www.thedollarbusiness.com
Vol.3
Issue 04
April 2016
100
$2
EXCLUSIVE INSIDE KALRAJ MISHRA Union Minister for Micro, Small and Medium Enterprises, GoI DR. GILBERTO LLERENA GARCIA Ambassador of the Republic of Panama to India CHRISTOPH REMUND CEO, DHL Global Forwarding (India) M. A. BHASKARACHAR Chairman-in-Charge, Chennai Port Trust SANTOSH KUMAR SARANGI Chairman, Tea Board
FOREIGN TRADE . EXPORTS . IMPORTS
...AND MORE!
AN UPHILL TASK FOR MSMEs
THE DOLLAR BUSINESS ANALYSES WHAT AILS EXPORT-MANUFACTURING IN THIS HIGH-PRIORITY, FLAG-BEARING AND INDISPENSABLE SECTOR OF INDIA
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Union Budget 2016
High incentives from the government ensure double-digit margins for exporters
Does it address issues of the exports fraternity and help Make in India?
It glitters & makes business sense
Thorns and roses
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Casual identity or export catalyst? Do GI Tags make a difference when it comes to exports from India?
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LETTER FROM THE EDITOR–IN–CHIEF
SOMETHING WHIZZED PAST. OH! T’WAS THE BUDGET.
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here can be no full stops to hope. Those who trust that the ‘Dream Budget’ will one day be revealed in this sphere of mortals can vouch for that. Even as the afternoon clock struck one on the last day of February this year, the wait for this very gathering of optimists was extended by another year. Not to say that Budget speeches have forever failed to inspire, but sometimes you expect more than a recital that is only “just satisfying” for the masses. For once, it’s not totally illogical to expect an “inspiring” hour-and-a-half display of full-hearted economic rhetoric once a year, one laden with proposals that are far from being outcomes of back-calculations crafted to achieve numerical targets and stitched neatly to win your nation some temporary theoretical victory (something like a triple-A rating by S&P is motivating, isn’t it?). To expect some thunderclap of cheers on a clear morning is one fair expectation in a nation from whom the world expects much. Some words of praise did trickle in alright, but the decibel levels didn’t tear across the skies on Budget Day. Those living in close proximity to foreign trade were expecting a greater act of generosity from the FM. Picture this: since the incumbent government came to power, for whatever reason – global headwinds or domestic tremors – India’s performance in both exports and manufacturing has looked more discomforting by the day. Between May 2014 and January 2015, India’s monthly exports fell by 15%. And that gradient hasn’t changed polar orientation in time. It has only become steeper. As compared to May 2014, exports in January 2016 fell by 25%! And to talk about manufacturing, the recently announced Index of Industrial Production (IIP) figures were a sore. Even the RBI chief has called the numbers “disappointing”. As per the Ministry of Statistics & Programme Implementation, while Overall IIP fell by 1.5%, manufacturing sector production index fell y-o-y by 2.8%. Interestingly, about half of the 22 industry groups that form a part of the manufacturing sector index showed negative y-o-y growth in January 2016. So last month, when our FM walked into the Parliament with his brown leather suitcase, expectations – of India’s foreign trade community – were high. What was commendable about the Budget was that it contained a well knocked-in pro-poor agenda and aimed to provide socio-economic security to the underprivileged. “I have outlined the agenda of our Government to ‘Transform India’ for the benefit of the farmers, the poor and the vulnerable,” said the FM in the closing minute of his speech. And that brought about a casual thought – a question – in my mind, “Should this Budget have aimed to first transform India and then use that macro change to make differences in the lives of the underprivileged? Or should it have been the other way round – work at micro and local levels first to transform India as a whole?” I think the difference between the thoughts appears little, but when looked at carefully, may be an explanation of why the Budget failed to score high on creativity. Harsh words these, you think? Look, the world’s in trouble. India’s macroeconomic indicators or even its bourses are not so heroically defiant. And in such a scenario, something more offbeat – outlandish you may say – would have been desirable. Something to give India’s exports and manufacturing the desired launch pad to win the world and which in turn would have given birth to greater employment, making India’s BPL headcount shrink by the hour. Symbolic, but yes, India is hosting the Twenty-20 World Cup this year, a game that’s www.thedollarbusiness/blogs/steven
@SPWarner
Changes should have been announced to minimise import duty exemptions granted to subsidise products consumed by the rich. Gains made should be used to increase incentives offered to Indian exporters.
Steven Philip Warner
President (VMPL) & Editor-in-Chief, The Dollar Business steven@thedollarbusiness.com www.tumblr.com/blog/steven-p-warner APRIL 2016 II THE DOLLAR BUSINESS 3
far removed from the five-day-long format! A year of defensive play will not win you the trophy. Let’s explore some highlights of the Budget and evaluate what it means for stakeholders of India’s foreign trade. The words “poor”, “farmer” and “vulnerable” were spoken about 50 times during the speech. Agreed. Provisions like interest subvention, irrigation funds, smoother flow of credit to cultivators, decentralisation of procurement aided by an online procurement system, etc., will help increase India’s farm output and facilitate exports. But if a key agenda of the Budget was to uplift the poor and support the “export sector”, the FM could have made bolder moves to minimise exemptions granted to subsidise products that are consumed by the rich, and in turn given incentives to encourage exports of processed agricultural and non-agricultural products. For instance, how about stemming the tide of revenue losses caused through application of effective rates of duty (ref. Customs Notfn. 12/2012) on items that are imaginably not made for the poor or the lower income class? Passing on benefits to the rich or to companies that import these products at subsidised duties for manufacturing of products (that again, are inarguably meant for the upper middle and rich class) is beyond logic. Why should basic duties on sun dried dark seedless raisin stand reduced from 105% to 30%? [When was the last time you saw any poor popping a raisin into his mouth?] The same is
There was no discussion on MAT or DDT removal or giving a boost to manufacturing across operational SEZs true for cranberry products and juices, soya protein concentrate, patent leather, non-industrial diamonds other than rough variety, and other products. The government can think of raising revenues by taxing these imports at tariff rates and passing on the gains made by offering incentives for exports. That will encourage manufacturing and create millions of jobs. It is understandable if the duty relaxation is given for raw materials which can be either consumed directly by the farmers and the underprivileged or need further processing for exports like unprocessed precious stones (rubies, diamonds, etc.), urea, compounds for making of fertilizers, unwrought forms (dore bars) of gold and silver, etc. FTAs till date have caused enough damage to the exchequer. No point throwing exemptions to non-FTA nations by subsidising imports that are ‘not’ meant for consumption of the underprivileged. And MNCs or those of the gentry should have no problem in shelling out duties at tariff rates. Announcements made with respect to the infrastructure sector are encouraging not only for manufacturing units across the country but also for the exim community. Plans to revitalise projects under PPP formats and outlay on roads, railways, airports, and national waterways are needed for more efficient transport formats in the years to come. Talking further of investments, in case of FDI, allowing 100% through the automatic route in marketing of food products produced and manufactured in India is a handsome development for the food processing industry and one that could help boost India’s export potential in times to come. This will also enable quicker establishment of the 42 Mega Food Parks that was announced earlier by the government. 4 THE DOLLAR BUSINESS II APRIL 2016
The Budget was also an attempt to bring in tax reforms, albeit change on a small scale. Increase in turnover limit under Presumptive taxation scheme (u/s 44AD of IT Act to Rs.2 crore) ‘could’ bring relief to about 50 lakh MSMEs. Reduction of Corporate tax for small enterprises and new manufacturing companies is one way in which this Budget has contributed to support Make in India. New manufacturing companies will be taxed at 5% lower rates if they avoid claims like profit-linked or investment-linked deductions. And for FY2016-17, relatively small enterprises (with turnover not exceeding Rs.5 crore in FY2015-16) will be taxed 1% lower. The big news for start-ups (set up between FY2016-17 to FY2018-19) is that they will now be allowed 100% deduction of profits for three out of first five years. But continued applicability of MAT (at 18.5%) was a dampener! If the idea was to really fuel the start-up environment, something like a flat, reduced rate of (you could call it) SMAT (Start-up MAT) on book profits could have been proposed, say at 5%, equivalent to the lowest (start-up) category of tax rates applicable to individuals. India is a nation that scores low on R&D still. Only 8% of our product exports are "high-technology" – even Azerbaijan, Barbados, Burkina Faso, Kazakhstan, Latvia, Mongolia, Mozambique, Niger, Sao Tome and Principe, Solomon Islands and Timor-Leste have better numbers! Think hard – when did you last use a high-tech product made in any of these 12 nations? Really, India needs to wake up. And if that’s the situation the country’s labs are faced with, what logic defines a reduction of incentives in R&D? The benefit of tax deductions for R&D by companies stands reduced to a maximum of 150% from FY2017-18 and 100% from FY2020-21. Should the government – in doing exactly the opposite – not have increased the limit from the existing 200%? SEZ units and developers too feel that the Budget was a mixed joy. There was no discussion on MAT or DDT removal or giving a boost to manufacturing and employment generation across operational SEZs by allowing something like exports to DTAs at FTA customs rates. The announcement however signalled more than just hints of phasing out of deductions for SEZ developers and units. No income tax benefit under section 10AA of the IT Act shall be allowed for SEZ units that begin manufacturing or start providing services on or after 1st April, 2020. Also, those SEZs which are notified but are not operational yet will not be eligible for the 10 year-long tax holiday under section 80-IAB of the IT Act if these do not become operational by or before 31st March 2017. These are signals indicating the end of incentives era for India’s SEZs that contribute to 27% of our exports. Why are we trying hard to make the future of exports so uncertain? Aren’t global headwinds enough trouble? While the new deferred sunset clause for SEZs does weaken India’s stance on Make in India, certain aspects of the indirect tax recommendations look a mixed bag. Suitable modifications in customs and excise duty rates on certain inputs, intermediaries and even finished goods (like golf cars, aluminium products, imitation jewellery, e-readers, etc.) to improve competitiveness of domestic industry in sectors like IT hardware, capital goods, defence, textiles, chemicals, petrochemicals, petroleum, MRO of aircraft and ship, etc., were proposed. There were some surprising recommendations that didn’t quite fall in line with the idea of supporting domestic manufacturing. Increase in BCD of Primary Aluminium from 5% to 7.5% was one. First, the metal is used extensively in high-tech industry (from aviation to auto, IT hardware, consumer durables,
1-1-91 11-1-91 9-1-92 7-1-93 5-1-94 3-1-95 3-1-96 11-1-96 9-1-97 7-1-98 5-1-99 3-1-00 1-1-01 11-1-01 9-1-02 7-1-03 5-1-04 3-1-05 1-1-06 11-1-06 9-1-07 7-1-08 5-1-09 3-1-10 1-1-11 11-1-11 9-1-12 7-1-13 5-1-14 3-1-15 1-1-16
etc.), and with Make in India, the use is bound to skyrocket. Sec- India's performance in exports ($ million) ondly, India consumes 96% of this metal ore that it produces. With The last time India fared so badly at the ports was when economic an annual excess stockpile of just 0.16 MMT, and the threat of rising machines around the world were crippled by a meltdown input costs, why would the government want to make imports of this basic input difficult? Then, while on one hand, exemptions of 35,000 BCD (10%), CVD (12.5%) and SAD (4%) on accessories of mobile 30,000 phones when imported into India have been withdrawn to encour- 25,000 age Make in India, the government is imposing an excise duty on these very components that are domestically manufactured and sup- 20,000 plied to mobile phone manufacturers as OEMs. So mathematically, 15,000 if you’ve increased the price of Made in China cellular phone charger 10,000 from Rs.200 to Rs.256.20p, you have increased the price of Made in 5,000 India product from Rs.250 (assuming the price of Made in China to 0 be lower by ‘just’ 20%) to Rs.281.25p. So by prescribing imposition of excise duty of 12.5% (this tax being indirect, it will ultimately be Source: International Trade Centre borne by the final buyer), you’ve burnt the chance to give the pricing edge to the Made in India charger! Next, Drawback Rates. The DBK schedule announced a few on the country’s Ease of Doing Business rankings and in this reweeks before the Budget had sweet somethings. Ceiling of Draw- gard, providing certainty in taxation along with rationalisation of back for gear boxes – India’s largest exported product in auto com- tax rates will help. ponents – was increased from Rs.13 to Rs.17 per unit, with the DBK Moving on to India’s gateways to the world, while allowing inrate being kept unchanged at 2%; in the case of brakes, bumpers and creased free baggage allowance for international passengers is a drive axles – the next big export bestsellers – ceilings were raised good move to encourage forex earnings through the aviation sector, from Rs.16 to Rs.17/unit, Rs.36 to Rs.61/unit, and Rs.13 to Rs.61/ some deadline should have been shared with India’s import-export unit respectively. Plus there were some products added at the 6 and stakeholders as far as putting to practice of the much-talked about 8-digit levels. But for the FM to declare that the DBK scheme has Customs single window clearance is concerned. All that we are told been “widened and deepened to include more products and coun- is that it’s still a work in progress and will remain so until the begintries” was not realistic. Two arguments here: (a) Since when did DBK ning of FY2017-18. [As per CBEC Circular 10/2016, dated March rate depend on a list of countries?; (b) If we take a look at the Cus- 15, 2016, online clearance under Single Window Project has been toms notification (22/2016), HS code for bumpers (of vehicles other rolled out so far only at main ports and airports in Delhi, Mumbai, than railway or tramway) is stated as 870801, brakes as 870803, gear Kolkata and Chennai.] boxes as 870804, drive axles as 870805…and so on. The notification When we talk of ports, we can’t miss sight of our precious stockalso recommends changes in HS Codes 630101, 630102 and 630199. piles at the warehouses. Change in procedure to provide for a shift Try looking up on these HS codes in any present day Customs Tariff from physical control to record-based control for customs bonded manual and you’ll realise the joke – these HS Codes are non-exis- warehouses is welcome, but at the same time, the reduction in intent! So much for a “widened and deepened” DBK schedule that was vestment-linked deduction (u/s 35AD of IT Act) is a move that's proudly announced during the Budget speech as one of the “mea- hard to explain. Reduction of tax exemption from 150% to 100% sures to support the export sector”. in the case of a cold chain facility, warehousing facility for storage Then there were other announcements worth taking a note of. of agricultural produce, 100-bed plus hospitals, and production of Allowing deferred payment of customs duties for a certain class of fertilizers w.e.f. April next year is harsh. At a time when we talk of exporters and importers with proven track record may not be a very wasted agri-produce, lack of storage spaces, making India a hotspot good idea, unless the definition of "proven track record" is made for medical tourism, why should the government look to discourclear. Else this provision will end up pumping more volume into the age incentives that come with greater investments? grey area in India’s foreign trade. However, rationalisation of interest One year back, it would have been too early for India’s foreign rates on delayed payment of Customs duty under section 28AA at trade community to expect a bouquet of good tidings from the 15% from the current 18% is sensible. This rate needs to go south- Budget. Then, the new Foreign Trade Policy was due and the inwards in order to protect parties who may subsequently have the cumbent government had barely been in office for over ten months. decision going against them in ongoing cases. The government’s an- This time, it was different. When our FM started with the words, nouncement to reduce litigation and simplify the existing Customs “Madam Speaker…”, millions of Indians listened in startled silence. (Import of Goods at Concessional Rate of Duty for Manufacture of When he ended his monologue, a big chunk of those millions wonExcisable Goods) Rules, 1996 is welcome. Hopefully, the near doz- dered what had whizzed past. en new benches of CESTAT will affect quicker resolution to existing Perhaps next time, we will hear some things bigger and bolder cases of Customs, Excise and Service Tax and make India’s foreign for capitalists small and large, and especially those who wish to take trade environment appear more conducive for foreign investors, im- the world by storm. porters and exporters. The government is working hard to improve After all, there can be no full stops to hope. www.thedollarbusiness/blogs/steven
@SPWarner
www.tumblr.com/blog/steven-p-warner APRIL 2016 II THE DOLLAR BUSINESS 5
Volume: 3 Issue: 04 April 2016 www.thedollarbusiness.com facebook.com/tdbIndia twitter.com/TheDollarBiz in.linkedin.com/in/thedollarbusiness/ President (VMPL) & Editor-in-Chief EDITORIAL & RESEARCH Editor Executive Editor Senior Editor Senior Editor (Online) Senior Assistant Editors Assistant Editor Assistant Editor (Online) Principal Correspondent Correspondents
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© Copyright 2014 No part of this magazine may be reproduced in whole or in part without an expressed permission of the publisher. The information on this magazine is for information purpose only. Manish K. Pandey, Editor, The Dollar Business, is responsible for the selection of news and content under PRB Act. Vimbri Media Pvt. Ltd. assumes no liability or responsibility for any inaccurate, delayed or incomplete information, or for any actions taken in reliance thereon. The information contained about each individual, event or organisation has been provided by such individual, event organisers or organisation without verification by us. All disputes are subject to exclusive jurisdiction of competent courts and forums in Hyderabad, Telangana. Printed and published by Avnish Goyal for Vimbri Media Pvt. Ltd. Published at 5-2-198/4, Distillery Road, Ranigunj, Secunderabad - 500 003, Telangana. Printed at: Kala Jyothi Process Pvt. Ltd., 1-1-60/5, RTC Cross Roads, Musheerabad, Hyderabad - 500 020, Telangana. FOR EDITORIAL/CONTENT Email: editorial@thedollarbusiness.com FOR ADVERTISEMENT Email: ads@thedollarbusiness.com FOR SUBSCRIPTION Email: subscription@thedollarbusiness.com . +91-40-67609999 For queries / comments you can send us an SMS at +91-888-633-1947
8 THE DOLLAR BUSINESS II APRIL 2016
28 COVER STORY
MSMEs
SEEMINGLY ENDLESS ROAD TO NOWHERE? WHAT AILS EXPORTS FROM THIS ALL IMPORTANT SECTOR
Despite being the high-priority, indispensable sector of India, MSMEs face various issues that are troubling the sector. The Dollar Business takes a deeper look at various challenges that are plaguing the flag-bearing sector.
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Ambassador of Panama to India tells why he sees India as a natural ally, in terms of trade
CEO, DHL Global Forwarding (India) reveals the company’s investment plans for India
DR. GILBERTO LLERENA GARCÍA
47 10
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KALRAJ MISHRA
UNION MINISTER, MSME,GoI TDB caught up with the Minister to find out how he plans to change the fortunes of MSMEs in the country.
INBOX
Letter to Editor
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DOCKYARD
PRIME FOCUS
Can this port live up to its commercial legacy of bygone era?
Life savers face a lethal dose of Customs duties
CHENNAI PORT
SPOTLIGHT
Your feedback, criticism, and appreciation that hit our mailboxes in March 2016
MONOLOGUE
SPECIAL FEATURE
50
From Narendra Modi’s reaction on Budget to Christine Lagarde on the growth of global trade & more...
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PANAMA This Central-American nation has moved beyond banana and coffee when it comes to exports
PEOPLE SPEAK
GLOBAL TRADE
End of Canada’s golden era, UK’s trade deficit with EU, Zimbabwe’s not-so-a‘maize’ing imports & much more...
INDIA TRADE
No more scanning of Japanese food imports, India’s locomotives chugging into Myanmar & a lot more...
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IMITATION JEWELLERY
This form of jewellery adds glitters not only to your fashion, but business as well
SECRET INGREDIENT CORN
STATUS QUO GI TAG
An assessment of pros & cons of the status given to unique products
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POLICY MONITOR
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TDB FORUM
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DATEBOOK
SAFFRON
THE MIDAS TOUCH
PHARMACEUTICAL
This wonder crop of India is waiting for a revival in its exports
IMPORTO’NOMICS Just because it is the world’s costliest spice, doesn’t mean you can’t make a fortune by importing it!
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UNION BUDGET 2016
Analysing whether or not the newly announced duty structures will give a boost to the manufacturing sector
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CHRISTOPH REMUND
TEA BOARD Chairman Santosh Sarangi on efforts to make the sector competitive
Questions about foreign trade that hit our mail box in March 2016
Some trade shows you shouldn’t miss out in India and abroad in April and May APRIL 2016 II THE DOLLAR BUSINESS 9
inbox
editorial@thedollarbusiness.com SMS your views to +91-888-633-1947
WE VALUE YOUR FEEDBACK, WHETHER CRITICISM OR APPRECIATION. AND HERE ARE A FEW THAT HIT OUR MAILBOXES IN MARCH 2016
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his is with reference to the story titled ‘Niryat Bandhu Scheme much done. Much left to be done.’ published in the March 2016 issue of The Dollar Business. It seems articles on The Dollar Business resonate well with me. As a curious engineer trying to comprehend the International trade industry, I faced many issues and challenges myself. I spent months pouring over books, websites, blogs and news sources. I realised that one of the challenges I faced was the plethora of industry related jargon and acronyms everywhere. INTERVIEWS INS IDE: Every article I read, I came across some new term and this made progress slow. However, I do not agree with your view of government spending on IIT/IIM compared to Niryat Bandhu Scheme and that the difference between target-spend and actual is Rs.8 lakh vs. Rs.800. One is an institution offering 3-4 year residential courses aimed at providing a comprehensive education, including meals, accommodation, and facilities for personal growth. The other is a series of lectures/seminars over a smaller period, with a focused objective of imparting the working-class with requisite knowledge to help them kick-start their enterprise. A more appropriate comparison would be the amount of government spending on IIT/IIM vs. IIFT for example. Since a vast majority of people in the industry cannot devote (or afford) two years pursuing a full-time course at IIFT, this scheme could help familiarise them with the most important aspects of trade. KUNAL AGARWAL Founder, BlueWhale, Mumbai, Maharashtra +91-8811090XXX kunalagarwal@blue-whale.in
www.thedollarbusines s.com
Vol.3
Issue 03
100
‘Cumin’ology: Scienc e of expor
ts Syria’s and Turkey ’s losses imply India’s gains in export s of cumin When business
Hand-made paintin meets art gs can yield rich dividends for its importers
Niryat Band
Is the scheme meetin hu Scheme g of India’s foreign trade expectations community?
Rendezvous
An exclusive conve rsation with Narendra Singh Tomar , Union Minister of Steel & Mines, GoI
FOR EIGN TRA DE . EXPO RTS . IMPO RTS
...and more!
Vol.3
Issue 03
March 2016
100
$2
RNI: APENG/2014/5 4643
THE DOLLAR BUSI NESS SPEAKS TO 40 REMARKAB LADIES OF INDIA LE LEADING ’S FOREIGN TRAD E ON THEIR STRU SECRETS, SUPP GGLES, ORT SYSTEMS AND SUCCESS PRESENTING A STRATEGIES. FIRST-TIME EXCL USIVE COVERAG E
$2
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am really delighted to read articles on The Dollar Business website. It has a lot of information on the subject of foreign trade. In fact, I see it as an excellent tool for every businessman who wants to expand his business. SELVAM KARUPAIYA Davam Exporters, Tamil Nadu kselvamdavam@gmail.com +91-9629276XXX
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he focus of your magazine is very different from other magazines and as such it makes for an interesting read. RAMESH G. DESHPANDE Investment & Finance Consultants Bethesda, Maryland, USA, ramesh@deshpande.name +1-301-229-7XXX
HARSIMRAT KAUR BADAL, CABINET MINISTER, FOOD PROCE RASHMI VERMA, SECRETARY, MINIST SSING INDUSTRY, RY OF TEXTILES, GoI GoI I SHOBANA KAMIN ENI, VICE-CHAIRP ERSON, APOLLO HOSPII KAVITA GUPTA, TEXTILE COMMISSION JAYANTI CHAUHAN, ER, GoI I TALS I MONICA OSWA DIRECTOR, BISLER I I ANITA SANGHI, MEHER PUDUMJEE, L, GLOBAL CFO & DIREC DIRECTOR, MONTE CARLO I CHAIR TOR, DELL SERVIC RAJNI BECTOR, FOUND PERSON, THERMAX I MANMEET ES I VOHRA, DIRECTOR–M CHAYAA NANJAPPA, ER, MRS. BECTOR’S FOOD I HUZAN ARKETING, TATA STARB MISTRY, CHIEF–BD FOUNDER, NECTO UCKS I (CURR R FRESH I DEVITA SARAF, CEO, VU TECHN ENCY & DEBT MKTS.), NSE I OLOGIES, AND MANY MORE...
10 THE DOLLAR BUSINESS II APRIL 2016
March 2016
SPECIAL FEATURES
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he Dollar Business is very good magazine and its helping me grow my business – it has plenty of useful data on international trade. It’s good as a business resource. I am eagerly looking forward to more information and analyses. BAGYALAKSHMI Diya Exporting diyaexporting@gmail.com +91-9176345XXX
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went through The Dollar Business website a few days ago and I must say that it has some really useful information for the EXIM community. ABHISHEK GUPTA Deloitte Touche Tohmatsu Ltd. abhishek.gupta84@gmail.com +91-9899741XXX
Source: The Huffington Post
DR. MANMOHAN SINGH FORMER PRIME MINISTER OF INDIA On the Union Budget’s aspiration on doubling income of India’s farms on average by the year 2020
DAVID CAMERON PRIME MINISTER OF BRITAIN Explaining why it would do well for Scotland to stay in EU at the Scottish Tory conference in Edinburgh
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assure my countrymen that this budget is a budget of your dreams. This budget has presented the commitment of government towards realisations of your dreams. NARENDRA MODI PRIME MINISTER OF INDIA On the Union Budget 2016-17
Source: narendramodi.in
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think it is an impossible dream and there is no inclination, no way of telling the country how it will be achieved because it implies a 14% annual increase in the farm income in each of the five years.
Scotland relies on the door to the single market being wide open. Scottish farmers can sell their meat, without quotas, without tariffs, to a market of 500 million people. But if Britain leaves, that could all change. A trade deal, like the one Canada has agreed with the EU, could involve tariffs and quotas on our exports. And if we have to fall back on the basic rules for global trade, that could mean tariffs as high as 13% on Scottish salmon, 40% on lamb and up to 70% on some beef products.
Source: The Scotsman
monologue
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Source: PTI
STEVEN CIOBO AUSTRALIAN MINISTER FOR TRADE AND INVESTMENT On the barriers to negotiating a successful FTA between Australia and India
12 THE DOLLAR BUSINESS II APRIL 2016
RITA TEAOTIA COMMERCE SECRETARY On why it is taking so long to negotiate an FTA with Australia
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lobal trade is now expanding at, or below, the rate of the global economy. Aside from the China effect, this is because of the slowdown in trade liberalisation in recent years. We need greater efforts to open up global trade systems and promote trade integration through regional and multilateral agreements.
CHRISTINE LAGARDE MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND On the growth of global trade
Source: International Monetary Fund
I
ndia is a country that has a huge amount of potential and a huge amount of opportunity, but there is a fairly strong amount of bureaucracy. Sometimes it requires you to roll up your sleeves and apply a little elbow grease.
overnment is making efforts to speed up negotiations for an early result. Efforts would be on till a favourable situation in terms of goods and services is felt by the Indian side, as they form the core part of FTA in any country.
GLOBAL
TRADE
News & Analyses
LAST MONTH
CANADA GOLD RESERVES
End of a golden era!
O
nce upon a time Canada was one of the largest producers of gold and now it has none! There was a time when most currencies in the world had a backing of gold, but today many countries use fiat currency, no longer depending on gold. In the 1960s Canada had more than a thousand tonnes of gold as part of its foreign exchange reserves. However, it has been long since Ottawa decided to part with gold as it was deemed to be no longer useful as a diversification tool for its monetary interest. The selling away of gold began decades ago and according to the Canadian finance department on March 7, 2016, it just had 77 ounces of gold, which is equivalent to a mere $100,000, against its existing foreign exchange reserves of about $80 billion. Speaking to the press recently David Barnabe, the Finance Department spokesman said, “the Canadian government has a long-standing policy of diversifying its portfolio by selling physical commodities (such as gold) and instead investing in financial assets that are easily tradable and that have deep markets of buyers and sellers.” Canadian policymakers believe that it doesn’t make sense to hold gold as the yellow metal hasn’t delivered a good rate of return over time and it costs money to store it. The Sage of Omaha, Warren Buffett thinks gold is a mere cube that loses its sheen once its value is realised. Buffett in 2012 said that if the world’s entire gold stock was melted into one big cube, that cube would be worth $9.6 trillion, capable of buying all of America’s cropland plus 16 ExxonMobils with a trillion left over. Over time the reserves of cropland would have produced bountiful crops and the ExxonMobils would have mega-multiplied in dividends, but the yellow
14 THE DOLLAR BUSINESS II APRIL 2016
shiny cube would remain just the same. Not all countries subscribe to the Sage’s words, especially countries such as India and Russia, who have been on a buying spree. The World Gold Council states central banks around the world have added 336 tonnes of gold to their reserves since the second half of 2015, a 25% y-o-y increase from the previous year. It’s noteworthy that US, the world’s biggest economy, holds 8,133 tonnes of gold that makes up about 72% of its forex reserves. Germany, Italy and France too hold more than half of their reserves in gold.
Countries with largest gold reserves
Not all countries subscribe to Canada’s theory on gold reserves 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
USA
Germany
Italy
France
China
India*
Source: World Gold Council; figures in MT; data as on March 7, 2016; *India ranks No.11 globally
GLOBAL
TRADE LAST MONTH
ZIMBABWE MAIZE IMPORTS
Grain, grain come again? As Zimbabwe struggles to stave off starvation due to a severe drought situation in the country, Zambia has suspended maize exports to the former in order to build its stocks in the wake of the El Nino induced drought. This decision of the Zambian authorities has left Zimbabwean grain importers struggling to obtain already paid for maize worth $24 million. With Zimbabwe facing its worst drought in 25 years, the country has now turned to Ukraine for the supply of over half a million tonne of maize, which is an important staple food for Zimbabweans. Zimbabwe’s Vice President Emmerson Mnangagwa, who is also the Chairperson of the Food Security and Nutrition Committee, claims to have secured 500,000 tonnes from Ukraine. The UN food agency has already warned that the El Nino’s impact will be one of the worst in decades and will cause intense drought in southern Africa that will have a devastating impact on the region’s food security.
Zimbabwe’s maize imports
Maize constitutes over 30% of Zimbabwe’s total cereals imports 300
NETHERLANDS BEEF EXPORTS
A beefy sigh
After years of negotiations, stringent tests and measures, US has finally agreed to open its doors to Dutch beef. It was 20 years ago when US had imposed a ban on Dutch beef imports amid the crisis over mad cow disease. This comes as a great news for exporters of beef in Netherlands, which is the second biggest fresh beef exporting nation after US. Bovine Spongiform Encephalopathy or the mad cow disease hit Britain in 1985 and from there it spread to the rest of EU. An incurable, untreatable fatal ailment that affects cattle as well as humans, the disease had an enormous impact on the world’s beef trade. Netherlands, now becomes the third country, after Ireland and Lithuania, in EU which can export beef and veal to US. The easing of the trade ban comes in the light of US and EU trying to negotiate and implement the TTIP (The Transatlantic Trade and Investment Partnership), the world’s largest free trade zone of a billion customers. According to a Dutch official, the lifting of the ban would mean exports of beef worth about $87 million every year.
Dutch beef exports vs. American beef imports
The lifting of the ban will boost beef exports from Netherlands 7,000
250
6,000
200
5,000 4,000
150
3,000
100
2,000
50 0
1,000 1
2
3
4
5
6
7
8
9
10
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 Source: International Trade Centre; figures in $ million
UK-EU TRADE DEFICIT
Deficit fuels Brexit fire
Adding fuel to the Brexit debate, Britain’s trade deficit with EU hit a new record with its exports in the last three months plunging to the lowest in over six years. The figures from the Office of National Statistics revealed that 16 THE DOLLAR BUSINESS II APRIL 2016
0
CY10
Dutch exports
CY11
CY12
CY13
CY14
US imports
Source: International Trade Centre; figures in $ million; HS Codes 0201 (fresh and chilled bovine meat) and 0202 (frozen bovine meat)
there was a goods trade deficit of £8.1 billion with the bloc. The widening of the deficit was largely on account of rising UK imports from EU which jumped 3.7%, while exports of trade goods were down by 2.7%. EU is Britain’s biggest trading partner. UK is presently preparing for a referendum on its continued membership of EU. Those in favour of the socalled Brexit want UK to focus on new markets while those against it advocate for closer ties with EU.
News & Analysis UAE FISH BAN
No more ‘fish’y business
UAE’s Ministry of Climate Change and Environment has once again brought into effect its yearly rule banning the marketing and sale of locally bred or imported emperor fish and rabbitfish. The ban also includes re-exporting of these species during the breeding season and will remain effective until April 30, 2016. The country’s fish stocks have been facing severe challenges, such as overfishing and exploitation, leading to a severe decline in natural fish production. Considering this, the authorities, this year, are leaving no
stone unturned to create awareness among fishermen in the country. Such is the extent of the ban that inspection points at all the ports have been set up. Fishermen or traders caught not complying with the ban would be fined and their licences will be revoked if they are caught again. According to Dr. Saif Al Ghais, Executive Director at the Environment Protection and Development Authority, the government has informed all fishing cooperatives, market agents, etc., about the ban.
USA ANTI-SLAVERY BILL
INDONESIA MINERAL EXPORT BAN
Under fire from all corners on the slavery issue, Thailand yet again faced a hard blow and this time from Uncle Sam, as the United States President Barack Obama signed a bill banning the imports of goods produced by slaves, children or indentured labour. While this move from the United States is being seen as a step forward in the fight against slavery, the new law is also seen to close a loophole in an 85-year-old ban that failed to keep slavemade goods out of America. Fish caught Barack Obama, by slave workers or seafood produced President, USA by them in Thailand would be among banned products in the United States. Various reports, in the past, had exposed the inhumane working conditions in Thailand’s seafood industry following which several slave workers from the Thai seafood sectors were rescued. Despite the reports of slavery in the lucrative shrimp industry, the exports of Thai seafood to US, Europe and Australia continued unabated. It is worth mentioning here that the new law will also prohibit gold mined by children in Africa and garments sewn by women under duress in Bangladesh from entering the United States.
