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Loss of export subsidies: A blessing in disguise (II)

Mini

India’s potential for increasing exports is very high provided we have a coherent long-term strategy.

Loss of export subsidies: A blessing in disguise (II)
We discussed in Part I that we should not be unduly concerned about loss of direct export subsidies such as MEIS which India will have to withdraw from 2019 but use the funds to create capacity for value-added exports where we do not have to compete solely on the basis of labour coast but create knowledge-led competitive advantage. We have a large number of sectors where this is not only possible but India can take unassailable lead.
In addition to creating a basket of high-value products, we must also focus our attention on another motivator, the development of new markets which are emerging throughout the world.
It is in the emerging countries that the majority of the world’s growth is expected to take place in the near future.
Up to the year 2020, close to 40 per cent of economic growth is expected to take place in Asia. We also see that growth is taking off in many countries in Africa, albeit from lower starting levels.
Increased international competition, larger financial flows towards developing and middle-income countries and the rapidly expanding middle class in Africa and Asia mean that new remote markets become more important for the future of Indian exports.
This indicates that exports must increase to countries outside the major markets of US and Europe in both the short and the long term.
A three-fold strategy is envisaged below that is
(i) Focus on regional markets rather than countries
(ii) New markets within reach due to lower logistics costs and
(iii) reduction of non-tariff barriers.
Focusing on regional markets
Africa is one of the regions where there is tremendous untapped potential. Recently international traders and investors have been looking at the African continent for growth in trade.
Once called “The Dark Continent” due to its extreme poverty and never-ending civil wars and tribal strife, a majority of countries in Africa are now politically stable and thus Africa has been hailed as the next big business destination.
There are over 150 billion-dollar companies in Africa, and more than 500 with annual sales of $100 million; more than 400 companies generate at least $1 billion in Africa-based revenues. Today, 26 of Africa’s 54 countries have achieved middle-income status.
Africa has a larger portion of its population entering the workforce than any other region in the world. There are 720 million African mobile users, more than in Europe or North America and Kenya is a world leaders in mobile payment application.
Five of the 12 fastest-growing economies in the world are in Africa.
The continent consists of 54 countries, most of which were too small to invest market development efforts. In March this year, 44 out of 55 countries have signed an agreement to establish an economic community, a trading network trading network with the ambitious and far-reaching Continental Free Trade Agreement.
This region has many countries with among the highest GDP growth in the world such as Ethiopia, Rwanda, Ghana, Mozambique which have GDP growth rate in excess of 7% per annum.
India has, in the past concentrated on countries on the east coast and some larger countries such as Nigeria to focus its export efforts. The West coast countries such as Morocco and Algeria have not received the same attention.
This is a large region and has tremendous export potential for items like pharmaceuticals, food products, vehicles, engineering goods etc.
While Africa gears up to become a continental Free Trade Community in the near future. Even today, Africa has 14 different trading blocs with overlapping members.
Most countries belong to at least two blocs e.g. Southern African Development Community (SADC), Common Market for Eastern and Southern Africa (COMESA) and East African Community (EAC). These larger markets associated with large scale infrastructural development offer tremendous opportunity to Indian exporters.
Latin America has long been neglected by India (but not China) but situation is changing now and new markets are opening up in various sectors such as chemicals, pharmaceuticals, vehicles etc.
In 2016-17, India exported more to Mexico ($3.5 billion) than to Thailand ($3.1 billion), Myanmar ($1.7 billion) and Iran ($2.4 billion) and India’s trade with the Dominican Republic ($900 million) was more than the trade with Portugal and Greece.
Here too, regional economic communities such as Pacific Alliance and Mercosur offer larger markets for exports. Sectors which offer high potential are vehicles and components, pharmaceutical, organic chemicals, iron & steel, plastic & aluminium items etc. which are now India’s strengths.
Indian exporters should focus on the markets in the Pacific Alliance (Mexico, Colombia, Peru and Chile) whose economies are growing more and whose trade policies are more stable, transparent and predictable, with the least protectionism.
Latin Americans have started paying more attention to India, especially after arrogant and insulting remarks from Donald Trump against Mexicans and his protectionist trade policies.
They also want to reduce the over-dependence on China, which has used its dominance to hurt the region’s industries and given rise to other risks. They see India as a non-threatening trade partner in the long term.
Nearer home, we have yet to fully exploit the opportunities available through our various FTAs with Asean, South Korea and Japan. For example, India is the largest producer of generic medicines in the world and within Asean, it is the largest supplier to Vietnam.
However, its share in Thailand, Malaysia and Indonesia is miniscule. The government has to take up matter with the respective governments vigorously to solve non-tariff issues holding up exports.
Both South Korea and Japan which have signed FTAs with India import huge amount of food products. We are the second producer of fruits and vegetables in the world but our fruit exports are below Vietnam and vegetable exports below Myanmar. Till today, we have only focused our attention to the West Asian markets and its time to look elsewhere too.
