly, weakened demand of bovine meat in India's top two export desinations – Vietnam and Egypt – was to blame for the occurence. Of the $468 million contraction that happened in the two periods (Q1-Q3, 2015 vis-a-vis Q1-Q3, 2014), the two markets were responsible for a lion's share of over 95.11% of the damage! On aggregate, demand in these two markets shrunk by over 25% y-o-y. 

Talk about bovine meat and it's not easy to forget all the political hullabaloo that has accompanied it, all through 2015  and until this very day. Opposition from the various religious and political outfits (demanding a ban on exports of the product) too played a spoilsport for the industry. In the absence of zero incentive structure for exporters of bovine meat, there is little hope that exports of this product category from the land of the Holy Cow will witness an upswing any time soon. Unless, global demand plays a surprising saviour in the months to come. 

 

 

Processed Foods - Processed Foods On a Diet?

In the early 1990s when India started to actively participate in global trade, processed food was one of the fastest growing exports from India. Come today, and the sector is registering a decline in exports across almost all categories. What is stopping the sector from realising its true potential?

The Dollar Business Intelligence Unit | February 2016 Issue | The Dollar Business

The food processing industry in India accounts for about 32% of the country’s total food market. The importance of the sector is reflected in the fact that it accounts for 13% of India’s total exports, attracts 6% of the total industrial investment and constitutes 13.04% of employment generated in the registered factory sector. Despite impressive numbers, the food processing industry in India is struggling to become a global force to reckon with. Recent exports numbers are a proof.

During January-September 2015 period, the sector registered a downward trend in exports of almost all of the major products category. Exports of processed food from the country nosedived by 18.1% to $3.61 billion during the said period from $4.41 billion in the corresponding period last year. Weighed down by negative growth, segment-wise, processed food exports presented a mixed basket with a few – three of eight food groups – emerging unscathed and on the positive side. Among those losing maximum ground were residues, wastes of food industry, animal fodder (Chapter 23), down by 40.6% y-o-y to $886.51 million; dairy products, eggs, honey, edible animal product (Chapter 04), down by 33.5% y-o-y to $275.99 million; and albuminoids, modified starches, glues, enzymes (Chapter 35), down by 27.% y-o-y to $192.72 million.

Cocoa and cocoa preparations (Chapter 18), cereal, flour, starch, milk preparations and products (Chapter 19), and animal, vegetable fats and oils (Chapter 15) were the only three food groups which reported an export growth of 24.9%, 3.4% and 2.9% y-o-y respectively during the nine-month period ending September 30, 2015.  Problem was – items that gained in export value consisted under 24% of the overall processed food basket by value. A ship that's more than three-fourths under water cannot continue to sail; it can only be rescued! 

The Reason

The underperformance can be attributed to many factors. One major issue that the industry faces is quality of output. There are strict regulations in the industry all over the world and it has become very difficult for Indian manufacturers to comply with them. Speaking to The Dollar Business, Manish Prakash Nikhade, CEO of Nashik-based Nikhade Corporation that exports pickles and murabba claims, "There have been instances where some countries formulated their health regulations in a manner that hinders import of agro-based products from India."

The other reason that continues to trouble the industry is the over-dependence on monsoon. Once agriculture suffers, the agro-based processing sector is bound to suffer. But then, what about programmes like 'Make in India' that promises to make India a manufacturing and export hub? Isn't food processing one of the 25 sectors, which ‘Make in India’ focuses on?

Still A Laggard

The situation presently, despite all the growth potential and government initiatives, remains bleak. Even foreign investors haven't shown much interest in making India their regional manufacturing base. According to the data released by the Department of Industrial Policies and Promotion (DIPP), foreign direct investment (FDI) of just $6.55 billion has been made in the Indian food processing sector since April 1 2000 (until September 30, 2015). This, despite the fact that automatic approval for foreign equity upto 100% is available for most of the processed food items except alcohol and those reserved for micro and small enterprises (MSEs).

Trying Hard

To overcome the challenge of stringent food quality and safety norms across developed international markets, the Food Safety and Standards Authority of India (FSSAI), a statutory body under the Ministry of Health and Family Welfare, has laid down various regulations and processes to harmonise existing food products standards with CODEX international food standards. However, there have been several instances where the manufacturing community and the regulatory body have been at loggerheads, sometimes for the right reason, and most of the times for wrong! "Although the Indian food processing sector has been keeping abreast of quality assurance mechanisms, the focus has been more on getting safety certification rather than constant quality improvement," states a joint report by FICCI and PwC.