If all goes well, Indonesia may start exporting unrefined minerals including nickel, copper, zinc and bauxite next year. There are speculations that the Indonesian government may review its mining policy that had banned partially processed metals exports, in order to prop up its economy. The controversial ban, part of the country’s 2009 Mining Law, was implemented in January 2014 to encourage companies for constructing smelters domestically and boost exports of finished mineral products. However, the ban cost the country billions of dollars of revenue loss as nickel prices plummeted forcing many nickel and bauxite miners to suspend smelter projects.
Saying no to slavery. Again?
Revision. Revival. Return.
Exports of nickel ore from Indonesia
The ban resulted in revenue losses of billions of dollars 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 Source: International Trade Centre; figures in $ million; HS Code:2604
APRIL 2016 II THE DOLLAR BUSINESS 17
INDIA
TRADE LAST MONTH
INDIA-JAPAN FOOD IMPORTS
Under the scanner no more!
G
ood news for those involved in imports of processed food products. India has decided to take Japanese food products off the list of products that need to go through radioactive scanners before entering the Indian market. An order released by The Food Safety and Standards Authority of India (FSSAI) states, “The advisory dated 15.03.2011 issued regarding monitoring of food articles imported from Japan for radioactive contamination, issued earlier as a temporary measure in 2011, is hereby withdrawn.” The decision comes five years after the Fukushima nuclear disaster in Japan. The move is expected to be welcomed by exporters of food products from Japan, which otherwise run the risk of radioactive contamination, as they will now get easy access into Indian territory. However, the decision to discontinue the scanning of food items has alarmed some experts who believe that it is far too early for such a step. According to FSSAI officials, the screening was unnecessarily delaying the process of imports from Japan. While India has decided to discontinue scanning, countries like US, Russia, Germany, Turkey and Australia are still strictly scanning all products which are being sourced from Japan, a process that was put in place in 2011 af18 THE DOLLAR BUSINESS II APRIL 2016
ter leaks from Fukushima Daiichi nuclear plant. Even as FSSAI officials say no contamination was found in items from Japan, in March 2015, radiation was found in samples of green tea imported from Japan in US. Japanese food products currently being imported to India include sea food, confectionery, fruits and vegetables. According to APEDA, India’s imports of agrofood products from Japan in FY2015 stood at $4.09 million, which given this decision is expected to rise in FY2016.
India’s imports of food products from Japan
Imports are expected to rise with removal of radioactive scanning 18 16 14 12 10 8 6 4 2 0
FY10
FY11
FY12
FY13
FY14
FY15
Source: APEDA; value in $ million
News & Analyses
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INDIA
TRADE LAST MONTH
SHARK FINS EXPORT BAN
Even sharks deserve kindness The Kerala High Court’s directive to put a stay on a writ petition filed by a Kochi-based seafood exporter to remove the ban on ‘shark fin’ exports has been met with disappointment by shark meat exporters across the country. The exporter from Kochi was contending that the ban was issued without consulting seafood exporters and had nothing to do with marine fishery conservation. For the uninitiated, shark fin is a delicacy and considered a lucky charm in many cultures, especially in the South-East Asian countries. According to a release by the United Nations, India is the second-largest shark catcher in the world (Indonesia ranks No.1) averaging 75,000 tonnes of sharks every year. The ban was aimed to check reckless destruction of sharks while securing the fins. ‘Finning’ is a barbaric practice where shark’s fins are chopped off and the rest of the body dumped back into the sea while still alive. Through a notification issued by the DGFT on February 6, 2015, prohibition of export of shark fins was put into place. It’s worth noting that about 70 million sharks are killed every year worldwide for their fins.
Dried shark fins and shark meat at a shop in a local market in China.
INDIA-IMF GLOBAL ECONOMY
Bright spot to a shining star After endorsing India as a bright spot in the otherwise gloomy global economy, the International Monetary Fund (IMF) added another feather to India’s cap as the Fund’s Chief Christine Lagarde said, “India’s star shines bright” amid global challenges. At a conference on ‘Advancing Asia: Investing for the Future’, the IMF chief further said: “the world’s fastest-growing large economy is on the verge of having the largest and youngest ever workforce and, in a decade, set to become the world’s most populous country.” It must be noted that IMF in its Regional Economic Outlook for Asia and the Pacific released in October last year had said that India will be a ‘bright spot’ in the global economy.
MARUTI SUZUKI BALENO EXPORTS
With love, from India
Providing a further boost to the Make in India initiative, Maruti Suzuki India started exports of its premium hatchback Baleno, which was launched in India in October last year, to Europe recently. The first consignment comprising 1,800 units was shipped from Gujarat’s Mundra Port. The car is expected to go on sale in Europe this spring season. The shipment to Europe comes just a month after the madein-India Baleno was exported to Japan by the Indo-Japanese carmaker – the company for the first time exported an India-made car to its home market. It must be noted that Baleno, which is being produced only in India, is expected to be exported to over 100 international markets. 20 THE DOLLAR BUSINESS II APRIL 2016
Christine Lagarde, Head of IMF
News & Analyses INDIA-KUWAIT POULTRY EXPORTS
INDIA-IRAN EASING IMPORT TARIFF
When Kuwait had lifted the ban on imports of Indian poultry products six months back, the move had brought cheer to the domestic poultry sector. But that joy was short-lived as the Persian Gulf nation has re-imposed the ban on imports of poultry products from India in the wake of an outbreak of avian influenza or bird flu in some states, which was confirmed by the Department of Animal Husbandry in January this year. It may be recalled that Kuwait, in October last year, had lifted the ban on imports of Indian poultry products, which was imposed in 2013. Even as Kuwait has a small share in India’s exports of poultry products, the move is likely to impact the domestic industry. According to the provisional estimates by Agricultural and Processed Food Products Export Development Authority (APEDA), India’s poultry exports during April-December period of 2015-16 jumped to Rs.584 crore from Rs.484 crore during the corresponding period last year.
In a move to make Indian tea more competitive in the lucrative Iranian market, the Indian government has approached Iran’s Customs authorities and asked them to be more flexible while arriving at import duties to correct the disproportionately high levies being imposed on low-priced Indian tea. India has requested Iran to have different tariff lines for premium varieties and non-premium varieties and also two separate ones for peak-season and off-season. If the Iranian authorities become flexible in calculating import tariffs of low-value tea, it would make Indian tea more competitive in the Persian country. Notably, an import duty of 20% is imposed by Iran along with 9% VAT on Indian tea. Indian tea exporters fervently hope that Iran will be amenable to India’s request. Besides being the second-largest importer, Iran is a crucial export market for Indian tea owing to high price realisations. Iran, under a trade pact, had recently agreed to purchase 30 million kg of Indian tea annually.
Ruffling feathers, yet gain
Kuwait’s poultry imports from India
Though volume is small, ban will impact India’s poultry exports 0.40
3000
0.35
2500
0.30
2000
0.25
1500
0.20 0.15
1000
0.10
500
0.50 0
FY11
FY12
Volume (R-axis)
FY13
FY14
FY15
0
Value (L-axis) Source: APEDA; value in $ million and volume in MT
Meeting over a cup of tea
India’s tea exports to Iran
Exports will receive a boost if Iran eases duty on Indian tea 120 100 80 60 40 20 0
FY11
FY12
FY13
FY14
FY15
Source: Ministry of Commerce, GoI; figures in $ million
INDIA-MYANMAR LOCOMOTIVES EXPORTS
Chugging into Myanmar
In a bid to help the country bolster its rail transportation system and meet the increasing demand for passenger and freight traffic, India will supply 18-meter gauge diesel electric locomotives to Myanmar. A contract was signed in March between Indian public sector undertaking, RITES and Myanmar Railways. With features like fuel-efficient engine, microprocessor controls and ergonomic cab design, the locomotives will be made by Diesel Locomotive Works in Varanasi. The project is being funded under a line of credit extended by the India to Myanmar. Rajeev Mehrotra, CMD, RITES said, “We are making all efforts to augment export of rolling stock manufactured at Railway Production Units and response from South East Asian markets is very encouraging.” APRIL 2016 II THE DOLLAR BUSINESS 21
SPOTLIGHT
PANAMA
IF YOU KNOW ITS CURRENCY, YOU KNOW PANAMA! Panama gave the world the Panama Canal, a trade link between the East and the West. This Central American country, which has FTAs with several countries including US and Canada, has moved beyond exporting just bananas and shrimps. Only concern is, its exports in 2015 was the lowest in over two decades! TDB INTELLIGENCE UNIT
PANAMA’S TOP TRADING PARTNERS USA
SPAIN
136.85
3,141.50
17.44
JAPAN
CHINA 40.94
5.78
1,158.89
13.47
91.76
621.07
18.25
454.25
6.89
428.64
COLOMBIA 361.60
271.46
THAILAND
SOUTH KOREA 12.35
279.87
ITALY
COSTA RICA 53.31
292.10
GERMANY
MEXICO
8.65
341.83
Exports
196.22
Imports
The narrowest and southernmost country in Central America shares borders with Costa Rica and Colombia and does significant trade with both the countries. Interestingly, if revenues from the Panama Canal are considered forex revenues, it would amount to more than three times of its merchandise exports! Sources: International Trade Centre; figures in $ million, for CY2015
PANAMA’S MERCHANDISE TRADE Panama’s trade is in large part from the Colón Free Trade Zone, the largest free trade zone in the Western Hemisphere. Merchandise trade has been choppy over the last few years. Trade suffered a severe dip in 2011-2012 and has been on an uneven road to recovery with the economy slowing down. 22 THE DOLLAR BUSINESS II
APRIL 2016
25,000 20,000 15,000 10,000 5,000 0
CY06 Imports
CY07
CY08
CY09
CY010
CY11
CY12
CY13
CY14
CY15
Exports Sources: International Trade Centre; figures in $ million
PANAMA’S IMPORTS FROM INDIA
PANAMA’S EXPORTS TO INDIA
India is Panama’s 18 largest import partner. While apparel and textiles constitute the largest portion of Panama’s import shipments from India, imports of machinery, articles of iron and steel, plastic products and pharmaceuticals have also increased over the last few years.
Since natural resources are in abundance in Panama, its exports to India is largely represented by wood and its articles. India has also been importing substantial quantities of mineral fuels and mineral oils through Colón Free Zone in Panama.
th
Articles of apparel and clothing accessories, knitted or crochetted. Vehicles other than railway or tramway rolling stock, and parts and accessories thereof Articles of apparel and clothing accessories, not knitted or crochetted Other made up textile articles, worn clothing and worn textile articles; rags Man-made staple fibres. Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof Pharmaceutical products Other
22% 38%
3% 3% 4% 4% 10%
16%
59%
40%
1%
Mineral fuel, mineral oils and products of their distillation; bituminous subOther waxes stances; mineral Wood and articles of wood; wood charcoal Source: Ministry of Commerce, GoI; data for FY2015 (includes Panama CZ)
Source: Ministry of Commerce, GoI; data for FY2015 (includes Panama CZ)
PANAMA’S IMPORTS FROM THE WORLD
PANAMA’S EXPORTS TO THE WORLD Fish, crustaceans, molluscs, aquatic invertebrates Edible fruits, nuts, peel of citrus fruits, melons Wood and articles of wood, wood charcoal Residues, wastes of food industry, animal fodder Iron and steel Meat and edible meat offal Aluminium and articles thereof Paper and paperboard, articles of pulp, paper and board Coffee, tea, mate and spices Sugar and sugar confectionery Other
Mineral fuels, oils, distillation goods, etc. 14%
Machinery, nuclear reactors, boilers, etc. Vehicles other than railway, tramway 11%
40%
8% 2% 3%
Electrical, electronic equipment Articles of iron or steel Pharmaceutical products
11%
3%
4%
4%
22%
25%
Plastics and articles thereof Articles of apparel, accessories, not knit or crochet
3% 3% 4% 4%
Iron and steel Other
The Central American nation depends heavily on imports of mineral fuels and capital goods to meet the growing needs of its light manufacturing sector. However, the country’s overall imports have been on a downhill journey for the last few years.
20% 4%
5%
5%
Panama, taking advantage of its 2,850-km-long coast line, has today become a major exporter of marine products from the region. Thanks to large swaths of forests, the country also exports wood and wood products in large quantities.
Sources: International Trade Centre; breakup for CY2015
PANAMA-INDIA MERCHANDISE TRADE Despite a slowdown in most of the sectors, both nations have succeeded in maintaining a healthy pace of bilateral trade. While India’s exports to Panama have been steady, there has been a decent reduction in its imports from the Central American nation.
5%
Sources: International Trade Centre; breakup for CY2015
350 300 250 200 150 100 50 0
FY2011
FY2012
India’s exports to Panama
FY2013
FY2014
FY2015
India’s imports from Panama Source: Ministry of Commerce, GoI; figures in $ million
APRIL 2016 II THE DOLLAR BUSINESS 23
OVERSEAS TALK
DR. GILBERTO LLERENA GARCÍA, AMBASSADOR OF PANAMA TO INDIA
“IT IS TIME FOR PANAMA & INDIA TO DRAW CLOSER TIES” India-Panama relations are deep-rooted, dating back to the middle of the 19th century. In fact, it was the first country in Central America where India established a resident mission. In a freewheeling interaction with The Dollar Business, Dr. Gilberto Llerena García, Ambassador of Panama to India, reasons why he sees India as a natural ally when it comes to trade and development. INTERVIEW BY AHMAD SHARIQ KHAN
TDB: Panama was the first country in Central America where India established a resident mission. How do you see this long-held association gaining momentum in the times to come? Dr. Gilberto Llerena García (GLG): It is important for our country that today we have an Asian ally as important as India. Being one of the fastest growing and sustainable economies, it makes it imperative for our country to widen our cultural, economic, and commercial relations and remain associated with this growing major economy. One of the factors that will work toward achieving this closeness and strengthening of bilateral ties is that both countries believe in similar principles and a democratic style of life, and have a common objective – which is to improve the quality of life of its citizens. Panama also offers India and the world, the Panama Canal, which is currently undergoing a massive expansion programme, one of the most important waterways in the world for trade that allows countries in the east a quick and rapid communication channel with the west.
PANAMA CAN BE AN IDEAL GLOBAL LOGISTICS BASE FOR INDIAN COMPANIES 24 THE DOLLAR BUSINESS II APRIL 2016
It is only timely that Panama and India should draw closer ties. At the dawn of the 21st century, distances are far less of an obstacle to strengthening bilateral links than they were even a few decades ago. With an expanding middle class, diminished travel costs, and readily available information, all is in place for tourism and business to grow multi-fold between the two countries.
several projects where Indian companies can participate. Science and technology is another area where India can help Panama in a big way. Further, Panama’s evolution as a trans-shipment centre means there is an ever-growing demand for quality education, training, and capacity-building, and we can definitely draw lessons from India’s knowledge-based economy.
TDB: What key areas or sectors would you like to see India using its expertise in Panama for the mutual benefit of both the countries? GLG: As Indian industry continues its expansion into newer markets, Panama is its logical next in Latin America. Given its geographical location, Panama can prove to be an ideal global logistics base for Indian companies. Studies carried out by the Panama Canal Authority suggest that the Canal, ports located at the Canal’s Atlantic and Pacific outlets, and the free zone, will continue to predominate the trade in the region in the near future. When it comes to investments, there is a lot of scope for further development in infrastructure and manufacturing sectors – expansion of Tocumen Airport Terminal, increasing the capacity and efficiency of existing container terminals, addition of two new container terminals on the bank of the Canal, setting up refineries, pipelines, shipbuilding, etc., are
TDB: Of late, representatives of several export promotion councils from India have visited Panama. Also, hundreds of Indian companies participated in the ‘Made-in-India’ exhibition held at Expocomer in Panama City. How do you view this? GLG: For Indian companies, Expocomer in Panama City is an ideal place to know the line of products at the local and regional level, to present new products to the market, evaluate competencies, obtain representation of their products in Panama and use the Colón Free Trade Zone as the link for importing, storing, assembling, repacking, and re-exporting products, with a view to commercialise a product in the Caribbean, Central America and South America. In fact, theses are the reason why participation of Indian companies in Expocomer has only increased over the last few years. No doubt, India’s technological boom, its prodigious curve towards economic
APRIL 2016 II THE DOLLAR BUSINESS 25
OVERSEAS TALK
DR. GILBERTO LLERENA GARCÍA, AMBASSADOR OF PANAMA TO INDIA
growth, its demographic advantage, and its low-cost highly qualified human resource are reasons for Panama to consider India above other countries. But then, at the same time, Indian companies can benefit from the country’s locational advantage and from the progress Panama has made in light manufacturing. TDB: India remains a staunch proponent of South-South Cooperation, which also constitutes a fundamental pillar of its foreign policy. What role, according to you, has the Indian Technical and Economic Cooperation (ITEC) programme played in enhancing the said cooperation, particularly when it comes to Indo-Panama trade relations? GLG: South-South Cooperation can be defined as exchange of experience and resources between countries that have common development goals. It is based on criteria such as solidarity, equity, efficacy, mutual interests and sustainability. In this sense, India has definitely made an important contribution to the Republic of Panama through its policy of international cooperation and through Indian Technical and Economic Cooperation (ITEC) programme. Under the programme, India provides the technical know-how and expertise as well as training opportunities, consultancy services and feasibility studies to Panamanian citizens and companies, both in Panama and in India. The pro-
Container loading area at Port of Balboa, the Pacific-side port of the Panama Canal. 26 THE DOLLAR BUSINESS II APRIL 2016
gramme not only complements our government’s efforts to promote an efficient economic and social climate in our country, but also offers innovative partnerships for mutual benefit.
Zone; the Logistics International Center; the Container Seaports – are infrastructure available to further expand international trade, particularly with countries from Asia, such as India.
TDB: How do you see Indian government’s ‘Make in India’ programme? GLG: Panama praises the ‘Make in India’ initiative as one that takes full advantage of all that India has to offer, particularly its talented human resources pool. At the same time, as bilateral ties strengthen and companies from both countries become acquainted with each other’s markets, joint investment opportunities will emerge. However, I do have to admit that both governments must play an active role, based on political will, to facilitate trade and investment between them.
TDB: Tourism is one area which has reaped good profits for both countries. Please tell us about your recent endeavours to strengthen this segment. GLG: Panama’s tourism industry has enormous potential, particularly given the country’s geostrategic and historical position as a connection hub. Until recently, inside as well as out of Panama, the general perception was that the Panama City is all about Panama Canal. However, today, thanks to our government’s constant efforts to promote tourism, Panama is known as the melting pot of cultures, and as a result tourists inflow into the country have increased significantly in the last few years. The growth in tourism sector has encouraged the Panama Tourism Authority to develop a Master Plan for Sustainable Tourism Development, which aims at boosting visitors inflow, increasing the time period of the stay of visitors, and positioning tourism as a tool for sustainable development. In order to achieve these objectives, Panama is showcasing all its natural, cultural, and commercial attractions to the world. Even when it comes to business visitors, we are ideally located with our proximity to both North America and Latin America.
TDB: Panama’s geographical location makes it the gateway to many Latin American markets. It also enjoys many FTAs. How do you visualise Indian investments into Panama in future? GLG: Panama’s strategic location at the center of the western hemisphere and its open economy as signalled by its myriad free trade agreements, make it an ideal springboard for Indian companies looking at global growth. From here, they have easy connectivity to the rest of the region. The multimodal complex of Panama Canal; the Tocumen International Airport-COPA Hub; the Financial International Centre FIC; the Colon Free
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
28 THE DOLLAR BUSINESS II APRIL 2016
ARE INDIA'S MSMEs ON A ROAD TO NOWHERE? THE DOLLAR BUSINESS ANALYSES WHAT AILS EXPORT-MANUFACTURING IN THIS HIGH-PRIORITY, FLAG-BEARING AND INDISPENSABLE SECTOR OF INDIA The role of micro, small and medium enterprises (MSMEs) in employment generation, entrepreneurship, exports and innovation is well understood. Only problem is, in most parts, it 'only' remains understood. Prime issues ailing the MSMEs in India largely remain unappreciated and unattended. And therein lies the problem! TDB INTELLIGENCE UNIT
M
ehfooz Mody, Owner of R. F. International, a small enterprise that is into manufacturing and exports of textile and apparel in Noida, the industrial town next to the national capital New Delhi, believes his business is in dire straits. The company's export consignments have shrunk by about 50% over the last two years, and Mody is finding it hard to obtain loans and keep his business afloat. “Today, the moment factory shutters go up, costs start piling up on your shoulder, and there is hardly any cash supply around. With only family funds and goodwill in the market, we may not survive for long," laments an apparently distraught Mody. He, like many other manufacturers who belong to the micro, small & medium enterprises (MSMEs) camp in India, had once dreamt of taking the world's merchandise supply chain by storm. But that is now an almost forgotten dream, his ship washed ashore by the high and uncertain tides of "fortunately-unfortunately". R. F. International has abandoned its exports dream a couple of years back, and Mody is today busy focussing on just the domestic market. Justifying his changed strategy, he states, "Aren't we a country of 1.25 billion people? That in itself is a big market. So why get stuck with ever-elusive orders, vicious bureaucratic circles, complex paper work, cumbersome inspections, rampant corruption, ports delays, and most importantly payment issues from the importers' ends." Not a rare thought that, Mody is only one of many MSME operators for whom self-justification has overcome logic and thirst for business beyond boundaries. It's not entirely his fault though. Mohammed Tanveer, a Daryaganj (Delhi)-based fashion jewellery exporter and proprietor of M. T. Enterprises, echoes Mody's concerns. Tanveer is worried about the rising cost of compliance for MSMEs, and the cumbersome procedures that MSMEs are required to go through in order to export. He rues about the lack of financing options for small enterprises and exporters. Coincidentally, there are many such exporters across the country in the MSME category, who have been letting APRIL 2016 II THE DOLLAR BUSINESS 29
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
go of the proverbial "sour grapes", due to issues that can understandably be looked into or best, get sorted with minimal efforts from the government. "But that doesn't seem to be happening, not as of now" Mody tells The Dollar Business. With working capital in short supply, exports slowing down across the globe, 'ease of doing business' still a distant dream, and a severe lack of infrastructure and government support, most MSMEs are experiencing tough times even running their factories and as some of them, such as the two entrepreneurs mentioned above, are only playing the survival game. Their story sums up the general experience of a large section of MSMEs in our country today.
BIG BET. BIG TROUBLE.
The MSME sector has always played a vital role in the growth of India’s economy. It is well dispersed across the country's nook and corner and is responsible for producing a diverse range of products and services to meet the needs of not just the local markets but also the national and international value chains. All this, makes it the top vehicle to spread industrial growth across the country, thereby also aiding in inclusive growth of masses across the country. MSMEs are complementary to large industries such as ancillary units, handicrafts, food processing, textiles, etc., and contribute enormously to the socio-economic development of the country by not just providing large employment opportunities at comparatively lower capital cost than large industries, but also by way of helping in the industrialisation of rural pockets across the country. Today, with the dismal business outlook hurting even many large enterprises, including the 'multinational' camp, across the country, the MSME sector seems to be withstanding the brunt of decreased levels of production and a reduced cash flow cycle. Several recent surveys have hinted that despite increased cost of raw materials, slow global demand and tough international competition, exports from these enterprises have the potential to grow given the right business environment. With 30 THE DOLLAR BUSINESS II APRIL 2016
There is an acute credit crunch in the textile sector as most handlooms and powerlooms are in the unorganised sector, with little access to institutional credit.
Chinese products hurting our manufacturers in almost all sectors, there is a growing need that our MSMEs innovate by thinking out-of-the-box and storm global markets with products that are world class and competitive in pricing.
MAKE IN INDIA READY?
Let’s start with a food for thought: With echoes of our PM’s clarion call to Make in India buzzing in every nook and corner of the country, is it also not time to pause for a moment and ponder why only 20% of our MSMEs are reported to be into manufacturing? Are we really Make in India ready, without the participation of this key sector? Do we really have the capabilities, the potential, the infrastructure and the support systems to transform India into a manufacturing hub, much like what China has done over the last few decades? Because if we are to realise the dream of replicating the Dragon’s success story, there is a serious and urgent need to address issues that MSMEs into manufacturing businesses face today.
The Make In India website mentions the government's initiatives and interventions to help MSMEs realise their potential through cluster development, technological upgradation through the National Manufacturing Competitiveness Programme and the Credit Linked Capital Subsidy Scheme, but the reality on the ground remains that MSMEs are today surviving mostly on their own. The government needs to realise that while the schemes are good on paper, if they are to produce results on the ground, creating awareness about the schemes and making them user friendly will be key to success. By nature and definition the micro and small players are widely dispersed and not well-versed with technology and compliances. The government needs to do more to bring them into the fold to truely realise the dream of making India a manufacturing hub.
A LOPSIDED AFFAIR
Although MSMEs contribute significantly to India’s exports (38-40%), the
majority of contribution comes from just 15-20% of the MSMEs. Also in what can be considered as quite appalling, the small and medium enterprises (SMEs) are reported to constitute only 5% of the total MSMEs in the country, with the micro enterprises comprising the majority – all this hints at the wide asymmetry prevalent in the sector. Further, SMEs in India contribute only about 8% to the country's GDP unlike some of its global peers where their contribution to the country's GDP stand above 50% – while SMEs in Taiwan contribute 85% to the country's GDP, their share of contribution to GDP in Singapore stands at 50%. Interestingly, in India, micro enterprises, mostly in the unorganised sector contribute to 30% of India's GDP and this is where the real problem lies!
nance Minister Arun Jaitley in the Union Budget 2016 have expressed their sector's specific concerns as well. Across the MSME fraternity, Jaitley’s announcement on the Budget proposal to offer tax relief for small businesses with turnover of up to Rs.2 crore (u/s 44AD of IT Act), twice the previous limit, has been widely hailed as a positive decision. Experts feel, the move will encourage Indian MSMEs to expand, both domestically and globally. Prior to this, when our MSMEs wished to scale up production, they would slip off the tax exemption bracket which consequently proved a major deterrent for growth for them. It is hoped that the increased exWithout governmental intervention, emption limit will indirectly enable them the micro enterprises are finding it dif- to not only increase their production but ficult to grow up to become small and invest in modern technologies so as to medium enterprises, and thus remain become more competitive. Many Federation of Indian Micro and inefficient in terms of productivity and competitiveness. Additionally, our MS- Small & Medium Enterprises (FISME) MEs, by and large, are still not regarded members whom The Dollar Busias a force to reckon with in international ness spoke to, feel that this time, PM Momarkets. Studies claim that this is mainly di's ambitious project ‘Make in India’ was due to their lack of capabilities to inno- given a back seat in the Budget, as far as vate and add value to their products in MSMEs are concerned. Their argument? tune with global demands and require- Most concessions given in terms of Indiments. Many landmark key legislations, rect Taxes (including Excise and Customs such as the Goods & Services Tax (GST), Duties) are for inputs typically used by are still stuck in Parliament. It's high larger players who are into manufacturtime the government takes necessary ing of engineering goods, machinery, corrective measures to create infrastruc- electrical equipment, instruments used ture, add adequate skilled manpower, for semiconductor wafer fabrication and hasten up key regulatory reforms, en- LCD fabrication units, etc. “While these may be welcome steps sure access to credit and technology and bring in labour reforms, else this crucial to promote the electronics industry, the micro production unit will take the path engineering segment of the MSME secopposite to growth in these testing times. tor was eagerly looking for some sops in this year’s budget. Make in India cannot A PRO-MSME BUDGET? happen with just the large companies. Many MSME players while acknowledg- MSMEs too play a vital role,” says Anil ing the good initiatives announced by Fi- Aggarwal, Managing Director, PME APRIL 2016 II THE DOLLAR BUSINESS 31
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MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
Exports of MSMEs in engineering sector are rendered uncompetitive by high tariffs and other forms of protectionism on imported inputs.
Power Solutions India Ltd. He believes more than the small companies, large firms are turning NPAs, which affects the entire economy. As per Aggarwal, the Finance Minister should also think about the MSME sector which, he feels, has largely been ignored in this year's Budget. Talking about the dismal export outlook, he says, “High tariffs and minimum import price on steel products that are primarily used in the production cycle, are making our engineering items highly uncompetitive across export markets and also in exports of projects where Indian industries compete with global firms”. Another entrepreneur from Muzaffarnagar, Naveen Jain, MD, Dayachand Engineering, says, “While in the Economic Survey, there was a mention about the
safeguard duties on finished goods, in the Budget there was no mention of it.” Jain believes that the absence of any such measure negatively impacts the Make in India vision of the government and shows lack of concern for India's MSMEs! “The Budget would just benefit the large players as the MSMEs have been completely ignored this time. More interestingly, in other basic metals like aluminium, where prices are on a tailspin in global markets, the Customs Duty has been raised to protect the domestic large manufacturers. For aluminium and zinc alloys, the Basic Customs Duty has been increased from 7.5% to 10%. How this will encourage ‘Make in India’ for MSMEs in electrical and other aluminium and zinc based sectors is anybody’s guess,” declares Jain.
"MSMEs NEED AN ENABLING IMPORT REGIME" TDB: In your view, is India's current Foreign Trade Policy pro-MSMEs? Anil Bhardwaj (AB): The FTP 2015-2020 has quite a few new features – Manufacturing Exports Incentive Scheme (MEIS), Services Exports Incentive Scheme (SEIS), simplification of procedures, online submission of applications, etc. While its effectiveness in improving exports from India is yet to be seen, it surely does not address the major pain points of micro, small and medium enterprises (MSMEs). MSMEs lack resources and often cannot follow the nuances of the trade policies and so cannot avail benefits available under FTP. For example, under Advance Licencing, previously advance authorisation with a validity of 18 months and revalidation upto 36 months was allowed. This period has been reduced to 18 months validity with one revalidation upto 24 months. Such straight-jacketing may look fine on paper, but is not pragmatic for MSMEs. Flexibility becomes necessary for MSMEs for various reasons: project gestation may be long, one may have to wait for the import to be viable depending upon prevailing international prices of the commodity, achieving a minimum lot of quantity below which nobody even gives a quote, availability of funds at the disposal of MSME, etc. In any case, wherever export obligation has been met and foreign exchange realised, revalidation should be for the asking so that export-
ers are not denied their legitimate right to get duty free raw material to replenish duty paid stock used in export production. The government should also consider the 2nd relaxation for all existing cases where export obligation has been completed, and for future the validity may be expanded for 36 months. TDB: Along with easing of norms in multi-brand retail, the debate – whether mom-and-pop and domestic suppliers can co-exist with big giants, has surfaced again. Your take and recommendations to the government to protect the domestic players. Will it have some impact on MSMEs as well? AB: Allowing FDI in multi-brand retail is no doubt a gigantic step which is likely to affect several large sections of the population – right from farmers to general consumers to MSMEs or large manufacturers and service(s) providers. It will have both desirable and undesirable consequences. On the positive side, it may induce efficiencies in supply chains because of better technology, processes and economy of scale at the command of large foreign retailers. It may also bring down prices for consumers, enhance income for producers including farmers and MSMEs and because of variety and enhanced choice, could boost demand and increase spending. On the negative side, while the benefits could be limited to only those MSMEs or farmers who join the supply chains, thou-
ANIL BHARDWAJ
SECRETARY GENERAL, FEDERATION OF INDIAN MICRO AND SMALL & MEDIUM ENTERPRISES (FISME) 32 THE DOLLAR BUSINESS II APRIL 2016
SMEs contribution to GDP: India vs. some major global economies
Thanks to the dominance of unregistered and unorganised players, India lags far behind its global peers when it comes to GDP contribution from SMEs 100% 80% 60% 40% 20% 0% South Africa
China Italy SMEs
France
Germany
UK
US Singapore
Canada Russia
Brazil
Argentina
India
Non-SMEs Source: Country specific SME reports and TDB Intelligence Unit; non-SME sector includes unorganised and unregistered enterprises
sands of small business and retailers could perish. Unfortunately, experiences of advanced countries including USA reinforces this belief. FISME’s view is that liberalising FDI regime should have been preceded by consultations with stakeholders, impact analysis and a mitigation strategy for those to be affected adversely. The road map for opening up the retail sector could have been more nuanced and properly sequenced. The reforms for making India a common market, introduction of GST and amending APMC (Agricultural Produce Market Committee) regime should have taken precedence. TDB: What’s your take on the current level of export incentives provided to MSMEs by the government? What further recommendations would you like to offer? AB: A high-level FISME delegation recently met the Commerce Minister and submitted a detailed memoranda on the issues related to the MSMEs sector that need immediate attention. The EPCG scheme – ease in importing of inputs has a huge bearing on the ability to export. Manufactured exports (especially high-tech manufacturing such as engineering or capital goods, etc.), requires a very enabling import regime. The EPCG scheme is therefore critical for exporters. However, the existing provisions are rigid and do not take into account the vagaries of international trade. Another anomaly in the scheme is that the export obligation is same whether it is for capital equipment such as machine or for testing equipment. Instead of encouraging imports to make exports competitive, the policy actually becomes a pain for genuine exporters if anything goes wrong in export obligations, conditions of which are very stringent. While the scheme and obligations under it ought to be governed by a far more pragmatic approach, the laboratory or testing equipment should have no minimum obligation to promote – zero
effect, zero defect. Irrational conditions such as average export obligations should be done away with. TDB: How do you see the Make in India initiative? How can MSMEs make most of this initiative? AB: So far we have not seen many initiatives to enable MSMEs for Make in India. The series of policies, report, etc., are being announced on Make in India for various sectors but you have to read with a magnifying glass to find ‘MSMEs’. FISME had been called by almost all Committees to give its viewpoints on ‘how MSMEs can make most of the initiative’ and we have submitted well-thought suggestions, but we find most of these have not found any place in the final reports. So, no purposes will be served by repeating them here. I would only like to mention that Indian MSMEs segment is a thriving sector, notwithstanding the oft-repeated ‘high sickness rate’ and enabled with adequate handholding, facilitating ease of doing business, they could be the real pioneers of ‘Make in India’ through innovation, flexibility and competitiveness. TDB: There are critics who believe that there's nothing much in FTP 2015-2020 that will boost exports from the all-important MSMEs sector. Do you agree? AB: The FTP may be good or very good depending upon who you are, but it needs to be MSME enabled if the government wants to enhance exports from MSMEs. MSMEs account for 40% of India’s exports, but you can count on your fingers how many times the word MSMEs appear in FTP. MSMEs need special dispensations and it is a global phenomena. I will cite another example of insensitivity to MSMEs in the trade policy; while the policy allows (even encourages) import from China in yuan to reduce dependence on dollar, a number of consignments are stuck at ports as in the currency section the yuan is not recognised as an eligible currency. APRIL 2016 II THE DOLLAR BUSINESS 33
Interview by Ahmad Shariq Khan
Echoing similar concerns, Animesh Saxena, Managing Director of Neetee Clothing, says, “The skewed view of the government with respect to the MSME sector is further demonstrated in textiles, where the excise duty on readymade garments has increased, the tariff value enhanced and even the basic fibre used (PSF /PFY) is proposed to be taxed at a higher rate. This is definitely going to impact units in the textile industry in the country. The above measures will affect the cost structure of the entire value chain of the readymade garments industry which is predominantly in the MSME sector.” If the government of the day is serious about turning around the fortunes of this sector, it should review the Budget proposals to address these concerns.
