India's Merchandise Exports Limp Along Even as Global Trade Picks Up

The precipitous drop in October exports shows that the feared GST-fuelled disruption of MSME supply chains has now started taking its toll on the country’s export performance.

Credit: Reuters

After recovering in September, exports from labour-intensive sectors witnessed steep drops in October. Credit: Reuters

New Delhi: India’s merchandise exports have turned negative in October, with a surprising 1.12% drop, and are expected to fall further in November as exporters turn away clients and new orders due to the difficulty of complying with the Goods and Services Tax (GST) regime.

The fall in exports comes at a time when global trade is booming.

As per the latest forecast by the World Trade Organisation (WTO), global trade is likely to grow by 3.6% in 2017, up from the lacklustre 1.3% growth in 2016. The strong performance of world trade in 2017 is attributed to the resurgence of Asian trade flows and recovery of import demand in North America.

The timing of India’s export drop is equally perplexing given that the WTO upgraded its earlier world trade growth forecast of 2.4% on September 21. Experts say that the the decline is also surprising given that exports are usually strong in the months leading up to Christmas as retailers in Western markets build stocks.

India’s October export performance contrasts with those of its Asian trade rivals like Bangladesh, Vietnam and China who reported positive growth. Vietnam reported nearly 21.3% growth in monthly exports, China nearly 7% and Bangladesh 6.4% during the month.

India had reported impressive export growth of 25.67% in September. The precipitous drop in the October exports shows that the feared disruption in MSME supply chains has now started taking its toll on the country’s export performance.

Exports from labour-intensive industries, such as textiles, gems and jewelry and leather and leather goods have reported steep drops in October.

Decline in dollar value of exports from labour-intensive sectors in October 2017

Sector %decline in exports
Gems and Jewellery 24.51
Readymade garments 39.23
Leather and leather products 9.81
Man-made yarn/fabrics/made-ups, etc 5.91
Carpet 31.32

Source: Commerce ministry

The ready-made garment sector reported a 39% drop in dollar export earnings during October, the gems and jewellery sector nearly 25% and leather and leather goods about 10%. All these sectors are dominated by MSMEs.

The sectors that have bucked the trend and reported positive export growth during October are engineering goods, petroleum products and organic/inorganic chemicals. These sectors are highly capital intensive and dominated by big corporate players who have better managed GST compliance and escaped unscathed from demonetisation.

Garment exporters say their export competitiveness has fallen due to the increase in working capital requirement and reduction in incentives. As per industry estimates, Indian garment exports have been 8-10% costlier in the wake of the GST. This is also impacting exporters’ margins in addition to sales volumes.

Industry sources say that exporters are not able to pass on the increased cost to customers as they are getting tough competition from suppliers from countries like Bangladesh, Vietnam, Sri Lanka and Cambodia, some of which are also enjoying duty-free access to the EU market which gives them 5% head start. As a result, India exporters’ cost disadvantage works out to 13-15% in the final analysis.

Merchandise export growth in select countries during October 2017

Country % export growth
India (-1.12)
Bangladesh 6.4
Vietnam 21.3
China 6.9

Source: Commerce ministries of respective countries

In rupee terms, garment exporters’ earnings dipped by 41% from Rs 9,100 crore a year ago to Rs 5,398 crore in October.

Alarmed over the sharp decline in October exports, the government has offered more incentives to provide relief to besieged garment exporters. Post-GST rates for claiming rebate of state taxes under the scheme for remission of state levies (RoSL) on exports of readymade garments and made-ups have been announced. The government has also doubled the rates for incentives under merchandise export from India (MEIS) scheme to 4%.

New MEIS rates are effective from November 1.

A textiles ministry release said post-GST rates of RoSL are up to a maximum of 1.70% for cotton garments, 1.25% for man-made fibre, silk and woollen garments and 1.48% for apparel of blends.

Meanwhile, the commerce ministry is working on a relief package for gems and jewellery exporters. The ministry has already asked the gems and jewellery industry to work out a proper business plan to promote growth of the sector.

“We have some time left, in another few weeks we have to finalise it as Budget will be in February, so we have to work on that (relief package for gems and jewellery exporters),” commerce and industry minister Suresh Prabhu said recently.

The Gems and Jewellery Export Promotion Council has demanded that import duty on gold should be slashed to 4% from the current 10% level.

The trade body is mindful of the government’s concern that a lower import duty could lead to a spurt in gold imports but hopes that a cut would be finally made as a trade-off.

Another MSME-dominated sector, leather industry, estimates that it would need additional capital of over Rs 3,000 crore following implementation of the GST. There is a fear in the industry that many units could close down due to failure to raise capital.

The Council for Leather Exports, an industry body, has demanded that Centre’s duty drawback scheme for leather exporters should be extended till March 2018 as exporters’ capital was blocked on account of GST payment.

The industry body also wants the GST on finished leather goods and job work reduced to 5% from the current level of 12% and 18% respectively.

India’s competitiveness in the labour-intensive export sectors has been on a declining path in the last decade and needs significant structural reforms that need to be addressed, rating agency Crisil said in a recent report.

Crisil analysed the competitiveness of the labour intensive gems and jewellery, readymade garments and leather and leather products, and found these have become less competitive over the last decade.

“It is disquieting that India’s export growth is decelerating at a time when the global environment is becoming more conducive for trade. The reason is not currency strength, but weakening competitiveness. This needs to be reversed if India has to see sustainable, employment-generating exports growth,” Crisil said.