‘Eaten Out Share Of Some Competitors': FIEO's Ajay Sahai On India's Goods Exports Rise

India’s merchandise trade deficit hit a record high in October this year, widening to $31.46 billion. This is in part due to a sharp rise in gold imports during the festive season. 

And this is a surprise number. “One of the reasons for the record trade deficit is that export has not improved in the way that imports growth has happened,” said Ajay Sahai, director general and chief executive officer of the Federation of Indian Export Organizations (FIEO), which was jointly set up by the Ministry of Commerce, Government of India and private trade and industry segment to promote India’s exports.

“Primarily it is on account of oil and gold imports. If you are talking about non-jewellery and non-oil imports, they have grown by around $1.5 billion which is marginal,” Sahai added. “In a way you can say it’s a good sign if gold imports have happened, [but] we have to see whether this is just a demand for domestic consumption or it leads to export.”

While there has been a 6.2% rise in goods exports in October, overall exports this year have been relatively soft. This is only the second time in nine months that overseas shipments have seen an uptick, the first being in August. 

Goods exports in the country crossed $450 billion in 2022-23. However, goods exports between the period of April and October this year are about $245 billion, 7% lower than last year’s figure for the same period. 

The reason for this is that international markets are weak and global demand has taken a hit. This is not just for merchandise exports, even services exports have slowed down between September and October. “With the interest rates moving up, consumer demand has also taken a hit. And this has affected demand for most products,” Sahai said. 

But the October numbers are a good sign, he added. “Though the demand has taken a hit, India's exports have improved. That means that we have eaten out the share of some of our competitors,” he said. 

There has also emerged a distinct trend of exporting more technology and knowledge-driven products now, as compared to labour-driven products in the past, Sahai highlighted. “It's very important [for us] to follow a strategy to push the sunrise sector at the same time. We have to keep pushing on the employment-intensive sectors because if not for export, at least for job creation they're extremely important,” he said. 

For The Core Report: Weekend Edition, financial journalist Govindraj Ethiraj spoke to Sahai about the composition of exports in India today, why some of these sectors are not doing so well today and what could counterbalance it.

Here are edited excerpts from the interview: 

We are seeing a record deficit in trade in the month of October and going from September to October. Why is this happening?

One of the reasons for the record trade deficit is that export has not improved in the way that import growth has happened. But if you're looking into the import side also, we are seeing a growth of around $8 billion happening in October as compared to October 2022. 

Primarily it is on account of oil and gold imports. If you are talking about non-jewellery and non-oil imports, they have grown by around $1.5 billion which is marginal. In a way, you can say that's a good sign if gold imports have happened. We have to see whether this is just a demand for domestic consumption or it leads to export. 

But generally, whenever there has been a surge in gold imports, much of it [finds] to be into an export market also. I'm not against imports, if that is of the capital goods or the raw material, because that shows signs of industrial recovery and India's manufacturing growth. 

We are concerned with the imports of the finished goods particularly in the consumer durables, which is happening, but I personally feel that the way the government is attracting investment in the PLI (production-linked incentive) scheme, many of the consumer goods sectors will see a hit on imports also, maybe in a timeframe of three to five years. We will not only see drop in imports on consumer goods. On the contrary, we will see much better exports of these goods, we are seeing that not only the mobile but probably in the white goods segments, lots of TVs are being exported by some of the multinational companies that have established their plants in India, and this is a trend which will continue. 

So of course, the rising trade deficit is a cause of concern but I think we will be more interested to do a profiling and see whether it is because of the finished goods. And that is a cause of concern. And we need to talk to the industry in what way we can look into the substitution of these imports by domestic production.

That is import and not to dwell too much into it, because I'm going to talk to you more about exports today. Why have exports on a relative basis been weak this year?

In fact, the demand globally has taken a hit. That is the trend whether you're talking about China, you're talking about Japan, or even our Southeast Asian competitors. They're facing the same trend. And it has much to do with the global economy. We know that interest rates have been firmed up everywhere, inflation is pretty high. 

So on the one hand, with the high interest rate, they are keeping a very lean inventory. And since in the past a lot of imports have taken place, inventories are high. With the interest rate moving up, the consumer demand has also taken a hit. And this has affected all the demand for most of the products in some of the segments, we may seem bullish even now. So leaving apart pharmaceuticals and food products, in most of the other products, we are seeing that demand is taking a hit. 

And that's why the number which has come for the month of October is a good sign because in many of these products, though the demand has taken a hit, India's exports have improved. That means that we have eaten out the share of some of our competitors. And if that is happening, that shows that the strength of those sectors is growing so far as we are talking about the competitive advantage.

If you were to break that down, you said food products and pharmaceuticals are doing well as compared to many other sectors. Is that right?

No, I'm saying that these segments are not affected by the demand. If you're looking into sectors which are doing well, I think in the electronics sector, we are doing extremely well. One of the reasons is that we have a low base, India was not exporting electronics two to three years down the line, we are still on a base of around $25-30 billion. 