Agricultural and Processed Food Products Export Development Authority (APEDA) has also developed a web-based traceability system for tracing, tracking and product recall under a single window clearance system for peanuts, grapes, pomegranate and organic products. Exports of these products are routed through this online system.

Further, in a bid to organise the unorganised food processing sector and realise its true potential, the government, as a part of 'Make in India' initiative has announced to set up 42 Mega Food Parks across the country.

These Mega Food Parks, with common utilities like road, electricity, water supply, sewage facility and common processing facilities like pulping, packaging, cold storage, dry storage and logistics, are being promoted in areas with a strong agricultural resource base. However, out of 42 approved Mega Food Parks only 5 had become operational till December 2015.  

But problems galore

Ironically, one big challenge that India’s food processing industry is facing is extensive wastage occurring at each point in the supply chain due to inadequate storage, improper handling and poor packaging, making exports further uncompetitive.

As per a recent KPMG report, "Inefficiencies in the agricultural procurement and supply chains have resulted in loss up to 40% of food grain produced annually." Further, inconsistencies in central and state laws and a lack of trained manpower also ail investments and growth in this sector.

The government cannot fix these issues alone. Addressing these problems will require a multi-pronged approach from all stakeholders. No doubt, the challenges for the Indian food processing sector are diverse and demanding and as such, need to be addressed on several fronts to derive maximum market benefits.

It's the combination of uncontrollable and controllable factors that are affecting the growth of the sector and stopping it from achieving its true potential. That demand from high business markets like US, EU (especially Netherlands and France), and Asia (China, Malaysia, etc.) has fallen is one excuse for the ordinary performance of this sector in 2015. But when 2016 comes and goes, and if the world wakes up to increased consumption in these years, it'll become hard for Indian exporters of processed food to hide behind the curtains of negative externalities! 

Petrochemicals - Playing Sp'oil'sport to India's Exports

Amid an increasingly challenging environment of declining demand and rising competition, petrochemicals have been witnessing a near catastrophic fall across world markets for quite some time now. India's exports in this segment has also been a casualty of the global meltdown. The Dollar Business analyses key reasons and developments responsible for the sector’s dismal performance.

Ahmad Shariq Khan | February 2016 Issue | The Dollar Business

With the global petroleum sector in the doldrums – sending trade equations in a tizzy and oil prices hitting historic bottoms – the cascading effect on India has ironically been both positive and negative. Positive, because the declining prices did take care of reducing the country's subsidies burden and bridging the fiscal deficit to some extent. Negative, as India was among affected nations that went through an overall fall in export levels of value-added mineral fuels, oils and distillation products and in turn losing out on truckloads of precious forex.

India's merchandise exports, which had recorded a CAGR of around 11% during the four-year period FY2011-2014, dipped by 11% in FY2015 over that of the previous year. The patterns were in tune with global exports which registered a CAGR of 9.08% during the four-year period before dipping by around 8% in the fifth year. Mineral fuels, oils, distillation products, etc., accounted for a considerable share in India's total exports of all commodities with shares increasing from 17% in FY2011 to 20% in FY2014 before falling to 18% in FY2015.

A quick analysis of the nine-month period ending September 30, 2015, reveals that exports of mineral fuels, oils, distillation products, etc., from the country was cut down to almost half (49.45% to be precise of that exported during the corresponding period in CY2014), i.e. from $47.28 billion to $23.90 billion.

Major product categories which reached subterranean levels in exports during the cumulative first three quarters of CY2015 over that of the corresponding period in CY2014 comprised high-speed diesel (HSD; which constitutes more than 45% of India's total petroleum products exports) and petroleum spirit for motor vehicles which dipped by about 50% and 31% y-o-y respectively.

 

The Nosedives...

According to the Petroleum Planning and Analysis Cell (PPAC) of the government, exports of naphtha, fuel oil and lubricants showed the maximum fall on a y-o-y basis: naphtha by 16%, fuel oil 23% and lubricants 65%. Exports of other products such as liquefied petroleum gas (LPG), ATF and bitumen, too,

nosedived. Sounds all bad when it comes to petroleum products exports (ITC HS Chapter 27), but there are also many who feel exports from the segment was never India's strength. "Exports in petrochemicals has never been India’s strength and the country largely has been a net importer in this segment," says Mahinder Singh, Secretary General,  Chemicals and Petrochemicals Manufacturers Association of India (CPMAI). So to rue the fact that India did badly during a time when crude and world trade fared poorly isn't an emotion justified.