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
FRAGILE BACKBONE
Even though India’s share in global manufacturing has grown from 0.9% to 2% over the last 20 years and GDP share has grown from 1.2% to 2.5%, the relative share of manufacturing in the Indian economy has remained unchanged (as per a recent BCG-CII report titled, 'Make in India': Turning Vision into Reality). The scenario is a bit of a dampener if one were to contrast it with what can be observed globally. In India, the manufacturing sector accounted for 15% of GDP in 1993, a ratio that has virtually remained unchanged till date. This is in sharp contrast to the Rapidly
Developing Economies (RDEs) which have increased their share of manufacturing to above 20% of their GDP, particularly Thailand (34%), China (32%), Malaysia (24%), Indonesia (24%) and the Philippines (31%), as highlighted in the abovestated report. Clearly, going by the continued stagnated contribution of manufacturing to the economy's GDP, if India's manufacturing as a whole hasn't learnt to run faster than the overall, larger economy (which practically means budging for the sake of moving, literally), why should we today, in even our faintest fantasies expect India's underfed MSMEs to be sprinting faster
than Usain Bolt? This is further exemplified in India’s exports sector where even though India’s performance has improved, with its share of global merchandise exports up from 0.5% to 1.7% in the past 20 years, this increase has clearly remained modest compared to that of a country like Chinas. China's share in world's exports during the same period rose from 2.4% to 11.5%! The foremost step to reviving manufacturing is getting the infrastructure execution right. According to the aforementioned BCG-CII report, over the past few decades, while momentous growth rates have fuelled India’s emerg-
"MSME EXPORTERS' FUNDS ARE TIED UP IN VAT REFUND"
TDB: But what about ‘Make in India’ initiative? Hasn't it made the manufacturing environment better for MSMEs? RKA: Initially, just like others from the industry, I also had many hopes from the campaign. But sadly, I would say nothing great has happened on the ground so far. I believe despite the government’s strong advocacy that it’s against the ills of inspector raj, license raj, things are still in very bad shape. In fact, lot of issues relating to Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) are yet to be sorted. Each month my representative is told by officials at the MSME Ministry that they have sent the recommendations to the higher authority but are yet to hear anything from officials at the top. We need to urgently sort out these bureaucratic hurdles.
RKA: Presently, we are importing PVC heavily from China. The reason is simple. Our production is half of our domestic requirement, so we have no choice but to import. But then we have the classic case of government putting anti-dumping duty on it. I believe, if Indian manufacturers are not able to meet our demands and China offers products at a good price, it makes for a sound business sense to import. Recently, we had a notification for the imposition of anti-dumping duty on injection moulding machine. Interestingly, in India only a few make such machines, and those who do, take ages to produce. TDB: How do you see the status of the MSME segment in this sector? What are the issues that you would like the government to address on a priority basis? RKA: Given the gloomy business outlook across sectors, MSMEs segment has also been affected to a large extent. MSMED Act has been pending for more than a year now. This has created many hindrances for MSMEs which are into petrochemical exports. Even bankers these days are not willing to give benefits to manufacturers. Corruption is still rampant in this segment. Many MSME exporters' money is tied up in the VAT refund process. This affects the small players for whom the dollar is in short supply.
TDB: Where do Indian manufacturers stand vis-à-vis Chinese manufacturers?
R. K. AGGARWAL
TDB: A perception is doing rounds that the government is focussing more on big corporates. Your take? RKA: No, I don’t think so. Besides small players, I am in regular contact with many big players and all they say is that the status quo is yet to be challenged.
PRESIDENT, THE ALL INDIA PLASTICS MANUFACTURERS ASSOCIATION (AIPMA) 34 THE DOLLAR BUSINESS II APRIL 2016
Interview by Ahmad Shariq Khan
TDB: A huge chunk of manufacturers in the plastics industry belong to the MSME category. How do you see the production levels changing in the months to come? R. K. Aggarwal (RKA): Generally speaking, I believe, given the domestic consumption of plastic products in the country, its production will not suffer in the long run. Amid the global commodity crisis, though value-wise, we have not-so-encouraging figures, yet volume wise, we are not much affected by the slowdown. On the exports front, yes I would say, we are passing through very challenging times. The government is not doing enough to rescue ordinary factory owners who are being affected by sluggish export demands.
ing economic prowess, the country has lacked the corresponding investment in infrastructure development. The proportion of manufacturing in GVA (Gross Value Added), a measure that has been adopted by the government, has been stuck at around 17% for last few years, far below the government’s goal to ramp it up to 25%. Even when it comes to job creation, India has only created 4 million manufacturing jobs since 2010. And, at the current rate, India may only create 8 million jobs by 2022, well below the government’s goal of 100 million! The power sector is in a dire state of affairs, as is the transportation sector which has been limited in growth due to the poor quality of public transport, roads and rolling stock in railways. Indian ports have a turnaround time which is more than twice that of Chinese ports. If this is the health of our infrastructure even in the present day, how could we have expected to see an MSME sector with enviable performance metrics?
POLICY BOTTLENECKS
Besides infrastructure, driving labour reforms and ease of doing business can greatly enhance an environment that fosters manufacturing oriented development. At present, the effort and time taken in India for starting a business, dealing with construction permits, gaining access to electricity, registering property, paying taxes and enforcing contracts is higher than in many other countries, even developing ones. All efforts must be therefore made to gain global competitiveness. Building an export eco-system via policy reforms, investments and infrastructure building can greatly enhance India’s attractiveness as a preferred manufacturing hub, thereby helping our MSMEs reach their full potential. Policy reforms aimed at simplification of the prevailing tax regime and building of a robust financial system could also go a long way to make our MSMEs stronger. As India works to transform its MSMEs, entrepreneurs also need to be encouraged to take a longer-term approach to their investments and establish an ‘Indian’ way of manufacturing.
Field Report "COST OF COMPLIANCE IS TOO HIGH FOR MSMEs" MOHD.TANVEER
I
M.T. ENTERPRISES, FASHION JEWELLERY EXPORTER
t’s been about 20 years that I am in this business of fashion jewellery exports. Though I am registered as an MSME player, but so far I have not received any benefit from the concerned ministry. I believe the money gets into the hands of only the powerful and never reaches the needy people at the bottom. Compared to last year, our exports are down to the extent of 50-60%. Although government has inked many MoUs, both in India and outside, I think the government has been unable to convince the corporates to invest money into the economy and hence this logjam in the economy. Presently, the Indian domestic market is strong, and why should it not be, we have such a huge population. That’s the reason why all MNCs want to come here because we now have increased purchasing power. In India, power availability is a big issue. Funding is another major issue hurting us these days. Going to a bank is a nightmare for us. They ask for collaterals and guarantors and we are left with no option but to work with funds from family and friends only. Everything works on trust in my sector. Since PM Narendra Modi came into power, I don’t think getting credit has become easy. I recently visited China and found that for a bulk importer there are huge discounts on offer (especially items that are ready for shipment) but if you order them to make for you, the same gets dearer by 20-25%, which actually could be your profit margin. I believe with global exports down, everyone in China wants to dispose of their unsold inventory. Currency devaluation is also working for them. I can say, there is a huge demand for handmade items because they (Chinese manufacturers) mainly specialise in machinery-work. Kashmiri Shawls, gift items are in big demand in China and we want to do business there but we want the government to support us – by offering us low interest loans and incentives. MSMEs indeed need the support they are not getting at present. Testing is too complex these days and this factor is fast becoming a major deterrent for MSME exporters. Buyers are insisting on testing to be done at their nominated labs which charge sky high prices. These labs have an arbitrary policy in place and it is difficult to get certification. International compliance is also another big issue. Buyers insist on getting this done from their nominated companies. We need to pay Rs.2-3 lakh each year and then have to renew it every year as well. I believe only big players can afford such investments; micro enterprises like us can’t. I know of people whose shipments worth crores of rupees are stuck due to testing and QC clearances. Then you have CHAs who want commissions for issuing QC clearances. Exports documentations are a big hassle as well. We cannot afford talent and yes, not many of us have IT skills to manage documentation on our own. Duty drawback was good earlier, e.g. on brass, iron items we used to get 20-25% drawback, but it has now been reduced to 1-7%. We are not aware of the credit rating process and I don’t know how it can really help me get funds. The policymakers need to create awareness about it.
APRIL 2016 II THE DOLLAR BUSINESS 35
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
LACKING CREDIT
Financial inability to sustain the long periods between marketing the product and realising payments is another reason for the MSMEs being in poor financial health. Currently, as per a report by the Comptroller and Auditor General of India, only 5% of SMEs have access to credit. The main reasons for this have been lack of awareness about the facilities available, high transaction costs and inability to provide collaterals. To add to the sad state of affairs, of the 5% who have access to credit, a considerable number are neck deep in debt. What The Dollar Business also learnt
during its investigation on the ground is that MSMEs on average, operate at gross margins that fall in the sub-10% range (imaginable given that 95% of MSME sector consists of 'micro' enterprises), and that makes debt financing at a 10-14% standard bank rate unviable for them. As per RBI, the number of sick micro, small and medium enterprises (MSMEs) in India was 5.17 lakh until March last year (the number of sick units had more than doubled in a span of two years) and the incidence of NPAs in these MSMEs was sizeable. To their (bank) lenders alone, these units in total owed
INDIA’S GLOBAL RANK IN INFRASTRUCTURE USA
RANK 2015-16 11
RANK 2014-15 12
RUSSIA
35
39
CHINA
39
46
THAILAND
44
48
INDONESIA
62
56
INDIA
115
BRAZIL
74
76
CHINA
70
VIETNAM
76
81
INDIA
81
87
COUNTRY
TRANSPORT INFRASTRUCTURE INDIA
32
CHINA
21
ELECTRICITY INFRASTRUCTURE
Source: World Economic Forum
Rs.33,378.16 crores (as of March 31, 2015)! On one hand, that gigantic sum – which can be now considered bad debt (assuming that all sick units are found potentially unviable for debt restructuring and therefore rehabilitation by the banks) – reflects how credit has been over the years been pumped into infeasible and unviable industries without any scientific study about their market potential. On the other, it also reflects how subsequent credit needs of many of these sick units were written off for lack of a profitable track record with the initial trance of funding! All in all, it reflects the absence of a monitoring mechanism to gauge the performances of MSMEs at the Centre's level. This systemic lack of a process at the policymaking level however does not reflect on the competencies of this high-potential sector. If we look at the performance of the MSME sector in comparison to the corporate sector in terms of NPAs, then we find the MSMEs better placed than their bigger peers! “By comparing the Gross NPA levels and the Stressed Assets levels of the MSME segment vis-a-vis the banking system as a whole, it is clear that the build-up of restructured assets is comparatively low
"INFORMATION ASYMMETRY IS A CHALLENGE" TDB: Please shed some light on your process of setting up the parameters for credit worthiness of an SME firm? Sankar Chakraborty (SC): SME Rating is a comprehensive assessment of the rated enterprise. The evaluation is based on financial as well as non-financial parameters. SMERA has rated more than 39,000 SMEs in the last 10 years. We re-look at our rating model periodically to check for the relevance of parameters. We also check the defaults of SMEs we have rated and look at rating-wise defaults, i.e. how many SMEs with ratings in the higher categories have defaulted vis-à-vis defaults by entities with ratings in the average category and so on. An SME is compared to its peers in its industry who are in the same line of business. We have created benchmarks of financial and non-fi-
nancial parameters. Every SME is compared to the above-average, average and below-average performer in its industry and the benchmarks are adjusted periodically. Our rating process is standardised, transparent, reliable, prompt and customer friendly. We have signed memorandum of understandings (MOUs) with over 40 leading banks, lending institutions and industry associations in the country. TDB: Currently, only 5% of SMEs have access to credit. What are the bottlenecks that are responsible for the situation? SC: In emerging countries, small and medium enterprises usually encounter challenges in approaching a bank or financial institution to raise funds. Hence, the credit penetration
SANKAR CHAKRABORTY CEO, SMERA RATINGS LIMITED
36 THE DOLLAR BUSINESS II APRIL 2016
Lack of competition related information.
ths g n re t S
Poor adaptability to changing trade trends. Non-availability of technically trained human resources and export incentives.
Contribution of 45% in the industrial output and 40% in exports.
Dumping from China.
Lack of competitive management skills.
Lack of trust between SMEs and financial Institutions.
Largest share of employment after agriculture in the country. A catalyst in industrialisation of our rural & backward areas. Can be started at a very low investment.
Digitally unaware management. Failure to meet the international quality standards.
WTO Entry of big firms or MNCs in their respecled global tive sectors. trade regime offers abundant opportunities for FTAs like TPP, CEPA, etc. Indian MSMEs.
SMEs continue to be the thrust area when it comes to government policies.
level remains relatively low. The major reasons for low credit penetration include lack of awareness about the facilities available, high transaction costs, limited or no access to capital markets, inability to provide collaterals, etc. On the other hand, banks and financial institutions in emerging markets find it complex to evaluate SMEs from a credit perspective on account of lack of credit information, lack of credible data, limitations to the analysis, no or limited peer set for a meaningful benchmarking or relative assessment exercise, and so on. TDB: Why are there so many sick MSMEs, resulting in an increase in NPA levels of lending banks? SC: While MSMEs are more vulnerable to economic downturns and industry specific scenarios, they have managed to repay their loans and fulfil their debt obligations. With the thrust of government on MSME sector reflected through campaigns like Make in India, Digital India and formation of MUDRA, the growth potential is immense. However, banks can further reduce their NPA levels within the MSME segment, if they encourage the use of external credit ratings assigned by agencies like SMERA amongst their SME clients and staff. TDB: Information asymmetry in MSMEs is one factor that
Various bilateral and multilateral trade agreements/FTAs, etc.
t Opportuni
Another area of concern for our MSMEs relates to their inability to effectively exploit technology for their benefit. This is despite the fact, that India has the third largest pool of technologically trained manpower in the world. At present, India has one-fifth the numbers of researchers per million as compared to China and an even lesser proportion as compared to developed countries. This could be the reason why high-technology exports from India currently form less than 7% of the total exports, while
Lack of competitive marketing skills.
Threats
Enhanced credit support by government. Emergence of online marketplaces offering abundant export opportunities.
ies
Alternative funding models slowly entering the sector.
has so far made underwriting a challenging task for financial institutions. Your take? SC: Information asymmetry continues to remain a major challenge in this segment. MSMEs are wary of rating exercises and apprehensive that they may not get a high rating because the financial statements that they have prepared to get rated do not reflect the true and fair picture of their performance. Further, most SMEs operate in an unorganised manner, and also lack transparency and financial discipline, which makes sourcing the required information from them a difficult task for credit rating agencies (CRAs). However, CRAs like SMERA, in association with SME development institutions and Ministry of MSME, are working towards the financial inclusion of the sector and bridging information asymmetry. TDB: What factors beyond financial parameters can one look at while rating an MSME? SC: We are already using parameters such as the educational and professional background of promoters, number and quality of customers and suppliers, banking conduct and relationship with stakeholders, and many such relevant factors. We also look at the age of the business and their investment in processes as a measure of performance. APRIL 2016 II THE DOLLAR BUSINESS 37
Interview by Ahmad Shariq Khan
NOT TECH SAVVY
Low investments and high cost of credit.
nesses eak
among MSMEs. Hence at a systemic level, the risk from MSME loans is relatively low compared to that from the large corporate segment as far as impact on capital ratios of banks are concerned," says Sankar Chakraborti, CEO of SMERA Ratings Limited, an RBI-accredited credit rating agency based out of Mumbai. The recent Mallyagate involving default of over Rs.9,000 crore loan hints at how over the years, the big fish have always been treated differently by our banks (both private or otherwise). [Don't you suddenly feel the need for introspection in India's MSME lending and monitoring policy?] Â
ANALYSIS OF INDIAN W MSMEs
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
this number is in mid-twenties for most of other countries that India competes with. Indian MSMEs, over the years, have largely ignored R&D requirements and have not embarked on new product development or technological upgradation at the requisite pace. The policy to aid this way forward for the MSMEs hasn't been one unique plan either. The MSME Ministry conveyed their approval for continuation of the Credit Linked Capital Subsidy Scheme (CLSS) for technology upgradation of Micro and Small Enterprises, but with a ceiling of Rs.1 crore and subsidised loan at 15%! First, what's the rationale behind choosing a one-size-fits-all ceiling of Rs.1 crore? [Is it because 95% of MSME units are those that fulfil the "scientific" condition of the value of plant and machinery not exceeding Rs.25 lakh? Perhaps.] Second, that ceiling probably sounds encourag-
ing to the likes of noodle manufacturing units, doll makers, artificial jewellery craftsmen, and poultry farmers. But how about the interest rate of 15%? [And the MSME ministry calls it "subsidised"!] In this regard, there is a need for industry-wise technology upgradation loans that are tailormade as per specific needs of those in need [like Technology Upgradation Fund Scheme (TUFS) of Ministry of Textiles]. Blanket schemes don't do MSMEs much good.
LACK OF MARKETING
Though currently, the Ministry of Commerce offers a host of marketing tools and platforms for the benefit of exporters, a lot of them are not turning out to be as effective. For example, not many MSME players know about or are making use of the Market Development Assistance (MDA) scheme that is be-
ing implemented by the Indian government to assist individual exporters for export promotion activities overseas. The government though is taking steps to monitor the scheme. Union Minister for Micro, Small & Medium Enterprises (MSME) Kalraj Mishra recently reviewed the MDA Scheme with officials from Khadi Village Industries Commission (KVIC). More such reviews are the need of the hour across policy segments and across the broader MSME spectrum. In the case of handicrafts sector, many exporters with whom The Dollar Business spoke to, wanted the government to support them through mechanisms like opening of warehouses in major world markets, exemption from service tax and inclusion of artisans in Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA). They believe MNREGA scheme could provide
"MSMEs LACK CRITICAL DIMENSION FOR R&D" TDB: In what can be considered as quite appalling, the small and medium enterprises constitute only 5% of the total MSMEs in the country, with the micro enterprises comprising the rest. Why is this the case? Dr. A Didar Singh (ADS): This scenario is prevalent not only in India but also worldwide. The percentage of micro units is far higher than the small, medium as well as large enterprises. In fact, the micro units have the largest proportion when it comes to number of units operating in an economy followed by SMEs and a very small portion of large enterprises. One of the prime reasons for this is because of the fact that over 90% of the output generated by micro-enterprises is meant for consumption in domestic market. A very minuscule amount of output generated by micro-enterprises caters to the requirement of SMEs and a very small percentage of SMEs are then catering to the large enterprises as their ancillaries. Of course, the lack of financial support, market accessibility, technology upgradation, etc., do impact the growth of these micro units. Another reason could be the geographic spread of micro units. Rural enterprises comprise over 54% of the overall enterprises and are mostly associated with the production of traditional goods and handicrafts with limit-
ed technology and scale of operations and therefore the number of micro units is very high as compared to SMEs. TDB: Indian MSMEs, by and large, have not been able to gain a foothold in the international markets? Do you think it is because MSMEs lack capability and capacity to innovate and add value to their products in tune with global demands and requirements? If so what solution do you suggest for boosting exports from MSMEs? ADS: Majority of MSMEs across different industries are not able to identify their competitive strengths within their value chain. Also, they lack the critical dimension necessary to support adequate R&D and training costs, particularly in the context of increased participation in the global value chain (GVC), thus restricting their ability to grow further in the value chain. Lack of working capital is also one of the obstacles. The fulfilment of strict product standard and quality required for participation in GVC is costly as every country/company has its own standard, which makes the cost of compliance burdensome for MSMEs. In order to foster growth of the sector, both central and state governments have come out with various schemes to support MSMEs.
DR. A. DIDAR SINGH
SECRETARY GENERAL, FEDERATION OF INDIAN CHAMBERS OF COMMERCE (FICCI) 38 THE DOLLAR BUSINESS II APRIL 2016
YET TO WEAVE MAGIC
The Indian textile industry is going
through a challenging phase. Global demand is at a low ebb. The decline of cotton prices in Indian and global market continues to be a bad, long nightmare. And imbalances in domestic textile intermediary goods supply and credit crunch are further ruining the sector's health. Pointing at difficult times ahead for India’s textiles exports, Atul K. Mishra, Economist, Confederation of Indian Textile Industry, while talking
However, there is a lack of awareness among MSMEs on the schemes available. According to a FICCI-Grant Thornton report, creating awareness of the schemes available for MSMEs to build their competitiveness, organising training and coaching programmes for training MSMEs on global standards and educating them on how to effectively target global value chains, encouraging multinational corporations and large corporation to develop key vendor capabilities among MSMEs to help them move up the value chain, creating funds for facilitating R&D among MSMEs and facilitating ease of doing business for MSMEs are some of the measures that could be taken up to help MSMEs integrate with GVC. This will help them in overcoming compliances and regulatory hindrances, which are some of the key challenges being faced by Indian MSMEs. TDB: Protective measures like additional import duties on raw materials are considered to be a major impediment to the growth of the MSMEs. Your views. ADS: Imposing additional import duties on raw materials generally are deliberative steps taken by the government aimed towards safeguarding the local industry. If, in case, the raw material cannot be procured domestically, then of course the government tries to reduce the import duties on raw materials. Therefore, this should not be seen as an impediment to the growth of MSMEs. The development of MSMEs has been assigned an important role in India’s national plan. Hence, the government, besides maintaining duties, should consider taking measures towards integrating our MSMEs with the global value chain, which would help in knowledge sharing, link to customers, link to global buyers, access to latest technology and building quality standards.
to The Dollar Business, says, it’s been a decade now that the government has not accepted major demands of the industry like a correction in inverted duty structure prevailing since long, a reduction of excise duty on man-made fibres, putting textile industry under priority sector lending, and providing credit to industry at 7%. Also, according to Atul, the Trans-Pacific Partnership (TPP) – a preferential trade agreement between
TDB: In many countries benefits like credit support and related guarantees are provided to MSME exporters to overcome this situation. In India also some financial institutions like EXIM Bank provides such support. Do you think this support is sufficient? If not, what are your suggestions? ADS: India is a large country and we should realise that the government also has limited resources which need to be best utilised and allocated. But at the same time, in my view, opportunity should be given to every MSME to prove its potential as a winner. Hence, the government’s support system should be based on multiple factors and one of them could be how an MSME is performing. TDB: A considerable number of MSMEs are neck deep in debts and are declaring insolvency and bankruptcy. Does it not reflect that loans have been pumped into infeasible and unviable projects and industries without any scientific study about their market potential? Does it also not reflect absence of monitoring mechanism to gauge their performance from time to time? ADS: Banks have defined certain parameters for doing the due diligence before sanctioning and disbursing loans. It is not feasible and possible for a bank employee to ascertain each and every business model. Consultants and experts in a particular field having practical exposure should be deployed by the bank to understand the financial needs of the unit and should be given the responsibility of due diligence. There is a mechanism in place defined by RBI for rehabilitation and restructuring process for MSMEs to help them before they turn NPA. External factors such as prolonged power cuts, delayed payment, etc., also at times lead to losses. These factors need to be taken care if NPA levels have to be reduced. APRIL 2016 II THE DOLLAR BUSINESS 39
Interview by Ahmad Shariq Khan
stability of production and supply and potential availability of volumes which in turn, would lead to reduction in prices of handicrafts and better development of MSME artisans across the country. The same has also been urged by the Handicrafts Export Promotion Council (EPCH) recently but as has been the case with many other well-intented suggestions from the industry, the ministry is yet to pay heed to this one. According to Gokhale Utpal, General Manager, EXIM Bank, the best performing sectors when it comes to exports from MSMEs are textiles, pharmaceuticals, food processing, engineering and gems & jewellery. Yet all these sectors also face their unique challenges. Let us turn our eyes then to these sectors to see what ails them.
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
12 countries including US and EU – can pose a major challenge for the Indian textile industry, as the proposed trade bloc accounts for more than 40% of the global trade and to counter that, India needs to intensify its existing bilateral trade ties and forge new ones that are profitable for its exports community (unlike most existing pacts). And in that sense, the very thought of TPP enabling Vietnam to run away with world demand is making Indian textile MSME export-manufacturers feel a surge of anxiety. “Exporters are concerned
THERE IS A NEED FOR INDUSTRYWISE TECHNOLOGY UPGRADATION LOANS FOR MSMEs
with the zero duty access to EU markets by Vietnam. Vietnamese exports are likely to grow faster due to implementation of zero duty from 2017. (India faces an import duty of 9.6%). TPP allows export opportunities from Vietnam to USA with a benefit of 17-30% export duty relief. The India-EU Broad-based Trade and Investment Agreement (BTIA) is yet to be finalised and exporters are expecting conclusion of the talks so that they can compete with Bangladesh and Vietnam," Ashok G. Rajani, Chairman, Apparel Export Promotion Council (AEPC), tells The Dollar Business. Wool, which is a primarily rural-based, export-oriented industry, faces a similar challenge. This segment is increasingly said to be impacted by the low production of raw wool indigenously. However, our traders are of the view that the industry is subject to high rates of Customs duty on many specified tex-
Because of high capital investment on international compliance requirements, units in the pharma sector tend to miss out on the MSME tag that could have otherwise benefitted them.
Sector-wise distribution of MSME exports
Jewellery and textiles top the list
Major destinations of India’s MSME exports
USA and UAE are the biggest importers 14%
35%
40%
13% 60%
5% 4%
6%
4%
11% 8%
Pearls, Gems, Jewellery, Metal & Coins Textile & Apparel Electronics & electrical equipment Pharmaceuticals Others
Source: Ministry of MSME
40 THE DOLLAR BUSINESS II APRIL 2016
USA UAE Singapore Hong Kong Others
China Source: Ministry of MSME
tile garment machinery and spare parts for general machinery – a concern also shared by Ashok Jaidka, Chairman, Wool & Woollens Export Promotion Council (WWEPC), who for the betterment of the sector wants lowering of Customs duty and a revision of incentives scheme for exporters in this segment. This, he believes, will encourage more exporters to join the trade. The other challenges hurting productivity and growth of the sector are high transaction costs, problems of power supply and power cost, a rigid labour policy and shortage of skilled/semi-skilled manpower, and lower rates of incentives.
NO REMEDY IN SIGHT
Despite the fact that today, the Indian pharma sector can boast of being a Rs.2 lakh crore-a-year turnover industry (with about 50% of the revenues coming from exports), yet the industry is plagued with many-a-bottleneck. Ashok Kumar Madan, Executive Director, of The Indian Drug Manufacturers’ Association (IDMA), tells The Dollar Business that MSME players in this capital intensive sector are losing out on many fronts. In addition to asking for a change in the investment ceiling oriented definition of an MSME by the government, he says, “most of the pharma players, given the very nature of their business operations, fall outside the Rs.10 crore bracket and are unable to benefit from any MSME-oriented scheme of the government. Besides ease of doing business, we want implementation of the Katoch Committee’s recommendations for the bulk drug industry in the country, as it outlines ways for creating a level playing field for our indigenous bulk drug manufacturers and supporting the ‘Make in India’ initiative.” While India remains the largest provider of generics globally (accounts for 20% of the world exports of this class of drugs), apprehensions remain about the utility of many preferential trade agreements (PTAs) signed with some of its trading partners. For example, the industry body, Assocham recently noted, “India’s pharmaceutical exports have not benefited from tariff reductions under the India-Japan CEPA, mainly because
it’s too cumbersome to deal with Japan’s drug regulator. No surprise, the utilisation of India’s PTAs for export promotion remains very low”. The government needs to take into account the changing paradigm in this much-valued sector so that it continues growing at a stable pace.
Field Report "THE GOVERNMENT HAS TO GET ITS FOCUS RIGHT" M. MODY
PROCESSING SLOWLY
Despite being one of the largest food producing countries in the world across several categories, the country’s processing level in this sector stands at only 10%, unlike many other smaller countries like Thailand, Malaysia and other EU nations that are able to process up to 80-90% of their agricultural produce! Food processing is recognised as a priority sector in the new manufacturing policy and in the recent budget, attractive fiscal incentives have been announced by the government. These mainly relate to FDI, subsidies, tax rebates, depreciation benefits, as well as reduced Customs and Excise duties for food processing machinery. Harsimrat Kaur Badal, Union Minister for Food Processing Industries, Government of India, had for long been urging the Centre to allow FDI in multi-brand retail for food products that are fully grown and processed in India. Her efforts finally paid off this Budget. Speaking to The Dollar Business, she said that the government's nod to allow 100% FDI into this segment will be a game changer for the sector. “I believe this can play a catalytic role in setting up the infrastructure from farm-to-fork. We are at 10% of our potential today and have 90% to go. This will not only boost infrastructure and strengthen the local supply chain in the agriculture sector, but will also benefit farmers and MSMEs across the country, in a big way,” she says. In a bid to support export-related activities in the sector, the food ministry is planning to set up 42 mega food parks (of which two are already operational and 35 have got final approval) and these food parks could really change status quo for a large number of MSME players in the sector.
A DOWNHILL TRIP
The engineering sector, long recognised as a key driver of the nation building pro-
W
R. F. INTERNATIONAL TEXTILE EXPORTER
e have been participating in the EPCH fair for the last seven-eight years, but this year there were fewer buyers compared to last year. Most of the buyers that we have today have come from this fair only. This time we had orders from Spain, US, EU countries. We do not work with wholesalers, rather we prefer working with branded chain stores that put emphasis on quality. Currently, the export demand is very low and international testing is adding to our woes. Buyers generally insist on getting tests done at their nominated labs only which charge very high rates. Also, many buyers insist on getting tags/labels (for the items) from a designated company in Hong Kong. This results in delays in many of our consignments and we also then have to add this cost to the final price and this eventually increases our price. For example, a scarf without a tag and international testing costs $4 per piece, but with the addition of these costs, the unit price of the same scarf increases by $2.5- $3. A customer ultimately bears this cost. Despite the Prime Minister trying his best to revive the markets, we are having hard times these days. Our factories are running at 30% capacity. Global markets are down as well. Also as China has devalued its currency, our exports are hurt. When it comes to value additions, yes, we are lagging behind Bangladesh where in every home there is a (unregulated) factory and they also enjoy the Least developed Nation status. Yet, I believe, compared to Bangladesh, an international buyer prefers India because he knows that we will have all international compliances and certifications. Generally, I believe wholesalers who want to pick large quantities prefer Bangladesh or China but still there are many good brands that prefer India for its strong adherence to quality. In India, we still are plagued with electricity shortages, rigid labour laws and taxation issues. GST will be good but we really don't know when it will get cleared in the Parliament. As of now, we are not able to see any silver lining. Our industry is flooded with many unscrupulous players who deal in cash, and don’t give any taxes, unlike us, who do only online transactions and prefer everything to be transparent. The government should take steps to stop these malpractices, else we will never have a level playing field. At Customs, many a times, they seize our items and each time give different reasons for doing so – there is no fixed policy there. Some times they let the stuff pass too. We believe, the policy is arbitrary there. Customs duty is too high as well. On invoice value, we are taxed presently up to the tune of 25%- 35%. China has less corruption than us. Their government also wants to help their exporters. If an MSME player here in Noida wants a piece of land, it will be a herculean task for him to get it allotted in his name, unlike for big industrial players who can lobby and lubricate their way to the top of the decision making chain.
APRIL 2016 II THE DOLLAR BUSINESS 41
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
cess, has been on a downhill trip for quite some time now. As per data from Engineering Export Promotion Council of India (EEPC), engineering exports from India (comprising 23% of the total merchandise shipment in January 2016) to 19 of the 25 top countries – to which India supplies products in this category – have shown a decline. Further, out of the 33 broad engineering products, 22 recorded a fall. Capacity utilisation across India also remains relatively low hurting the MSME sector involved in this segment. Currency fluctuations in various global markets have also added to their woes. Yet, the sector holds immense potential considering the talent pool that India has. In a bid to safeguard the interest of MSMEs in the sector, Engineering Export Promotion Council of India (EEPC) has urged the government to address the issue of a sharp fall in engineering exports, saying the promotional schemes for external trade must be realigned immediately in the wake of worsening conditions in the global market. “The situation has been worsened by excessive protection given by the government to the domestic large scale steel firms by way of safeguard duty and anti-dumping duty. There is also a proposal to fix a minimum import price. All these measures are lopsided and overlook the interests of the MSMEs, which are then made to buy their raw material at higher costs, losing competitive edge in the tough international market,” T. S. Bhasin, Chairman, EEPC, recently told The Dollar Business. EEPC also blamed the government
for failing to address the issues of technology upgradation and infrastructural bottlenecks. “Within the country, issues like lack of technology upgradation in the Indian engineering industry and small and medium enterprises (SMEs) facing infrastructural bottlenecks are hampering both production and exports. Lack of harmonisation between Indian and International standards is the prime cause for India being behind its competitors. There have been instances where ‘Made in India’ products were refused entry in the major export markets due to lack of harmonised standards. Most of the time, our MSMEs are not even aware of the quality standards and necessary document requirements for exports. In certain cases, the required certifications are also expensive. Lack of market intelligence and market access schemes are among other key reasons,” added Bhasin, who feels that plans like MEIS (Merchandise Exports from India Scheme) should be done away with and a new scheme where the benefits accrue for all tariff lines and for all countries should be announced. Really simple a solution as Bhasin suggests. But why go even that far? How about modifying the very 'investment-related' definition of MSMEs and allowing investments beyond Rs.10 crore for all units and most necessarily an industry like engineering goods. Learned parliamentarians, how difficult is this to understand – you need very different machines to (a) produce machines to be used in power, steel, infra, and other projects, and (b) make glass noodles or cut glass for handicrafts! And what we've done is, for the sake of con-
India's processing level in the agricultural sector stands at only 10%. Smaller countries like Thailand & Malaysia process up to 80-90%! 42 THE DOLLAR BUSINESS II APRIL 2016
venience of policymaking, we've shoved them all – small and big, and blue, red and green – into one coop. Again, a generalised rule won't do much good. How difficult is that difference to understand?
