India Business & Trade By TPCI -July 2019 by Trade Promotion Council of India

July 2019

India

business & trade Indian enterprise. Global opportunities

MEXICO: JEWEL IN THE CROWN

RMG: IS INDIA STUCK IN THE MIDDLE?

RCEP before the

last leap The RCEP deal is expected to precipitate a sharp increase in the trade deficit. Should India take the plunge?

TPCI.IN

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From the Chairman’s desk Dear Readers, Regional trade agreements (RTAs) have steadily increased in number over the years, from 50 in 1990 to over 280 in 2017. Their role becomes even more important considering the present trade environment, characterised by internecine trade wars, rising protectionism, and a gradually weakening consensus at the WTO. When designed and implemented properly, RTAs can play a major role for regional integration beyond just tariff reduction to facilitating investment, deepening linkages in global value chains and improving outcomes in social welfare. RTAs now extend to a number of areas like competition policy, government procurement rules, SMEs, IP, digital business, etc. The Regional Comprehensive Economic Partnership (RCEP) is one such mega RTA. Currently under negotiation, the agreement involves the ASEAN region and its 6 FTA partners – China, South Korea, Japan, Australia, India and New Zealand. It would create a free trade area accounting for 34% of global GDP and 40% of world trade, making it the largest trading deal ever. India’s entry into the RCEP can have its advantages. Some of India’s key export sectors will gain better market access, and the deal will compel even China to adopt a transparent, rules-based framework in its trade policies. More importantly, Indian companies will get an opportunity to plug into regional and global value chains, thereby enhancing their competitiveness. However, India Inc is less than enthused about RCEP, especially because of the elephant in the room – China. The agreement is expected to cover 80-90% of tariff lines over 20 years and India is already inundated by cheap imports from its north-eastern neighbour. Moreover, India’s trade deficit with RCEP nations has increased from US$ 69.83 billion in 2011 to US$ 108.5 billion in 2018. A simulation by the Centre for Advanced Trade Research (CATR) under TPCI proves that signing the RCEP will only worsen this deficit. Post-RCEP, India’s imports could increase by as much as US$ 30 billion annually, implying a revenue loss as high as 1.3% of the GDP. Correspondingly, exports would increase at only around US$ 5.5 billion every year. As a report commissioned by the government further proves, the potential increase in India’s services exports will be woefully inadequate in compensating for the potential surge in merchandise imports. Considering the potential loss to Indian enterprises, India should not sign this agreement without securing its interests. Access to its service professionals is absolutely non-negotiable from India’s perspective. Furthermore, India must stick to its stand of a calibrated withdrawal of import tariffs depending on its trade equations with each partner. This will help minimise the disruption for the MSME sector and give them sufficient time to strengthen their competitiveness.

business & trade Indian enterprise. Global opportunities

Vol 1 | Issue 1

July 2019

TPCI CHAIRMAN: Mohit Singla DIRECTOR: Sameer Pushp

EDITORIAL EDITOR: Virat Bahri WRITERS: Abhishek Jha, Dr Ishmeeta Singh, Preeti Kumari, Nikhaar Gogna

DESIGN ART DIRECTOR: Prakash Shetty DESIGNER: Ajay Kumar Singh India Trade & Business is a monthly magazine published by Trade Promotion Council of India, 9, Scindia House, Connaught Circus, New Delhi- 110001, India . Material in this publication may not be reproduced in any form without the written permission of TPCI. Editorial opinions expressed in this magazine are not necessarily those of TPCI, and TPCI does not take responsibility for the advertising content, content obtained from third parties and views expressed by any independent author/contributor. For any editorial queries/ feedback, please contact: editorial@tpci.in For advertising queries, please contact: advertising@tpci.in

Best Wishes

MOHIT SINGLA Chairman, TPCI

TPCI.IN

TABLE OF

CONTENTS

TPCI News Buzz Latest trade and business news updates from across the world

CATR DATA MINING 10 Focus sector: Engineering India’s engineering exports reached a record high of US$ 81 billion during 2018-19. The government aims to raise engineering exports to US$ 200 billion by 2025.