To take the case of mango, India is the largest producer of mangoes in the world but only ranks number 10 in exports. Same is the case with bananas. We are the largest producer of pomegranate in the world but our export of juice is minuscule.
As the western world look to cut meat consumption and increase vegetarian diet, especially vegetable & mixed juices, we can take the initiative to increase exports substantially.
China itself is a huge market. After years of decline, Indian exports to China rose sharply in 2017, registering a 14 per cent growth to reach $16.3bn.  Due to its continued trade war with United States, China has recently lowered tariffs on many items such as diamond and jewellery, pharmaceuticals & food supplements, auto parts etc.
This offers a window of opportunity to Indian exporters. China will hold an import Trade Fair at Shanghai in November of this year and Indian exporters should take advantage to showcase their strengths.
New Trade Routes
It had been a long and costly transport to take goods to Central Asian and Eurasian countries, especially Russia and therefore Indian competitiveness suffered. Now, two new routes are developing which will cut down transit time by nearly 50%, making our goods more competitive in these markets.
Chabahar deep sea port in Iran along-with associated Free Trade Zone is being developed by India to ease trade with Central Asian Republics and Afghanistan and further transhipment of cargo by rail to CIS and EU. For instance, a company exporting uranium from Kazakhstan should take it by land to the Black Sea and ship it all the way through the Mediterranean, the Suez Canal, the Red Sea and the Arabian Sea.
The process could take 25 days. In contrast, the Iran route could take just about 15 days. The first shipment to Afghanistan took place in late 2017.
Another route which will ease the supply chain costs to Central Asian and Eurasian countries, especially Russia is North-South Corridor via Iran’s Bandar Abbas Port.
Our trade with Russia alone can go up from $10 billion to $30 billion in about 10 years with the opening of NSTC which can cut down transit cost by 30% as test runs have shown.
Through the new projects implemented, such as Tajikistan – Afghanistan – Turkmenistan (TAT) and Northern – Southern Corridor (Kazakhstan – Turkmenistan – Iran) we must consider the advantages of the networks in these states for freight transit on the Europe – Asia direction and back.
These states benefit from a series of important routes for the inter-regional transit. A good example is the railway between Kazakhstan, Uzbekistan, and Turkmenistan with links to the Kyrgyz Republic and Tajikistan which provides important connections between much of Central Asia and seaports on the Persian Gulf, the Mediterranean Sea, the Black Sea and a transit potential between East Asia (via the Druzhba border post) and Central and Southern Europe.
A multimodal freight link between Kazakhstan and India through Iran can “technically” be operational now. The rail link until the Iranian port of Bandar Abbas was already established.
The rail link could currently carry two to three million tonnes of freight annually. “This capacity is proposed to be upgraded to eight to 10 million tonnes. Regular freight movement would also require finding solution to the problem of railway line gauge differential, existing between Kazakhstan and Iran.
India-Myanmar-Thailand trilateral highway (to be further extended to Cambodia, Laos and Vietnam) is expected to be completed soon and will boost growth in India's trade, not only with Asean but also ease container movement with China.
The Dawei SEZ includes construction of the highway as well as a deep-sea port which will link Thailand, Cambodia and Vietnam in the ASEAN region to India, the Middle East, Europe and Africa. A port at Dawei will also shorten transportation time by eliminating the need to navigate around Singapore through the Malacca Straits.
This project has been in the implementation stage since 2013, going is slow and it is hoped that it will conclude soon. This project when completed would cut down on transit time from India to Vietnam and China.
Non-Tariff barriers
This area of export management is generally in the domain of central government which negotiates with importing countries or trading blocks on reducing non-tariff barriers. However, exporters must keep track of changing rules and regulations in various markets.
This is a dynamic area of export management and many rules of imports are changed, either for safety and protection of people, livestock and plants or to protect the local industry on a regular basis.
For example, the following two recent examples illustrate it.
Chili Exports to EU Down 90% in Jan Post ‘High Risk’ List
(14 January 2018)
The European Union recently added India's "peppers" (except capsicum) in the "high-risk category" for pesticide residues. Agricultural and Processed Food Products Export Development Authority (APEDA) officials claimed that 10% pepper export from India would now be randomly tested at European destinations for pesticide residues. Consequently, close to 90% of pepper export shipments from the state had stopped.
India asks EU for relaxed blacklisting norms
(31 January 2018)
India on Monday urged the European Union (EU) not to ban or blacklist any seafood exporter immediately after finding problems with one consignment as this extreme step will work against the interests of all the stakeholders, Marine Products Export Development Authority (MPEDA) sources said.
Although government of India, at its level, does take up the matter with foreign government to make conditions easier for Indian exporters, the exporting parties have to understand that conditions of import which affect human consumption, environment and sustainability are only going to be stricter. More countries will follow the examples of these trendsetters.