...And The Silver Lining

Although India's chips are down in exports, there is a possibility that the country can convert adversity into opportunity, especially given falling crude prices. The domestic segment is already shaping up to meet the challenge. PPAC data indicates that the fall in exports coincided with increased domestic consumption of petroleum products, which rose by more than 4% y-o-y to 165 MMT. Exporting refiners are now diverting their products towards the domestic market. Thus, it is not surprising that oil major, Essar Oil’s retail domestic business (during Q3, FY15) – as per its last quarterly statement – now accounts for 8% of its revenues against 2% in the corresponding quarter last fiscal. Speculations are rife that another major oil player Reliance Industries Ltd. (RIL) is planning to gradually open its shuttered retail outlets across the country. A spokesperson of RIL, on the condition of anonymity,  tells The Dollar Business that owing to the drop in the price of crude oil in international market, exports did take a hit value-wise but the impact was not so significant volume-wise. According to the spokesperson, responding to PM Modi’s clarion call for 'Make in India',  RIL plans to come up with a $15 billion investment plan for the domestic market and will gradually reopen its retail outlets across the country.

These are examples that prove how domestic firms are increasingly finding solace in domestic market at a time when international markets are experiencing a shake-up for any reason whatsoever. This is a logical alternative for the short term, but if hung on to as a permanent solution will harm not just India's foreign trade but will prove damaging for India's leading firms. The Indian market cannot be an alternative for the global market, can it?

Side-Effects

The past year hasn't been without other developments good and bad. With demand slowdown in their domestic market, Chinese manufacturers are exporting products at prices that have forced the Indian government to initiate anti-dumping investigations on products that are derivatives of crude oil. A case in point could be the recently initiated anti-dumping investigation concerning imports of ‘Purified Terephthalic Acid’, originating in or exported from China.

Now to the good part. There have been many encouraging developments on the petro landscape in the country that have the potential to soon change the trade equations of India vis-à-vis its trading partners. This includes Indian Oil Corporation's (IOCL) soon-to-be-launched 15 MMT Paradip refinery in the eastern coast. It’s expected that owing to its proximity to the ports and a huge capacity of 300,000-barrel-per-day, this India's largest refinery off the eastern coast, once operational will be exporting a lot of products that can dramatically change the existing export trade equations of the country. Germany’s BASF, which is also the largest chemical producer in the world, is also all set to invest $202 million (BASF’s largest project in India) in a new multi-product chemicals site at Dahej (Gujarat) soon. With increases in oil output bound to occur in the months to come, India's exports in the said category will definitely move northwards. Provided, no major bottlenecks appear.

Numbers Hurt

Despite recent advancements by India on many fronts to boost its petrochemical trade, compared to US and our neighbour China, India’s per-capita consumption of polymers is still insignificant. So, while India consumes about 5.2 kg per capita of polymers, the dragon’s per capita consumption stands at a huge 30 kg. India’s consumption of polymers is about 6.2 MMT, which is only around 3% of the global consumption of 200 MMT. Also, currently, India’s petrochemicals sector spends a paltry 1-2% of its turnover on R&D, compared to 5-10% in developed countries, and that is one of the reasons behind our poor export performance in the petrochemicals sector.

The industry at present suffers from high costs (both capital and energy), inadequate regular supply of natural gas, low focus on value-added end products, elements like no import duty differentials between polymers and feedstocks and shortage of olefins that are critical in manufacturing of value-added exports. There is also a need to upgrade and innovate, if not for exports then to cater to domestic demands.

Despite these deficiencies, India continues to remain a fertile terrain for FDIs which is substantiated by fact that $6.6 billion flowed into India's petroleum and natural gas sector between April and September 2015 (DIPP data).

With apprehensions amongst prospective investors about procurement of raw material at reasonable prices reduced to some extent in recent months, the prospects for global collaborations look bright. Of course, much still depends on what the government desires and how it acts. While the government has initiated policies to set up integrated Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIR), it needs to determine how to make the policy attractive for both private and public players so that exports get a boost. 