THE ROAD AHEAD
It is relatively easy to enumerate and expound on the ailments that hinder exports from the MSME segment. Having been on the ground with MSMEs and having talked to experts from industry associations and financial institutions, The Dollar Business also received various recommendations from stakeholders on how to alleviate the pain of MSMEs. There are also several models of regulatory frameworks and MSME-oriented developments across the globe that have seen success. How should the government then go about their business to ensure that MSMEs perform to their potential when it comes to exports? There is no panacea, but here are a few strategies, if implemented well, can help MSMEs grow organically and contribute more towards India's exports.
REDEFINING MSMEs
The existing cap on investment in plant and machinery for the purpose of classifying the units as SMEs does not encourage Indian SMEs to move up the value chain. Presently, under the MSMED Act 2006, within the manufacturing sector, micro enterprises are classified as those with investment in plant and machinery not exceeding Rs.25 lakh, investments for a small enterprise has been kept in the range between Rs.25 lakh and Rs.5 crore, and a medium enterprise is defined as
Exports of engineering products have been on a decline and MSMEs in the sector may face tough times ahead.
Field Report "COMPLICATED POLICIES HINDER OUR GROWTH" S. K. MIDHA
MANAGING DIRECTOR ECL MAGTRONICS LTD.
TDB: You claim that MSMEs are not treated at par with bigger companies. Any experience that you would like to share? S. K. Midha (SKM): We have put in limited efforts due to limited funds; but we are satisfied with our efforts. We had faced a major problem in August 2014, when we wanted to move into a bigger office in the same town. When we submitted an application, the DGM of that department said you need to close your business and then re-apply. Had I closed operation, I would have lost a lot of my customers. We had to face a lot of hassles due to the government’s complicated policies. There was no assistance from the government. TDB: Has 'Ease of Doing Business' raised your confidence? SKM: Not yet. Concept-wise, this is an amazing initiative. But on the ground level, not much has changed. I wanted to expand my business, wanted to have a bigger unit, but I was taken aback with all the running around I had to do just for trivial issues. Today, whenever an entrepreneur tries to expand his business, he does not get much support from the government. In most of the cases, there are 20-30 types of different clearances required. There are almost 20 types of returns one has to file. Some government policies have no logic; they should be reassessed and reworked. TDB: How complicated is it to take credit facilities from banks? SM: Taking a loan from a bank is a complicated process. It is only against pledging of your property. Not otherwise. There is no subsidy as well. There is suppose to be a subsidy on interest, but it’s not there. Just because I run a small-scale unit, I am not entitled to an interest subsidy. Recently, I had taken loan from a bank, and I had to pledge my house. And to top that my rate of interest is somewhere between 10-11%. It is huge! I don’t think the government helps small-scale industries grow. Earlier small-scale units used to get a concession on excise duty. The government now doesn’t differentiate between a small scale business and a medium or a large unit. TDB: What other challenges would you like to highlight? SM: Our infrastructure is very poor. When consignments are dispatched from the country, they have to face huge queues at depots. Sometime it takes 24 hours for our goods to get unloaded in Delhi. And then it takes time to be loaded and sent to Bombay and shipped from there. It adds to our cost. Things need to be much better organised. TDB: What percentage of your revenue comes from international markets? SM: It is 50% at the moment. We export to around 10 countries including Sri Lanka, Peru, Colombia, Slovenia, Indonesia and a few South American countries. Global slowdown hasn’t affected our business, but I think the growth could have been much better. Our exports have been stagnant during the last two-three years.
APRIL 2016 II THE DOLLAR BUSINESS 43
Interview by Deepak Kumar
one with investment in the range between Rs.5 crore and Rs.10 crore. Here, the Indian policymakers must appreciate the fact that each sector has its own unique capital requirement, standard revenue, growth rates and business cycle. Globally, annual turnover, headcount and potential export revenues are some of the key metrics being used to define MSMEs. Further, emerging economies have taken a step ahead to constantly revise and raise the turnover and headcount caps to match the global standards. For instance, Brazil categorises its MSME sector as individual entrepreneur, micro and small businesses. Similarly, South Africa classifies its MSME sector into micro, very small, small and medium businesses thereby encompassing all the small businesses in its purview. Also, countries like South Africa and Argentina have extensively defined their MSME sector based on industries (agriculture, trade, services, industrial, etc.) Isn’t that the best way to maintain unique characteristics of each industry and best channelise resources to support their development requirements? In India, owing to such low level of investment ceiling, Indian MSMEs are forced to either expand laterally or to remain engaged in low-tech/low-value products – a fact that Indian Drug Manufacturers Association’s Madan also highlighted to The Dollar Business. He said, a large chunk of pharma players (belonging to an industry characterised as capital intensive and hi-tech) when making inroads globally have to make adequate investments needed to adhere to various international quality standards and certifications. Due to added investments in plant and machinery, they don't remain MSMEs, and eventually lose out on many much-needed benefits due to them. On the same note, it is worth mentioning that China defines SMEs as those firms having investment ceiling of 300 million Yuan (~Rs.309 crore); another country with similar economic demographics as ours, Thailand prefers to define SMEs with a ceiling on investment capital of up to 200 million Thai Bahts (~Rs.40 crore), Singapore defines SMEs with a ceiling on investment capital of upto S$15 million (~Rs.75
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
crore); meaning that most of the leading and developing economies around the world have positioned the ceiling on investment for medium enterprises at much high levels, so as to encourage technology upgradation, quality improvement and most critically, export orientation. In order for our MSMEs to develop a competitive advantage to operate in the global market, a strong focus on implementing new-age technology, and technology collaboration with global partners is likely to play a crucial role. New areas for technology application, opportunities for commercialisation of R&D, and hand-holding of MSMEs in their R&D intensification are the need of the hour. Institutions should also collaborate with the industry, particularly MSMEs, on research initiatives and help
provide technology support to commercialise innovative product and service ideas. But technology needs capex. And that means the limits defining MSMEs have to be relooked into. [It is worth mentioning here that the new MSMED Act 2015, which has been tabled in the Parliament has proposed redefining of these limits.]
ACCESS TO FINANCE
Then there is a need for deepening and widening the delivery of credit to MSMEs. Also, with regards to all those small businesses that wish to go global, the biggest concern is the lack of funding avenues. For example, in the textile sector, which is among the largest and highest net foreign exchange earner for the country, new investments remain scarce – a concern also echoed by Rashmi Verma,
Textile Secretary, GoI. “Of our domestic textile sector – 80% represents the unorganised sector and this large chunk includes a majority of our handloom weavers, the power loom weavers and the biggest challenge for them is lack of access to credit and working capital – so we need to find ways to link them to government’s schemes such as Mudra, etc,” she tells The Dollar Business. SMEs with business models revolving around import substitution and exporting from India often require funds to set up facilities and scale up operations. Schemes for speedy financial assistance should be formulated, including funding for market access and development. India has a long way to go when it comes to providing alternative sources of capital like angel funds and risk capital to Indian MSMEs. At present, there
"EXPORT PROCEDURES ARE NOT MSME FRIENDLY" TDB: EXIM Bank has schemes for both project exports as well as merchandise exports. What is the percentage of allocations for commodities vis-à-vis project exports and what is the basis for the allocation? Gokhale Utpal (GU): EXIM Bank is a major agency for extending ideas to ECGC (Export Credit Guarantee Corporation of India Limited). We have developed the Indian Development and Economic Assistance Scheme (IDEAS) under which we have extended short-term loan to overseas buyers to import from India. We believe these key projects will enhance our country's exports. It will be difficult for me to give a commodity wise or project exports wise breakup. But, we support all types of commodities and destinations. In recent times, as part of the initiative, we have reached out to many countries in Africa and Latin America as well.
funding agencies and the World Bank and we charge MSMEs a one-time success fee for loan facilitation. For grassroot enterprises, we have a training programme. This programme is very intensive and extends support and promotes grassroots enterprises by providing specific interventions such as assistance in skill development, product development and export readiness, etc. We train them for four months, we give them certificates and some funding. We also go to villages and identify people who can work for these enterprises. We give weavers, artisans, and others from the village equipment, so that they can work even from home and in this way we try to bring in a trained workforce to work for MSMEs.
TDB: What is the criteria for selection of MSMEs when it comes to extending LoCs (line of credits) and other loan facilities? GU: We have the same criteria for MSMEs and large enterprises. We have product development financing, which can be used as a lever for augmenting loans to MSMEs. If there are some usual requirements, loans can be extended at affordale interest. We also provide finance to viable medium and small enterprises. We have links with multinational
TDB: Is EXIM Bank providing loans for technology upgradation in export-oriented MSME units? If so, what is the process involved in identifying beneficiaries for technology upgradation? GU: Yes, we do provide funds for technology upgradation. With technology upgrades, MSMEs can have better bargaining power and are able to realise better price and arrive at payment terms that suit them. It is important for us to be involved in technology upgradation as a funding body. TDB: Is LoC extended only to manufactur-
GOKHALE UTPAL
GENERAL MANAGER – CREDIT, EXIM BANK 44 THE DOLLAR BUSINESS II APRIL 2016
programme offers a technology guarantee service, which covers losses incurred when borrowers default on loans. Such a policy measure could also be introduced in India. The MSME sector in many developed economies (UK, USA, Australia, etc.) make use of mezzanine financing, a non-conventional funding that shares characteristics of both debt and equity. There is a need to develop these alternate sources of funding for India's MSMEs.
CLUSTER DEVELOPMENT
A cluster development approach for MSMEs, as followed by China, which is a sectoral and geographical concentration of enterprises, manufacturing same or related products facing common opportunities and threats can help achieve high levels of competitiveness,
er-exporters or is it even for merchant traders involved in exports business? GU: Anybody can export under LoCs as long as he/she is qualified for exports. There are some products where the government is trying to strengthen economic ties through economic diplomacies. Typically, this is what is happening with African countries and Latin American countries. Incidentally, there are a large number of importers and exporters. So, manufacturers and traders from any sector and of any size can avail LoCs. I must say that LoCs definitely give a boost to trade ties. TDB: Are MSMEs which have availed loans from different financial agencies also eligible for EXIM credit facility? GU: Absolutely, we provide loans to all MSMEs even if they have availed loans from other financial agencies. In fact, we would also encourage them to take certain capital from other financial institutions. This helps in stabilising these MSMEs as they are not dependent on one agency. TDB: EXIM Bank's LoC policy or rule makes it mandatory for the recipient country to source 75% of the imports from India. Does this import have to be from EXIM Bank specified exporters or can the products be sourced from any Indian exporter? If so, can you explain dynamics of LoC and market linkages? Has this instrument been effective in ensuring loyalty to Indian exporters by recipient countries? GU: No, they can source products from any Indian exporter. It can be a small commodity exporter, an MSME export-manufacturer, a small subcontractor or a large exporter. Speaking about the dynamics of LoC, EXIM Bank signs LoCs under the aegis of the Government of India. This is a kind of contract that happens with any other bank, and we follow the same kind of due diligence. Borrowers should normally use a shorter term
CHINA'S 'CEILING OF INVESTMENTS' FOR SMEs IS Rs.309 CRORE. AND INDIA'S? RS.10 CRORE! ensuring complementarities, common facilities, collective activities including collective sourcing and marketing tasks. With this, SMEs can also achieve efficiency through collective innovations. However, it is pertinent to upgrade the clusters through strengthening of linkages and creation of value chain. These can be achieved through promotion of linkages among firms, strengthening local position within value chains, building cluster-specific skill centres, enhancing
LoC, but at the same time the borrower has to keep in mind that the LoC should be for a term that enables the entity to successfully complete the order. TDB: What is EXIM Bank’s success rate in terms of achieving credit targets and also credit recoveries from the export oriented MSMEs during the past five-year period? GU: I cannot give the success rate in terms of percentage. But I can tell you that we have been seeing great success. We can say that there are externally oriented proposals which finance even the imports made by companies for products which would otherwise have no exports. TDB: When it comes to export performance, what is the success rate achieved by EXIM Bank-supported enterprises? GU: Again, I cannot give you a number as such. But then the success rate of these enterprises has been quite good. The top performers would be from services, jewellery, textiles, pharmaceuticals and food processing industries. Exports from these sectors have seen a good growth over the last few years. However, we still see a little instability in these industries and that needs to be fixed. TDB: From EXIM Bank’s perspective and experience, can you elucidate on the reasons for indebtedness and sickness among a considerable number of MSMEs? GU: The sickness among MSMEs is due to various reasons. It could be difficulty in getting the financial support, or lack of market accessibility or institutional funding and host of other reasons. Export procedures are still not entirely MSME friendly. We can say that these are various reasons which prevent the sector from seeing the light of the day. However, we have been seeing good improvement in these sectors in recent times. APRIL 2016 II THE DOLLAR BUSINESS 45
Interview by Aadhira Anandh M.
is almost negligible flow of equity capital into this sector. The Australian Government has been supporting Venture Capital Limited Partnerships (VCLPs) and Pooled Development Funds (PDFs) with tax incentives for providing equity capital to the growing SME sector in Australia. Thailand with its 'Market for Alternative Investment' plan offers access to capital for smaller companies. India also needs to develop such programmes to support SMEs to access alternate sources of capital. In fact, India can learn a thing or two from Korea too, which has instituted the Korea Technology Finance Corporation (Kibo) that after duly assessing the technological expertise and technological competency of SMEs, enables banks to accept technology as collateral for extending financial support. The unique
COVER STORY
MSMEs: WHERE ARE INDIA's ENGINEs OF GROWTH HEADED?
linkages with local suppliers, and facilitating greater level of interactions among the stakeholders of clusters.
REVIEWING FTAs
Consider this: India has so far signed almost 15 pacts falling in the various categories of bilateral trade treaties like free trade agreements (FTAs), preferential trade agreements (PTAs), comprehensive economic cooperation agreements (CECAs) and comprehensive economic partnership agreements (CEPAs). How-
ever, how many of these are really helping our MSME sector compete equally with their foreign counterparts or earn access to markets in partner countries? Rashmi Verma, Textile Secretary, GoI, feels not many of them. “We need to change our course of action keeping into account the changing paradigms of foreign trade for each particular sector. These FTAs are not giving us good returns as the targetted countries are no longer our main markets. Our competitors, i.e. Bangladesh, Vietnam and Sri
GLOBAL GOOD PRACTICES USA’s Small Business Innovation Research (SBIR) encourages domestic small businesses to engage in R&D that has the potential for commercialisation. USA has a HUBZone Programme that helps small businesses in urban and rural communities gain preferential access to federal procurement opportunities. Singapore’s Infocomm Adoption & Transformation (iSPRINT) programme offers a grant to settle costs of Infocomm projects to improve or innovate business operations (upto 70%). Singapore’s Productivity and Innovation Credit (PIC) scheme, offers Productivity and Innovation Credits for businesses, whereby they can enjoy 400% tax deductions/ allowances and/or 60% cash payout for investment in innovation and productivity improvements. Singapore has a shared integrated cold chain set-up for processed food hub in the Senoko region, allowing the SMEs to lower their costs and investments. Government of Malaysia provides concessional financing (maximum of RM3 million) through Malaysia Industrial Development Finance (MIDF) to undertake branding/rebranding exercises of SMEs. Canada’s Accelerator and Incubator Programme (CAIP) helps MSMEs with outstanding performance to grow and generate employment by providing financing, and other facilities through incubators and business accelerators. It also provides a grant for international ventures/export market access by covering 50% expenses – trade shows, freight, marketing brochures, etc., up to CAD30,000. Canada’s CentrePort Canada (an inland port) offers single window access to the benefits offered under the FTZ programme such as low electricity rates and exemption from certain taxes like inventory tax, and corporate income tax. It’s also developing some of its regions as tariff free zones for SMEs. Italy provides grants (starting from €100,000) fund to MSMEs for purchase of hardware/software/ICT tools. Further, €R20,000 of tax credit is provided for improving network speed (of mobile and fixed line) to more than 30 Mbps. UK under its ‘The Small Business: GREAT Ambition’ policy enabled conversion of high-street properties for multiple uses. This enables small enterprises to operate out of shared office spaces in key business districts where real estate would otherwise be unaffordable for them. Canada, France, Italy, UK, Singapore, Japan give out subsidised loans to MSMEs/start-ups. Germany’s MSME Market Entry Programme is aimed at promoting German companies especially MSMEs in their export activities.
46 THE DOLLAR BUSINESS II APRIL 2016
Lanka, are not only able to export at zero duty rates but also get an edge over us due to their various trade pacts with those markets”. Hence, the government needs to seriously review its FTA strategy and see to it that if it’s really in tune with the changing dynamics of global trade equations and realities.
TRAIN TO COMPETE
If we look at many countries that enjoy a similar economic landscape as ours, we find that they have been trying to explore many innovative practices to nurture their MSMEs. For instance, the Mexican government, under its Micro and Small and Medium Enterprises Support Fund tries to increase the competitiveness and knowledge development of its SMEs. Under this, support is being provided through activities related to consultancy, training, studies, innovation and technology development. Also, Mexico, through its ‘Implusoras’ programme provides tailor-made consultancies to inform SME exporters about technical specifications, regulations and quality requirements in target markets. Of late, even Malaysia has been training its SMEs through collaboration with its various universities. Its SME Corp is implementing a skills development programme for enhancing skills and capabilities of workers of SMEs at technical, supervisory and managerial levels. SME Corp finances upto 80% of the training cost paid by employers to train their employees. It’s high time, we draw inspiration from them, and work towards establishing skill development programmes focused on MSMEs.
BETTER DAYS AHEAD
Despite the various challenges plaguing the MSME sector, it has increasingly shown innovativeness, adaptability and resilience to survive. This Indian sector deserves to be given that extra push – to enable it to compete and grow effectively in today’s competitive global marketplace. The government has been making the right noises. Now if we could implement what is on paper, the sector is bound to see better days ahead.
"WE ARE COMMITTED TO WORK FOR THE WELFARE OF MSMEs"
Kalraj Mishra
UNION MINISTER (MSMEs), GoI
Already burdened with many infrastructural and policy bottlenecks, the present-day status of Indian MSMEs cannot be described to be very promising. Unquestionably, our MSMEs are today feeling the pinch of sluggish exports from the country. The Dollar Business caught up with Kalraj Mishra, Union Minister for Micro, Small and Medium Enterprises (MSMEs), to understand how he plans to uplift the sector and enhance its competitiveness. BY AHMAD SHARIQ KHAN
TDB: As per the recent CAG report, there are about three lakh sick MSMEs in India and the incidence of NPAs in these MSMEs is sizeable. How do you plan to revive these sick units? Kalraj Mishra (KM): We are fully aware of the challenges faced by our MSMEs. For this, we have notified a ‘Framework for Revival and Rehabilitation of MSMEs’. Under this framework, any enterprise can seek revival and rehabilitation benefit through a Committee constituted by the bank with representatives from state governments, experts, regional or zonal head of the bank and the officer in charge of MSMEs credit department of
the bank. We are trying to streamline the process. TDB: Many MSMEs have been urging for the revision of investment caps defining micro, small and medium enterprises as given under MSME Act, 2006? Your thoughts. KM: Yes, we are aware of this and in this regard, I can tell you the revision of the definition of the Micro, Small & Medium Enterprises (MSMEs), including that of service enterprises, are under consideration of the government. We have already introduced the bill, 'The Micro, Small and Medium Enter-
THE NEW MSMED ACT 2015 PROPOSES TO INCREASE INVESTMENT CAPS prises Development (Amendment) Bill, 2015', in Lok Sabha and this proposed bill is aimed at replacing the old one and seeks to increase the allowance for investment in plants and machinery in our micro, small and medium enterprises. We believe, once the bill is passed, our MSMEs will be able to gain benefits from APRIL 2016 II THE DOLLAR BUSINESS 47
COVER STORY
MSMEs: ENGINEs OF GROWTH?
the new ceiling limits. TDB: Despite much buzz about job creations and Make in India by Prime Minister Modi, estimates say there is a requirement of 12 lakh jobs a month. How do you plan to fill this gap? KM: Our Ministry is conducting skill development programmes aimed at the entire value chain of manufacturing, starting from village industries to state-of-the-art manufacturing, in all key sectors such as engineering, auto component, etc. During FY2014-15, we have successfully trained about 8.37 lakh people through our various programmes across the country. 18 Tool Rooms and Technology Development Centres, under the MSME Ministry, are already providing both long and short-term training to more than 1 lakh youth. However, we accept, their present training capacity is much less than what is required for making our MSMEs globally competitive (in terms of state-of-the-art manufacturing technologies). Additionally, for the same reason, 15 new Tool Rooms are being set up with World Bank assistance during the 12th Five Year Plan period. TDB: Please tell us about your endeavours aimed at changing the fortunes of the MSME sector in the country? KM: We are determined to work for the welfare of the MSME sector in the country and in recent times, we have taken a number of initiatives to boost the growth and development of MSMEs in the country. After thorough consultations with various stakeholders, some of the important schemes that we are re-looking are Credit Guarantee Scheme, Credit Linked Capital Subsidy Scheme, Cluster Development Programme and National Manufacturing Competitiveness Programme. Further, the Ministry of MSME has been interacting with various ministries,
WE HAVE SUCCESSFULLY TRAINED 8.37 LAKH PEOPLE IN FY2015 48 THE DOLLAR BUSINESS II APRIL 2016
departments, state governments, banks and other stakeholders to streamline the mechanism for grant of loans, simplify labour laws and other procedures to facilitate the setting up of MSMEs. Worth mentioning here is our ‘Skill India and Make in India’ strategies that aim to facilitate investment, foster innovation, enhance skill development and build manufacturing infrastructure in the country. The real objective of this is to ease investment caps and controls to open up India’s industrial sectors to global participation. We believe, this is a well-drawn out strategy and is most relevant to our MSMEs. We plan to connect these initiatives and programmes through a conscious strategy of skill mapping, credit guarantee, and technological upgradation and clustering. One of the other major schemes of this Ministry is National Manufacturing Competitiveness Programme (NMCP), which we believe is important in achieving zero effect and zero defect manufacturing, whereby we are highlighting the need for enhancing the competitiveness of the Indian manufacturing sector by reducing their manufacturing costs through better space utilisation, scientific inventory management, improved process flows, reduced engineering time etc. This is determined by measuring the productivity vis-à-vis the use of its human capital and natural resources. TDB: Lack of innovative ways of running a business and entrepreneurship remains an area where Indian MSMEs lag far behind their global counterparts. Please tell us about the various ways you plan to learn from the success stories of global MSMEs? KM: Given the geographical diversity of India and its high reliance on agriculture, MSMEs could unquestionably be the lifeline of economic development and growth in the coming times for India. We are working closely with various international bodies for enhancing the capacity building of our MSMEs. Our International Cooperation (IC) Scheme is an ongoing scheme for technology infusion and upgradation of MSMEs and their modernisation and promotion
of exports. The scheme encompasses deputation of MSME business delegations to other countries for exploring new areas of technology infusion or upgradation, facilitating joint ventures, improving the market of MSMEs products, foreign collaborations, participation by Indian MSMEs in international exhibitions, trade fairs and buyer-seller meets in foreign countries as well as in India, having international participation, and holding international conferences and seminars on topics and themes of interest to the MSMEs. Apart from these, for the betterment of our MSME sector, we have inked many MoUs with European countries and going forward, I wish to say that we are committed to bringing in the latest skillset and technology from all parts of the world. TDB: Ease of access to finance is a big challenge for Indian MSMEs. How do you plan to get rid of this bottleneck? KM: Of late, many initiatives have been taken up by the Government of India in collaboration with Small Industries Development Bank Of India (SIDBI), across states for easy loan facilitation to the vulnerable segments like the micro and small entrepreneurs. Also, to mitigate the issue of risk perception amongst banks and facilitate enhanced credit, the government has in place, a Credit Guarantee Fund Scheme for micro and small enterprises – that provides guarantee cover for collateral free credit facilities to micro and small enterprises (MSEs). Under the scheme, guarantee cover is provided to collateral free credit facility extended by member lending institutions (MLIs) to the new as well as existing small enterprises on loans up to Rs.100 lakh. The scheme is being operated by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up jointly by the Government of India and SIDBI. SIDBI also has the Make in India Soft Loan Fund for Micro, Small & Medium Enterprises (SMILE Scheme). The objective of the scheme is to provide soft loans, in the nature of quasi-equity, and term loan on relatively soft terms to MSMEs to meet the required debt-equi-
ty ratio for establishment of an MSME as also for pursuing opportunities for growth for existing MSMEs. Focus will be on all the 25 identified sectors as mentioned in Make in India programme. TDB: How do you plan to counter the threat arising out of cheaper imports from China and other countries, and safeguard Indian MSMEs? KM: It is true that in many sectors, in which we traditionally had strengths, China is resorting to large-scale dumping. But then we should also not forget that India is very much a part of various multilateral trade agreements and Indian laws are accordingly shaped on the lines of international law. However, there is an anti-dumping Secretariat within the Department of Commerce which takes up anti-dumping cases. As per the current applicable law, our MSME units may appeal to the anti-dumping Secretariat with the necessary evidence against any country, including China. In case, any evidence is found against any particular country, then the matter can be taken up by the Department of Commerce and Ministry of Finance. TDB: Please tell us about your immediate priorities? KM: We are making efforts to streamline procedures for establishing an enterprise. In today’s changing times, we are fully aware of the reality that a start-up or entrepreneur not just needs easy credit on one hand but also basic infrastructure on the other, and hence we want to streamline the process of many of these formalities required by entrepreneurs (who largely come from MSME sector). Also, the government is working towards creating a more conducive environment to establish an enterprise with minimum difficulties. We have recently started Udyog Aadhaar Registration for universal online registration. This will help in streamlining many of our MSME related policies as our MSME units can now avail benefits of every scheme by registering on the website. We believe this initiative will also go a long way in bringing the unorganised sector of MSME into the organised sector, and thus help them grow at a faster pace. APRIL 2016 II THE DOLLAR BUSINESS 49
SPECIAL FEATURE
UNION BUDGET 2016-17
UNION BUDGET 2016: THORNS AND ROSES Finance Minister Arun Jaitley was his usual erudite self while presenting the Union Budget 2016 in Parliament, talking numbers and quoting verses with equal elan. While his Budget laid special emphasis on infrastructure and rural sectors, he also tweaked duty rates of several products to push ‘Make in India’. But will these new structures really give manufacturing a boost? The Dollar Business analyses BY INDRANIL DAS 50 THE DOLLAR BUSINESS II APRIL 2016
1,500 Multi Skill Training Institutes under ‘Skill India’ programme apart from allocating Rs.25,000 crore towards recapitalisation of public sector banks. He also reduced the customs duty and/or special additional duty (SAD) on several key raw materials/components, either to make them available cheaper to Indian manufacturers, address duty inversion, or address CENVAT credit accumulation, along with increasing the customs duty on a few items to make domestic manufacturing more competitive. With India being described as a ‘shining star’ in a gloomy global economic climate, Jaitley could proudly spout an impressive GDP growth rate of 7.6%. But at the same time, with elections round the corner in key states, the government had to be sensitive to political realities and yet the development agenda, being the plank on which the BJP came to power, could not be left behind. True to form though the Union Finance Minister consistently pushed Make in India, Prime Minister Modi’s key initiative to make India a global manufacturing hub. So, while Jaitley has put emphasis on road and rail infrastructure, ease of doing business, he has tried to rationalise corporate taxes and safeguard the domestic manufacturing sector through changes in customs duty and excise duty. But has he, really? And more importantly, how?
INFRA PUSH
T
he Union Budget, as is always the case, this year too was applauded by some (for maintaining a focus on infrastructure, rural development, and being within the fiscal target) and criticised by many (including the opposition, for being a budget with an eye on elections in key states). Nevertheless, the Union Budget 2016 was a budget where Finance Minister did give everyone something, via his ‘nine pillars of focus’. While he made a total outlay of Rs.2,21,246 crore for infrastructure and an allocation of Rs.87,765 crore to rural sector, he kept aside Rs.1,700 crore for setting up
A key pain point that has been brought up, time and again, by manufacturers and exporters is the lack of proper infrastructure and, hence, the high cost of logistics in India as compared to its peers globally. In fact, a report by the Indian Foundation of Transport Research and Training (IFTRT) states that developed countries spend about 9-10% of their GDP on logistics and transportation while India spends about 13-14%. This is largely a result of diverse geographic conditions and poor core infrastructure. And, not to say, has only put Indian products on the back foot in international markets. Finance Minister has tried to address this issue by allocating Rs.55,000 crore in the Budget for roads with additional Rs.15,000 crore to be raised by NHAI through bonds. Together with the capi-
AMENDMENTS MADE TO THE CENVAT CREDIT RULES 2004 HAVE RECEIVED WIDE ACCLAIM tal expenditure of the Railways, the total outlay on roads and railways will be Rs.2,18,000 crore in FY2016-17. He has also allocated Rs.800 crore to the National Waterways project which will go towards development of new ports and improving existing port infrastructure. According to Siddharth Jairaj, Director, TVS Dynamic Global Freight Services Ltd., the budget has struck the right note with respect to infrastructure development. “Improvement of infrastructure is one of the main requirements for growth and this has been highlighted time and time again. It’s a welcome move by the government. It will not only give a boost to infrastructure development, but will also create employment,” Jairaj tells The Dollar Business. Although the government has initiated the process of reorienting strategies and infusing funds to transform India’s major ports into viable and productive assets, the real change could still be hundreds of miles away.
EASING CREDIT FLOW
The Finance Minister has also proposed to amend the Cenvat Credit Rules 2004 with the purpose of improving credit flow and reducing the compliance burden and associated litigations, particularly those relating to apportionment of credit between exempted and non-exempted final products or services. Changes are also being made in the provisions relating to input service distributor, including extension of this facility to transfer input services credit to outsourced manufacturers, under certain circumstances. This seems to be a good move from Finance Minister as the amendments in these rules will not only improve the flow of credit, but will also minimise the cascading effect of tax on tax paid by manufacturers, thus providing a boost to Make in India campaign. In fact, one of the biggest benefits to APRIL 2016 II THE DOLLAR BUSINESS 51
SPECIAL FEATURE
UNION BUDGET 2016-17
manufacturers is that the definition of ‘capital goods’ has been expanded to include more products. For instance, the exclusion of ‘equipment or appliance used in an office’ has been deleted from Rule2(a)(A)(1). The effect is that such office equipment or appliance, if falling under chapters 82, 84, 85 and 90, or being components, spares or accessories of these though falling under other chapters, would now become eligible for taking Cenvat credit of the duties paid on them. Further, low-value capital goods, the value of which is up to Rs.10,000 per unit, have been included in the definition of ‘input’ with the effect that items that otherwise fall into the definition of ‘capital goods’ will now be treated as inputs for the purposes of Cenvat credit. This will enable full credit to be taken upon receipt of the goods, without the restriction of 50% in the year of receipt as applicable to capital goods. Also, the FIFO mechanism for utilisation of Cenvat, which was introduced in the Union Budget 2015, has been done away with. The FIFO rule had attracted negative reactions from the industry last year. With an eye to the realities of the time, and the present manufacturing landscape, the amendment to the Cenvat Credit Rules will enable manufacturers with multiple manufacturing units to maintain a common warehouse for inputs and distribute these inputs with credits to the individual manufacturing units. Industry bodies across sectors have welcomed these changes and believe that the new rules will lead to easier flow of credit and less confusion and hence less litigations.
A FARMER’S MARKET?
The Union Budget 2016 seeks to double the income of farmers in a five-year time frame. FM, in his speech, said that this is a move towards “giving farmers income security for the food security that they give the country.” With only around 46% land under irrigation and the rest dependent on the vagaries of monsoon the agri-commodities sector has seen tough times over the last couple of years, with prices of pulses and onions shooting up due to shortage in domestic production and becoming political flashpoints. India 52 THE DOLLAR BUSINESS II APRIL 2016
had to resort to imports of pulses and onions, causing a drain on the exchequer. In fact, agri-commodities exports have been on a continuous decline for the last 15 months, further hurting prospects for India’s exports growth. Now with FM announcing a term irrigation fund to be created in NABARD with a corpus of Rs.20,000 crore and bringing 2.85 lakh hectares under irrigation, agriculture may hope to no longer be dependent on monsoon. Also the target for agricultural credit has been raised upwards to Rs.9 lakh crore in FY2016-17 from the Rs.8.5 lakh crore in FY201516, and a provision of Rs.15,000 crore has been made for interest subvention to reduce the burden of loan repayments on farmers. A word of caution here, successive governments have announced measures to bring more land under irrigation, the implementation on the ground though is yet to be seen. But with the government trying to remove the tag of ‘suit boot ki sarkar’ and giving priority to the agricultural sector, we may see exports of agri-commodities rising. Meanwhile the cashew industry received a jolt in the form of a 5% Basic Customs Duty (BCD) on cashew nuts in shells (HS Code: 08013100). Earlier, the BCD on imports of cashew nuts in shells was ‘zero’. This has created a furore amongst cashew processing units across the country. “The duty would sound the death-knell for the cashew processing industry in the country,” says Karnataka Cashew Manufacturers Association President Bola Rahul Kamath. And why not? With 5% BCD, 4% special additional duty (SAD) and a 3% education cess, the total duty on imports of cashew now comes to 9.27%, turning the books of several small cashew processing units into red. Interestingly, India does not produce enough cashews to meet its domestic demand and as such relies on its imports – India imported a total of 9.75 lakh tonnes of cashews in FY2015, up from 9.07 lakh tonnes in FY2014. Chairman of Cashew Export Promotion Council of India (CEPCI), P. Sundaran, reacting to the Budget announcement says that the import duty would adversely affect the cashew processing industry in India. “We have lost the
EXPORTS OF PROCESSED CASHEW COULD SUFFER DUE THE LEVY OF A 5% BCD ON CASHEW NUTS competitive advantage. The government should introduce enough incentives for exports to mitigate the impact,” he tells The Dollar Business. The cashew processors and exporters in the country have been passing through tough times owing to an increase in prices of raw cashew nuts against declining prices of finished product in international markets. As per CEPCI, at inflated prices of raw nuts, processing and exports will become unviable and might lead to closure of many factories. Interestingly, exports of cashew nuts (shelled) from India (HS Code: 080132) have fallen from $913.86 million in FY2012 to $887.46 million in FY2015. With input costs rising, it is likely that exports of cashew nuts will suffer more in days to come.
