India's Export Crash: Handing Out Crutches To Lameduck Exporters Is Not The Answer

India’s export story appears to be one of serious de-growth. In December 2015, exports fell 15 percent, the 13^th consecutive decline in as many months, and the April-December export figure shows a fall of an even higher magnitude – 18.6 percent.

But should we worry? Yes and no. We should worry that our merchandise exports are not competitive enough to handle the current global shrinkage in demand; but we should not be wringing our hands in despair either because it takes two sides to make a trade ledger.

What matters is not just exports, but imports. As long as imports are also in decline, our macroeconomic problems are not going to worsen. In April-December 2015, imports declined by 15.8 percent. Our trade deficit, despite falling exports, is down from last year’s $111.68 billion to $99.2 billion in the first nine months of this year. So, relax.

Put another way, we should worry about our internal weaknesses which make our exports falter at the slightest sign of rough trade weather overseas, not the fact that there is rough weather everywhere. There is something we can do about the former, and nothing we can do about the latter.

A simple lesson can be drawn from the recent performance of Reliance Industries, which operates at the edge of the same stormy sea of falling commodity prices.

In the third quarter ended December 2015, Reliance saw revenues drop by a solid 24 percent and exports crashed by a hefty 37.5 percent – that’s a $5.5 billion loss of exports for just one company. It puts the country’s overall export losses in perspective.

But here’s the kicker: despite the drooping topline, the bottomline has never been perkier, with Reliance’s net profits up by 42 percent to Rs 7,218 crore. Refining margins were the highest in seven years at $11.5 a barrel.

What Reliance has done is build resilience into its oil business model, by being flexible in its raw material and finished products strategies. It takes advantage of every drop in oil prices by sourcing the right crudes from the right suppliers and manages its final product mix according to price trends in various markets. This nimble-footedness is what explains its higher-than-average refining margins when product prices have been falling.

India’s export strategy should draw some lessons from how Reliance has managed a shrinking topline to fatten the bottomline. Export success is not about selling more, but about shifting your focus to the right products and markets through an appropriate strategy when the occasion demands.

Of course, governments can’t do what businesses can do, but government is an important enabler of trade. If businesses are to grow more nimble, we simply have to keep chipping away at procedures and policies that make doing business in India a nightmare.

You can’t shift to a more paying export strategy if you can’t hire and fire workers depending on demand; you can’t chop and change the product mix if you can’t make quick buy-or-make decisions; you can’t lower your costs if you can’t change your debt-equity mix to reflect comparative costs of these two sources of financing, not to speak of the debt-debt mix (whether to borrow from abroad or at home). If the Reserve Bank, even in a liberalised atmosphere, needs you to fill multiple forms to remit money abroad to a knowhow supplier or to repay an exiting business collaborator, you are actually reducing business flexibility. You can’t boost agriculture exports if every time there is some spike in onion or sugar prices, you ban exports or impose export duties. Nor can you do so by forcing sugarcane factories to pay high prices for cane that they cannot afford. Business is not about transferring cash from unviable factories to unviable farms.

Again, if you are going to make draconian laws on black money for political reasons, many of your businessmen will shift abroad, with consequent shifts in the direction of trade and exports. Why would an NRI businessman want to boost exports from his Indian unit when he can do so more easily from his Sri Lankan subsidiary or from Thailand?

More important, sops for export financing or tax breaks for exporters are not what will make Indian exports competitive. These, in fact, will make exporters more dependent on government dollops to become profitable, and make them more complacent and less competitive.

The objective of India’s trade policy must be to make it possible for exporters to become profitable by improving productivity and by focusing on the ease of doing business. Funnelling profits into uncompetitive businesses, spoon-feeding profits to get short-term gains in exports are the surest way to make Indian exports uncompetitive.

Make in India cannot be about handing out export crutches to lameduck businesses.