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Issues in export sector during COVID19

Search 11th April, 2020 Spotlight here: http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx 

Topic: General Studies 2

• Government schemes and policies

Earlier in February, with the country’s exports showing no signs of a meaningful recovery, India’s premier foreign trade agency had reduced the average Export Obligation (EO) for exporters who had availed authorisations under the Export Promotion Capital Goods (EPCG) scheme. Applicable to all exporters who operate in sectors that had seen a five percent or more drop in exports over the preceding year, the move was expected to provide some much-needed relief. But this was before COVID-19 had swept the floor from beneath us.

The Challenges we are looking at 

A. Policy paralysis: India’s Foreign Trade Policy (FTP) is in a spot

• Almost all export incentive schemes under the FTP were ruled World Trade Organisation (WTO) non-compliant by the global trade regulator. And while the government has appealed against the ruling, it knows that India must do away with a subsidies-based policy.
• To replace the scheme, the government has now approved a new scheme named Remission of Duties and Taxes on Exported Products (RoDTEP) which aims at refunding taxes and duties like Value Added Tax (VAT) on fuel that is beyond the ambit of the Goods and Services Tax (GST) to exporters.
• Given what the RoDTEP attempts to refund, the rates under it are unlikely to be comparable to the MEIS rates of as much as five percent available until now. So, even if RoDTEP manages to pass through the WTO’s lenses, the scheme is unlikely to give the kind of price competitiveness that MEIS used to give to Indian exporters.

B. Countries are increasingly likely to adopt more and more protectionist measures

• Countries like India that are dependent on intermediate and agricultural exports and are on the lookout to tap newer markets, will have to pass through tougher territories. 
• There are an estimated 6.33 crore unincorporated MSMEs engaged in non-agricultural economic activities, employing 11 crore persons across the country. MSMEs contribute nearly 30 percent of India’s gross domestic product and close to half of the country’s total exports.
• Exporters are left with “very” few orders and if factories are not allowed to work with a minimum workforce, many of them will suffer “irreparable losses” which will bring them to the brink of closure as they are saddled with a fixed cost that in any case has to be absorbed by them.
• With India in a lockdown and a large chunk of its workforce, particularly those employed in Micro, Small and Medium Enterprises (MSMEs), back in the hinterlands, even if demand from existing export markets comes back, our exporters will still find it difficult to cater. 
• This will give a chance to India’s competitors to take the opportunity which might lead India to lose out on some of the export markets.

In short,

• Reduced employment of casual labour (factory closures and people moving back to their home towns) and reduced consumption.
• Cash flow constraints: The sector has been grappling with profitability issues due to a sharp decline in yarn exports, cheaper imports etc. these issues only look to get aggravated further with the current crisis.
• Supply chain disruption: The Garment manufacturers need to look at local sourcing opportunities, due impact on imports and export.
• Consumer sentiment: If nationwide lockdown continues and the situation persists, it will impact consumer sentiment on the higher side, due to closure of the market and mall also to maintaining social distancing, safety and health.

Is there any silver lining for India?

• Reports of several Western manufacturers looking at moving their factories out of China. Many Indian chemical producers have gone on record at having received enquiries from Western manufacturers who earlier never used to look towards India as a source. 
• Indian IT and ITeS sectors can focus on Latin America Sectors for Banking Process, Company Financial& Audit Process, E-Commerce industries process, Telecommunication industries, development of online applications, Agritech and others. Customers may accelerate their journey towards Cloud and Digital adoption to minimize human touch points.
• India, the world’s largest producer of hydroxychloroquine (HCQ), exported $51 million worth of the drug in FY19. This was a minuscule portion of the country’s $19-billion pharma exports. Indian Pharmaceuticals industries are ready to ramp up the production to meet domestic as well as export requirements. India manufactures 70 percent of the world’s supply of hydroxychloroquine (HCQ). India exported hydroxychloroquine API worth USD 1.22 billion in April-January 2019-20. During the same period exports of formulations made from hydroxychloroquine was at USD 5.50 billion.

The Way Forward

• India needs to put some serious thoughts into innovating on the policy front. Government needs to revisit its plan as exporters would require much more support than just export incentive schemes.
• Some steps that can be taken by the Government include – 
  • Interest-free working capital term loans to exporters to cover the cost of wages, rental, and utilities
  • Employee provident funds and Employees’ State Insurance Corporation’s waiver for three months from March to May
  • Extension of pre and post-shipment credit by 90-180 days on their maturity
  • Extension of interest subsidy benefits

Connecting the Dots:

1. Rescuing the MSME sector from COVID-19
2. Infusing Innovation in Policies