But the way it is improving, I'm pretty sure that in the next five years, maybe overcoming the engineering exports of the country, a quarter of the total export is of the engineering product followed by to a large extent pharma and chemicals, then gems and jewellery and textile. The rest of the sectors are minor as far as the percentage share is concerned. 

What we are seeing a distinct trend is that now we are exporting much more technology driven products and much more knowledge driven products as compared to labour driven products of the past. So for us, it's very important that we follow a strategy to push the sunrise sector at the same time. We have to keep pushing on the employment intensive sectors because if not for the export, at least for the job creation they're extremely important. 

Let me come back to the larger figure first. In 2022, we did total exports of about $770 billion. In 2023, we were aiming for about $900 billion. I think there were some good talks about $1 trillion as well. But let's stick to $900 billion for now, of which about $500 billion was merchandise as a target for 2023. That's the current year. At the current run rate, It doesn't look like we are going much above $400 billion. Would that be fair?

At the moment, we'll be projecting a figure which is close to $420-425 billion. Unless because of the conflict in the Middle East, the situation gets further deteriorated. If that happens, the numbers may be revised downwards. 

Let's say we have a basket of new export goods, including electronics components and so on from India. Now, if you were to take that away, where do we stand at this point of time in this $33 billion dollars that we are exporting per month presently?

When you are looking into the figure, if you are taking out the mobile exports, you can say that every month you can take around $1.5 billion out of it. So it will not be affecting much of exporting to that. At the same time mobile imports have lots of imported components also. So that also needs to be looked into, I think we need to look into the totality of the picture, which is emerging. We are seeing the globalisation of production happening, multinational companies coming into the country, they are looking into India as a big market at the same time they are using India as a hub for global exports also.

What I'm trying to understand is the export basket as it was, let's say five years ago, versus what it is today. And what is within that basket, from what you're saying to me has not changed all that much, except for a few billion dollars here and there.

Except for the electronics sector, not much change has happened. But I think it's too small a time to change the composition of exports happening. When you're looking into the composition of exports or diversification of the market, one has to look into a period of 10 to 15 years, because it's a slow process. Even when you developed a product, you have to look into what could be the possible market, you have to look into the market access issues and then only you can start exporting that.

You said roughly 25% of our exports today are engineering-linked. Could you break that down a little further?

I'm talking about the engineering. The change, which I would like to explain here, is that in the past, even when engineering was contributing to around 20%, it was dominated by exports of iron and steel only. Today it is dominated by automobile exports. So a lot of value addition within the sector is also happening. Today, the automobile and auto components sector together account for around $20 billion-plus of exports.

If you could just break up the top three export categories today, by contribution to value, what would they be?

Top three today would be engineering, followed by petroleum, followed by pharma and chemicals together.

Now, let's talk about pharmaceuticals for a moment. How have things changed there?

In fact, during Covid-19, when India started supplying vaccination, we had the goodwill of many countries, which over a period have translated into the market also. Most of the countries have realised that so far as the qualities are concerned, Indian pharma is now meeting the best of the quality standards, most of them have either the FDA (Food and Drug Administration) standards or they have the corresponding European Union standards also. And that's why on the quality front, we are not having any kind of issues. Secondly, I think so far the costs are concerned, we are much more competitive as compared to any multinationals who were supplying the similar kinds of products. 

Let's touch upon garments for a moment because I said it's a visible sector, there are listed companies, some of them are actually doing well now compared to the last few years. How are things looking in the garment space at this point of time and its contribution to the $33 billion dollar export number?

If you're looking into garment exports as a whole, and textile exports as a whole, we clicked close to around $14 billion. The government alone has more than $13-14 billion in garment exports. We are competitive except for the fact that some of our competitors who have the advantage of tariffs, either they have the free trade agreement in the major market or being the LDC they enjoy concession that was I think denying the market to India. But now with those countries, we are working out on the free trade agreement. 

When you talk about your membership base at 36,000, the 80-20 principle obviously applies. So, let me talk about 80%. What would be their biggest constraints to growth and scale at this point?

The biggest constraint is finance. We have the schemes which provide for collateral free lending, but it just happens on paper, practically, if you are not having collateral, you have a good order, banks will not be coming forward to help you out. 

The good thing which has happened in the last few months is the emergence of fintech companies. And these fintech companies, based on your export turnover based on your GST (goods and services tax) turnover, they are in a position to provide some kind of support, but since they already have limited funds and the funds are not flowing in, and we have seen that the fund flow position has deteriorated in last few months, there is a challenge. 

But, I know this must be a smaller factor or component, let's say an Amazon today, which is picking up goods or displaying goods from a local manufacturer in a small town and then displaying them to potential buyers elsewhere in the world. And obviously then importing that or exporting that depending on where you are. Is that making any difference at all?

