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India’s export traffic jam

india Updated: Jun 06, 2012 15:19 IST
Sumant Banerji
Sumant Banerji
Hindustan Times
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At Orient Craft, there is frenetic activity in the air – and possibly, some prayers on the lips. India’s largest garment exporter, with 21 factories, is busy for the spring of 2012.

Now is the year’s biggest season for buyers and the next few weeks could make or break orders

But looming fears of a double-dip recession in the US — market slang for a second contraction in three years in the world’s biggest economy — has upset the mood just when everybody thought that the fears of the 2008 meltdown had been put behind.

Last week’s downgrade of the US economy by credit rating agency Standard & Poor’s kicked off a new round of uncertainties.

Textile Troubles
The apparel export sector, with 35 million workers, is India’s second biggest employer after agriculture. And it is not the only one worried about how a US recession — and its knock-on effects on Europe and Asia — could pan out for the business it does.

Software, automobiles and gems and jewellery — other key drivers of India’s exports — are all affected, though the degree of concern varies. Merchandise exports accounted for $245 billion (R1,112,300 crore) in the last fiscal year, while information technology and IT-enabled services made up for $59 billion (R267,850 crore).

Staggered exports could hurt growth, especially when interest rates in India are high as the government battles high inflation by squeezing money supply to choke domestic demand.

“A market crash on a day or for even a week does not have an immediate impact but if it persists and the sentiment gets affected, it would be a matter of concern,” said Sudhir Dhingra, chairman and managing director of Orient Craft. “Every buyer would start adjusting his purchases and order sizes get reduced,” he said.

Almost 65% of what Dhingra produces is shipped to the US while 30% goes to Europe and UK. In the first five months this year, apparel exports to the US increased by almost 20% year-on-year to $ 1.5 billion. The sector’s sentiment is now wobbly because the US and the European Union together account for more than 70% of its exports.

“If US goes into a recession again, others like Europe will follow suit,” said D K Nair, secretary-general of the Confederation of Indian Textile Industries.

“It is the single largest export market for India accounting for a third of all exports from here. So a slowdown there will have a substantial impact at a time when things had just begun to look up.”

With overall revenues of $ 55 billion (R247,500 crore), a third of which is accounted for by exports, garments and textiles make up for 12% of India’s exports and 4% of India’s gross domestic product (GDP).

Optimism had surged in the sector after old-world export quotas were abolished in 2005 in developed markets. But that turned out to be a story that flattered to deceive because affluent buyers of that time could be indebted or jobless citizens now with less money to buy Indian clothes.

The government had then set an ambitious export target of $ 50 billion by 2010. Less than half of that has been achieved, although industry officials blame that not just on the global economic crisis.

They say India also needs to diversify into more lucrative products.

Automobile Agonies
With India emerging as the hub for small car manufacturing around the world, car exports have witnessed a quantum jump since 2007-08.

While Maruti and Hyundai, the two big players in the country, are also the biggest exporters of cars, others such as Nissan and Ford have also joined the bandwagon, betting on India’s cost-effective engineers.

But Europe’s lingering downturn is a speed breaker.

Hyundai’s export volumes dipped by over 18% in 2010-11 to 233,069 units while Maruti’s slipped 7%.
For both, Europe is the single largest export destination. Though India’s home market is the bigger story, manufacturers are nurturing markets in South East Asia, Latin America and Africa to boost exports.

“It was because of our diversification efforts that we were able to restrict our decline in car exports last year,” said Mayank Pareek, managing executive officer (marketing and sales), Maruti Suzuki India Ltd. “Almost 45% of our cars are exported to Europe and demand there remains very sluggish. This year, we will be very happy to maintain the level we achieved last year.”

Software Stutters
The story is somewhat different in the information technology sector led by companies such as Tata Consultancy Services (TCS) and Infosys. There is more caution than pessimism because IT work often involves cost-cutting or boosting of efficiency, which corporate customers do even in recessions.

However, uncertainties typically delay spending related to future plans. Europe and US, which account for 90% of India’s IT and BPO (business process outsourcing) exports, are highly vulnerable at the moment.

“We are watchful of the evolving global situation but do not see any changes in the business demand environment in North America and Europe,” said N Chandrasekaran, CEO of industry leader TCS.

Happily for the IT industry, the shock of 2008 had made them look for new markets. Asia-Pacific and Latin America contribute insignificant shares to IT firms’ revenues but the industry is working hard to develop them.

“We were able to react very quickly in the past (2008) when the recession happened. Those responses are still fresh in our memory and I believe that the industry will be able to withstand another downturn,” said S “Kris” Gopalakrishnan, CEO of Infosys.

TK Kurien, CEO (IT business), Wipro said clients seeking to adapt to new circumstances could look to IT companies for help.

“Innovation will be key and companies need to come up with cost optimisation solutions to stay relevant,” said Kumar Parakala, chief operating officer for India at consulting firm KPMG.

Shining Jewels
Amid such caution, a tinge of rose is seen in the gem and jewellery sector. The biggest markets for India’s gems and jewels are in the petroleum-rich Middle East, where high oil prices sustain consumer demand.

Gems & jewellery exports from India grew by a handsome 47% to $43.14 billion (R195,290 crore) in 2010-11. The sector may suffer a little but companies believe a surge in gold and diamond prices could keep financial growth high, as each item fetches a higher price, even if profit margins stay stable or lower.

Mehul Choksi, chairman and managing director of Gitanjali Jewels, said despite the global crisis, the industry expects 15 to 20% growth in the current fiscal year.

“However, volume-wise we may see marginal impact,” he said.

Not just the oil-rich Gulf, China and Japan are also counted among the hot markets for gems and jewellery.

The sheikhdoms of the United Arab Emirates account for as much as 47% of India’s gems and jewellery exports, followed by Hong Kong that has a 22% share. However, crisis-hit United States is the third largest importer with 11% share.

“Until now we have not seen any impact on our order and expect demand to be stable going forward,” said Anand Shah, director of Mumbai-based Ansa Jewellery, which makes high-end jewels for advanced markets.

The silver lining could be in gold items and software may weather a hard punch, but India’s export story is certainly vulnerable, as US and eurozone economies count the after-effects of borrowing too much to spend on goodies.

(With inputs from Vivek Sinha and Sachin Kumar)