Recessionary trends in world economy and its impact on Indian exports

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Ganesh Kumar Gupta | 06 Nov, 2008
The World economy is in turmoil and its impact is being witnessed by all countries around globe with varying degree. The outlook for 2009 also points to a protracted economic slowdown. Unlike many previous emerging market crisis ,present mess spread from the advanced world due to increasing integration of international trade and financial markets.

IMF world economic outlook for 2009 pegs growth at 3% as against close to 4% in 2008 and 5 % in 2007.

US has entered into recession and growth is projected to be 0.1% in 2009 as against 1.6% in 2008.Europe will grow by 0.2 % in 2009 as against 1.3% in 2008.Japan will witness a growth of 0.5% as against 0.7% in 2008. These three countries account for about 40% of our exports and thus the slow down does not auger well for Indian exports.

Job oriented export sector have shown upto 70% negative growth and there is a sharp decline in tea (-20%), handicrafts (-70%), carpets (-32%), oil meals (-50%), man-made yarn (-17%), cotton yarn (-19%) and marine products (-19%)

With several factors impeding exports, the overall export growth in September this fiscal plunged to a little over 10% from 26.9% in August, 2008.

Despite depreciation of Indian rupee by about 20% in the current year, exports is not picking due to general slow down. Exporters are now facing new challenges due to present financial crisis which include:

(i) Problems related to Insurance:

Due to the global slowdown, ECGC/insurance companies have

(a) hiked premium rates by 25% to 30% imposing restrictions such as maximum liability and credit limit on single buyers;

(b) reduced maximum liability that can accrue to them by 25% to 30% in case of default by buyer

(c) pre-shipment covers have been curtailed by private players such as Bajaj Alliance, IFFCO Tokyo, ICICI Lombard, New India Assurance etc.; as a result, commercial public sector banks are also diffident to provide pre and post shipment finance on such LCs.

(ii) Problems related to Banks:

(a) Some exporters have informed FIEO that due to US sanctions on Iran, prime commercial banks like State Bank of India and other advising banks in India are unable to honour their claims/payments.

(b)Indian Banks have stopped accepting payment guarantees for exporters against Lines of Credit of foreign banks due to fear of Lines of Credit collapsing due to collapse of several banks and financial institutions abroad.

(c) Further, in order to cover part of their exposure public sector Banks like SBI are tying up with CGTMSE , a subsidiary of SIDBI which levies a guarantee fee and annual service fee of 0.75% and 0.375% respectively which may also accrue to the MSME borrower. [The cumulative impact of all these factors would make credit costs prohibitive and exports out of bounds and uncompetitive];

(d) Banks have increased margin money requirement for Bank Guarantees to 100% as against 3% charged from established exporters which is blocking the working capital requirement of exporters who are already squeezed for finance

(iii) Problems related to liquidity (both domestic and external) to exporters

The Reserve Bank of India has taken several measures to buoy the economy and the stock markets.

Between 1st and 2nd November, 2008, CRR was reduced by an aggregate of 350 basis points to 5.5% releasing Rs.1,60,000 crore in the system. However, Banks are reluctant to give loans against pre sanctioned loans where the project has not commenced. Exporters who want to expand or diversify their business are hit due to such reluctance on part of the banks.

Moreover, the Prime Lending Rates (PLR) / Benchmark PLR has been on the increase and between June, 2008 to August, 2008 has increased by at least 200 basis points increasing the cost of credit for the MSME export sector (The impact of the CRR cut is yet to translate into lower cost of credit for the sector.)Since export credit is linked to BPLR, the increase in BPLR is pushing exports credit and most of exporters are getting credit at around 12% as against 5% at which it is available to most of our South East Asian competitors. The withdrawal of subvention scheme has pushed the cost of credit by about 5% which needs to be addressed quickly.

With increasing pressure on Dollar, the Dollar denominated credit is virtually unavailable to MSME exporters as Banks have limited dollars and prefer to give it to Corporate flouting RBI norms requiring banks to give preference to exporters and give Foreign Currency loan at LIBOR + 100 basis points.

(iv) Issues related to existing export orders and new orders

Many of the buyers are either cancelling the order or postponing them to a future date which may have serious consequences for Indian exports. Buyers are also demanding longer period of credit to tide over the present financial crunch.

There has been a general decline in the export orders from the US and European markets particularly in sectors such as Garment, Textile, Leather, Marine, Handicrafts & Life Style products etc.

The trend is towards the low priced goods even in Europe and US and Indian exporter is thus facing the challenge to modify its production line to target this segment.

(v) Increasing Trade Deficit

While exports have gone up by 10%, imports in September, 2008 have increased by 43% swelling trade deficit to record level of US$60 billion for the 1st six months of the financial year. Softening of crude prices will provide some relief but the trade deficit will cross US$100 billion for the current year.

On the contrary, the foreign exchange reserves are fast depleting. In last two months only, the outgo was about US$40 billion and with redemption of over US$80 billion due by July, 2009, the forex reserve may fall below US$200 billion.

Moreover, increasing trade deficit due to excess imports of finished products and intermediates is not good sign of manufacturing capability at home and may impact manufacturing growth in the forthcoming months.

Suggestions:

1. The rate of export credit in Indian Rupee should be linked with Bank Rate instead of benchmark prime lending rate. Such export credit should be made available at bank rate + 100 basis points.

2. The post-shipment credit which is presently available only up to 90 days should be provided for a tenure of 270 â 365 days, keeping in view the financial crunch faced by overseas buyers thus demanding longer credit period.

3. Pre-shipment and post-shipment credits in foreign currency should be made available to exporters at LIBOR + 100 basis points as stipulated by the Reserve Bank of India. RBI should issue directives to banks to provide such credits to exporters.

4. With the risk of default by buyers going up, banks will be reluctant to give credits without adequate insurance. Insurance companies should be incentivized to keep supporting exporters.

5. Government may in turn, stand as a guarantor for exporters receiving orders from abroad so as to encourage banks to provide credit to such genuine exporters. A guarantee by bank will provide necessary cushion and support to bank to provide loan to such deserving exporters.

6. ECGC should adopt flexible single buyer policy and adopt case by case approach rather than taking a rigid stand not to give single buyer policy to exporters as the same will be detrimental to cause of diversification of exports in present scenario.

7. Indian Banks should be encouraged to confirm Letter of Credit received from overseas banks and government guarantee may provide necessary buffer in case of default which will be few and far between.

8. Government should ensure to provide all export benefits to exporters in a time bound manner to tide over the present crises. The issue of delay in grant of Drawback at various ports should be expedited.

9. In view of difficult financial situation, the Government should de-link grant of export benefit subsequent to realization of export proceeds as buyers will now seek longer tenure of credit and linking of the export benefit with realization will delay grant of such benefits.

10. Government should incentivize exporters diversifying their export to new and unexplored destinations. The facility available under focus market scheme may be increased to 5% and new markets should be added to the list of focus countries.

11.The MDA scheme should be further liberalized so as to encourage exporters to participate in international trade fairs and exhibitions as otherwise export growth will slow down in 2009. The direct participation in the trade fair should be encouraged and limit of Rs. 15 crores should be removed.

Note:

The author is the president, Federation of Indian Export Organisations (FIEO)
The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of SME Times