MOVING BEYOND THE GSP DEBATE US must recognise the pitfalls of a hostile trade equation with India

CROWN JEWEL IN LATIN AMERICA Mexico is now India’s largest trading partner in the region

2 | India Trade Watch • April 2019

PERSPECTIVES 12 Aluminium Industry - Dying a slow death The government must address the sector’s structural faults before it is too late. 14 Time to treat the ‘dragon deficit’ With China’s market opening up for drug imports, it is a good time for India’s pharma industry to capitalise. 16 Much more to review beyond GSP A spirit of reciprocity needs to be honoured by the US in trade talks with India. 18 Breaking the vicious subsidy cycle Instead of relying on ‘fire-fighting’ subsidies, India needs to boost long term competitiveness. 20 Rate cuts an inadequate defence With savings rate on decline and banks in a limbo, cutting rates by RBI won’t be enough. 22 H-1B - the wrong bargaining chip The Trump administration would be well advised to further liberalise the H-1B visa programme. 24 Logistics - from barrier to catalyst The future of logistics depends on development of support systems & adaptability of service providers 26 India-Ukraine - the balancing act CATR analyses product categories where India needs to negotiate tariff reductions with Ukraine

COVER STORY

28 RCEP - Before the last leap The RCEP deal is expected to precipitate a flood of goods imports into India, without commensurate gains in exports. India must act with caution before entering into this agreement. 35 “Metals & capital goods should be out of FTAs” There should be a level playing field for all regions of the world.

POLICY FOCUS: E-COMMERCE 36 Protecting the oil of the 21st century India’s skepticism towards free flow of data across borders is logical. Data could be leveraged as a tool for future negotiations at the WTO.

FOCUS PRODUCT: RMG

SCRAP USE IN INDIAN STEEL

Prof Aparna Sawhney, Jawaharlal Nehru University

40 Getting back to the drawing board Despite China’s declining competitiveness, India has been unable to grow its market share in garments, and risks inviting further turmoil unless urgent measures are taken. 44 “India must diversify its apparel basket” Mr Rahul Mehta, President, Clothing Manufacturers Association of India talks about strategies to boost India’s position in global apparel trade.

FOCUS MARKET: MEXICO 46 India’s new crown jewel in Latin America? Mexico has emerged as India’s largest trade partner in Latin America. However, India’s trade deficit is quite high and tariffs remain a significant barrier.

RMG

India has been unable to capture the space vacated by China

IMPORT FOCUS: COFFEE 50 Rejuvenating the Indian coffee story Despite the rise in out-of-home coffee drinking culture, the Indian market offers huge untapped potential.

WHAT’S THE LATEST @ TPCI 52 Thaifex - World of Food 2019 TPCI organised the India Pavilion with 45 member exporters at this prominent trade show

COFFEE India’s coffee market still offers huge untapped potential

April 2019 • India Trade Watch | 3

News buzz

International

Global repercussions of US-China trade war

he US-China trade war is being closely watched due to its wider implications for the global economy. According to a Fitch Ratings Report, the imposition by the U.S. of 25% tariffs on US$ 300 billion of imports from China would reduce world economic output by 0.4 percentage points in 2020. Further, global GDP growth would also slow down to 2.7% this year and 2.4% next year, compared with their ‘Global Economic Outlook’ baseline forecasts of 2.8% and 2.7% respectively. The growth rates of US & China too are likely to dip by 0.4 percentage points & 0.6 percentage points respectively in 2020. Other side-effects include lower export volumes and higher import prices, a reduction in real wages, dampened business confidence

and equity prices. These ripple effects are likely to spill over to other trading partners, with the world headed towards possibly the weakest economic growth rate since 2009. Bloomberg estimates that if tariffs are expanded to cover all of US-

China trade, and there is a resultant market slump, global GDP could be hit by around US$ 600 billion in 2021. The broader implications on trade are also visible, for instance, in the drop in imports by China from other trading partners like Japan and South Korea.

G20 resorting to trade restrictive measures

S-China hostilities are the headline, but the shift towards protectionism is a much wider trend across major countries globally. Findings of the WTO’s 1st Monitoring Report suggest that G20 members have imposed 20 new trade-restrictive measures in the last 8 months (between midOctober 2018 and mid-May 2019). These measures include regulations

related to tariff increases, import bans and new customs procedures for exports. This, according to WTO Director-General Roberto Azevêdo, will have wider implications related to increased uncertainty, lower investment and weaker trade growth. The report has further suggested that the turbulence generated by current trade tensions is continuing.