MAKE IN INDIA
As in last year’s Budget, ‘Make In India’ found several mentions in this year’s Budget speech too. In fact, this year’s Budget makes in pretty clear that the Narendra Modi government has made up its mind about a larger share of manufacturing in GDP, with the programme being its primary tool to take the country on a high growth trajectory. “Incentivising domestic value addition to help ‘Make In India’ was one of nine pillars on which the Budget 2016 was based.” So, making an attempt to correct the prevalent inverted duty structure, which has been hurting the domestic manufacturing since long, FM reduced customs duty and/or special additional duty (SAD) on several key raw materials/components across sectors, while increasing it in the range of 2.5% to 10% on many finished products. For instance, in textiles (Chapter 54 and 55), BCD on specified fibres and yarns have been reduced from 5% to 2.5%. The products included under this
facility are nylon 66 filament yarn, Polyester anti-static filament yarn, aramid flame retardant fibre, para-aramid fibre, nylon staple fibre, nylon anti-static staple fibre, modacrylic fibre and flame retardant viscose rayon yarn. This measure will not only help in bringing down the input cost for several technical textiles manufacturers in the country, but will also make its exports from India more competitive globally. Technical textile holds enormous export potential with demand for it being high from the developed countries. India, however, has been lagging behind its peers – Vietnam and Sri Lanka – in this product category. R. K. Dalmia, Chairman, Texprocil, too welcomes the move and says, “this should make exports from India more competitive.” However, the textile industry is unhappy about the 2% excise duty that has been levied on branded readymade garments [falling under Chapters 61, 62 and 63 (heading Nos. 6301 to 6308), except those falling under 6309 00 00 and 6310] above a value of Rs.1,000. Animesh Saxena, Managing Director of Neetee Clothing, talking to The Dollar Business says, “The excise duty on readymade garments has increased, the tariff value enhanced and even the basic fibre used (PSF / PFY) is proposed to be taxed at a higher rate. This is definitely going to
OTHER KEY HIGHLIGHTS OF THE UNION BUDGET 2016-17 A term irrigation fund to be created in NABARD with a corpus of Rs.20,000 crore. Government to set apart Rs.412 crore to encourage organic farming. Rs.38,500 crore allocated for MNREGA in FY2016-17. It will be the highest ever if entire amount is spent. Shops to be allowed to open on all seven days of the week. Total outlay for infrastructure at Rs.2.21 lakh crore for FY2016-17. Rs.450 crore allocated to Sagarmala project that is aimed at port-led development in coastal areas. A new credit rating system to be developed for infrastructure. More FDI reforms proposed in insurance, pension, asset restructuring companies and stock markets. Government to allow 100% FDI through FIPB in the marketing of food products produced and manufactured in India. Excise duty of 1% imposed on articles of jewellery excluding silver. 1% infra cess on small petrol/LPG/CNG cars (till 1200cc), 2.5% on sub-4 metre diesel cars till 1500cc. Additional 1% tax on luxury cars and 4% on higher capacity sedans, MPVs and SUVs Rs.25,000 crore to be provided for recapitalisation of public sector banks. Government to introduce bill to amend Companies Act for ease of doing business. Government to enable registration of companies in a day. New manufacturing companies incorporated after March 2016 will be given option of being taxed at 25% plus cess plus surcharges. Start-ups to get 100% tax exemption for 3 years except MAT which will apply from April 2016-2019 for creation of jobs. 0.5% Krishi Kalyan Cess to be levied on all services.
APRIL 2016 II THE DOLLAR BUSINESS 53
SPECIAL FEATURE
UNION BUDGET 2016-17
impact the textile industry in the country and will affect the cost structure of the entire value chain of the readymade garments industry.” The electronics and technology hardware industry has also received a significant ‘Make In India’ push. The duty structure for the mobile phone industry has been modified to dis-incentivise semi knocked down (SKD) manufacturing of mobile phones. SAD exemption on charger, adapter, battery and wired headsets, speakers for use in manufacture of mobile handsets including cellular phone has been withdrawn. Also, import of populated printed cir-
cuit boards (PCBs) by manufacturers would now attract a 2% duty. The same is the case with E-Readers. However, interestingly, BDC and CVD has been exempted on inputs and parts for manufacture of charger, adapter, battery and wired headsets, speakers of mobile handsets including cellular phone and inputs and sub-parts for use in manufacture of parts of charger, adapter, battery and wired headsets, speaker. BCD on parts and raw material for manufacture of E-readers is being reduced to 5% subject to actual user condition. The intention appears to be to create a manufacturing ecosystem through a process
of backward integration. While this may be a step in the right direction what also needs to be seen is whether the indigenous mobile phone manufacturing industry is capable of ‘Making in India’. Pardeep Jain, Managing Director, Karbonn Mobiles in a statement said, “This is disheartening and is likely to stifle the growth of Indian smartphone players and impact their price competitiveness. The parts and components ecosystem in the country is still in its nascent stage. Government should have allowed for a gestation period for local handset players to strengthen their manufacturing capabilities
“BUDGET 2016 HAS MANY POSITIVES” TDB: Hyundai Motor India recently used the sea route to ship cars within the country. What is your expectation from coastal shipping on which the Finance Minister has put a lot of emphasis in the recent Budget? Siddharth Jairaj (SJ): This is definitely a step in the right direction. India has tremendous potential to utilise coastal shipping mode of transport. This will not only address the issue of traffic congestion, but will also help in reducing carbon footprint. Even other stakeholders are offering incentives to further this cause. The government is actively promoting coastal shipping and ambitious Sagarmala project is a step in this direction. Because of this, savings of about Rs.20,000 crore are expected on logistics cost in the next ten years. TDB: There has been a significant allocation in the Budget towards building new roads. How will this impact the logistics industry? SJ: Improvement of infrastructure is one of the main requirements for growth and this has been highlighted time and time again. It’s a welcome move by the government. It will not only give a boost to infrastructure development but also create employment. This will definitely have a positive impact on logistics sector with regards to the ease of doing business. 54 THE DOLLAR BUSINESS II APRIL 2016
TDB: A report by the Indian Foundation of Transport Research and Training (IFTRT) says that developed countries spend about 9-10% of their GDP on logistics and transportation while India spends about 13-14%. By when do you think this expenditure will fall and we would have good and developed logistics and transportation sector? What needs to be done at the policy level to bring these costs down? SJ: It is a well known fact that logistics cost in India is much higher than other parts of world. Most seaports and airports in the country are privatised and are reasonably efficient. However, in most major ports in India, the infrastructure, roads leading to ports, the time taken to enter the ports, check post and toll booth all add up significantly pushing up overall logistics cost. Combination of rail and coastal shipping will definitely bring down the cost of logistics. With simplification of documentation process and implementation of Goods & Services Tax we expect this cost to come down in near future. TDB: Starting FY2016-17, Customs single window project will be implemented at all major ports and airports across India. How will companies like yours benefit from such projects? SJ: TVS has been a part of a group, working with the Customs Department and a high-level delegation, representing key
Siddharth Jairaj
DIRECTOR, TVS DYNAMIC GLOBAL FREIGHT SERVICES LTD.
aspects of the industry in benchmarking global customs processes and procedures, and trying to further simplify this process. We have submitted our report comparing dwell time of cargo in US, Europe, Asia and Australia. The authorities have also been very open when it comes to receiving inputs and suggestions from various industry bodies. All I can say now is that we are moving in the right direction. The single window system will further simplify the transaction system, which will result in ease of doing business.
before withdrawing tax exemptions on completely built units.’’ As exemplified by Jain, this brings into question how the new mobile phone manufacturers in the domestic market, who do not have requisite technology and manufacturing wherewithal cope in a competitive market. It seems the much in the news ‘Freedom 251’ phone, whose cost structure had raised questions of feasibilty, will remain a pipe dream. Chinese mobile phone manufacturers, with their low cost structures, will keep giving indigenous manufacturers a hard time. Coming to the engineering sector, customs duty has been raised from 5% to 7.5% on primary aluminium products falling under HS Codes: 7601, 7603, 7604, 7605, 7606 and 7607, and from 7.5% to 10% for other aluminium products [HS Codes: 7608 and 7609]; and for zinc alloys [HS Code: 790120] from 5% to 7.5%. While this will help protect large domestic manufacturers, the MSME sector will suffer. Naveen Jain, Managing Director, Dayachand Engineering, a Muzaffarnagar-based manufacturer says, “For aluminium alloys and zinc alloys the enhancement in BCD is a negative with respect to smaller players. How will this encourage ‘Make in India’ for MSMEs in electrical and other aluminium based sectors is anybody’s guess?” With respect to increase in BCD on primary aluminium from 5% to 7.5% it is interesting to note that India’s trade surplus in this item has risen significantly from $14 million in CY2011 to $744 million in CY2015. This increase also comes at a time when hit by the slowdown in China, the largest consumer of aluminium, smelter capacity use worldwide is down by a third. Hindalco, the country’s largest aluminium maker, had also announced the closure of their smelter in Hirakud, while Balco, part of the Vedanta Group, the other large player in the industry had also started shutting its rolling mill in Korba, Chattisgarh. In this state of affairs, it is but obvious that major aluminium makers are happy with this hike in duty with T. K. Chand, Managing Director, Nalco hailing the move as a positive step towards protecting the domestic industry from cheap imports. It seems the government has sought
BCD changes in Union Budget 2016 that will have a big impact Electric motor, used in agriculture Cashew nuts in shell Denatured ethyl alcohol Iron ore lumps (below 58% Fe content) Iron ore fines (below 58% Fe content) Bauxite (natural), not calcined Super Absorbent Polymer Pulp of wood Specified fibres, filaments/yarns Primary aluminium products Other aluminium products Zinc alloy
to give ‘Make in India’ a boost through rate changes in customs duty, however across sectors there is a feeling that only large manufacturers will benefit from the changes in duty structure and MSMEs feel betrayed by the budget. With MSMEs accounting for 40% of total exports it is difficult to see how the decline in exports over the last 15 months can be arrested by this Union Budget.
BOOST TO MRO
To stem the outflow of foreign exchange and give a boost to the Maintenance, Repair and Overhaul (MRO) industry, the Budget has exempted tool kits used for maintenance, repair, and overhauling of aircraft from both customs and excise duties. And it was the need of the hour given that a $600-700 million MRO business is going out of the country. In fact, in an exlusive interaction with The Dollar Business, Ashok Gajapathi Raju, Union Minister for Civil Aviation, GoI, too raises this issue. “MRO issues need to be addressed because that will generate a lot of jobs. As of now, barring the public sector airlines, private airlines are going abroad for their routine maintenance. They are going to places like Singapore, Dubai and Sri Lanka. From Indian players point of view, it’s a $600-700 million business going out of the country. The impediments seem to be from two sides, as far as GoI is concerned – one is the service taxes and the other is Customs duties.” The finance bill also allows foreign aircraft brought to India for MRO work to stay up to 6 months or as extend-
2015 12.5% 0 5% 30% 10% 20% 7.5% 5% 5% 5% 7.5% 5%
2016 6.0% 5.0% 2.5% 0 0 15% 5.0% 2.5% 2.5% 7.5% 10.0% 7.5%
BASIC CUSTOMS DUTY ON PRIMARY ALUMINIUM PRODUCTS INCREASED FROM 5% TO 7.5% ed by the DGCA. The aircraft can carry passengers in the flights at the beginning and end of the stay period in India. This is expected to bring in foreign carriers to the Indian MRO market, providing a boost to the Indian civil aviation industry by creating an alternative revenue streams.
A FINE BALANCE
Arun Jaitley had mentioned in his Budget speech that the theme of the Budget was to “Transform India”. It does seem that the government has the right intentions, from the many changes introduced in both direct and indirect taxes as well as allocations towards the rural and infrastructure sector. While in a democracy there will always be political compunctions (and with elections in key states coming up soon it was necessary to play to the vote bank), the government has also remained focussed on its development agenda. But when it comes to transforming India, only time will tell if the Budget 2016 will be able to do that by making India a global manufacturing hub and stem the tide of declining exports from the country. APRIL 2016 II THE DOLLAR BUSINESS 55
IMPORTO’NOMICS
SAFFRON
HOW (SA)FROWN CAN MEAN A SMILE! The world’s most expensive spice, saffron is worth more per ounce than many precious metals. This small member of the lily family entices any chef. It is known to have healing powers too and enhances quality of your skin. Inarguably the most exotic of all spices, saffron is lucrative enough to be smuggled across borders. That of course, doesn’t mean that you can’t make a fortune by legally importing it! BY MANISHA CHOUDHARI
N
o Mughlai feast in India is complete without biryani! With its mouth-watering aroma, and splendid golden yellow colour, this delicacy has always been a treat – not just for your eyes, but also for your taste buds! But ever thought what makes biryani so exotic and desirable? It’s the most premium of all spices – saffron!
AROMA EVERYWHERE
And not just biryani, these red bulbous stigmas of saffron crocus (the flower) add special touch – from colour to flavour to fragrance – to cakes, kheer or any Indian sweet. In fact, not just India, saffron forms an integral part of Spanish Paella, Italian Risotto, and Iranian sweet Sholeh Zard, and many more such delicacies across the globe. There is really
no substitute whatsoever for saffron in terms of taste and fragrance! Why just stop here? Apart from being the valuable culinary ingredient, this precious spice – popular as Red Gold – has innumerable health benefits. It works as an antioxidant, an antidepressant, helps do away with sleep problems. What’s more? This super premium spice has aromatic essence and is used to enhance quality of skin. No wonder the Egyptian queen Cleopatra bathed with this exotic spice to boost her charm. Not to forget, this premium spice is also known to not only boost vitality, but also works wonders when it comes to healing wounds. In fact, Macedonian king Alexander the Great was noted to take saffron-infused baths as a curative to heal battle wounds. Besides, saffron also forms part of offerings to gods in
India’s saffron imports
A fall in production of saffron has resulted in increased imports over the years 12 10 8 6 4 2 0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Commerce Ministry, GoI; figures in $ million
56 THE DOLLAR BUSINESS II APRIL 2016
Hindu rituals. Still not amazed by little spice’s omnipresence? Here’s some more. Saffron also features in some gins. Remember ‘Kesar Kasturi’, the royal saffron liquor from Rajasthan? Did you know that the Buddhist monks traditionally dye their robes with turmeric or saffron? Its strong colours make saffron the product of choice in the dyes (also edible dyes) industry. It is also used as a raw material in several processed food products like biscuits, jams, pan masala, etc.
THE COVETED SPICE
Given its medicinal properties and innumerable applications, it’s a no surprise that saffron is regarded as the most valuable of all spices. No wonder, this is one of those products that also falls under the high-risk, high-reward category – as supplies are scant, the product can be sold at a super-premium prices. So what makes it so valuable and vulnerable at the same time? It is due to the intensive labour that goes into its cultivation and harvest. From planting of the bulbs to picking of the flowers (crocus sativus) to removal of stigmas and stamens, and then packaging (as threads or in powder form) – everything is done by hand. If industry experts are to be believed, it takes nearly 150-160 flowers to produce one gram of saffron. The red saffron threads that we usually see are actually the dried stigma of the saffron flower, which are handpicked.
India’s biggest saffron suppliers
Afghanistan has emerged as the biggest supplier in 2015 surpassing Iran & Spain
2.26% 3.98% 93.72% 0.04%
Profit estimates for saffron imports
Inadequate production of saffron in India means steady margins for its importers Buying price ($/Kg) * Freight & Insurance ($/Kg) ** CIF ($/Kg) CIF (Rs./Kg) *** Basic Duty (30%) CIF + BD CVD (0%) Basic Duty + CVD Cess (3%) CIF+Basic Duty+Cess+CVD ACD (4%) Final Cost (INR) Selling Price in India (INR) Profit (INR) Profit Margin (%)
1,749.00 12.44 1,761.44 1,18,897.72 35,669.16 1,54,566.36 0.00 35,669.16 1,070.07 1,55,636.43 6,225.46 1,61,861.89 1,80,000.00 18,138.11 10.08
* Saffron filament; HS Code: 09102010 ** Freight and insurance cost from Kabul, Afghanistan to New Delhi, India; Minimum order quantity (MOQ): 1 kg ***Assuming USDINR at 67.50 Important disclaimer: Profitability has been calculated based on time-bound indicative prices (prevalent during the second week of March 2016). Prices may vary during a different time period, resulting in profit fluctuation. Factors like brand value, supply chain-related costs like warehousing and logistics, administrative costs, sales and advertising costs, etc. have not been included in the cost of procurement. Margins have been calculated considering government policies (announcements, notifications, etc.) as on March 15, 2016. Risk factors and currency fluctuations have to be considered while importing. Calculations have been provided for informational purposes only; The Dollar Business takes no responsibility for any loss resulting from investments in the said commodity/product. Though all efforts have been made to ensure the accuracy of the content stated herewith, the same should not be considered a statement of law or used for any legal purposes. Prior permission is required before calculations stated herein are published or quoted in a third party web or print property.
Each flower produces three red stigmas or strands, which are then dried to get the red saffron threads we commonly see. The yellow stamens, on the other hand, are primarily used as colourants. It is the colour of the saffron thread that also defines its flavour.
PREMIUM TRADE TAG
All this accounts for saffron’s fascinating cross-border trade. And it’s Iran that accounts for most of the production of saffron in the world. In fact, nearly 70%
of the saffron in the world comes from Iran, thus making it the world’s largest exporter, followed by Spain. The world’s largest importer of saffron is the United Arab Emirates. UAE’s love for the red threads can be gauged from the fact that it imported saffron worth $109.9 million in CY2014, accounting for about 38% of world’s imports of saffron. India too is no stranger to the spice. In India, saffron is mainly produced in Kashmir. Interestingly, India also exports nearly 50% of the total produce.
Afghanistan
Iran
Spain
Others
Source: International Trade Center; breakup for CY2015
While Iranian saffron is considered to be of premium quality, those in the trade also regard Kashmiri saffron of similar standard. “While there is not much difference in the form, Iranian saffron has a very strong colour. However, there is a subtle difference in flavour and fragrance – Kashmiri saffron is a lot stronger in those aspects,” says Riyaz Ahmad, a producer of Kashmiri saffron.
IMPORTS POURING IN
Despite being a prominent producer of the premium spice, India is dependent on saffron supplies from Iran, Afghanistan, Spain, etc., to satiate its domestic demand. What’s more? Owing to a fall in saffron production in Kashmir over the years, there has been a significant rise in its imports into India, so much so that we are now the seventh-largest importer of saffron in the world. And interestingly, India’s neighbour Afghanistan has emerged as its biggest supplier to India in CY2015 (accounting for 93% of India’s total imports of the spice), replacing Iran (which till last year was the biggest source of India’s saffron imports) which has been relegated to the third spot behind Spain. Even a fairly high import duty on saffron (36.136% from non-FTA partners) has not stopped its imports from moving northward – from imports of just $0.91 million in FY2005 to imports worth $10.10 million in FY2015, a whopping growth of 1,010% over the last decade. The increased imports of saffron can be attributed to the declining trend in the production in Kashmir, which accounts APRIL 2016 II THE DOLLAR BUSINESS 57
IMPORTO’NOMICS
SAFFRON
for about 90% of India’s total saffron production. According to industry sources, the area under saffron cultivation in Kashmir has declined from 5,707 hectares in 1996 to 3,700 hectares in 2015. Plummeting production coupled with rising domestic consumption has made space for imports from other countries. “The demand for saffron is increasing by each day. Kashmir produces 10% of
India’s total consumption and other 90% comes from overseas markets,” echoes Ahmad and goes on to add, “We face issues in transporting saffron across India. In fact, there have been times when the entire consignment got stolen!” Infrastructure and logistics issues remain rampant, and provide an impetus to saffron imports as it is easier at times to source the product from overseas than
sourcing it from Kashmir.
MONEY SPINNER
The spice is so lucrative a commodity that people have even taken to its smuggling in India. When it comes to profit margins, they are known to vary with variety and the source of origin. In words of Rohit Saxena, a Karnataka-based importer of Spanish saffron, “Our buying price is
About 1 lakh flowers are needed to obtain 1 kg of saffron. It’s the size of individual stigmas that decides the quality of saffron.
“SAFFRON MISSION WAS GOOD, BUT IT FAILED MISERABLY”
Riyaz Ahmad
PROPRIETOR, SUPREME TRADING CORPORATION 58 THE DOLLAR BUSINESS II APRIL 2016
TDB: What, according to you, is the reason behind the fall in production of saffron in Kashmir? Riyaz Ahmad (RA): There are certain issues in Kashmir, the major being lack of irrigation facilities. If we maintain proper water in fields, saffron will grow. Apart from irrigation, there are other factors but then they are not as important as irrigation issue. The government also comes out with schemes such as the Saffron Mission, but they are of no use. They showed us how to sow seeds and all, but the scheme failed miserably. Production has been falling since 2010. We had a flood in 2014, which was bad, as too much rain also harms crops. So, we need a better sewage system as well.
TDB: What varieties do you sell? Which ones are most in-demand? RA: There are three types of saffron. The first is the raw form, called Lacha, which is acquired by pan masala, ghutka and ayurvedic companies. Mongra is the processed form, which is found in wholesale markets – the red threads that we usually see. This is most in demand. The last type is zarda, which is the yellow stamen of the saffron flower. This again, is used by ghutka companies. TDB: What can be done to increase saffron production in Kashmir? RA: We are very dependent on the government; without them, it is very difficult to go about our business. The Saffron Mission was unveiled with good intentions, but it somehow tanked. As I mentioned earlier, we need better irrigation facilities to boost production.
60-70% higher than our other counterparts due to a number of challenges and thus margins are adjusted accordingly”. According to Saxena, cities such as Delhi, Kolkata, Mumbai and Bangalore have a very high demand for saffron in India. When The Dollar Business contacted Avneesh Chhabra, Partner, Baby Saffron (one of the biggest importers of saffron in India) and quizzed him on the margins available in this trade, he said, “I don’t want to talk about import margins, as it’s a confidential matter.” Either there’s a trade secret that Chhabra isn’t disclosing, or he’s concerned about having to split the market with other players in future.
A HELPING HAND
In order to boost production of saffron in India and its promotion overseas, the Ministry of Commerce, GoI, has approved the formation of the Saffron Production & Export Development Agency (SPEDA). This move to set up an exclusive agency for saffron is expected to address numerous challenges that saffron farmers and exporters face in Kashmir, the biggest producer of saffron in India. It must be recalled that in November 2010, the then government had launched the Rs.373 crore National Saffron Mission in an attempt to revive saffron production in Kashmir. The Mission aimed to develop a suitable system for organised marketing, pricing based on the quality, and to help instigate direct contact between the farmers, traders, exporters and other industrial agencies involved in the saffron business. In addition to this, it also attempted to tackle problems like pest infestation in fields, depletion of nutrients in the soil of the saffron fields, and the issues of adulteration in the final product. In October 2015, the Mission was extended for two years, but the need of the hour is greater government engagement with farmers and producers in Kashmir on making the National Saffron Mission work, in addition to providing viable infrastructure and logistics options for safe distribution of the product. Saffron’s versatility as a spice is what makes it omnipresent – from Arab cuisines to Indian sweets, from dyes to
beauty products. It is due to this popularity and the increasing globalisation of Indian food that makes India’s consumption of saffron increase by every single day, while production remains stagnant.
Despite the Saffron Mission, Indian saffron producers have a long way to go before they start matching domestic consumption. Until then, importers are bound to rule the Indian market.
“GOVERNMENT SHOULD REDUCE IMPORT DUTY ON SAFFRON” Rohit Saxena, FOUNDER & CEO, MAAISH INC. TDB: What factors have accounted for increased imports of saffron, despite Kashmir being a prominent producer in India? Rohit Saxena (RS): The main factor that has brought about a rise in imports, in my opinion, is that the quality of Spanish saffron is far better than the saffron produced in Kashmir – the texture and flower dust is minimal with best content and, above all, it is lab tested as Grade-I with international recognised standards. TDB: Could you tell us more about Spanish saffron? RS: Saffron colour scores or grades are measured at certified testing laboratories worldwide using photo spectroscopy reports. These colour grades range from grades lower than 80 (for all category IV saffron) up to 190 or greater (for category I). With a certified colour score of 200+, Spanish saffron is one of the best types of saffron available in the world. Elite quality Spanish “Coupe” saffron is so good you just need to follow the adage “less is more” when using it, as just a pinch will go a very long way. In comparison, saffron with an ISO rating of Category II (150-170 colour score) yields just 1/4th the potency. TDB: How challenging is it to compete with sellers of other varieties? RS: It is very tough to compete with cheaper variants from Kashmir, and the further cheaper ones from Iran. The first thing we have to do is to make customers aware of the quality of our product, and then explain the advantages to them. A single thread of Spanish saffron can bring the same taste and
colour as 4-5 threads of its counterparts. In this way, Spanish saffron, despite costing more upfront, is actually more cost effective! TDB: What hurdles do you face when it comes to importing saffron? RS: High import duty and other taxes which amount to almost 35-40% of the cost and lack of friendly policies from the government for importers of exquisite and exotic spices are some of the major hurdles that we have been facing for quite some time now. TDB: How can the government help? RS: The government can help us by reducing the duty on saffron. A single window clearance and a reduction in the number of permits required to be a reseller would also be very helpful. TDB: Do you think India can increase its saffron production? If so, how? RS: Firstly, we need to bring in some standardisation in the testing process of saffron threads. Secondly, there is a need for hi-tech production and processing techniques in order to make Indian saffron competitive. Thirdly, government as well as other stakeholders need to keep a close watch on adulteration in saffron, which is a major concern as it creates doubts in minds of international buyers. As Kashmir is the only region in India that produces saffron, we need to build a stable and secure geo-political environment both for farmers and traders in the region. Additionally, marketing of Indian saffron needs to be improved upon. All these measures will help increase the production of saffron in India. APRIL 2016 II THE DOLLAR BUSINESS 59
THE MIDAS TOUCH
IMITATION JEWELLERY
IMITATION: SOCIALLY WRONG. ORNAMENTALLY RIGHT. Across the globe, imitation jewellery made in India has found popular acceptance as a fashion accessory. And with the government’s latest move to increase basic customs duty on imported imitation jewellery by 5% assuredly complementing benefits to exporters like 5% MEIS and up to 7% Drawback, exportmanufacturing of this category is bound to grow in months to come. BY VANITA PETER D’SOUZA
T
ired of repeating your regular pair of gold earrings to every wedding function? Looking for some fresh piece of jewellery [and within your budget!] every time you step out of your house? The answer might be hidden in a fashion store next door. With gold and diamond prices shooting through the roof, imitation or fashion jewellery is the choice of the hour. It’s fun to wear, comes with a wide range, within your budget, and of course, adds glitter to your fashion statement. Even when it comes to business, imitation jewellery has surely got some dazzling future. The reason is simple. Imitation jewellery is gaining popularity across the globe and if you can measure the market pulse well, its exports can fetch you big moolah. According to RNCOS, a business consulting firm, the imitation jewellery market in India is ex60 THE DOLLAR BUSINESS II APRIL 2016
pected to grow at a CAGR of about 20% during 2013-17. What’s more? India is also one of the fastest growing exporters of imitation jewellery in the world.
SELLING EVERYWHERE
India is the world’s second-largest manufacturer of imitation jewellery after China and its eighth-largest exporter. If the government data is anything to go by, India’s exports of imitation jewellery bloated by almost 72% in FY2012 to $313.72 million from $181.64 million in FY2011, with majority of shipments going to US, UK, UAE and Iran. After touching a high of $337 million in FY2013, exports slipped to $283 million in FY2015. However, exports are once again picking up and India in the first nine months of the current fiscal has shipped imitation jewellery worth $205.90 million across the globe. While the drop in exports is being
attributed to the global slowdown, Imitation Jewellery Manufacturing Association (IJMA), is hopeful that the exports will eventually pick up. “We are slowly recouping from this meltdown and we are pretty much sure that we would be able to recover quickly,” says Nagendra Mehta, Secretary, IJMA. Those in the trade indicate that profit margins of 10% and above are still quite achievable. And then there are dedicated B2C e-commerce platforms that are creating a direct connect between Indian sellers and foreign buyers, making it possible for even micro-manufacturers to access export markets. While the shine of India’s non-precious jewellery continues to attract customers from US, France, Germany, UK and the Middle East, demand for the same from our neighbour – Pakistan – has grown manifold over the last few
“MIDDLE EAST MARKET HAS A LOT OF POTENTIAL” Profit estimates for exports of imitation jewellery
5% MEIS plus upto 7% Drawback ensures double-digit profits for exporters! Cost of Production (INR/unit)* 945.0 FOB Value (INR/MT)** 1,050.0 Operating Profit 125.0 Operating Margin (%) 11.11 *Bangles made of copper & brass, studded with white artificial stone; high quality gold polish and non allergic (HS Code: 71179090); cost of production factors exclude incentives (MEIS of 5%) and subsidies (like Duty Drawback of 7% with a cap of Rs.150 per kg when Cenvat facility has not been availed); ** FOB Nhava Sheva ***Minimum Order Quantity (MOQ): 1,000 units Important disclaimer: Profitability has been calculated based on timebound indicative prices (prevalent during the second week of March 2016). Prices may vary during a different time period, resulting in profit fluctuation. Factors like brand value, supply chain-related costs like warehousing and logistics, administrative costs, sales and advertising costs, etc. have not been included in the cost of production. Margins have been calculated considering government policies (announcements, notifications, etc.) as on March 15, 2016. Risk factors and currency fluctuations have to be considered while exporting. Incentives have not been factored in while calculating indicative profitability. Calculations have been provided for informational purposes only; The Dollar Business takes no responsibility for any loss resulting from investments in the said commodity/product. Though all efforts have been made to ensure the accuracy of the content stated herewith, the same should not be considered a statement of law or used for any legal purposes. Prior permission is required before calculations stated herein are published or quoted in a third party web or print property.
years. However, many in the trade like Bhupesh Mahajan, a Delhi-based jewellery trader, are a little apprehensive while exporting to Pakistan. “There’s a constant fear trading with the neighbour without any trade pact. If any such agreement is signed in future, Pakistan can emerge as a top export market for Indian jewellery,” he tells The Dollar Business.
THE CHINA CHALLENGE
If Pakistan holds the potential to be the largest market for India, China is already a supply threat to the Indian imitation jewellery industry. Being the world’s top exporter in this category, China is a fierce competitor in the global market. In fact, China exported imitation jewellery worth $2.65 billion in CY2015, almost 10 times more than what India exported during the same year. And not just our exports, China is also
TDB: Give us a gist of the various types of imitation jewellery available in the market? What kind of raw materials go into the making of these products? Bhupesh Mahajan (BM): The horizon of the imitation jewellery is vast and consists of a huge range. You can fit in a lot of raw materials – beads, metal, imitation stones, CZ crystals, etc. We are mostly into 14 and 18k gold jewellery, sterling silver jewellery, semi-precious jewellery, beads and metal jewellery. We majorly use brass as other metal alloys might be unsafe for certain skin types. Since we are primarily into exports, we have to follow safe practices as per the norms accepted internationally. There are strict norms in the international market with regards to nickel content in jewellery pieces, hence we always abide by those norms. TDB: Imitation jewellery export is trending downwards. What do you think is the reason behind this? BM: There are two reasons. Firstly, markets, especially in the fashion segments, change according to the trends. Something which is in fashion today may not be in fashion tomorrow and then it may come back to fashion after sometime. Most of our manufacturers do not study the trends and change accordingly. Secondly, the slowdown in global economy is also a reason why the exports are not doing well. TDB: In recent Union Budget, FM Arun Jaitley increased the Customs duty on imitation jewellery imports. Do you think domestic players can benefit from it? BM: Eventually, they would. China has had a monopoly in the imitational jewellery market. Duties were not only low, but a lot of traders also used to smuggle the goods too from China and neighbouring countries. People selling this substandard Chi-
Bhupesh Mahajan
MANAGING DIRECTOR, VOGUE CRAFTS & DESIGNS PVT. LTD.
nese jewellery make 5-6 times more margins than us. TDB: Tells us about your export markets. BM: We export to US, UK, Europe and Australia. We see the Middle East as an upcoming market. This zone has always been into precious gems and jewellery, but now there is a growing craze of imitation jewellery. Pakistan is also a potential market. But the only problem between India and Pakistan is there are hardly any trade agreements and, hence, there is always a level of apprehension. TDB: Have your buyers ever complained about the quality of Indian imitation jewellery? BM: Some exporters make false commitments to clients just to beat the competition. When the order is due for dispatch, manufacturers start giving excuses and seek extensions or eventually deliver defective goods to meet the timelines. At times, if the order is ready there is no quality check on it and, eventually, these buyers stop giving business. This is why we have a strict in house quality check process to make sure only the promised quality is delivered. APRIL 2016 II THE DOLLAR BUSINESS 61
THE MIDAS TOUCH
IMITATION JEWELLERY
eating up India’s domestic fashion jewellery market with low-priced Chinese imports. In fact, 65% of the imitation jewellery imported into India is from China. It was only recently that the sector got an impetus as the Finance Minister Arun Jaitley, during the Union Budget 2016,
hiked the Customs duty from 10% to 15% on imports of imitation jewellery. However, the domestic players feel that such measures would have a very limited impact on the sector as the importers often under-invoice their bills or resort to smuggling jewellery from China. The
Top export destinations for India’s imitation jewellery
World’s biggest exporters of imitation jewellery
Exports could cross $300 million in 2016
MAKING IN INDIA
Not surprisingly, China tops the chart
35 14%
30
7%
6%
25
5% 5%
20
4%
29%
15
4% 3%
10
3%
20%
5 0
USA
UK Pakistan
UAE Iran
Malaysia
Source: Ministry of Commerce, GoI, Data for FY2015-16 (April-Dec.); figures in $ million
Imitation Jewellery Manufacturers Association (IJMA), welcomes the rate hike but expects more action from the government. “We have sent proposals to the government about the malpractices prevailing in the industry. We hope that the government will take necessary steps to restrict these malpractices,” says Mehta.