That trend has started in the last two years. Still, we have to move a long distance. If you look into the e-commerce exports of the country, it is around $25-30 billion, as of now. We are looking into a 10x multiplier for the sector in the next five years. There are still a few regulatory issues which need to be looked into. We need to provide the same treatment to e-commerce exports that we are providing to our conventional exports. 

We are waiting for a new e-commerce policy to be unveiled by the government soon, e-commerce retail export has been recognised by the BJP (Bharatiya Janata Party) in the new foreign trade policy. 

If I were to take an example of let's say a carpet maker from Jaipur, and let's say the carpet maker was exporting a million dollars or $5 million worth of carpets every year. And today, part of it is obviously going through e-commerce so my question is, has e-commerce expanded the market or is it only you know, taken out what would have otherwise gone by ship or by air?

Opportunities here are tremendous. Many of these schemes like GI (geographical indication) product of one district, one product can also result in a very short time, when you bring them on the electronic platform. Please bear in mind that those who are producing these kinds of products, they don't have the deep pockets to go for conventional marketing. And we are also encouraging newcomers to test the market through the e-commerce portal. 

But has the size of the manufacturing pie for that carpet maker, to use the same example, expanded?

Absolutely, new players have also come. Let us look into the differentiation between B2B (business-to-business) and B2C (business-to-consumer) e-commerce. B2C e-commerce is highly tailor-made…and that is why the client for B2C is completely different from a B2B perspective.

We did say that there is a demand slowdown in the Western world, and that's been the case, post-Covid. And it may pick up, it may not, we don't know. So, why is the traditional export base not growing as much as it could?

Let us bear in mind that whenever the size of the cake is shrinking, it becomes very important how aggressive you are in the market. Unfortunately, at that front, Indian exporters are not doing well. Because if the markets are not giving you immediate response, most of them being short of the funds, they are not showcasing their product. And that is something which we are trying to repeatedly communicate to our members that it is very important that you be visible in the market, even when the conditions are not conducive. 

When we compete with Bangladesh, let's say it assumes that we are mostly making the same stuff for the same people we're trying to supply to, maybe GAP, or Marks and Spencers. But when you're making carpets in Jaipur, or you're producing a more, let's say, intricate engineering product, then perhaps the competition is not so much and not so sensitive. What's your sense? 

Well, in fact, as a thumb rule, I will say that all of them are adding more value because if you want to survive in the market today, it is extremely important that you cut down your cost and you improve the efficiency and thereby increasing the cost of the product also. 

Some of them have moved to the branded segment of exports and there they are not having any competition. We are competing with Bangladesh because they are exporting shirts, we are exporting shirts. But if I'm exporting an Arrow shirt, there is no competition from Bangladesh. 

The labour probably in Bangladesh is much more productive than the labour in India. And that is why a lot of work needs to be done on the skilling side. Secondly, I think we have to look into what extent we can instead of exporting the raw material, which at times make my competitor more competitive. 

When you look at it from the eyes of a small manufacturer, whether it's a carpet once again, or it's an engineering product or something else, how friendly would you say the logistics infrastructure is? 

That situation has improved drastically in the country in the last few years. In fact, for the logistics, I think they are the biggest beneficiary of GST. It has truly made the country as a one market. The efficiency of the trucks has gone up tremendously after the e-way bill and the electronic plazas happening. Today, if you're looking at JNPT (Jawaharlal Nehru Port Trust), the turnaround time of the ship is 28 hours, whereas in Singapore and Colombo it is around 22 to 24 hours. So we have drastically improved, but still, we have some way to go to reach the international benchmark. I think the new logistics policy is aiming at that. We have now the freight corridor also coming and most of it has been operationalized. Once it is fully connected, we will have better logistics efficiency. 

Now, as we conclude, we've seen a very high trade deficit in October, which as you said, obviously is because we've seen a spike in imports, including gold. And it's interesting why people are buying so much gold despite tariffs or customs duties being higher than ever before. But if you look ahead in the next year or so, amongst the many sectors that we've talked about, what in your mind holds the maximum promise in terms of value addition, in terms of creating, let's say, jobs, or manufacturing jobs, in terms of creating a strong brand India presence internationally? 

I think we have done exceptionally well in the engineering sector, on all these three parameters. We are doing very well in the drugs and pharmaceutical sectors also. Value addition is happening and probably once we start manufacturing parts and components of electronics in India, the value addition will skyrocket. So this is a segment where I hope that, in the next five years, we will not be exporting a sizable portion of India's export; probably the value addition will also go very high into the country. 

My concern is basically with regard to the challenges the labour-intensive sector is facing because whether it's leather, whether it's textile, particularly apparel sector, or in gems and jewellery sector and all that segment,  global share is going down. And that's a huge cause of concern. I'm not looking into these sectors. Just from the perspective of exports, I've made it very clear today that the demand for technology products is much more and the size of the market of these products may be limited. But if you're looking into the creation of jobs in the country these sectors are extremely important. So, whatever factors are affecting the growth of this segment that needs to be looked into very carefully because contrary to the general perception, these segments are under pressure.