Exports head towards contraction as orders from US, Europe vanish
After sudden growth in February, exports are fast heading towards a lengthy period of contraction as buyers cancel major shipments in foreign-exchange (forex) earning sectors, fear exporters.
“We expect contraction in March. With major economies continuing to see sharp rise in cases, the cumulative fall in demand would spill over into April, causing a bigger contraction,” Ajay Sahai, director general of the Federation of Indian Export Organisations, said.
A string of order cancellations by major clients in the US and Europe — two major centres of the coronavirus outbreak — is expected to massively hit sectors like engineering goods and apparel. More than 40 per cent of India’s engineering exports land up in both markets, while Indian apparel is already under threat from cheaper Bangladeshi and Vietnamese alternatives in their primary export destination of Europe.
“This industry needs immediate relief in terms of faster clearance of banking and packing credit, late realisation of export bills, and raising of advance limit to 25 per cent without any collateral to ease working capital constraints,” A Sakthivel, chairman, Apparel Export Promotion Council, said. Also, there should be no penalty on advance forex booking and deferment of equated monthly instalments by six months to start with, he added.
Exports had caught a rare breather in February, rising after six months, leading to hopes of a recovery period beginning soon. However, policymakers are not convinced as yet. “Last month, exports gained over a low base. Also, global oil prices suddenly spiked, allowing India to pull in more receipts from the sale of refined petroleum,” a senior government trade expert said.
Case in point, relatively higher oil prices allowed India to bring in $3.4 billion, a jump of more than 10 per cent in February, after January’s 7 per cent fall. Since then, a tough price war between Saudi Arabia and Russia has seen prices tumbling to their lowest levels in 18 years. The price of a Brent crude barrel hovered at $26 as of Monday.
Exports have also been rocked by chronic labour shortage, arising from a massive exodus of workers from the urban industrial zones to the rural hinterland. “This issue continues as people are afraid of not being able to survive for the entire duration of the lockdown. More importantly, smaller businesses making up the majority of the sector continue to be harassed by local authority and police despite the commerce department saying exports are a priority sector,” a senior functionary of the Clothing Manufacturers Association of India, said.
While a final notification from the home department regarding which businesses can remain open has assured the sector and the government has confirmed logistics chains would continue, these small businesses remain worried. Coupled with a lack of liquidity with export credits having contracted by about 23 per cent in 2019 (January-December) even before the coronavirus outbreak, factory units look set to make major losses.
“While the moratorium on all loan repayments for three months and 75 basis points cut in interest rates would help exporters, the sector has been the worst hit by the recent outbreak and the moratorium should be extended at least to six months to one year, since the global economy is set to be slipping into a recession,” Ravi Sehgal, chairman of the Engineering Export Promotion Council, said. He added that under such painful circumstances, there remains no point in counting the possible gains to export as the US dollar rises against the rupee. The Indian currency closed at 75.46 to the US dollar on Monday, 10 days after crossing the psychological 75-mark.
As a result, total exports again run the risk of missing the government’s internal target of $350 billion. India’s total outbound trade tally stood at $331 billion in 2018-19. It was the first time that exports remained above $300 billion for two consecutive years.
On the other hand, government is gearing up to announce the extension of the current five-year foreign trade policy by at least six months, multiple sources said. Commerce and Industry Minister Piyush Goyal is expected to announce the same on Tuesday morning at a meeting with exporters and sectoral councils. The updated foreign trade policy 2020-2025 was expected to go live from April 1.
This will also give the government enough time to thrash out the rates for the new remission of duties or taxes on export products scheme, set to replace the current merchandise exports from India scheme.