The silver lining, however, is that these economies implemented 29 new measures aimed at facilitating trade. It needs to be noted that this is the first time since the commencement of the trade monitoring exercise that the number of initiations of trade remedy investigations by G20 economies is equal to the number of trade remedy actions terminated.

G-20 leaders at summit in Osaka, Japan in 2019

4 | India business & trade • July 2019

EU-Vietnam sign FTA & IPA

n June 30, 2019, two trade deals will be concluded in Hanoi between EU & Vietnam – a free trade agreement (FTA) and an investment protection agreement (IPA). While the negotiations were initiated in June 2012, the conclusion of the deal was delayed by the impending decision of the European Court of Justice. In May 2017, the Court concluded that there’s a need of 2 separate agreements – an FTA & an IPA. The FTA provides for 99% eradication of customs duties between the two blocks. Around 65% of duties on EU exports to Vietnam will be abolished once the FTA enters into force, while the remaining ones will be phased out gradually over a period of up to 10 years. Around 71% of duties on Vietnamese exports to the EU

NUMBER GAME

US$

455

will cease upon entry into force, the remainder being phased out over 7 years. It will also bring down many non-tariff barriers to trade. The IPA will bolster protection of EU investments in the country. The agreement also contains provisions on intellectual property protection, investment liberalization and sustainable development.

UK GDP drops by 0.4%

billion in lost output due to US-China trade war over the last 6 months (IMF)

US$ 16 trillion

to be added to global GDP by AI by 2030 (PwC)

ritain’s economy shrank by 0.4% in April, the worst GDP drop in the last 3 years. This development is being seen as a consequence of the “Brexit hangover”, as manufacturing contracted by 3.9%, the worst drop since 2002. A 24% slump in car manufacturing is seen as the reason for the decline in manufacturing activity, which has forced many car factories to close their doors. According to reports, UK’s economy has also taken a hit in

the face of US-China tensions, as exports slowed down. Experts also point out that jobs growth slowed in the first three months to April. Surveys of business activity that are used by the Bank of England and the Treasury have also pointed towards weak economic growth of the country. This has led to increased concerns in UK’s political leaders, who have voiced their apprehensions about the stagnation in wages, investment and productivity.

13%

YoY drop in global FDI flows in 2018 (UNCTAD)

July 2019 • India business & trade | 5

IN QUOTES

Scott Morisson Prime Minister, Australia

The impact of any further deterioration of the relationship (in reference to the US-China trade war) will not be limited to these two major powers.

The globalization of yuan?

im O’Neill, former chairman of Goldman Sachs Asset Management, is of the view that Beijing can consider escalating the role of the yuan globally to challenge the hegemony of the U.S. dollar. Given the fact that Chinese assets are increasingly traded in international markets, more & more foreigners will need to trade in the yuan. This internationalisation drive will also help establish the yuan as a longterm alternative to the American dollar. China has

already made some strides towards internationalizing its currency. The weaker position of the yuan vis-à-vis the US dollar has also been one of the key bones of contention in the ensuing US-China trade war. US accuses China of deliberately letting its currency slide in order to keep its exports competitive. However, O’Neill also cautioned that a weaker yuan could negatively impact investor confidence and China could instead tap the growing power of its consumers to strengthen its universal position.

Fed keeps rates unchanged

Roberto Azevêdo Director-General, WTO

We urgently need to see leadership from the G20 to ease trade tensions and follow through on their commitment to trade and to the rules-based international trading system.

6 | India business & trade • July 2019

nternational Monetary Fund (IMF) Chief Economist, Gita Gopinath, was of the opinion that there is still scope for the US Federal Reserve to reduce interest rates this month, a view shared by other prominent economists. However, the Federal Reserve has left the rates unchanged. Fed Chairman Jerome Powell, and fellow policy makers left their key rate in the range of 2.25% to 2.5%. However, for the first time in more than a decade, the Federal Reserve demonstrated a readiness to lower interest rates. The spin toward easier monetary policy shows that the Federal

IMF headquarters, Washington DC

Reserve is swinging closer to the view that President Trump’s trade war is slowing down the economy’s momentum and that rates are too restrictive given the slow inflation. According to the popular view among investors, the central bank is likely to cut rates in its July 2019 policy review. Mr. Powell has been repeatedly pressurised by President Donald Trump to inject more liquidity into the economy by cutting rates. Some of the positive developments that followed the announcement include a rise in US stocks and the Treasury easing its losses.