China Hong Kong France Austria Italy Thailand USA India Singapore Germany Others Source: International Trade Centre; breakup of CY2014; HS Code: 7117
Even as the sector is truly living up to the spirits of ‘Make in India’, those in the trade have their own set of challenges and issues. Bhupesh Mahajan, Managing Director of Vogue Crafts, who procures brass (a base metal used for making imitation jewellery) from Moradabad a.k.a the ‘Brass City of India’ or from the lanes of Old Delhi, says it is not an easy job to purchase brass. “The problem is, if we go to factories to procure brass we have to order in bulk. Storing brass in huge quantities might not be a good idea as it can depreciate. Stocking up is not viable. Ulti-
“UNDERINVOICING OF 90% IS DONE ON CHINESE IMPORTS!” TDB: There has been a slowdown in the global economy. Have imitation jewellery exports been affected? Nagendra Mehta (NM): As far as the global meltdown is concerned, it has affected all business areas and imitation jewellery is not an exception. Exports from the sector has fallen, and there is a lower demand in the local market too. However, we are very optimistic about Indian traditional jewellery as it is very popular and not produced by any other country in the world. Talking about potential, it’s not just Asia that is a potential market, imitation jewellery has a very promising market in emerging countries like Brazil and Argentina. However, the biggest buyers are Saudi Arabia, Dubai [UAE], African countries and Malaysia. People of Asian origin living in UK and US also demand this kind of jewellery. The global scenario has been in a very bad shape, but the imitation jewellery sector is doing better than other in62 THE DOLLAR BUSINESS II APRIL 2016
dustries. Indian traditional jewellery is unique as it cannot be produced by any other country. If we take China, for example, there are buyers who buy certain imitation jewellery from them, but then again they cannot provide the traditional Indian jewellery which is very famous for its skilled artisans and delicate craftsmanship. We are slowly recouping from this meltdown and we are pretty much sure that we would be able to recover quickly. TDB: The Finance Minister in the Union Budget has proposed to increase the Customs duty on imported imitation jewellery. Do you think it would benefit the sector? NM: We had proposed it to the government saying that high Customs duty should be levied and Excise duty should be exempted. The government has agreed to our demand to increase the Customs duty on this product imported from any
Nagendra Mehta
SECRETARY, IMITATION JEWELLERY MANUFACTURING ASSOCIATION
country. However the 5% increase is not going to have much impact on the industry as such. The reason being that there are a lot of malpractices happening in the industry. For example, when the importers import from China they only prepare a 10% invoice for the same. So the in-
mately we have to find small wholesalers or vendors in Old Delhi or Moradabad. But the catch here is that the quality of brass procured from these people cannot be guaranteed. We have go with hit and trial approach to test it and a lot of time gets wasted in the process,” he expresses his concern. Finding skilled labour is yet another challenge that manufacturers of imitation jewellery face. One prime reason behind scarce labour is that artisans work in clusters and are not paid well. The skilled craftsmen move out of the industry in search of lucrative options. However, both trade figures and industry sources indicate that there is a demand for Indian imitation jewellery in US and Europe as well in Pakistan and the Middle East. “In terms of the size of the market, if you consider US, imitation jewellery constitutes 93% of the US jewellery market,” Archana Garodia Gupta, Owner Touchstone Gems & Jewellery India (P) Ltd., tells The Dollar Business.
voice is highly undervalued and the 5% custom duty will not have much impact. TDB: India’s traditional jewellery has always been highly valued in several markets across the globe. How did China emerge as a market leader? NM: There have been very rapid changes. People used to wear intricate jewellery a while back. But now the trend has changed. Nowadays, the jewellery normally worn by youngsters are simple chains or small studs or thin bangles. The demand for this is more and China is very strong in this particular field. Women in the age group of 25-35 years are the largest consumers of this kind of jewellery. China has captured this particular market, where jewellery can be mass produced. The machinery used are properly automated which can cater to the demand of a large number of consumers. They have huge plants for production. In India we still do not have proper machinery. Our artisans are still not exposed to the technology. Chinese jewellery is cheaper for two reasons, one being automation and the
Raising BCD on imported imitation jewellery may help, but first, rampant underinvoicing (especially of shipments from China, of up to 90%) has to be controlled by Indian authorities
This in itself speaks volume about the exports opportunities that Indian imitation jewellery can tap. Given the current market trend, the Indian imitation jewellery industry has enough potential to grow. All it needs is the government support to lure back its skilled artisans into the trade and,
of course, some right marketing moves. While the global slowdown may affect the speed of recovery, it cannot affect the industry’s trade potential. In fact, just a few creative ideas can churn an export-manufacturer double-digit (easily!) high profits. Now that’s some dazzle!
other being the support from their government. They are given land at very cheap rates and their duty structure is favourable to the industry. In fact, China has captured almost 30% of the market in India itself. We are worried about this.
the issue of acquiring skilled workers? NM: There is an acute crunch of labour in the market. The government schemes have actually made people lazy. They get all the amenities at a much cheaper price and the various scheme have all made it difficult to get labour. So we have selected a tribal area and we have signed a memorandum of understanding (MoU) with the National Skill Development Council to train these people. We will give the materials and ask them to produce jewellery. This way we can get more skilled workers and they can work from their place, eliminating the issue of leaving their native place. If the scheme works properly, then we will be able to get around 4,000 skilled workers.
TDB: What are the steps taken by the association to boost exports of imitation jewellery? NM: We have demanded that incentives on exports should be increased but there is no subsidy or support from the government side yet. We have asked the government to allot us land in Mumbai for a jewellery park. All our manufacturers can set up their business and buyers from around the world would have a reliable source for getting the product from here rather than being tricked by agents. In China there is a huge market with around 8,000 shops where you can just walk in, finalise the design, give the order and come back. We are hoping for the same to happen in Mumbai. Also we are educating manufacturers about exports. TDB: How is the association addressing
TDB: Tell us about the latest trends in the imitation jewellery sector. NM: Our social fabric is very diverse and we need to manufacture jewellery as per the requirements of various cultures. Talking about the latest trends, CZ Jewellery is very much in trend. It is also called American diamond where the pieces are intricately crafted. APRIL 2016 II THE DOLLAR BUSINESS 63
THE SECRET INGREDIENT
CORN (MAIZE)
A‘MAIZE’ING CEREAL AWAITS WONDER MOMENT It has been a muchacclaimed wonder crop in recent times for India. In terms of utility, it’s a winner – from food, and feed to energy stock; today, corn has become the third most important cereal after rice and wheat. Until 2013, each year the crop contributed millions of dollars to India’s forex earnings. However, the last two years have seen maize exports drop. How soon will revival happen? BY SHIVANI KAPOOR
I
magine watching the latest blockbuster without munching a bucket of buttery, salty puffed-up corns! Sometimes, the bucket gets emptied before we realise! Outside the air-conditioned multiplexes, on the fields of India too, the charm of this crop continues. India’s agricultural success in recent years is incomplete without the mention of maize or corn. From its human invention as teosinte plant (a wild grass) in Mexico some 10,000 years ago to a biologically remarkable cereal, corn has evolved as a versatile cereal extending its applications as food, feed and ferment.
THE WONDER CROP
The USP of this grain is its versatile nature. A rich source of vitamins, minerals and other quality nutrients, it is primarily 64 THE DOLLAR BUSINESS II APRIL 2016
Major destinations for India’s corn exports
Indonesia is by far the biggest importer
18% 32% 8%
13% 13% Indonesia Vietnam
16%
Profit estimates from exports of maize from India
Malaysia Bangladesh Nepal Other
As prices rise in international markets, exports will become more lucrative
Source: DGCIS Annual Export; breakup for FY2014-15
consumed as food. Although historically it has been preferred as a staple, over the years, several commercial uses of the crop have been discovered. Maize, which provides the bulk of green fodder for cattle, is now being commercially used as a feed for poultry. “Poultry industry in the country is heavily dependent on maize. Such is the increasing demand for corn from the poultry industry that 70% of maize production is used for animal feed,” says Soumen Sarkar, Marketing Lead – South Asia, Advanta Seeds. In addition, the cereal is used as a raw material for starch production, in distilleries and is also feedstock for ethanol (biofuel). The versatility of the cereal coupled with its qualities like high fibre content are factors that make maize a much sought-after product. Maize is cultivated throughout the year, one planted in June-July and harvested in October and the other planted in October-November and harvested in MarchApril. The major producers of corn in the world are the United States, China, Brazil, Ukraine and India. Interestingly, over the years, India has been among the top ten major producers of corn in the world. In fact, maize is today the third most important cereal in India after rice and wheat. Harvested in two seasons (kharif and rabi), the annual output of maize in India continues to gallop. What’s more? The production has grown at a CAGR of 5.5% between FY2005 and FY2014. This also explains the reason for India’s seventh position in the world as a maize (HS Code 100590) exporter, with US, Brazil and Ar-
Cost of Production (INR/MT)* FOB Value (INR/MT)** Operating Profit Operating Margin (%)
14,700.0 15,100.0 400.0 2.6
*Indian yellow maize, loose packing in bulk (HS Code: 10059000); cost of production/procurement exclude government subsidies; ** FOB Tuticorin *** Minimum Order Quantity (MOQ): 20 MT Important disclaimer: Profitability has been calculated based on time-bound indicative prices (prevalent during the second week of March 2016). Prices may vary during a different time period, resulting in profit fluctuation. Factors like brand value, supply chain-related costs like warehousing and logistics, administrative costs, sales and advertising costs, etc. have not been included in the cost of production. Margins have been calculated considering government policies (announcements, notifications, etc.) as on March 15, 2016. Risk factors and currency fluctuations have to be considered while exporting. Incentives have not been factored in while calculating indicative profitability. Calculations have been provided for informational purposes only; The Dollar Business takes no responsibility for any loss resulting from investments in the said commodity/product. Though all efforts have been made to ensure the accuracy of the content stated herewith, the same should not be considered a statement of law or used for any legal purposes. Prior permission is required before calculations stated herein are published or quoted in a third party web or print property.
gentina being the top three in this regard.
SURGING HIGH
Having witnessed a jump in shipments from FY2008, India had got a strong foothold in the international markets. According to the International Trade Centre data, India’s maize exports between CY2005 and CY2013 bloated by 20x from $61.63 million to $1229.36 million, with shipments going mostly to South-east Asian countries. In fact, India’s maize exports in CY2013 was the highest. This surge in exports can be attributed to demand for maize from international markets, marketing channels and also availability of speciality corns. South-east Asian countries like Indonesia, Malaysia, Bangladesh and Vietnam are major destinations for India’s maize. India’s share in the growing
world maize trade may be relatively small but it provides ample opportunity to exporters in the country.
….AND A GREAT FALL
However, all is not well with India’s maize exports. Amid fluctuating world maize trade figures, India’s exports of the cereal has been on the fall in the past two years. Indian maize exports in value terms, which was highest in 2013, fell to $808 million in 2014 and nosedived to $191.89 million in 2015. “The trade has halved in two years leaving us with no profits. The past few months have been worse. We have not shipped even a single consignment outside country in past three months. That itself explains how bad the situation is,” says Dattatray S. Chavan, Proprietor of Awadhut APRIL 2016 II THE DOLLAR BUSINESS 65
THE SECRET INGREDIENT
CORN (MAIZE)
Vegitable Suppliers. The reason for this steep fall in maize exports is not one. If those in the maize trade are to be believed, higher prices of Indian maize has been the prime factor for the collapse in exports. “Following the higher prices due to strong domestic demand for maize, there are hardly any takers for India’s cereal. Prices of maize are hovering at Rs.1,500 a quintal as against Rs.1,200 a quintal two years back,” rues Chavan. Then, improved supplies from global competitors have also impacted India’s
exports. However, as per Prabhakaran John, Managing Director of Jenirich Agro Products, “weak global prices have almost halted shipments. There is no demand for Indian maize as cheap supplies from countries like Brazil and Argentina have captured India’s export markets.”
DOUBLE TROUBLE
Another major reason for falling exports is lowered production. “Back to back droughts in two years in India have resulted in poor production and thus low exports. Poor rains have affected
India’s exports of maize
The country’s corn exports in CY2015 fell drastically to $191.89 million 1,400 1,200 1,000 800 600 400
NO RESPITE?
200 0
the output and there is no flow of maize for domestic consumption, leave aside exports,” says Chavan. It is worth mentioning here that maize production in FY2014-15 remained almost stagnant at 24.17 MMT from the previous year and estimates are that it will fall to 21 MMT in FY2015-16 (lower than the set target of 23.75 MMT). According to industry sources, the rising domestic demand for maize, especially in the poultry industry, has also accounted for increased consumption and thus lesser exports. Low production coupled with high domestic demand has affected the maize flow to a great extent. As industry participants claim, in 2016, forced by circumstances, India imported maize for the first time in 16 years. (Imports of maize are only allowed through STCs.) [In contradiction though, both Ministry of Commerce (GoI) and ITC databases prove that India has been importing maize every year in the past 15 years!]
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
India’s exports Source: International Trade Centre; value in $ million; HS Code: 100590
Amid falling exports, maize exporters are even concerned about the government’s role in handling the situation. “The production is down, there is a shortage of
“INCREASED DOMESTIC DEMAND IS HOLDING UP OVERSEAS SHIPMENTS OF CORN”
Soumen Sarkar
MARKETING LEAD – SOUTH ASIA, ADVANTA SEEDS 66 THE DOLLAR BUSINESS II APRIL 2016
TDB: India’s corn exports seem to have fallen off a cliff in CY2015. What do you think are the primary reasons for this plunge? Soumen Sarkar (SS): Obviously, corn exports have gone down. In India, corn is generally grown in an area ranging between 8.5 million hectares and 9 million hectares. But this time, the area of production dropped drastically because of drought situation across the country. There was a fall of approximately 20-22% in the production area. The productivity of the crop was also affected as there was not enough rainfall. Thus, the production couldn’t meet domestic demand and exports got affected. In fact, it’s not just low production that has led to a fall in corn exports. The government is supporting corn production and thus boost-
ing its prices. Maize prices have shot up by approximately 14% in last five years. Thus, the domestic purchase price is also impacting exports. Global corn prices sometimes tend to be weaker compared to that in India and thus there are no takers for Indian corn leading to a drop in exports. And also, domestic consumption of corn has increased. While production has fallen, increased domestic demand is holding up exports. TDB: Advanta is engaged in the research & development (R&D) of hybrid seeds. How, according to you, can R&D help in boosting productivity and thus exports of corn? SS: Advanta is one of the leading seed companies in South-East Asia and has specialised in tropical corn research.
maize and to top that the government has stopped incentives under VKGUY which gave maize exporters benefits of 5% of FOB value of exports. There are no subsidies or incentives left for us. The profit margin has come down to mere 1-3%,” laments John.
IN NEED OF HELP
Even as there has been thrust on maize farming wherein the government has fixed the minimum support price (MSP) of maize at Rs.1,310 per quintal and also included the cereal in government’s ambitious Rs.500 crore crop diversification strategy for Punjab, Haryana and Uttar Pradesh, the industry feels that more R&D is required to boost crop yield and that the government should provide incentives other than mere price support to encourage farmers and exporters. Expectations are alive though as far as rise in domestic production is concerned. With the Indian government recently cancelling a tender to import 240,000 tonne of corn and farmers expecting a bumper harvest this summer, the forthcoming harvest season may result in some surplus for exports.
From a productivity point of view, India does not have an edge in this area. There is much potential in the country when it comes to producing corn in quantities at par with other developed countries. There are seeds available for farmers to produce corn in quantities at par with US. Though research is driving us towards that direction, the challenge is to convert that potential into reality. We are working on producing disease-resistant and drought-supportive corn hybrids which would help Indian farmers increase productivity. Drought-tolerance is one of the focus areas of our research. The future would be about addressing the concern of less rainfall and producing corn within 100-110 days (which otherwise takes 120-125 days). Once productivity increases, it will help in meeting the domestic demand and simultaneously boost exports. TDB: Japan, Korea and Mexico are ma-
India’s maize production over the years
Back-to-back drought has affected the maize production as well as productivity 30 25 20 15 10 5 0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Agricultural Statistics Division, Directorate of Economics & Statistics Department of Agriculture, Cooperation and Farmers welfare; quantities in million metric tonne (MMT)
World’s biggest importers of maize
Japan, South Korea and Mexico are world’s biggest importers of maize 6,000 5,000 4,000 3,000 2,000 1,000 0
CY06 Japan
CY07
CY08
South Korea
CY09
CY10
CY11
CY12
CY13
CY14
CY15
Mexico Source: International Trade Centre; value in $ million; HS Code: 100590
jor corn importers. But despite being world’s top importers, they barely import from India. Why this anomaly? SS: I think everyone values the quality of a product. Based on my interaction with international clients, I have understood that they can’t blindly trust Indian corns. Quality is one area where the Indian farming community and traders should focus on. We have had bitter experiences in international markets. Two years ago, Vietnam had refused to accept a consignment of Indian corn at its port and that impacted the whole industry. The corn importers in countries like Japan and Mexico demand top quality and thus Indian farmers and exporters need to focus on upgrading quality. That is when we can compete with countries like US and Brazil. TDB: Of late, prices of Indian corn have been riding high, thus discouraging exports. What needs to be done?
Do you think the government is doing enough to help farmers and exporters? SS: The government is indeed supporting farmers when it comes to growing corn and getting best prices. The support price, which had been extended to corn farmers, is helping them make good profits. But then, there’s an issue. The issue is whether you export or sell in the domestic market, you are getting almost the same price. And India is a country which has a high domestic demand for corn and the situation is only discouraging exports. Once, prices in international market increase, we will see exports of corn picking up from India. Certainly the government has given the right price of the produce to farmers and has been advocating the right way to grow corn. But if your domestic market is fetching better profits with lower risks and paperwork than international markets, it would obviously make sense to first look at the domestic market. APRIL 2016 II THE DOLLAR BUSINESS 67
STATUS QUO
GEOGRAPHICAL INDICATION TAGS
PROSCIUTTO DI PARMA FROM
WINE FROM NAPA VALLEY FROM
Italy
USA
PORTUGUESE PORTO AND DOURO WINES FROM
Portugal
MEXICAN TEQUILA FROM
Mexico PERUVIAN PISCO FROM
Peru
FRENCH CHAMPAGNE & COGNAC FROM
France
BASMATI RICE DARJEELING TEA MYSORE SILK MADHUBANI PAINTINGS JAIPUR BLUE POTTERY GOAN FENI, AND 232 OTHER PRODUCTS
ARE GI TAGS HELPING INDIA’S EXPORTS? Exporters and producers of unique regional products have always tried to guard their produce from imposters and free riders. Geographical Indication Status or GI Tag as it is popularly known has gone a long way to preserve these unique products. But do GI Tags make a difference when it comes to exports from India? BY MANISHA CHOUDHARI
68 THE DOLLAR BUSINESS II APRIL 2016
F
or the uninitiated, Geographical Indication (GI) tag is a proof of where the product (which can be natural, agricultural or manufactured) is born or produced. A product is best known by its reputation, characteristics and its quality, which is in most cases dependent on its place of origin. GI status is also believed to be the oldest form of Intellectual Property (IP) protection. Some products worldwide with GI tag include Champagne, Feta cheese, tequila, Ceylon tea, Antigua (Guatemalan) coffee, and Kalamata olive. The tag is given to authorised users in a certain country, who can use it exclusively, and no unauthorised person is permitted to use the same. But there’s no foolproof method developed yet that ensures 100% protection to a particular GI tag. Picture this: It has been estimated by the International Trade Centre that every year, about 125% more coffee bags are labelled and exported as ‘Antigua’ than those truly produced in Guatemala! So how does a GI tag work? The tag is developed to protect consumers from misleading information and fake products, and producers from having to resort to selling goods for lowered prices. For instance, if someone sells counterfeit Darjeeling tea, he can be taken to court, because that product bears a GI tag in India. But if a seller in Bangladesh markets the fake product in Sudan, you cannot do much as your Darjeeling Tea’s GI tag is not recognised in Sudan. Going back to the Antigua coffee case, outside of Guatemala there is likely to be more coffee marketed as ‘Antigua’ by unscrupulous traders and “one estimate puts this at as much as 300-700% the actual volume produced in Guatemala (Dwijen Rangnekar, 2004; paper titled, ‘The International Protection of Geographical Indications’). That practically implies that GI tags have to be registered country-wise if they are to bear any significance because ‘multilateral GI registration system’ hasn’t been established yet under WTO; except of course in the case of wines and spirits. As on February 17, 2016, India had 238 products with GI status (with another 270 in the queue for approval) – the most recent being basmati rice. [Despite
Geographical Indication (GI) recognition for basmati rice grown across North India is expected to stabilise its prices in overseas markets and boost exports. APEDA plans to apply for the GI tag in EU, USA and Gulf nations.
the filing date being November 26, 2008, basmati rice only got accorded the GI status on February 15, 2016, when the Intellectual Property Appellate Board (IPAB) instructed Chennai-based Geographical Indications Registry (GIR) to issue a GI tag for the product.] Out of the GI tags registered in India, nine are foreign products – French Champagne and cognac, wine from Napa Valley, Scotch whisky, Italian Prosciutto di Parma, Portuguese Porto and Douro wines, Peruvian Pisco and Mexican Tequila. Made in India products include the world famous Darjeeling tea, Mysore silk, Madhubani paintings, Jaipur blue pottery, Goan feni, Hyderabadi Haleem, Naga Mircha (also known as bhut jolokia) and many more. The top five states that have the maximum number of products with GI tags are Karnataka (33), Tam-
il Nadu (24), Kerala (22), UP (21) and Odisha (15). As is mentioned in a paper by Sarah Bowen in 2010, ‘Embedding Local Places in Global Spaces: Geographical Indications as a Territorial Development Strategy’, GI status is very unique in the sense that it provides ‘a means of ensuring that control over production and sales of a product stays within a local area, but at the same time [it] makes use of extralocal [foreign] markets’. Of course, a GI tag is very different from a trademark, in the sense that the GI tag is given to a product from a certain place, but a trademark is given to a product from a certain company. The GI product can only be made at a certain place, while a trademarked product can be manufactured anywhere around the world by the same company.
Outside of Guatemala there is likely to be more coffee marketed as ‘Antigua’ by unscrupulous traders and one estimate puts this at 300-700% of the actual volume produced in Guatemala! APRIL 2016 II THE DOLLAR BUSINESS 69
STATUS QUO
GEOGRAPHICAL INDICATION TAGS
As is mentioned in a chapter by Cerkia Bramley, Estelle Biénabe, and Johann Kirsten called, ‘The Economics of Geographical Indications: Towards a Conceptual Framework for Geographical Indication Research in Developing Countries’ in a World Intellectual Property Organisation report from January 2009 called ‘The Economics of Intellectual Property’, GI tags can be thought to be the “result of a process whereby reputation is institutionalised in order to solve certain problems that arise from information asymmetry and free riding on reputation”. Products with a GI tag get premium pricing, thus helping exporters earn better, and which in turn incentivises producers. As is mentioned in the same report, since registration of the GI tag 18 years ago, producers of Italian Toscano olive oil started earning a premium of almost 20%. With premium pricing, producers of a GI product (especially in rural areas), can help improve their living conditions by means of this increased income. So who does GI tags help? Third world nations or those in the developed world? For poorer economies, the product recognition is like an insurance or protection, especially for those where manu-
EXPORTERS CLAIM, THE RECOGNITION THAT GI TAGS BRING TO PRODUCTS IN FOREIGN MARKETS IS HELPFUL
facturing happens across rural areas and with producers who cannot invest in branding owing to a lack of ‘marketing muscle’. For these producers the GI tag helps create brand equity. Like it has in the case of tequila manufacturers in Tequila (Mexico). Referring to Sarah Bowen’s study (of the differences between the enforcement of GI between French Comte cheese and tequila, focusing on the latter), tequila is made out of the blue agave plant. The Mexican government’s GI for tequila was enforced in 1974 and covers two types of tequilas – one that is made from 100% blue agave and the second made from 51% agave and 49% alcohol from other types of sugar. What makes the tequila made in Tequila different from that in, say Los Altos, is that the agave grown in Tequila is sweeter and a lot subtler. By promoting this very difference, the producers of tequila were able to secure for themselves a place in the global market. Today, Tequila bottles are a common sight across duty-free shops across international airports.
FROM WTO TO INDIA
The origin of the GI tag can be traced back to when WTO administered an international agreement in 1994 called the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) to safeguard IPs of member countries and set down certain standards for it. TRIPS has had its fair share of controversy. Protection under TRIPS is defined in two articles – Article 22 and 23. As per Article 22, GIs are protected to avoid providing public with mislead-
Only produces of the Old Mysore Region can be called ‘Mysore Silk’ 70 THE DOLLAR BUSINESS II APRIL 2016
ing information and to prevent unfair competition, and thus, products under this article are provided with standard protection. On the other hand, Article 23 is mostly used for GI tags for wines and spirits and are subject to a higher level of protection. Some countries including India, Pakistan and Switzerland want Article 23 to increase its coverage of products so that their respective produces can benefit from greater brand equity born out of them being a GI.
A MULTILATERAL SYSTEM
In 1999, the Geographical Indications of Goods (Registration & Protection) Act was passed in India. While the use of GI tags by unauthorised users is in principle illegal, there is no concrete method of preventing it. If a man, say, from Kenya decides to sell rice as Indian basmati rice, despite not being authorised to use the GI tag, at most, the government of India can write to the Kenyan authorities. But what if Kenya refuses to take action? It’s fairly impossible to even imagine the efforts and time that The All India Rice Exporters’ Association (AIREA) will take to go about establishing the GI tag for the product in every country. So the need of the hour is to ensure that GI tag given to any product in any country, retains its significance and essence of origin, and as such, once a GI is registered for any good in a country, the database on WTO website should be updated and a circular or notice should be shared with its member governments. The government in turn should publicise in their respecitve countries the fact that a cer-
Madhubani painting was the first product from Bihar to win a GI tag
Number of GI tags issued in India over a decade
As of mid-Feb, India had 238 products with GI status with another 270 pending approval 50 45 40 35 30 25 (Up till Feb 17)
tain GI registration has been awarded. This multilateral GI registration system is inarguably required immediately. Just because China, Hong Kong and a few other nations are using their muscles to arm-twist WTO, the multilateral system isn’t being worked upon at present. GI tags are not made for the Nikes, Apples, GEs and Guccis of the world. They are meant to serve interests of the third and first world manufacturers who don’t have the pocket for building an expensive-to-make brand. And for protecting their interests, the multilateral system has to be born soon.
20 15 10 05 0
FY05
FY06
FY07
FY08
FY09
FY10
FY12
FY13
FY14
FY15
FY16
Source: Geographical Indications Registry, GoI
GOOD FOR SOME...
The Darjeeling tea and logo were the first products to get a GI tag in India. Says Girish Sarda, partner at Nathmulls Tea, “The GI tag was a good step for the Darjeeling tea industry, as it helps check authenticity of the products being shipped. Earlier, we had a lot of tea being exported as Darjeeling tea, most of which were fake. However, the government needs to be stricter on that, as our laws aren’t strong enough”. On the impact on business since implementation of the GI tag, he says, “To be very honest, it hasn’t really affected the business in any way, except for the fact that more genuine tea is being sold. The laws are not implemented well, so it will take time for the GI tag to be successful”. GI tagging has really helped some products like Darjeeling tea, so much so that when the production would fall in India, its prices elsewhere would rise. The last time this happened was during the couple of years leading to 2013, when the agitation for a separate state (Gorkhaland) was on in Darjeeling district and adjoining areas. Exports of Darjeeling tea to many parts of the world including UK, Australia, China and Pakistan fell dramatically and in the first half of August 2013, at least three major dailies in England – The Telegraph, The Guardian and The Daily Mail – carried articles expressing concerns of Darjeeling tea-lovers. The press in countries like China, Australia, Pakistan and Gulf countries also echoed a similar concern. Prices of Darjeeling tea in high-street cafés across London, Paris and other
FY11
Last year, 90 kg of the first flush from a certain tea estate in Darjeeling fetched over Rs.40 lakh in London – that valuation had much to do with the product being labelled ‘Darjeeling tea’.
export markets shoot up when political or labour unrest happens in Darjeeling. That’s a known fact. Also, that about 90 kg of the first flush from a certain tea estate in Darjeeling fetched over Rs.40 lakh in London just last year – which translates to a kilogram of exported tea from India fetching close to Rs.45,000 – had much to do with the produce being labelled ‘Darjeeling tea’. But tea is an exception.
...OTHERS DOUBT IT
The direct impact of GI tags on exports is questionable. For example, the silver filigree of Karimnagar got the GI tag in 2007. Says Arroju Ashok, President of Silver Filigree of Karimnagar Handicraft Welfare Society (SIFKA) about its effectiveness, “There is a recognition of the product now – the tag has helped secure the identity of the silver filigree. But apart from that, there is no other effect. In fact,
the local people don’t even know what a GI tag is.” However, the recognition that GI tag has brought to the product in overseas markets has really helped. “Business has got better,” he says. What can be clearly sensed is a lack of education about GI tags that could play a pivotal role in making a good quality, indigenous product popular across international markets, and allowing the higher prices realised to aid greater investments and improve livelihood of the rural population, farmers, craftsmen, etc. It is indeed a circular flow. Dilip Kumar, Director at Nazrana Chikan has a similar story to tell. He says that GI registration is done in two parts – first the product and its area are registered, and then, the manufacturers and users of the product register themselves. Out of the thousands involved in Chikan work, he says woefully that only four have registered themselves. “There is no awareness of the product,” he laments, APRIL 2016 II THE DOLLAR BUSINESS 71
STATUS QUO
GEOGRAPHICAL INDICATION TAGS
“We need to popularise the art first within India and then the world. If even 70% people register themselves, the benefits will immediately follow. The state government, too, needs to promote chikan”. Lucknow Chikan got the GI tag in 2008, but its full potential is yet to be availed. Adds Kumar, “Internationally, Chikan craft is known as a handicraft product. However, I find it very strange that apart from UP, nowhere in India is this considered a handicraft, and so, it does not get the status of handicraft that it has in UP throughout India. This must change”.
CALL IN THE DOCTOR
It is also important that the government steps in to make GIs work well for Indian exports. Problems of acute funds shortage amongst many registered GIs, absence of civil and criminal remedies in case of GI infringements, lack of a vigilant market watch and regular inspections, improper coordination between actors involved in the value chain of exports of GI products, etc., are some areas that the central and state governments should look into. As per a paper titled, ‘Pre-and-post Geographical Indications Registration Measures...’ by Kulkarni and Konde in the Journal of Intellectual Property Rights, the researchers state that, “The Indian government has not made any headway in adopting strategies for branding and promotion of GI products or their marketing and distribution in both domestic and export markets.” True, if industries like handicraft and others that create rural employment are to flourish, in the absence of massive pockets, the government has to take GIs in all seriousness. Make in India is a good, steady development, but factories and warehouses will take their time to get established, and all of India is not skilled enough to be lifted from the farmlands and placed in factories.
CREATING IMPACT
Developed and developing economies hold the GI tag dear, as is seen in the case of Tennessee whiskey, Champagne, Darjeeling tea, and Kalamata olives. But what of the near-developed economies? There is another school of thought here. If India is keen on becoming a 72 THE DOLLAR BUSINESS II APRIL 2016
Naga Mircha (also known as bhut jolokia or raja mircha) was recognised as the world’s hottest chilli by the Guinness Book of World Records in 2007. It got a GI tag in 2008. Today, it is exported to Australia, EU and Venezuela.
near-developed economy, it has to move beyond the GI tag, and look towards the future i.e., Intellectual Property (IP) protection in the form of patents. The Trans-Pacific Partnership (TPP) doesn’t focus on GI, instead, it has moved ahead to this sort of IP protection. This is one of the reasons it will be a long time before India can even think of becoming a part of this historical trade pact. Let us go back to the fact that India recognises a mere nine foreign products with GI tags, which goes on to show just how important it is for your GI tag to even be recognised in other countries. If other nations do not acknowledge the GI tags of Indian products, why even give the product that tag to begin with? In order to have your GI recognised around the world, you can either approach the direct jurisdiction concerned, or agree to protect each other’s GI tags as part of a bilateral agreement (as is the case of EU and China – both recognise ten of the others’ GI products). If neither of these two ways are followed, one can refer to the Lisbon Agreement (appellation of origin can be subjected to international registration) or the Madrid system, where one application can ensure that your product is protected in more than ninety nations.
EXPORT DIFFERENTIATION
Advocates of GI tags claim that it is a tool in the hand of exporters, which can be used to classify your produce and supplies at levels above your foreign competitors’. “GI can be a valuable tool for export differentiation. As much as 85% of French wine exports use GIs on their labels, as do 80% of all spirits exported from EU. In exporting, GI can be valuable by ‘setting the bar’ or becoming the standard reference for that product in its
distribution chain. In certain instances, national and international retailers have made the designation a condition of their agreeing to carry the product,” states a WTO report titled, ‘Geographical Indications: Linking products and their origins’. But this very ‘quality’ attribute of GI tags can be a double-edged sword. Imagine two exporters of the Bangalore rose onion, a product that got GI tagged in 2014. Say, if one of the producers’ onions are of inferior quality. If a foreign importer pays the necessary premium for the GI product and gets the inferior quality onion, the experience will translate into loss or greater difficulty for the seller of genuine product. It all boils down to this – GI tags are good to have, but don’t ensure success in exports. Economics has always had much to do with prices, and perceptions with quality. But at the same time, these tags are like certificates that give India’s smaller producers, spread across our less-heard export temples, a greater assurance of business beyond borders. Growers, manufacturers and exporters of Toda Embroidery, Naga Mircha pickles, Coorg Orange marmalade, Alleppey coir, Coorg green cardamom, Jaipur’s blue pottery, etc., may not realise it, but the fact that their produces are GI tagged mean that convincing overseas buyers gets easier than usual. It also means having the power to be a price maker. If India wants to use the GI tags for gaining a toe-hold in the world market, the government must first encourage awareness amongst those producing these goods. There is a need to create a policy framework for it. While there is no doubt that GI status in itself is a brand building tool, the government will need to provide funding, tax breaks and education to make GI tags count.