Apparels & Textiles - Entangled in an Enigmatic Weave

Pertinent questions continue to persist on why India’s textile segment has failed to capitalise on its advantage of being positioned atop the world, both in cotton resources and skilled workforce. Is the exports pattern as paradoxical as indicated in the performance of textile products across the spectrum?

Satyapal Menon| February 2016 Issue | The Dollar Business

India’s textile dynamics portray an enigmatic scenario and it could qualify as one of the wonders of the world. And, it is not just because of the amazing array of unique creations that had embossed their imprint on the global marketplace and captured the fancy of connoisseurs across the world.  What is interesting is the fact that India continues to retain its global market share with the most unstructured and fragmented domestic industry, and to add to that obsolete machinery. Beats logic! Doesn’t it? The credit for churning out a major chunk of fabric and plethora of varieties should go to the innumerable villages and towns, each of which has positioned its textile creations on the world map. Ironically, both powerlooms and handlooms that roll out millions of yards of textiles every year, are under threat of extinction, all thanks to the government's apathy towards them. Agencies which are in charge of the welfare of the industry and artisans, seem to have failed and there are accusations of exploitation by middlemen. Result: Cottage industries and micro units at village and town levels are forced to do with minimal margins not even enough for their survival, forget about maintaining or upgrading their machinery. 

A Hole in the Weave

The signs of India losing ground is quite conspicuous from the performance indicators in exports across all textile segments and the reason is obvious. India is lagging behind on both technology upgradation and value addition fronts. While the past five year period indicators reflect a near stagnant growth, CY2015 (Jan-Sept period) witnessed negatives over that of the previous corresponding period, across all segments except articles of apparel, accessories, not knit or crochet (under Chapter 62) and articles of apparel, accessories, knit or crochet (under Chapter 61) which reported growth of 4.2% and 2.9% respectively.

Interestingly, India’s cotton exports suffered a deep dent, both in dollar (-22.9%) and rupee (-15%) terms. The export performance of cotton depends on several factors like available inventories or availability of stocks among the importing countries and there is always a likelihood of fluctuations in procurements. And slowing demand in China (29% of India's exports under chapter 52 are directed to China) perhaps was the culprit behind this decline in exports. Fall in exports has also been attributed to a weak domestic market as farmers have been reluctant to invest in cotton production. Further, devaluation of yuan by China has only increased worries of Indian textile exporters. “As China’s yuan has depreciated more than the rupee and given that China enjoys dominant position in international export markets, India will see increased pricing competition which will affect the profitability of Indian exporters,” ICRA, a credit rating agency, said in statement.

What is more disturbing is that some of the countries like Bangladesh, Vietnam and Sri Lanka, which source cotton from India, are also giving India a run for its money in exports of finished or value-added products. Does it mean that India’s value-added products have a long way to go in gaining widespread acceptance?

India is a big player in cotton exports (which accounts for 22% of its apparel and textile exports; CY2015) and a smaller one in garments (constituting just 4% of India's apparel and textile exports). Clearly, all that points towards India’s lethargic efforts to innovate and diversify according to market requirements across the value chain. However, once these structural imbalances are corrected, India's garments and home textiles are bound to become competitive. Also, its exports will diversify into mass production items in segments where India has very little presence right now. Good news is that the government has recently reintroduced the Technology Upgradation Fund Scheme (TUFS), under which it will be investing Rs.17,800 crore towards technology upgradation in the textile industry.

Behind The Times

The textile and apparel sector’s failure to catch-up with the growing demand for garments manufactured from man-made fibre has also impacted exports of garments from the country. According to a study by the Confederation of Indian Textile Industries (CITI), over 65% of global demand for garments is of man-made fibre-based products, whereas about 80% of India’s garment exports are cotton-based. Although India is an exporter of some significance in man-made filaments exports, but manufacturers’ access to these raw materials is impeded by high prices imposed by a few biggies who dominate its production. Added to this, the tacit support of the government through a slew of protective measures ensures that access to cheaper imports is denied. R. K. Dalmia, Chairman, Texprocil, is also of the view that availability of raw materials at international prices, especially man-made fibres, and preferential duty access vis-à-vis other textile exporting nations continue to remain as main challenges.

If India’s textile and apparel exporters have been able to hold ground despite adversities, imagine the spin-off that could have been tapped with technology upgradation, product innovation, diversification and value addition. It's time textile & apparel industry takes that first step toward greatness!