News buzz

National

India levies tariffs on 28 US import products

n the aftermath of the US pulling the plug on the Generalized System of Preferences (GSP) benefits starting June 5, 2019, India imposed retaliatory tariffs on 28 US products. Shrimps, the 29th item has been removed from this list. The tariffs came into effect on Sunday, June 16, 2019. The retaliatory tariffs of around US$ 200 million on products stemming from US worth US$ 1.4 billion had been frequently postponed since June 20, 2018. Some of the US commodities on which duties have been hiked by India include walnuts (120%) and chickpeas, Bengal gram (chana) and masur dal (70%). Originally, however, these tariff impositions were planned to counter US tariffs on certain steel and aluminium products. US producers in sectors

like apples, waltnuts and almonds have strongly raised their concerns over the tariff hikes by India. The Indian government had vowed to protect the “national interest” after the termination of GSP benefits by the US on the

grounds that it does not enjoy “equitable & reasonable access” to Indian markets. Issues raised by the US include the high tariffs on motorcycles, IP laws, restrictions on medical devices and dairy products and India’s e-commerce policy.

China, Malaysia propose RCEP minus India

iven the slow progress in the negotiations over India’s membership in the proposed Regional Comprehensive Economic Partnership (RCEP), China & Malaysia are mulling over the idea of concluding the

multilateral trade pact bereft of India, at least, for the time being. So far what has prevented India from signing on the dotted line of this mega Asia-Pacific trade agreement is its reluctance towards opening up its markets. Some of

Malaysian PM Mahathir Mohamad and Chinese President Xi Jinping

the other irritants that are pestering China are the “free and open IndoPacific” initiative being proposed by Japan and the US; and the fact that India’s position on tariff reductions is at odds with other RCEP participants. . Apart from India, Australia and New Zealand, too, have not yet been brought on board. The negotiations started way back in 2013 and revolve around 16 countries – the 10 Southeast Asian nations and their large trading partners: China, Japan, South Korea, India, Australia & New Zealand. Together, these 16 countries account for about one-third of the world’s GDP. However, in the last meeting when China proposed a 13 member RCEP, it faced stiff opposition from Japan & other South East Asian countries.

July 2019 • India business & trade | 7

NUMBER GAME

360% YoY growth in India’s oil imports from US during Nov’18 to May’19.

35%

YoY decline in India’s steel exports to US in 2018-19

`10,745 CRORE India’s defence exports in 2018-19

8 | India business & trade • July 2019

RBI chooses growth push

he Monetary Policy Committee (MPC) of RBI has emphasised that it is critical to prioritize the country’s faltering economic growth, since inflation in India well within the committee’s mandated target of 4%. Thus, it was nnot perturbed b the fact that retail inflation rose to 3.05% in May, higher than 2.99% in the previous month.

MPC has reduced the key interest rate for the third consecutive time this June, and changed its stance to “accommodative,” after data revealed that India is growing at its slowest pace in over four years. Reports suggest that Asia’s third largest economy grew at a sluggish 5.8% in the last quarter, which was slower-than-expected and far below the pace needed to generate jobs for the millions of young Indians entering the labour market each month. Michael Patra, a member of MPC stated during the meeting, “The evolving macroeconomic configuration imparts urgency to strong policy support for the flagging economy in pursuance of the goals set for the MPC.”

India criticised for agri-support

he Union government’s recently launched transport and marketing assistance scheme for farmers has come under attack at the World Trade Organization (WTO). The policy provides assistance for the international component of freight and marketing of agricultural produce, which is likely to alleviate the disadvantage of higher transportation charges of exports of specified agriculture products in specified overseas markets - North America, the EU, some countries in

South America, China, the ASEAN, New Zealand and Australia. Australia is of the view that this assistance qualifies as an “export subsidy” and infringes on the principles of the Nairobi Ministerial (2015) meeting. It has also asked India about the measures it took to prevent trade distortion. The US has asked India to divulge how much the government has budgeted for the scheme in the on-going year and also to give information on other subsidies given to products getting assistance under the new scheme.