Non-compliance means not only rejection of consignments, causing immediate loss to exporters but the cost of export goes up as inspection size and thereby cost increases.
Therefore, exporters must clearly understand and comply with these rules and regulations. We are giving here some of these trends and conditions as illustration.
Traceability
Traceability is a business process that enables trading partners to follow products as they move from field through to retail store or food service operator. Each Traceability partner must be able to identify the direct source (supplier) and direct recipient (customer) of product.
The first priority of traceability is to protect the consumer through faster and more precise identification of implicated product. This is critical if the product must be withdrawn from the supply chain.
In India, grapes export is already under Grapenet, the Indian grapes export traceability system.  Those farmers who are not registered under Grapenet cannot send their produce for export.
EU markets are among the most regulated in the world. Individual member countries of the EU maintain strict control over the fresh food market. Political decisions are likely to influence market opportunities for suppliers from developing countries.
Examples of how Europe is regulated can be found in agricultural subsidies, the EU’s response to phytosanitary issues and the prohibition of genetically modified products. Regulations in the individual countries may differ slightly from EU regulations, although generally market access requirements are very similar.
The rules and regulations for agricultural exports into EU can be viewed at www.cbi.eu.
Sustainability
Corporate Social Responsibility (CSR) and sustainability continue to gain importance. Consumers are more concerned about the origin of products and how they are made. They demand more sustainable (socially and environmentally responsible) foods from retailers.
Proof of social conduct includes IDH sustainable trade, Business Social Compliance Initiative (BSCI), Ethical Trading Initiative (ETI), Global Social Compliance Programme (GSCP), Fair for Life, Fair Trade and other similar ethical certifications.
CSR is well integrated in North Western European business. In the long term, CSR is expected to increase in importance in Southern and Eastern Europe as well. Certification relates to good agricultural practices including working conditions and production methods.
In addition, a trend towards local-for-local consumption and an increasing emphasis on the reduction of greenhouse gas emissions during production and transportation has been observed.
In the near future, water management can be considered an important theme as well. For suppliers from developing countries, CSR usually poses a larger obstacle than it does for European producers.
Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) is a European Union regulation dating from 18 December 2006. REACH (EC 1907/2006) aims to improve the protection of human health and the environment through the better and earlier identification of the intrinsic properties of chemical substances.
This is done by the four processes of REACH, namely the registration, evaluation, authorisation and restriction of chemicals. REACH also aims to enhance innovation and competitiveness of the EU chemicals industry.
In principle, REACH applies to all chemical substances; not only those used in industrial processes but also in our day-to-day lives, for example in cleaning products, paints as well as in articles such as clothes, furniture and electrical appliances. Therefore, the regulation has an impact on most companies across the EU.
REACH places the burden of proof on companies. To comply with the regulation, companies must identify and manage the risks linked to the substances they manufacture and market in the EU. They have to demonstrate to ECHA how the substance can be safely used, and they must communicate the risk management measures to the users.
If the risks cannot be managed, authorities can restrict the use of substances in different ways. In the long run, the most hazardous substances should be substituted with less dangerous ones.
Suggestions for increasing exports
  1. The Central and state governments through their export promotion agencies should make greater investment in Market Research activities. Almost 50 percent exports take place from SMEs and these companies cannot afford to invest in market research reports. Each report cost a minimum of $1500-2000. These report libraries should be created centrally at Export Promotion Councils and contents made available to members.
  2. The Export Promotion Agencies should build or lease common warehouses at strategic locations, both within regional markets as well as re-export hubs such as Dubai, Panama City etc. for SME exporters.
  3. Encourage greater participation in emerging markets trade fairs such as Morocco Auto Fair. Morocco is emerging as the foremost automotive hub of Africa but Indian participation is almost nil.
  4. Organise buyer-seller meet at re-export hubs such as Dubai. A large number of importers from Africa to Central & West Asia visit Dubai regularly but not India.
  5. Organise Indian Trade Fairs at re-export hubs at Dubai, Panama City, Singapore etc.
  6. Subsidise translation and interpretation costs of SMEs.
  7. Use power of import to influence exports – For example, India is one of the largest importers of palm oil from Indonesia and Malaysia. It should use this power to gain concessions in reciprocal exports of pharma products.
  8. The export promotion agencies should be proactive in tracking forthcoming regulations in sanitary & phytosanitary areas. These rules and regulations are imposed after lengthy discussions & deliberations. We should alert our exporters well in advance of likely changes so that they can prepare themselves.
  9. India’s potential for increasing exports is very high provided we have a coherent long-term strategy in place and use the fund freed from export subsidies to create a deep sustainable capacity for capturing a substantial share of the international market
    Suhayl Abidi is a research advisor at the GOG-AMA Centre of International Trade, Ahmedabad.

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