To trade is human.... In the early 19th century, David Ricardo gave the world the theory of comparative advantage that explains how countries can mutually benefit from trading those commodities in which they enjoy lower opportunity cost. Well! It is not that trade between countries did not exist before Ricardo’s theory. Even before the nomenclature of nation state came into being, trade over long distances finds its traces in Mesopotamian civilisation from the 19th century BC. And today with increasing internationalisation, every nation is vying to gallop its trade.
Notwithstanding this situation, international trade has remained a contentious issue. As economists are known for, arguments and counter arguments flow in favour and against it. No matter how much antagonistic the sentiments that prevail, no country can survive in today’s world sans international trade.
While every nation dreams of exporting more, many ends up importing more.
In the context of India, which some are saying is staring at crisis similar to that of 1991, with forex reserves left to finance the imports for only six months, it is all the more important to raise our exports to earn much needed foreign exchange. While India has proved its mettle in the information technology (IT) industry – being the 2nd largest software exporter and constituting 25 per cent of total Indian exports – it is the textile & clothing industry in India which happens to be the second largest employment generating sector, only after agriculture, for both skilled and non-skilled labour. Employing about 45 million people, it accounts for nearly 11 per cent of the country’s total export basket and 14 per cent of industrial production.
Abundance of cheap labour and bountiful of cotton make India a favourable market to buy for the USA and European Union nations. While textile exports stood flat at $7.79 billion in the April-June quarter of the current fiscal (2013-14), ready-made garment (RMG) exports, which constitutes about 39 per cent of the total textile basket, swelled 11.1 per cent to $3.56 billion in the period.
Focusing squarely on garments exports, things had not been as pleasant as they seem now. It has had its share of turbulence till last fiscal. Steadily rising from $5.5 billion in 2000-2001 to $11.1 billion in 2008-09, market conditions started turning worse as the biggest financial crisis since the great depression of 1930s struck the USA, then engulfed the entire Europe Union and is now grazing the Asian economies too.
In the last financial year (2012-13) garment exports dipped nearly 6 per cent to $12.92 billion. Exports to the EU region declined by 6.5 per cent to $1.1 billion in January-February and the scenario remained grim in the USA, too, with a 7.2 per cent drop to $571 million. Says Apparel Export Promotion Council Chairman A Sakthivel: ‘After the 2008 meltdown, the European Union and US markets remained sluggish till 2012. This has put a lot of pressure on Indian exporters to diversify their market base and invest in marketing strategy — as is evident from the data that the traditional market has around 80 per cent in total ready-made garment exports from India to the world till 2008, which has come down to 70 per cent.’ With the burgeoning current account deficit (CAD), the Government has been extending all measures to revive the sector. The rate under the interest subvention scheme was increased from 2 to 3 per cent on 31 July.
Confederation of Indian Textile Industry (CITI) Secretary General D K Nair said, ‘The Government has been extending all possible assistance to the textiles industry and exporters for increasing our exports. The CAD problem has only accelerated these efforts and assistance. However, the real increase in exports will happen only if demand picks up in the EU and other major markets.’
‘The other challenges are scaling up of our output of fabrics and garments, both of which are being produced mostly in small units and, therefore, do not get the advantages of economies of scale and the latest technology,’ he added. On the first quarter performance of the RMG sector and government’s much needed succour, economist and KAASA Advisor Siddharth Shankar believes, ‘We need to wait and see the growth pattern in the second half of the current year. The low base last year is the main cause of the current rise in numbers. I still don’t think Europe has revived. Going forward, growth rates will remain sluggish in both the USA and Europe. Buyers will renegotiate prices in dollar terms in the wake of the rupee’s fall.’
Well, the challenges are not only restricted to sluggish demand from the USA and Europe. In recent years, due to rising wages and inputs costs, India appears to be losing out to Bangladesh, Vietnam and China. According to AEPC data , RMG exports from China were around $148 billion in 2012, Bangladesh — which happens to be the biggest gainer in recent times — exported $23 billion worth of ready made garments and Vietnam’s exports were about $15 billion. In this period, India’s RMG exports hovered around $13 billion. India is now the sixth largest apparel supplier to the USA and fourth largest supplier to Europe.
Rupee decline: Gain for some, loss for some
Grappling with currency depreciation, which transmutes into higher imports costs spiraling into higher inflation, the Government is drawing flak from various quarters for its
failure to stem the rupee’s fall. But it is also a time to cherish for exporters as their profit margins increase during periods of currency depreciation. Since late May, the rupee has experienced a fall of 15 per cent in its value against dollar.
Countries like Japan have indulged in self-devaluation of their currencies to make their products more competitive in the global market. But there is a twist to the situation. Buyers start asking for discounts if they see that there is a significant decline in the currency value of exporting nation.
Nitin Batra, owner of Fabstract Clothing India Pvt. Ltd (Noida), which had a turnover of around Rs 20 crore in FY13, says, ‘Not all buyers demand discounts. I would say only 20 per cent of buyers would ask for it. At the time of costing of products, they seek to negotiate the prices.’
On the market front, he added, since 70 per cent of our exports go to the USA, our company has remained a little insulated from slump since USA has started showing signs of revival.
‘Mid-size firms like ours remain less affected as over-the-head charges increase in case of large export houses. But, yes, labour problems continue to be a big problem for each one of us. They do not work throughout the day so that overtime charges can be earned. Also, in order to boost the sector, I think the Government should provide other tax benefits to exporters. Five years ago, taxes were exempted. Now there are no tax exemptions,’ he pointed out.
Echoing similar views, K K Saklani, owner of Sara Creations Inc, said, ‘Our turnover was Rs 15 crore in FY12 and increased to Rs18 crore in FY13. Demand from the US market has increased significantly. The situation is much better after 2008. And, yes, the declining value of rupee will certainly benefit us but a few of the buyers do ask for discounts in such situation.’
‘At $25.83 billion, July exports were the highest since March while imports stood at $38.1 billion, a fall of 6.2 per cent, leaving a trade deficit of $12.27 billion in July. Now, with threats looming large because of the current account deficit which is rising to a frightening level, it remains to be seen if the red line of 4.8 per cent fiscal deficit target is breached or not?’
And in order to sail through these turbulent times, we need to increase our foreign exchange reserves — as experts say — by ‘earning them’ through increasing our exports and not through FII and FDI as the moment the market seems unlucrative, they just pull out their investments. India stands at the brink of a collapse — unlike Russia and China who have earned their reserves. And propping up garments and textile exports may be one of the ways to save our economy.