4.32% rise in India’s exports

TRADE TERMINOLOGY GENERALIZED SYSTEM OF PREFERENCES (GSP)

ndia’s total exports (merchandise and services together) in AprilMay 2019-20 were estimated at US$ 92.33 billion, growing by 4.32% YoY, according to data released by the Department of Commerce, Ministry of Commerce & Industry. Imports for the same period were pegged at US$ 109.75 billion, growing by 5.3% YoY and leading to a trade deficit of US$ 17.42 billion.

Merchandise exports rose by 2.37% YoY to reach US$ 56.1 billion, while services exports grew by 7.5% YoY to reach US$ 36.3 billion. Major commodities that registered a positive growth in May 2019 were electronic goods (51%), organic and inorganic chemicals (20.64%), RMG of all textiles (14.15%), drugs and pharmaceuticals (11%) and engineering goods (4.4%).

Under the GSP, developed countries offer non-reciprocal preferential treatment (such as zero or low duties on imports) to products originating in developing countries. Preference-giving countries unilaterally determine which countries and which products are included in their schemes. It is a clause under the Special & Differential Tariff Provisions of WTO.

Source: WTO.

IN QUOTES

Shri Piyush Goyal, Minister of Commerce & Industry, India

Mike Pompeo, Secretary of State, US

My own experience in the last five years is that wherever we have done away with subsidies, industry and business have progressed, grown and prospered.

We remain open to dialogue, and hope that our friends in India will drop their trade barriers and trust in the competitiveness of their companies and businesses.

July 2019 • India business & trade | 9

CATR Data Mining 1

Engineering exports

India’s engineering exports reached a record high of US$ 81 billion during 2018-19. The government has set an aspirational vision to take engineering exports to US$ 200 billion by 2025.

100 80 60

76.2

70.8 61.6

65.2

58.6

40 10 0

2013-14 2014-15 2015-16 2016-17

2017-18 2018-19

Source: EEPC, all figures in US$ billion

2 Export destinations US was the top export destination for India’s engineering exports in 2018-19 by a huge margin, followed by UAE, Singapore and Germany.

11.9

10 8 6 4.3

3.5

3.2

2.9

2.8

2.5

2.4

2 0

UAE SingaporeGermany Nepal Bangladesh UK Mexico Indonesia Italy Source: EEPC, all figures in US$ billion

July 2019 • india business & trade | 11

Centre for Advanced Trade Research (CATR) is a premier research institution of economists and researchers in TPCI. The institution facilitates its diversified stakeholders including Government and industry with inputs on trade and economic development matters.

Export share by segment India’s top export panel was iron & steel during 2018-19, followed by automobiles & auto components and industrial machinery. 120

Iron & steel & products 11% 21%

100

Non-ferrous metals and products

Industrial Machinery

Electrical Machinery

Auto & auto components/parts

11% 20% 18%

10%

77.3 70.7

81.8

75.9

65.4

58.4

76.2

20 0 -20

Ships, boat, floating products & parts

-40 2014-15 2015-16 2016-17

-6.6

-16.4

-17.5

Exports

Imports

-17.7

-23.2

2017-18 2018-19 Trade balance

Growth drivers

Region-wise share

Growth in exports during 2018-19 was led by industrial machinery; electrical machinery and ships, boats, floating products & parts. On the other hand, non-ferrous metals and products; aircraft & spacecraft parts and products and iron & steel and products recorded a decline.

North America, EU and ASEAN + 2 were the top destination markets for India’s engineering exports in 2018-19, accounting for over 50% of exports.

100

2.8

80 60

North America

1% 3%

40 20

3.5

3.2 3

ASEAN+2

19%

2.5

0 -20

104.2

93.9

Aircraft and spacecraft parts & products

Other engineering products

Trade balance

India’s trade deficit in the engineering segment has risen, due to a faster rise in imports of engineering products over the years.

Middle East & West Asia South Asia

10%

11.9 4.3

-40 Iron & steel & products Electrical Machinery Ships, boat, floating products & parts

Africa

2.9 Non-ferrous metals & products Auto & auto components/parts Other engineering products

12 | india business & trade • July 2019

20%

10% Industrial Machinery Aircraft and spacecraft parts & products

North East Asia Latin America

11%

15%

Source: EEPC

CIS Others

Alu indu min i s t a sl ry: um ow Dyin dea g th?