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PRIME FOCUS
WITHDRAWL OF DUTY CONCESSION ON LIFE-SAVING DRUGS
74 THE DOLLAR BUSINESS II APRIL 2016
LETHAL DOSE OF DUTY ON LIFE SAVERS? Customs Duty exemption has been withdrawn on several imported, life-saving drugs. While the government says there are cheaper domestic drugs available, many social groups foresee high doubledigit percentage rise in costs of drugs owing to lack of supply from Indian manufacturers. The Dollar Business analyses the logic of the government and the impact of this decision. BY SATYAPAL MENON
O
n January 28, 2016, the Central Board of Excise and Customs (CEBC) issued a debilitating notification that withdrew customs duty exemptions on 76 medicines, including life saving ones used for treating cancer and HIV. [The notification withdrew the zero duty benefit on import of 15 life-saving formulations of which 10 are in the National List of Essential Medicines (NLEM), apart from withdrawing the 5% import duty relaxation on 61 drugs of which 35 find place in NLEM]. The move immediately created an uproar as many believed that it might end up having widespread repercussions on the Indian pharmaceutical industry and hurting millions of patients fighting hard against terminal diseases. The objective of the notification, according to the government, is to promote and create an environment for home-grown generic players to manufacture these essential drugs used in the treatment of HIV, cancer, hemophilia, cardio-vascular problems and a host of other life threatening conditions.
The justification from the government is that with this move, indigenously produced generics for these ailments would have more scope in the Indian market vis-à-vis their branded or imported counterparts. Fair enough. “But will the outcome really be as desired?” is a question that many in even the pharma industry are seeking an answer to.
FOR PUBLIC INTEREST?
The removal of exemptions has put genuinely affected stakeholders in the industry in a catch-22 situation. The generics/ formulations segment has to now shell out 5% more duty on import of these APIs (active pharmaceutical ingredients) or intermediates, and the end consumers, i.e. the patients, would (as is usually the case) have to bear the burden of swollen prices. However, policymakers claim that the decision to withdraw the concessional customs duty for 76 drugs was taken in ‘public interest’. For the general public, this line of reasoning seems to defy logic. The Customs Act, 1962 in its Section 28D, clearly states that the amount APRIL 2016 II THE DOLLAR BUSINESS 75
PRIME FOCUS
WITHDRAWL OF DUTY CONCESSION ON LIFE-SAVING DRUGS
of duty paid at the time of clearance of goods, will form a part of the price at which goods are to be sold. The full incidence of such duty paid under the Act has to be passed to the buyer of such goods, unless proved contrary. Hence, this additional duty surely cannot benefit the ‘public’. Such unexpected and sudden change in customs duty may have to be passed by the pharmaceutical industry to the patients in the form of price increase of drugs, out of which 15 are life saving drugs. Clearly, this move will go against ‘public interest’! Ranjana Smetacek, Director General, Organisation of Pharmaceutical Producers of India (OPPI), points out that the recent hike in duties on life saving drugs will be detrimental to Indian patients and that the OPPI was not consulted by the
WITHDRAWAL OF CONCESSIONAL DUTY FOR LIFESAVING DRUGS WILL IMPACT PRICES
government in this matter. “Withdrawal of concessional customs duty for these drugs will adversely impact patients’ interest as it may lead to increase in prices. This is in complete contradiction to public interest as mentioned in the notification,” she tells The Dollar Business, adding that the withdrawal of concessional customs duty for 45 molecules, which are part of NLEM 2015, is not in accordance with these being listed as essential drugs and will lead to significant impact, specifically on companies importing these drugs. All in all, a disappointing step for companies and patients! Another glaring example of the strange ways the bureaucracy functions can be drawn from applicability of the decision on bulk drugs produced in special economic zones (SEZs). Was it not conscious of the fact that SEZs are deemed foreign territory for the purposes of trade operations due to which the bulk drugs sourced from these zones also attract import duties? Biocon, Chairperson and Managing Director, Kiran Mazumdar who is credited with letting the cat out of the bag and bringing the notification
“PATIENTS WILL NOT BE AFFECTED BY THE CHANGE” ASHOK KUMAR MADAN, EXEC. DIRECTOR, INDIAN DRUG MANUFACTURERS ASSOCIATION (IDMA)
TDB: The Indian government recently withdrew concessions on import of essential drugs? Do you think the notification was justified? Will this decision not have a negative spillover effect on the price of generics, which are being produced using imported bulk drugs? AKM: We at IDMA, believe this issue is not at all a decision that has been taken in haste, rather it was under consideration for the last two years. We observe that out of 76 drugs as per the notification, only 15 drugs have nil duty whereas 61 drugs have a concessional duty of 5%, meaning only an increase of 2-3% in customs duty in importing of the items, which will not have a major impact on the finished product price. Hence, there 76 THE DOLLAR BUSINESS II APRIL 2016
is no need for panic and patients won’t be affected because of this change. TDB: Do you think this decision will really encourage manufacturers? AKM: Removal of concessional duty is going to benefit the domestic exporter. India is self-reliant to meet the requirement of its 1.25 billion people. Currently, only 5% of the said drugs are being imported, and the rest are made domestically, so undoubtedly, we are self-reliant as far as our manufacturing capability in this segment is concerned. Hence, IDMA believes, removal of nil/concessional excise duty on imported bulk drugs where indigenous manufacturing is available is a right step taken by the Government
into broad daylight in her tweet stated, “The move will make these drugs more expensive for the patients. There are over 75 drugs in this list. This will also impact the indigenous drugs being manufactured in SEZs, thus adversely impacting the government’s agenda of making healthcare affordable and accessible to the patients in India.” Two experts and living in the pharmaceutical arena who are clear in their heads that this question of fortunately-unfortunately is actually a no-brainer. Their verdict – there’s going to be no benefit to the public at large from this move.
PARTIAL CURE
That the decision has been taken without giving considerable forethought to existing realities is apparent considering that not all generic or bulk drug substitutes are available in the country. This stands exposed from the manner in which policymakers beat a hasty retreat as suddenly as the notification had manifested and restored exemption on three drugs – Antihemophilic Factor Concentrate, Octreotide and Somatropin. Reason?
of India. This will certainly create a level-playing field for indigenous bulk drug manufacturers and support the ‘Make in India’ initiative of our PM. TDB: The government in its notification withdrew the zero duty benefit on import of 15 life-saving formulations of which 10 are in the National List of Essential Medicines (NLEM). How do you see it? AKM: Contrary to some media reports suggesting that following this notification, the prices of life-saving drugs will go up, we believe this is not at all true and these media reports are not representative of the pharmaceutical industry as a whole. We have scrutinised the 76 drugs mentioned in the said notification for removal of concessional duties and we understand that they have been selected by Government of India on the basis of availability of local manufacturing facilities. This being the case, providing
Indian pharmaceutical industry has been playing a pivotal role in the supply of affordable and quality pharmaceuticals to the developed and developing countries. Removing concessions on import of bulk drugs might result in Indian pharma losing out on its competitive advantage in generics.
Officialdom had realised that there was little or no production of these drugs in the country, specifically Antihemophilic medicines. Industry insiders claim that India produces only 10-12% of the annual requirement of about 700 million units of Antihaemophilic Factor Concentrates VIII and IX. This afterthought also reveals that there was no thought applied in withdrawing the concessions on essential drug imports. Result: The decision has not only raised eyebrows about the in-
tent, but also justifiable questions about the overall relevance of the withdrawal itself. For instance, India is yet to become self-sufficient in the production of generics and bulk drugs on which exemptions have been removed. A majority of companies which are producing these generics or formulations depend on imported bulk drugs – APIs and intermediates. There are only a few generic companies with their own bulk drugs and intermediates production facilities which do not depend on imports. So what was it that
initiated such actions in the first place? Clearly, the manner in which the notification was pushed through in post-haste, without consulting industry stakeholders and considering the impact on consumers, also leads some to believe that the decision was taken with an intent to protect a few companies in India, which have a monopoly on generic versions of some of these essential drugs.
customs duty exemption to this class of imported bulk drugs is not required. Customs duty on bulk drugs and intermediates were in the order of 110% ten years back and at that time the list of life saving drugs were prepared to bring down the cost of medicines. Now the customs duty plus CVD has been reduced. This is not likely to impact the price of finished products in a big way, since bulk drug is only one part of the total price of formulations. Hence, we rather believe the move will provide a boost to local manufacturers.
ports business, yet, we believe there are many bottlenecks hurting the industry. In this regard, we are constantly in consultation with related bodies and the Ministry. We are for the speedy implementation of the Katoch Committee report for the bulk drug industry in the country. Also, we believe, firstly that the government needs to change its definition of an MSME (Micro, Small and Medium Enterprises), as most of the pharma players, given the very nature of their business operations, fall outside of 10 crore bracket and thus are not able to benefit from the MSME related schemes of the government. Today there are costs such as bar coding (costing at least Rs.1.5-2.5 crore), WHO GMP certification, effluent power plants, adhering to ‘Quality by Design’, environmental clearances, and other international standard operating procedures that make our micro, small and medium pharmaceuticals producers uncompetitive internationally. In short, we want ease of doing busi-
ness for our sector. Today, in bulk drugs, taking an approval from the Ministry of Environment takes at least 1 to 2 years and then in case you decide to change the product mix, you need to re-obtain the approval which is again a very time consuming affair. When it comes to finance, we have asked for interest subvention. Bank moratorium period should also be as it is currently for infrastructure and power projects – where the payback period ranges from 10-20 years, with no payment in the initial 5 years. Presently no MSME pharma player is able to attain break-even before three years of operation, forget about profits. Today, if an SME player goes to a bank, it asks for balance sheet. When that is provided, the bank insists on profit figures; how do we expect a new pharma firm to show profits? We believe, it’s just a vicious cycle plaguing the sector. We need schemes focussed on the pharma sector.
TDB: Despite pharma sector leading the chart as among the top three foreign exchange earners for the country, the sector’s MSME players are still plagued with various bottlenecks. Please tell us about your recent endeavours in this regard? AKM: Yes, despite the fact that today pharma sector is worth Rs.2,00,000 crore of which Rs.1,00,000 crore signifies ex-
THE DIAGNOSIS
There might not be any substance to such
APRIL 2016 II THE DOLLAR BUSINESS 77
PRIME FOCUS
WITHDRAWL OF DUTY CONCESSION ON LIFE-SAVING DRUGS
claims or allegations, but one thing is for sure – the stated motive behind removing duty exemption on certain life-saving drugs doesn’t really make sense. The reason is simple. There are still not enough companies in India that manufacture generic versions of essential drugs figuring in the concession list (now withdrawn). In fact, the companies involved in the manufacturing of these formulations range from 2 to 14. A case in point could be anti-cancer
drug Imatinib Mesylate. Novartis and Sun Pharma are the only manufacturers that use this API to produce a drug which is used in the treatment of chronic myeloid leukemia. Sun Pharma, on December 15, 2015, was granted approval by the USFDA to manufacture the only generic version of this drug which is also produced by Novartis with the brand name Gleevec. The generic versions of another drug which has come under the axe of the
The number of companies involved in the manufacturing of generic versions of essential drugs figuring in the list on which concessions have been withdrawn is small.
“PRICES (OF LIFE-SAVING DRUGS) WILL RISE, SUPPLY WILL FALL” TDB: How would you react to the Indian government’s decision of removing a number of life-saving drugs and bulk drugs from customs duty exemption? Was the notification a hurried job? Siddharth Daga (SD): It is a decision taken in haste. I feel this was done based on the opinion of financial experts only to minimise the fiscal deficit. According to me, the move will not only result in prices of the life-saving drugs shooting up but would also lead to a heavy shortage in the supply of these drugs.
Siddharth Daga
CEO, VINS BIOPRODUCTS LTD. 78 THE DOLLAR BUSINESS II APRIL 2016
TDB: Many experts, manufacturers and suppliers are of the view that the decision has been taken without any forethought to existing realities. The ground reality at present is that not
government, Procarbozine, used for the treatment of Hodgkin’s disease (a cancer that starts in white blood cells called lymphocytes), brain tumor and melanoma, is being manufactured by just three companies in India – Zydus Cadila Healthcare, Alkem Laboratories, and Miracalus Pharma. Ranbaxy is the only company manufacturing the generic version – Macrogen 400mcg – of the drug Molgramostim, an immuno-stimulant for chemotherapy-associated neutropenia and bone marrow transplantation associated complications. These examples reveal that except for a few, who can afford their own bulk drug facilities, most Indian companies manufacturing life-saving, orphan or essential drugs, on which the concessions have been withdrawn, depend on sourcing their requirements through imports. The heavy dependence is evident from the fact that around 70% of India’s requirement of bulk drugs is sourced from international markets – a considerable quantum i.e., around 60% from China. In fact, if industry observers are to be believed, the imports have consistently been heading northwards. Analysis of import data proves them right too, with inbound
all generic or bulk drug substitutes are available in the country. Do you agree? SD: I do agree. Before taking a decision we have to think of alternatives and substitutes so that the general public does not suffer. In my view, the government should form a separate ministry for pharmaceuticals industry, instead of keeping it under the Ministry of Chemicals and Fertilizers, comprising of the Drug Controller General of India (DCGI), the National Pharmaceutical Pricing Authority (NPPA) and other central bodies related to the sector. That will prevent such less-calculated decision-making. TDB: The government had in its notification withdrawn the zero duty benefit on import of 15 life-saving formulations of which 10 are in the National List of Essential Medicines (NLEM). Consequently the customs duty on some of these formulations will now go
shipments rising from $800 million in 2004 to $3.4 billion in 2014, recording a CAGR of about 15% during the decade. So what does all this lead to? Withdrawal of concessions will prove to be counter-productive and perhaps result in detrimental consequences for the public at large. For instance, it would spell the death-knell for import dependent generic manufacturers and lead to dominance by major players, since the former would not be able to cope up with increased cost of inputs which also means inevitable escalation in production cost. Is this what ‘Make in India’ is supposed to achieve? India’s policymakers may have got their math wrong. Otherwise how would they explain the withdrawal of concessions despite being conscious of the fact that India first needs to achieve self-sufficiency and self-reliance? Or do we expect bulk drug units mushrooming across India overnight? The Indian Drug Manufacturers Association (IDMA) and the government believe that the withdrawal of concessionary rates will boost Indian drug manufacturing. But who will handhold the SME drug manufacturers when multi-million and billion dollar IPR liti-
up to 35%. Your views. SD: The prime objective of any government should be to make life-saving medicines available at affordable prices. There are many ways to do this. Just preparing NLEM list and putting them under Drug Price Control Orders (DPCO), and fixing a price is not the solution to a common man’s problems. Besides, withdrawing zero duty benefits and duties in inputs will only discourage the industry and create unwanted problems. In order to facilitate affordable medicines to the general public, the government should focus on reducing hospital expenses which contribute nearly 80% of the total expenditure incurred by any patient undergoing treatment at a hospital. TDB: Do you find generic life-saving drugs to be in anyway inferior to branded ones? SD: Definitely not. The manufacturing
DRUGS WHICH ARE A PART OF NATIONAL LIST OF ESSENTIAL MEDICINES AND FROM WHICH DUTY CONCESSIONS HAVE BEEN WITHDRAWN DRUGS REMOVED FROM 0% CUSTOMS DUTY LIST
IMPORTED FROM
ANTI-HEMOPHILIC FACTOR CONCENTRATE (VIII & IX)* ANTI-RABIES NORMAL HYMAN IMMUNOGLOBULIN ANTI D IMMUNOGLOBULIN FILGRASTIM /MOLGRASTIM (G-CSF / GM-CSF) IMATINIB MESILATE
UNITED STATES OF AMERICA (USA)
PROCARBAZINE RITONAVIR RITUXIMAB SAQUINAVIR TRASTUZUMAB
RUSSIA, GERMANY UK, CHINA USA USA, GERMANY FRANCE, SOUTH AFRICA, AUSTRALIA & CHINA USA, CHINA, IRELAND, MALAYSIA & SOUTH AFRICA USA AND GERMANY FRANCE, USA GERMANY & CHINA GERMANY USA, UK, RUSSIA FRANCE, USA & GERMANY US, IRELAND & UK Source: TDB Intelligence Unit; *Later restored
gations strike them? Has the government taken a blanket approval from USFDA, European Medicines Agency (EMA) and others, on behalf of Indian drug manufacturers, to mass manufacture all life-saving, patented drugs? Or have the policymakers forgotten that drugs that are patented cannot be produced indigenously without legal permissions? All this boils down to the question,
why did the government extend concessions on import of some of these essential drugs in the first place? Was it not because of a dire need for imports due to a dearth of indigenously produced drugs? The need for imports for essential formulae continues. So there’s essentially no need to alter policy or duties for “making changes” or for pleasing a certain faction of the pharma gentry.
of drugs in India is done under very stringent guidelines formulated by Drug Controller General of India (DCGI). These guidelines are meant to ensure quality drug manufacturing in India.
TDB: How conducive is the environment in India for growth of the pharmaceutical industry? SD: As I mentioned earlier, a separate ministry should be formed to take care of the pharma industry. This will facilitate faster decision-making and quicker statutory approvals will definitely benefit the industry, the common man and the country. Unless there is a ministry dedicated to address the needs and concerns of the pharma sector, the present suffocating environment cannot be done away with.
TDB: Why is it that there is little or no spend on drug discovery in India? Do you think some kind of government incentive to promote R&D will help the industry in the long run? SD: The Ministry of Science and Technology provides several incentives to promote drug discovery. The delays are mainly due to regulatory approvals which take longer time than expected. For growth in science, regulatory approvals and government incentives, should go hand in hand. India can then be recognised as a hub for drug discoveries in the world. Unless the government simplifies the process, there is not much scope for drug discovery in India.
TDB: How about the incentives provided to exporters of life-saving drugs? SD: Incentives available to exporters of life-saving drugs are negligible, ranging between 2% and 5%. In order to encourage ‘Make in India’ in the pharma sector, the government should offer more reasonable incentives. APRIL 2016 II THE DOLLAR BUSINESS 79
POLICY MONITOR
SANTOSH KUMAR SARANGI, CHAIRMAN, TEA BOARD
“TEA EXPORTS SUFFER FROM A SERIOUS COST DISADVANTAGE” India is one of the largest tea producers in the world, yet it suffers from very high costs of production. And that’s a drag on the Indian tea industry, which is trying hard to achieve newer highs in exports. The Dollar Business spoke with Santosh Kumar Sarangi, Chairman, Tea Board, on what the Board is doing to improve the situation and make the industry globally competitive. INTERVIEW BY MANISHA CHOUDHARI
TDB: Please give us a brief overview of India’s tea exports. What role has Tea Board been entrusted with? Santosh Kumar Sarangi (SKS): During FY2014-15, India produced 1,197 million kg of tea and registered a negative growth of 0.96%, which is modest and can be attributed to seasonal fluctuations. Out of this, about 78% was consumed domestically. On the exports front, there was a decline in volume and unit price earning as compared to FY2013-14. Overall, 199 million kg of tea was exported at an aggregate value of $626 million, showing an overall decline of 27 million kg in export volume and $121 million in export value. During the April-September period of FY2015-16, as compared to the same period in FY2014-15, exports of tea went up by about 6% – from 93 million kg to 99 million kg. This positive growth in half-yearly exports can be attributed to the reversal in declining demand trend in all key markets such as Iran, Russia, USA, UAE, Pakistan during April-September 2015 period. One of the primary functions of the Tea Board is to carry out promotional activities aimed at improving the demand for high-value Indian tea in international markets with high unit price realisation from exports. Promotional measures have been sustained to communicate the niceties of single-origin Indian tea to global customers. Focussed attention is 80 THE DOLLAR BUSINESS II APRIL 2016
given to select countries, where there is higher potential for increasing exports. Indian exporters are also provided with all possible support to encourage exports and marketing of Indian brands abroad. TDB: What measures are taken to ensure that the quality of Indian tea meets global standards? SKS: Ministry of Commerce & Industry, with Tea Board as the regulatory body, maintains the quality standard of Indian tea by monitoring and facilitating various control orders under the Tea Act. In fact, we recently issued a comprehensive set of guidelines for safe usage of pesticides, also known as plant protection formulations (PPFs), in tea plantations under Plant Protection Code (PPC) for the Indian tea industry. The Board has developed this PPC, for effective use of PPFs, in consultation with tea research institutes and the industry. The PPC deals with safe usage of PPFs, along with methodologies to be followed to reduce pesticide residues in tea. The PPC encourages tea growers to critically review and monitor the use of PPFs, reduce its use wherever possible and apply them in the safest way possible. The present version of PPC approves the usage of 35 formulations of pesticide permitted by the Central Insecticide Board & Registration Committee (CIBRC) in tea plantations across India. Tea Board of India has also launched
‘Trustea’, a programme which aims to sustainably transform the Indian tea industry. A Trustea verified unit will not use any pesticides that have been banned by the central and state governments, or their affiliated bodies. This programme aims to transform 500 million kg, or 51% of Indian tea, spread over 300,000 hectares by 2017. Trustea initiative will also support the certification of 40,000 small estate holders who produce about 25% of Indian tea. Furthermore, tea research institutes have been advised to monitor the use of PPFs in tea plantations, and generate residue and bio-efficacy data which are submitted to both national (CIBRC, FSSAI) and international (Codex, JMPR, FAO) regulatory bodies on a continuous basis for the fixation of MRLs (maximum residue levels). In fact, the Indian tea industry is constantly taking steps to make tea cultivation more sustainable and reduce its reliance on synthetic plant protection formulations, and to ensure that Indian tea continues to meet the high standards expected by both domestic consumers and international importers. Tea Board has also constituted two tea councils for monitoring and ensuring the quality standard of Indian tea exported abroad. We keep constant vigil on the quality of tea produced and exported by drawing samples from different sources including warehouses, manufacturing
units and markets on a regular basis to ensure their compliance to FSSAI standard or ISO 3720 standard. Utmost care is being taken by Tea Board to maintain the quality and image of Indian tea, both in domestic and global markets. TDB: The vision of Tea Board is ‘to make India, the leading producer and supplier of quality tea in the global market’. How far are you from achieving this vision? SKS: We are already the leading producer of black tea in the world, with 1,207 million kg of production per annum. However, when it comes to exports of tea to international markets, there are challenges. The domestic market is also expanding, a reason why India’s share of world exports has remained static over the last decade. Further, most of the tea exported is produced by large producer groups, which have high fixed and social costs, unlike other tea producing countries, such as Kenya, where 60% of the produce comes from low-cost, well-organised small tea growers. The Indian tea exports also suffer from cost disadvantage vis-à-vis other tea exporting countries, due to higher inland transportation costs and ocean freight. TDB: What are the main challenges faced by the tea industry today? SKS: The high cost of production of tea has been impeding the industry’s competitiveness. In the cost structure, 80% of the total cost is fixed cost, with little scope for reduction. Input costs have gone up significantly. Labour cost constitutes about 55-60% of the total production cost, as the industry bears the majority of the social cost as mandated by the Plantation Labour Act. The industry is constrained by rising cost of production, which is not adequately compensated by reasonable price realisations. Then, a number of estates have tea bushes which are over 50 years old (comprising 37% of the total area under tea cultivation). In order to sustain viability, an annual 2% of area replanting is essential. The cost of replantation and the gestation period involved pose a challenge for every tea estate. Moreover, companies also need to undertake regular
technology modernisation programmes and quality awareness initiatives for upgrading the quality of tea. Despite the availability of government incentives, the high cost of production has been discouraging sustained investments into the Indian tea industry. There is also growing evidence of the adverse impact of climate change with long drought periods and inadequate rainfall during the tea growing season. As the tea season is slowly getting restricted to eight months, there is a negative impact on productivity and cost of production. Climate change has also led to increased pest infestations, leading to severe crop loss. Under the circumstanc-
LABOUR COST CONSTITUTES ABOUT 55-60% OF THE TOTAL PRODUCTION COST IN INDIA es, the industry’s dependence on irrigation has increased phenomenally. However, the present support schemes of the government mainly cater to the needs of marginal farmers, and don’t address the issues of the organised tea producers. Production of safe tea using good agricultural practices is also of prime imporAPRIL 2016 II THE DOLLAR BUSINESS 81
POLICY MONITOR
SANTOSH KUMAR SARANGI, CHAIRMAN, TEA BOARD
tance. The industry requires pesticides that not only effectively combat the rampant pest infestations but also keep the crop fit for human consumption. In fact, harmonisation of MRLs among various tea trading countries is one of the biggest challenges being faced by the Indian tea industry, which it needs to adhere to in order to remain competitive. Small tea growers now account for over 30% of India’s total tea production, and have a positive impact on the socio-economic landscape in far flung tea-growing areas. However, the viability of this sector is linked to the price stability of the organised sector. Due to stagnation of prices and rising costs, the sustainability of this sector is a challenge. Finally – coming to labour problems – since more workers are now opting for work in urban areas, the tea plantations have started experiencing labour shortage during harvesting. Additionally, the industry has multiple unions. The Trade Unions Act 1926 allows only 7 workers to form a trade union in an enterprise – this legislative permissiveness has resulted in increased growth of trade unions. The multiplicity of trade unions has complicated the process of collective bargaining, as a minority union reserves the right to challenge the agreement entered into with the majority of unions before the courts, increasing litigation and over-burdening the adjudication machinery. Recognition of the bargaining agent is, therefore, necessary to streamline and strengthen the collective bargaining process. TDB: What are the reasons for the recent slump in tea exports? SKS: Exports for FY2015-16 (April-September) is at 98.69 million kg, with FOB value of Rs.1,945.84 crore, and average unit price realisation at Rs.197.17 per kg. The value realisation in dollar term stands at $302.92 million. Exports during the period increased by 5.63 million kgs and FOB value increased by Rs.81.26 crore, but value realisation in dollar terms decreased by $6.76 million. This is because the unit price realisation in dollars during the current period is $3.07 per kg, as compared to $3.33 per kg during the same period last year. 82 THE DOLLAR BUSINESS II APRIL 2016
TDB: India’s tea imports are also seeing a slow but steady rise. What is the reason behind this trend? SKS: Generally, tea is imported for re-export after blending with Indian tea, as a value addition. India allows import of tea by EOU/SEZ under zero import duty. However, tea imported for the domestic market attracts basic import duty of 100%, plus a special additional duty of 4% on basic duty as well as a surcharge. However, a concessionary rate of 7.5% basic duty plus other normal surcharges apply to imports from Sri Lanka up to a volume of 15 million kg per calendar year under Indo-Sri Lanka FTA. TDB: Since FY2010, overall tea production volume has gone up by 21.95%. While production in North India has gone up significantly, production in South India is barely increasing. Why? SKS: A majority of the increase comes from small tea growers sector, which is growing in North, whereas new planting isn’t really happening in the South due to limited availability of land. The increase of production in organised sector is not significant. In FY2014-15, the total tea produced in India was 1,197 million kg, out of which 20.16% came from South India, and 79.84% came from the North. TDB: In the last five years, tea exports from Sri Lanka and China – the two biggest exporters of tea – have increased by 17.74% and 62.3% respectively, while India’s tea exports growth has been erratic. What do Sri Lanka and China have that we don’t? SKS: The marketing of Indian tea in export markets has started gaining momentum only over the last two decades. Moreover, there are others factors that put India at a great disadvantage in comparison to the two major tea exporting countries viz. Kenya and Sri Lanka, which have little domestic demand for their produce. India is pre-dominantly a CTC (crush, tear, curl) tea manufacturer, while demand trend in international markets is primarily geared toward orthodox tea and green tea. There is also low export focus by the industry due to large domestic market size, which is
growing at a healthy rate. Furthermore, unlike competing countries, 74% of Indian tea industry comprises large producers with a high-cost structure against the well-organised, low-cost, high quality small-holder sectors in Kenya, Sri Lanka, Vietnam, Indonesia, and Malawi. Additionally, unlike these countries, it’s not a year-round harvest in India but in 5-6 flushes. Quality of the produce also depends on the agro-climatic conditions, resulting in inconsistency in quality across the country, unlike Kenya, which has no climate-induced variations in quality due to its geographical location. As mentioned earlier, we face higher inland transport costs compared to other competing countries. 75% of the tea is cultivated far away from the ports – from production or processing regions to auction centers, an exporter faces two types of challenges i.e. sourcing of quality tea and damage or pilferage during transportation. And from auction centers to the port, he incurs warehousing cost and port charges. The geographical location of the major ports is also such that the mother vessel cannot reach these ports. So, there is a long lead time before the consignment is actually shipped out of the country. This also means additional cost for exporters. Increasing exports in value terms – both high-value tea as well as tea in value-added form – is an important challenge to face during the 12th Plan period. Instead of merely chasing volumes without giving any thought to product mix our planning should be in sync with consumer requirements in key export markets. For instance, as per the latest trend in the international market, at an aggregate level, while shares of CTC and orthodox teas in the global tea market have declined over the last decade, green tea’s share has increased substantially. Keeping in view the said objectives, a comprehensive export strategy, encompassing added focus on creation of common facilities and sustained promotion in the focused markets, has been envisaged for implementation. The objective is to improve greatly on export volumes and unit price realisation during the coming decade.
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DOCKYARD
CHENNAI PORT
THE PORT OF CALL FOR AUTOMOBILES Chennai Port, the third oldest major port in the country, started commercial operations in 1880s. And thanks to its geographical location, this artificial all-weather port soon became the ‘Gateway of South India’. However, over a century later congestion and environmental concerns have started hindering its growth. Is there really a way out of the situation for this hub port for containers, cars and project cargo on the east coast? BY SISIR PRADHAN
84 THE DOLLAR BUSINESS II APRIL 2016
A
port at Chennai was first suggested by Warren Hastings, the first Governor-General of British India, in 1770s when he was posted in this city (then known as Madras). However, the work on the project only began about 70 years later, in 1850s, when the Madras Chamber of Commerce and Industry requested for a pier to berth sea vessels and until 1875 it continued to be one, on open sandy coast swept by storms and occasional monsoons. A full-fledged port started coming into existence only in 1904 when Francis Spring, the then Chairman of Madras Port Trust, created a new north-eastern entrance after closing the original eastern entrance to control the siltation of the channel in front of the basin. Subsequently quays were constructed at regular intervals and the port went on to become the biggest port on the east cost of India. Further, as energy-starved India continued to rely on import of coal from eastern countries like Indonesia, Australia and South Africa, the port only grew in size and stature. However, come today, and the second busiest container handling major port in the country after Jawaharlal Nehru (JN) Port at Nhava Sheva has become a victim of its own success. Although the rise of Chennai as the manufacturing hub for global automotive giants has helped the port gain ground (in terms of containerised and automobile export shipments) to an extent, the heavy
traffic of the metropolis has choked the roads to the port, as a result the container traffic has slowly started moving to other ports. So, while JN Port had handled 4.47 million TEUs of container traffic during FY2014-15, Chennai – with an installed container handling capacity of 1.6 million TEUs (at CCTPL) and 1.5 million TEUs (at CITPL) – handled just 1.55 million TEUs during the same period. Further, following the ban imposed by the Madras High Court on handling polluting cargoes like coal and iron ore on Chennai Port in 2011, these cargoes have also moved to other nearby ports. Officials at Chennai Port having realised the port’s limitations in handling high volume polluting cargo, invested in a new port (Kamarajar Port) away from the metropolis, at Ennore. But still, Chennai Port, located in one of busiest commercial regions in the country, continues to enjoy the patronage from the business community in South India.
THE AUTO THRUST
Chennai Port has come a long way since
CHENNAI PORT HAS REALISED ITS LIMITATIONS IN HANDLING HIGH VOLUME CARGO
The port has also started coastal movement of passenger cars and recently Hyundai had shipped 800 cars from Chennai Port to APM Terminals Pipavav in Gujarat. APRIL 2016 II THE DOLLAR BUSINESS 85
DOCKYARD
CHENNAI PORT
the first major export-shipment of 760 cars (Accent and Santro) by Hyundai Motor India was made in July 2000 to Algeria. While, over time, Hyundai has become one of the largest car exporters from India, with an average shipment of 2-2.5 lakh cars per annum Chennai Port is one of the top ports when it comes to exports of automobiles from India. The central government’s thrust on coastal movement of cargo and relaxation on cabotage law has further strengthened the future growth potential for automobile shipments from the port. In fact, recently, Hyundai shipped 800 cars from Chennai Port to APM Terminals Pipavav in Gujarat. These cars were meant for distribution in the western parts of India. Meanwhile, competition has also come up really strong for the port when it comes to shipping cars overseas. Kamarajar Port at Ennore, which was developed
to handle polluting thermal coal imports, has started investing in infrastructure to attract other types of cargo, and as a result the corporate port has overtaken Chennai Port to become the largest shipper of passenger cars in FY2015. Kamarajar handled 2.15 lakh passenger cars in FY2015 as against 1.93 lakh cars handled by Chennai Port during the same period. The reason for Kamarajar gaining traction among car makers is the availability of clean parking area in the port. Also with the port being located outside the busy Chennai metropolis, car carriers can travel faster to the port due to the absence of city traffic. Competition is expected to intense in near future as Adani Group, operators of India’s largest private port company, has got the mandate from L&T to operate its port at Kattupalli, which is located very close to the Kamarajar Port. Interestingly, Chennai Port also competes with ports at
Ennore, Kattupalli and Krishnapatnam for container business.
CONGESTION CONUNDRUM AT PLAY
Port stakeholders have time and again requested for a dedicated road freight corridor to bypass the city traffic while moving in and out of the port. National Highways Authority of India (NHAI) was assigned the project to build an elevated four lane link road from the port to Maduravoyal, a locality in west Chennai, on BOT basis at an estimated investment of Rs.1,815 crore. But that didn’t take off really well. The proposal was to start the road from inside the port and run up to Maduravoyal for a length of about 19 kms along Cooum River bank up to Koyambedu and along National Highway No. 4 thereafter. While construction was in progress, a stop work notice was issued by the state Public
“DEDICATED JETTY IS BEING DEVELOPED TO HANDLE COASTAL CARGO” TDB: You have additional charge as Chairman of Chennai Port Trust. Why are there so many major ports running without full-time Chairmen? M. A. Bhaskarachar (MAB): It was a decision made by the central government that I take charge of Chennai Port in addition to Kamarajar Port. The government is taking action to fill up the positions and except for a few ports, most of major ports have full-time chairmen. Sometimes it is difficult to find a right candidate who meets all the parameters required to head a seaport and in such a scenario it is required to re-advertise and reconvene the SSC (Services Selection Committee). This, at times, takes time and the appointment gets delayed, otherwise the government believes in a proactive approach to fill up vacant positions on a proactive basis. TDB: What are the major issues at Chennai Port that you would like to address on a priority basis? MAB: The biggest challenge for Chennai Port is traffic congestion on the roads that 86 THE DOLLAR BUSINESS II APRIL 2016
connect the port to the national highway. It was not properly co-ordinated or regulated because of involvement of various agencies like container freight stations, terminal operators and traffic police. Although all the agencies are trying to establish a proper co-ordination to ease the congestion but the congestion issue is yet to be completely resolved. We have devised a mechanism with the support of city police that all trailers will move only in one row and no over-taking will be allowed. A single window system has been devised where all statutory documents like port entry pass and Customs will be checked and in case any cargo carrier fails to submit all the documents, the trailer will be turned back. Earlier truck operators used to join the queue and unnecessarily create blockades awaiting for their documents. A 24/7 monitoring of traffic has been put in place which has helped in resolving the congestion issue to a large extent. Now as only one row of trucks have been allowed, it leaves space for general traffic to move. The next major problem has been
M. A. Bhaskarachar
CHAIRMAN-IN-CHARGE, CHENNAI PORT TRUST
mechanisation of cargo handling operation. Mobile Harbour Cranes (MHCs) were pressed into service through PPP mode but the cranes have not been in operation due to opposition from local stevedores. The entire process of allocation of the contract has been done through
Engineering project cargo being towed by tugboats. The port now has 3 docks, 24 berths and draft ranging up to 16.5 metres.
Chennai Port has an installed container handling capacity of 3.1 million TEUs, and in FY2014-15 it handled 1.55 million TEUs.
Works Department in March 2012 stating violation of certain conditions. NHAI filed a writ petition before the state High Court challenging the order. The High Court gave a verdict in favour of NHAI, but the state government challenged the verdict in Supreme Court in April 2012 and the case is still sub-judice. While trade bodies in general declined to comment on the issue as the case is
sub-judice, the general sentiment is that the objection to the project is a result of the political rivalry between two major parties in the state. Till the Supreme Court comes out with its verdict, the connectivity problem remains. Giving details of the ordeal faced by locals and the trade, J. Krishnan of S. Natesa Iyer & Co. and General Committee Member of the Madras Chamber of Commerce
and Industry says that the administration has failed to check growth of human habitat around the port, which has led to a growth in traffic near the port. Further, due to the assemblage of cargo trailers on the roads leading to the port, frequent instances of violent confrontation between the truckers and locals are also being reported on a regular basis. Meanwhile, NHAI has taken up a proj-
a transparent tendering process and yet stevedores filed cases in court to stop use of MHCs. Now the cranes are in operation and ships have started to come back to the port. Meanwhile, dredging work is being carried out to increase draft inside the port and only 5-10% of the work is still pending which we are hopeful will be completed in a few days. Once the dredging is completed, the draft will increase to 14.5-15 metre which will allow bigger vessels, and even gearless vessels, to sail in. A contractor involved in dredging was slapped with a termination notice due to delay in completion of the work. The entire process of re-tendering and reallocation of work would have taken a minimum 6 months time. Hence, after assuming charge, I withheld the termination order and asked the contractor to bring in one more dredger and finish the work. The work is going on and we are hopeful it will be completed as per the decided timeline.
Supreme Court to the Empowered Committee for review. We have submitted a report before the committee that the port will install advanced cargo handling facility to handle coal without creating much dust and pollution. We are expecting a verdict on the matter before March 31.
few days before the Rail Budget and informed us that an auto rail hub is proposed at Walajabad, on the outskirts of the city. A stockyard is being developed at the auto hub where all vehicles for export will be assembled and from there it will be moved directly inside the port by rail which will help faster and congestion-free movement. We have reduced charges for the container trade, and vessel-related charges have been reduced for all vessels and there has been a hefty reduction on charges for mainline vessels. We have fully waived off rail side container handling charges inside the port area. We have asked CONCOR to bill the loading and unloading charges on the port.
TDB: What is the status of the appeal that the port had made before the Supreme Court of India to restart coal handling operations? MAB: The case has been referred by the
TDB: Handling of polluting cargo has already been stopped at Mumbai Port. How will you ensure pollution-free operation in a metropolis like Chennai? MAB: We will not move coal by road, it will be transported by train. If coal is moved from the ship to the storage yard and further loaded onto the rail rakes through closed conveyor belts, there is very little chance that it will create pollution. We expect to start with 3-5 million tonnes of coal per annum. TDB: What are the expansion and investment plans for the near future? MAB: There are no expansion plans for the time being but we will focus more on improving our productivity. We are going to have a common railway yard to handle all varieties of cargo and the rail yard will be connected to the main rail line. The Chief Commercial Manager of Southern Railway had visited the port
TDB: What support do you expect from the government? MAB: We are constructing a coastal jetty which is being developed with financial support from the central government. The government has asked all the major ports to develop exclusive berths to handle coastal cargo where ships will have a separate dedicated entry to the berths. It will not involve any Customs-related formalities which will definitely ease entry and exit of cargo. APRIL 2016 II THE DOLLAR BUSINESS 87
DOCKYARD
CHENNAI PORT
ect to construct a road to connect Chennai and Kamarajar ports, which is expected to ease congestion on port approach roads in the city. However, the trade fraternity is unhappy with the progress of the project and feels that “the road construction work is going at a snail’s pace and the implementing authorities need to speed up the project to ease congestion.” A few stakeholders believe that construction of dedicated roads is not a complete solution to the traffic congestion problem. They feel that authorities also need to come up with scientific and innovative ways to regulate traffic, for instance, development of parking areas outside the port so that trailer traffic can be regulated in accordance with the speed of cargo handling operations inside the port.
MOST TRADE RELATED AGENCIES ARE LOCATED IN THE VICINITY OF THE PORT HELPING EASE OF BUSINESS
Some stakeholders, on condition of anonymity, blamed the faulty BOT (build-operate-transfer) policy of the port for congestion and, in turn, for a fall in port’s performance. They say over a period of time container traffic has increased in the region. However, when the two private players were roped in to start mechanised container operations on BOT basis, it was decided that private operators will pay a certain royalty to the port based on the number of containers moving through the port. However, if the container traffic crossed a fixed number, the private operators were supposed to give a concession on tariff to port users. “And it is due to this clause that the private operators are deliberately slowing down the container handling operations so that they don’t lose out on revenue,” they say. Further, according to them, BOT contracts are allocated to private operators on long-term basis ranging from 30-50 years and the trade and economic conditions could go through lot of changes during these years. Hence, they believe, the government should keep the option open to amend the BOT contract, particularly revenue sharing arrangement and
tariff structure, at regular intervals as per prevailing market conditions. However, a senior official of CITPL, to whom The Dollar Business spoke to, refuted the allegations that CITPL is deliberately slowing down container handling operation to gain tariff advantage. She claimed that there are no financial or tariff advantages for the terminal in slowing down operations and that there is no clause to reduce charges (based on volume increase or decrease) in the notified tariff or in the licence agreement that CITPL has signed with the port. She also said, “the rebate we provide to a client is discussed and signed on a case to case basis. It has nothing to do with the contract. A terminal’s performance is measured by the volume it handles and the operator would never like to be seen as a non-performer.”
THE BURDEN OF LEGACY
Like most of the major ports in the country, which have come up before the 90s, this port too has a huge burden of excess manpower and related financial stress. However, despite all odds, the biggest advantage for Chennai Port is that most of
“THERE IS A NEED FOR PERIODICAL REASSESSMENT OF BOT CONTRACTS”
K. V. V. Giri
PRESIDENT, THE CHENNAI CUSTOM HOUSE AGENTS ASSOCIATION (CCHAA) 88 THE DOLLAR BUSINESS II APRIL 2016
TDB: What improvements, in terms of service and infrastructure, would you like to see at Chennai Port? K. V. V. Giri (KVVG): From the point of view of service quality, the port is comparatively good. But still there are some issues. Though container handling operations have been privatised, the trade is facing difficulties due to congestion, particularly on approach roads to the port. The port’s main access gate road is also very narrow. Moreover, the pace of container handling operations by private container terminal operators – Chennai International Terminals Pvt. Ltd. (CITPL), owned and managed by PSA International, and Chennai Container Terminal Pvt. Ltd. (CCTPL) – is slow. CITPL has been facing labour issues for the last three months. We, as a trade association,
have written a letter to CITPL seeking clarification, however we are yet to receive any response. For the development of the port, they should learn from private terminals like Krishnapatnam and Adani. Chennai Port Trust should make a clear, brief and open statement to all stakeholders regarding the available infrastructure and what needs to be done to help the trade. The congestion issue with regard to container cargo can definitely be resolved. Our past President P. S. Krishnan is a trustee of the Port Trust. He has devoted time and resource for the development of the Port. The association has discussed with all stakeholders and the city police to find ways to ease traffic congestion. TDB: The port officials say that since
the trade-related agencies, both government and private such as Customs, freight forwarders, Assistant Drug Controller, etc., have their offices located in the vicinity of the port. Considering this, exporters and importers still prefer this port as it saves them time. The port being one of the oldest ports in the region has developed an eco-system and a number of mainline vessels call on the port on regular basis. The port has also filed a report on dust-free handling of coal following the direction of the Supreme Court in March 2015. The cargo, which was once a major source of revenue for the port, is likely to come back to the port if all goes well and if the apex court decides in favour of the port. Chennai Port has had a long and rich tradition of success since its inception and has been contributing to the region’s growth for more than 130 years now. So, it will be tough for anyone to completely nullify the importance of the port. But then, expectations are also high and the port needs to live up to its commercial legacy of the bygone era. “But can it?” is one big question that only Chennai Port authorities can answer!
the elevated four lane link road from the port to Maduravoyal couldn’t be completed, congestion continues to be an issue. Do you agree? KVVG: We should look at ways to optimise the performance of the port with the available infrastructure. Last year we conducted a study to evaluate the performance of the terminal based on various parameters like time required to transport containers to terminal, dwell time, and average time required to load and unload a container. We found that there is a scope for reduction in dwell time. Containers have to pass through two gates to enter the private terminals – CITPL or CCTPL. Terminal operators should construct a separate road to drive out empty trailers from the terminals. It can be a permanent solution to the congestion problem generated by container carrier traffic. The general understanding is that the private terminal operators have signed a
Engineering project cargo is one of the major cargo types handled by the port.
Traffic handled at major ports
Thanks to congestion issue, container traffic is slowly moving away from Chennai 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Paradip Kolkata FY2015
Kamarajar (Ennore)
Visakhapatnam
V.O. Chidambaranar
Chennai
New Mangalore
Cochin
Kandla
Mumbai
Mormugao
JNPT
FY2016 Source: Indian Port Association; figures in ‘000 tonnes for April 2015 to February 2016 period
BOT agreement with the Port Trust, according to which if the containers handled at the terminal crosses a certain volume they have to pay an incentive to the Port. This is the reason why they are deliberately not focusing on increasing the container volume. As President of CHA association, I would request Port Trust to revisit the contract signed with private operators. Earlier, we used to get container related clearance inside the port area but it led to multiple problems and delays. But now there are 32 container freight stations located in the region to take care of paper work and other statutory clearances, hence the terminal operators should send off trailers without much delay but there seems to be some procedural issues that slow down the handling process. The BOT agreement was signed about 15 years back and the trade has gone through a lot of change in these years. Hence, the port authorities should evaluate the contract to suit the
current requirements of the trade. The port should allow usage of available land to construct a trailer parking yard. TDB: Despite all these challenges how has the port managed to remain the second highest container handling major port in the country? KVVG: The reason is Custom House in Chennai provides ADC (Assistant Drug Controller) clearance apart from other allied agencies also being based out of the city. This provides the convenience of obtaining all required clearances in one location. Customs has also become very proactive now. The department has introduced single window clearance, which brings on board an average of 44 agencies involved in clearing of a consignment from the Customs. Ministry of Finance has launched a pilot project based on an online platform and once it is implemented the processing time will reduce further. APRIL 2016 II THE DOLLAR BUSINESS 89
GLOBAL MANAGER
CHRISTOPH REMUND, CEO, DHL GLOBAL FORWARDING (INDIA)
“WE TAILOR SERVICES TO HELP SMEs GROW” DHL is one of the leading players in the world in logistics solutions, connecting 220 countries across the globe. In an exclusive interaction with The Dollar Business, Christoph Remund, CEO, DHL Global Forwarding (India), reveals how he plans to expand DHL’s already formidable presence across the country. INTERVIEW BY AHMAD SHARIQ KHAN
TDB: What is it that makes DHL stand out from the crowd? Christoph Remund (CR): DHL has been building its logistics presence and strengthening its leadership position in India since it entered the Indian market about forty years ago. DHL Global Forwarding India is a specialist in air, ocean and road freight as well as industrial projects, and end-to-end transport management solutions. I believe, DHL’s family of divisions offer an unrivalled portfolio of logistics services – all with specialised solutions for growth markets and industries including e-commerce, technology, life sciences and healthcare, energy, automotive and retail. TDB: What are the various tools that DHL offers Indian exporters to hedge their overseas risks? Going forward, how do you plan to assist freight and supply chain activities in India? CR: For over a decade, DHL Global Forwarding has maintained a market leadership position at all gateway airports in India. DHL’s vision to become the first choice of customers, investors and employees, has been at the core of its success. Amongst the many milestones, the company was instrumental in bringing in freighter operations to meet the demands of its customers. Our ‘Customs & Trade Consulting’ department helps exporters in getting Authorised Economic Operator (AEO) certification. AEO is a global Customs & Trade Security programme which India has also adopted recently. The company 90 THE DOLLAR BUSINESS II APRIL 2016
also has a security department which helps trade partners in understanding global security laws such as CTPAT (Customs-Trade Partnership against Terrorism). DHL Global Forwarding therefore assists trade in the preparatory work for getting accreditation, during as well as post the accreditation process to ensure the standards committed to are followed diligently. Further, our Free Trade Zone provides export consolidation platform for the overseas buyers within India thereby reducing the risk and cost for the Indian exporter. TDB: DHL is planning to invest about $16.3 million in India. Can you please elaborate on these investments? CR: DHL Global Forwarding India continues to invest in developing its own Free Trade Zone facilities in Mumbai and Tamil Nadu, to provide world class warehousing infrastructure, boost employment opportunities and offer related services to enhance trade opportunities for its customers. This includes a special multi-zoned temperature and humidity controlled area for the life sciences and healthcare industry. Several other value added services that cater to all sectors of industries include – labelling or bar coding for the fashion & apparel industry; specialised handling of hazardous commodities and open storage for the oil & gas industry; temperature controlled storage for the pharma industry; and general services such as packing management, sorting, inspection, re-invoicing, strapping, kitting and assembly of semi and complete
knocked down kits for aviation, IT and telecom industries. TDB: A DHL study reveals that small and medium-sized enterprises (SMEs) engaged in international markets are twice as likely to be successful as those that only operate domestically. What’s the lesson for Indian SMEs there? CR: Small & Medium Enterprises (SMEs) have been the backbone of the Indian economy and they have emerged as a highly vibrant and dynamic sector over the last few decades. Key benefits to Indian SMEs with an international approach are – access to new markets, access to knowhow and technology and diversification of their products or services. SMEs’ biggest concerns relating to international trade are a lack of available information on foreign markets, high customs duties and the difficulty of establishing contacts with foreign partners and overseas customers. As a global logistics company, we aid our SME customers to make this process efficient. Also, the company continues to tailor its services and solutions to help SMEs grow and compete in the global arena. TDB: The government is encouraging public private partnership (PPP) at major ports, besides it has also been pushing for multi-modal logistics parks. How will these initiatives help accelerate the pace of trade in India? CR: For India to become the manufacturing hub of the world, as envisaged by the government, these initiatives are a pre-requisite. PPP is a proven and tested
model that has worked well both in India and globally. Dedicated freight corridor (DFC) may need a fast track implementation as it complements the launch of state-of-the-art terminals. The Nhava Sheva port, for example, has regular congestions due to lack of a DFC. The key to DFC’s success, however, would solely depend on its speedy implementation. Once Goods & Services Tax (GST) gets implemented, we could see both the logistics parks and free trade zones (FTZs) developing at a much faster pace. TDB: Can you tell us about your recently adopted risk management platform aimed at managing risks in supply chains and gaining better visibility of end-to-end supply chain issues? CR: We ensure that our global customers have visibility into product flow right from the area of production to the area of consumption by deploying and constantly improving our state-of-the-art visibility systems. Whether it is for automotive, life-saving healthcare products or time sensitive fashion or retail products, the company constantly monitors the flow of cargo and accompanying documents over land, air and ocean. With sourcing becoming global, DHL’s growing presence on the world map ensures that subject matter experts provide visibility of cargo status for global customers irrespective of the time zone. We understand that we are in a business with many associated risks and are always ready for any eventuality. That’s the reason why issues such as lightning striking at the port, typhoons delaying container loading and traffic disruptions hindering last mile delivery are all plotted, while the supply chain systems are constantly modified, allowing the customers to be updated on delivery schedules. We are aware that production and sourcing from developing markets have challenges, thus we aim to reduce and control such risks for its global customers with real-time visibility, a strong operational process, monitoring by subject matter experts and managing government agencies and related compliance. All these tools are available to Indian exports community and are being extensively used. APRIL 2016 II THE DOLLAR BUSINESS 91
TDB FORUM
Ask a Question We export against advance payment by bank TT, and export by air cargo. It is a commercial shipment. The bank provides us with foreign inward remittance certificate. Do we need to inform RBI or DGFT of our payments? (Ashish, +918866767XXX, co.in)
nenotech_shah@yahoo.
Dear Ashish: As per the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000, prior approval of RBI is required by an exporter for receipt of advances for which the time duration of commercial shipment (exports) of goods exceeds one year as per the export agreement. As a response to requests received from exporters, RBI has also allowed Authorised Dealer (AD) Category-I banks (which includes 106 major banks), to allow exporters with a minimum track record of 3 years to receive long term export advance up to a maximum duration of 10 years. There are conditions of disclosure attached in this case as well. For instance, even in this case, receipt of advances of $100 million or more (Approx. Rs.670 crore+) need to be immediately reported to RBI. Do let us know the duration between agreement date/export advance and date of shipping in your particular case so we can suggest better. Response by: Steven Philip Warner, President (VMPL) & Editor-in-Chief, The Dollar Business
92 THE DOLLAR BUSINESS II APRIL 2016
In the world of export-import, each shipment counts. And you cannot afford to make any “uninformed investment”. So, if you have any doubt or a question, ask us. Our team of experts at The Dollar Business Intelligence Unit will be happy to answer your queries. Your question(s), if approved, will also be published on www. thedollarbusiness.com, and/ or in forthcoming issue of The Dollar Business I am a manufacturer of greige fabric. Can you tell me how to calculate the cost (FOB and CIF) if I want to export the fabric to UAE? Is there a fixed format? And, is there any reliable source to get the information about freight, insurance cost and duties etc.? (Mehul, Proprietor, MVEK IMPEX, +91-9099161XXX, patelmehul163@yahoo.com)
Dear Mehul: FOB means Free On Board (or Freight On Board). The term FOB indicates that the seller is liable to deliver goods on board a vessel designated by the buyer. This means all costs involved in delivering the goods on board of vessel (designated by the buyer) are to be borne by the seller. Beyond that point, the buyer has to bear all costs and risks of
loss or damage of goods. Cost, insurance and freight (CIF), on the other hand, requires the seller to deliver the goods to a port of destination decided by the buyer and seller, and provides the buyer with the documents necessary to obtain the goods from the carrier. In this case, the costs of insurance and freight are borne by the seller. In case you have further queries, The Dollar Business Intelligence Unit would like to hear from you. Response by: Dr. A. K. Sengupta, Chief Consulting Editor, The Dollar Business
Please help me understand Merchandise Exports from India Scheme (MEIS). How do I arrive at the incentive figure? (Uday, udayintech@gmail.com, 9632633XXX)
+91-
Dear Uday: The Merchandise Exports from India Scheme (MEIS), introduced in FTP 2015-2020, replaces erstwhile Chapter 3 incentive schemes – Focus Product Scheme (FPS), Focus Market Scheme (FMS), Market Linked Focus Product Scheme (MLFPS), Agri Infrastructure Incentive Scheme (AIIS) and Vishesh Krishi and Gram Udyog Yojana (VKGUY). The objective of the scheme is to offset infrastructural inefficiencies and associated costs involved in export of goods/products, which are produced/manufactured in India, especially those having high export intensity, employment potential and thereby enhancing India’s export competitiveness. According to FTP 2015-2020, “Exports of notified goods/products with ITC[HS] code, to notified markets as listed in Appendix 3B, shall be rewarded under MEIS. Appendix 3B also lists the rate(s) of rewards on various notified products [ITC (HS) code wise].” The basis of calculation of reward would be on realised FOB value of exports in free foreign exchange, or on FOB value of exports as given in the Shipping Bills in
TDB FORUM free foreign exchange, whichever is less, unless otherwise specified. Say, for instance, your product is entitled to 3% reward under MEIS. So, if the FOB value of your exports is Rs.1,00,000, you, as an exporter, are entitled to duty credit scrip worth Rs.3,000. [To get a better understanding of the scheme products covered under the MEIS scheme and the benefits available to the exporters refer to Chapter 3 of FTP 2015-20 on https://www.thedollarbusiness.com/ foreign-trade-policy-2015-2020 and updated MEIS Schedule on https://www.thedollarbusiness.com/ merchandise-exports-from-india-scheme] In case you have further queries, The Dollar Business Intelligence Unit would like to hear from you. Your question means a lot to us. Response by: Manish K. Pandey, Editor, The Dollar Business
I plan to export turmeric powder from Karnataka. After some research and based on the information I got from your website, a large number of shipments are going for Jebel Ali port. Which is the best way to contact the buyers in the Jebel Ali port, apart from commonly used trade portals? Please tell me if there are any other effective means of locating buyers.? (Varun, Director, Viva Paramount Agro Private Limited, +919901233XXX, varunhv18@gmail.com)
Dear Ashish: You can approach your concerned EPC – Spices Board – for assistance or reach out to potential buyers by posting your product information on https://www.thedollarbusiness.com/trade/b2b-login.php. You can also post your product information on platforms that meet your requirements and are popular among buyers in Dubai. Contacting Dubai Chamber of Commerce to help you find companies of your interest can be an option too. In case you have
further queries, The Dollar Business Intelligence Unit would like to hear from you. Response by: Indranil Das, Executive Editor, The Dollar Business
How do I export embroidery bridal lehenga? ((Tasdique, Owner, Noorie Creations, Delhi, nooriecreations@gmail. com, +91-9899548XXX)
Dear Tasdique: We assume you are a first-time exporter. First of all, you need to obtain an Importer-Exporter Code (IEC) from the DGFT. An IEC is a 10-digit number allotted to a person that is mandatory for undertaking any export/import activities. Application for obtaining IEC can be filed manually and submitting the form in the office of Regional Authority (RA) of DGFT. Now the facility for IEC in electronic form or e-IEC has also been operationalised. Once you have obtained the IEC and received an export order for your product from an overseas market you need to file the following mandatory documents required for export of goods from India: (1) Bill of Lading/ Airway Bill; (2) Commercial Invoice cum Packing List; and (3) Shipping Bill/Bill of Export. Once you have submitted these documents you can ship your product to the buyer. You can also begin with approaching your concerned EPC – The Cotton Textiles Export Promotion Council (TEXPROCIL), The Synthetic &
Rayon Textiles Export Promotion Council, Apparel Export Promotion Council etc. – for assistance or reach out to potential buyers by posting your product information on https:// www.thedollarbusiness.com/trade/ b2b-login.php. Response by: Manish K. Pandey, Editor, The Dollar Business
I want to import used jute bags from Thailand and Malaysia. These jute bags are of near virgin quality, having been used just once. I am really confused as to what permissions are required for the same. Do I need permission from the Textile Commissioner, or permission from DGFT? Please guide me, as a lot of this trade has already started. (Ashutosh Goenka, Proprietor, La Raiz Global, +91-9811126XXX, ashutosh. worldtrade@gmail.com)
Ashutosh: We assume you are interested in importing used jute bags falling under HS Code: 63051090. Usually, you need to take a ‘No Objection Certificate’ from Jute Commissioner for imports of jute bags. However, in case you want to import used jute bags you need to obtain a licence from the Textile Commissioner. Response by: Steven Philip Warner, President (VMPL) & Editor-in-Chief, The Dollar Business
You can log on to www.thedollarbusiness.com/tdb-forum and submit your foreign trade-related queries, or write across to our experts at editorial@thedollarbusiness.com. Every question matters – to your business, to The Dollar Business. APRIL 2016 II THE DOLLAR BUSINESS 93
case the latest products, machinery and equipments. It will also shed light on the developments in the industry in terms of creating business, technology upgradation and test marketing.
CONFAIR 2016
Have a product to showcase? Want to learn what your rivals are up to? Here’s a list of trade fairs you shouldn’t miss in April and May 2016
April 22-24 Coimbatore www.con-fair.in Having had its first edition in 2007, CONFAIR brings together the who’s who of the civil engineering and construction industry. Held by the Coimbatore Civil Engineers Association (COCENA), the fair is known as a confluence of both reliable suppliers and loyal customers. The exhibitor product range includes civil engineering softwares, construction chemicals, equipment and other machinery, and safety equipment, among others.
PUNE INTERNATIONAL SPORTS EXPO 2016 May 05-08 Pune www.pise.co.in True to its name, Pune International Sports Expo showcases sporting equipment and goods, and is amongst the first of its kind in the country. The product range includes sports apparel and accessories, fitness equipment and nutrition. The four-day event is also scheduled to have special exhibits and seminars to help give information to interested participants.
POWER GEN INDIA AND CENTRAL ASIA 2016
A file photo from CONFAIR 2015
[India] INDIA MED EXPO 2016
April 08-10 Bengaluru www.indiamedexpo.in India Med Expo, jointly organised by the Ministry of Chemicals & Fertilizers and FICCI, covers all the needs of the medical and pharmaceuticals industry. The event focuses on the potential of India’s healthcare market and also emphasises on the opportunities in Indian metropolitan cities and their rising demands. The expo will display a wide array of products like hospital equipment, home 94 THE DOLLAR BUSINESS II APRIL 2016
healthcare products, physiotherapy, medical technology and surgical equipment, among other related products.
TECHNOTEX 2016
April 21-23 Mumbai www.technotexindia.in Technotex will help participants, visitors and other key decision makers from a diverse cross section of the technical textile industry interact with each other. The exhibition aims to identify new business opportunities, provide innovative solutions, and create an environment hospitable to growth. The exhibition will show-
May 18-20 New Delhi www.power-genindia.com Power Gen India & Central Asia is India’s leading clean energy event and conference, covering all facets of electricity generation and distribution. The theme of the 15th edition of the event is “All Power: Cleaner, Leaner, Greener”, and will have representatives from several power companies, both national and international, under one roof. The show is a great opportunity for those who want to learn about the latest technology as the three-day event is expected to have over 20 conference sessions which will attract more than 5,500 visitors.
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[Global] COMEX 2016
April 12-16 Muscat, Oman www.comex.om The 26th edition of COMEX is set to showcase a number of products and services in the IT, telecom and technology sector, with the last edition attracting 120,000 participants over five days. COMEX is divided into three sections: ‘E-Oman’ pavilion for government entities to showcase their eServices; ‘Business’ section to promote the latest trends and technologies in the private sector, and ‘Shoppers’ section to entertain both B2B and B2C audience, and to display latest technologies, tools and products for the common person.
IBATECH ISTANBUL 2016
April 14-17 Istanbul, Turkey www.ibatech.co.tr/eng The year 2016 brings in the 9th edition of the IBATECH Istanbul fair, for bakery, ice cream, patisserie, and chocolate machinery and technologies. The main objective behind the fair is to provide a platform to manufacturers to promote their bakery products at an international level. Reputed companies from countries like Azerbaijan, Spain, India, UK, China, etc., participate in this fair to launch or introduce their confectionery items like ice cream, chocolate, coffee and other foods and beverages.
session. It is a must attend event for every importer.
LEATHER WORLD MIDDLE EAST 2016
April 26-28 Dubai www.leatherworldme.com The second edition of Leather World Middle East has been much anticipated after its successful inaugural launch. The exhibition welcomes all distributors, designers, manufacturers, retailers, and upholsters. The display wares include not only a large variety of animal hides, but also production chemicals and machinery, and leather products. The exhibition aims to create direct channels for regional and international markets through visiting decision makers, buyers and potential business partners.
SAUDI HEALTH EXHIBITION AND CONFERENCE 2016
May 16-18 Riyadh, Saudi Arabia www.saudihealthexhibition.com Known as the largest healthcare event in Saudi Arabia, the fourth edition of Saudi Health Exhibition and Conference will help you benefit from exposure to high net worth investors, key decision makers
and other Saudi government officials. Apart from the numerous conferences, the event has a platform like no other for government officials, providers of healthcare products and services and medical professionals for networking. With over 551 exhibitor from about 42 different countries expected to participate, the visibility at the exhibition is sure to get your company noticed by peers in the trade.
IDEAL HOSPITALITY EXPO 2016
May 18-21 Nairobi, Kenya www.idealhospitality.co.ke The fourth edition of the Ideal Hospitality Expo will bring together thousands of professionals and key senior decision makers in the hospitality industry from across world. The expo will showcase the latest technology, products and services available in the industry from leading suppliers. The four-day event will also feature industry leading seminars, social events, workshops and a number of excellent networking opportunities for delegates to develop long term strategies for their operations. The event focuses on the East African market, a growing hub of business opportunities, where hospitality products are in huge demand.
Log on to www.thedollarbusiness.com for more events and details.
CANTON FAIR
April 15 - May 5 Guangzhou, China www.cantonfair.org.cn The 119th edition of the China Import and Export Fair is divided into three phases, and will showcase a variety of products like consumer goods, machinery, electrical and household appliances, medical supplies and equipment, and textiles and garments, amongst others. It is one of the biggest trade fairs in the world, and the biggest bi-annual China trade fairs, with over 150,000 types of quality Chinese and overseas products and commodities on display. The renew rate of Chinese products is over 40% each
A file photo from Saudi Health Exhibition 2015 APRIL 2016 II THE DOLLAR BUSINESS 97
BORDERLINE
EDITOR’S COLUMN
WHEN FRIENDS CHANGE
N
epal has once again shaken the bedrock of the special and privileged relations that it shares with India. The Himalayan nation has signed 10 agreements – including the much talked about and strategically important transit trade treaty – with its giant eastern neighbour China, which, if critics are to be believed, is the beginning of the end of the Indian monopoly in Nepal. The two countries have agreed to build a strategic rail link through the Himalayas (of course, Tibet!) to reduce the landlocked nation’s dependence on India. [Nepal not only relies on India for 65-70% of its imports, but is also totally dependent on Indian ports for third-country trade through sea]. Plus they have also cemented their ties by signing a memorandum of understanding (MoU) on a feasibility study on a free trade area (FTA). Infrastructure development, cooperation on energy, trade diversification, tourism, finance and education were some other areas of agreement. All in all, it’s a geo-economic game-changer! But then, there’s nothing wrong in it? This was bound to happen considering the way India had been dealing with its smaller neighbour for quite some time now. Remember, how a few months ago the Indian-origin Madhesis (who were not happy with Nepal’s new constitution) had blocked the country’s trade-routes with India, bringing normal life to a grinding halt. And now recall how did New Delhi react to it! Well, this wasn’t the first time. India, for better or worse, has always tried to play the role of a big brother (or in plain words of a strong political influencer) to Nepal. This is now not only not going well with the elected government at Kathmandu, but also the country’s youth, who blame India for polarising its populace. Result: The country is now looking at the other side of the Himalayas to balance the geopolitical calculus in the Himalayas. In fact, India even runs the risk of being perceived as a supportwww.thedollarbusiness/blogs/manish 98 THE DOLLAR BUSINESS II APRIL 2016
Manish K. Pandey Editor, The Dollar Business
er of reactionary groups in Nepal if it doesn’t rethink her relationship with Kathmandu really soon. So, if looked upon from Nepal’s point of view, its latest accords with China make great sense. They not only provide the Land of the Himalayas an alternate route to greater economic prosperity, but also turn it into a more confident nation when it comes to negotiating with India and also dealing with its internal matters. In fact, it had all begun last year, when, for the first time ever, Nepal entered into an accord with China for importing petrol and gas. It was an indication that Kathmandu has started looking at Beijing to decrease its reliance on New Delhi.
India’s role of a self-proclaimed big brother is now not going well with Nepal. The country is now looking at the other side of the Himalayas to balance the geopolitical calculus in the Himalayas. It’s worth noting that Nepal shares about 1,236-km border with China and the latter is really keen on strengthening its diplomatic ties with Kathmandu. Not to forget, it’s already Nepal’s second-biggest trade partner and one of the biggest source of foreign direct investment into the country. Considering this and the growing proximity of the Dragon with India’s other neighbours, improving (rather reviving), the Nepal-India relationship should be really high up in the foreign ministry’s scheme of things. Remember, a country can’t choose its neighbours, but it can definitely choose its friends! Ignore Nepal and India may have one friend less. Or it may have one more low cost ‘exporting’ competitor by 2025. The second reason will perhaps get New Delhi thinking harder. @MK_Pandey
RNI: APENG/2014/54643; POSTAL REG. NO.: H/SD/486/14-16 . Date of posting: 28th of this month