PERSPECTIVES

Lower import duties have led to a huge inflow of aluminium imports, reducing market shares of Indian players. The government must address the sector’s structural faults before it is too late. BY NIKHAAR GOGNA

luminium, a non-renewable resource is of immense strategic importance to India, one of the fastest growing economies in the world. A number of sectors including power, automobiles, construction, packaging, industrial and consumer durables are dependent on aluminium production. However, a significant proportion of this precious metal is imported into India to meet the huge domestic consumption. And this is the scenario when aluminium consumption in India at 2.5 kg per capita is way below the global average of 11 kg per capita. Over 55% of the aluminium demand is met through imports at present, with China as the largest contributor. Imports from China in have risen sharply over the past few years from US$ 642.7 million in 2014 to US$ 1.1 billion in 2018

(ITC Trade Map). Correspondingly, India’s exports of aluminium to China have been insignificant and in fact declined from US$ 13.29 million in 2014 to US$ 11.1 million in 2018. India’s northeastern neighbor provides several incentives to its aluminium industry like interest free and low cost loans, subsidised land on new smelter projects, income tax rebates and transport subsidies. Slowly and steadily, China has succeeded in not just reigning supreme as the largest consumer, but also as the largest producer of aluminium in the world. Indian exporters have not been successful in tapping the huge potential that the Chinese market offers. The China factor is also harming India’s interests indirectly on another front with its decision to add aluminium scrap to its ‘Restrictive Imports List’ from July 2019. Due to the trade war, China has also

12 | India business & trade • July 2019

increased tariffs on aluminium scrap imports from US to 25%. As China builds barriers to scrap imports, India is emerging as a natural destination for dumping of the product. Furthermore, low import duties on aluminium scrap (2.5%) have eroded market shares of the domestic aluminium industry. Players like Vedanta Ltd, Hindalco Industries & National Aluminium Company (Nalco) have borne the brunt of this development, as their market shares dropped progressively from 60% in FY’11 to 40% in FY’19. A NITI Aayog paper identifies aluminium as a strategic sector for India going forward. It would greatly help enhance the fuel and cost efficiency of railways, pave the way for India’s commitment to CO2 emission norms, catalyse adoption of electric vehicles, improve the

share of renewable energy to 40% and beyond and promote indigenisation in defence equipment, aerospace and aviation sectors. But the sector faces a number of constraints at present. High cost of production is a major issue, led by high power costs that account for 30-40% of production. Mining of bauxite and coal also faces challenges with delayed clearances for operations, bad connectivity, land acquisition hurdles, etc. Given the low competitiveness of the industry, it is not surprising that countries like China has been able to make deep inroads. As Professor

TREND IN INDIA’S ALMINIUM IMPORTS 6.00 5.48 5.00 4.00

4.15 3.55

3.61

2014

2015

3.61

3.00 2.00 1.00 0.00 2016

2017

2018

Source: ITC Trade Map; (All figures are in US$ billion; Data is for HS Code 76)

TOP SOURCES OF IMPORT OF ALUMINIUM FOR INDIA 1,200 1,097 1,000 800 600 486

478

455

400

363

285

269

200

201

152

0 China

Malaysia

UAE

USA

Saudi Arabia

Korea

Australia

Source: ITC Trade Map; All figures in US$ million; Data is for HS Code 76

Qatar

Anwarul Hoda, Chairperson, ICRIER affirms in his conversation with India Business &Trade, “With plentiful bauxite reserves, India is highly competitive in aluminium, but its competitiveness is affected by the mining policy and poor transport infrastructure in the country. As a result China has been able to price aluminium more competitively in world markets and export large quantities into India despite import tariffs”. Given the current scenario of possible dumping of aluminium scrap, immediate increase of import duties on the product is a must. India has sufficient aluminium scrap, and imports need to be restricted to boost domestic recycling. The industry has also alleged that China is breaching Rules of Origin and routing aluminium exports to India through ASEAN nations, for which the government should immediately consider appropriate safeguards. But that is only a short term fix. India needs to cut down its import dependency for aluminium, given that its strategic relevance is only expected to surge with rising economic growth. To ensure that, India must draft and implement a National Policy on Aluminium with specific short, medium and long-term targets for both demand augmentation and capacity addition, and provide the necessary policy impetus to achieve them.

July 2019 • India business & trade | 13

Indian pharma: Time to treat the ‘dragon’ deficit The Indian pharma industry still hasn’t managed to penetrate the second largest economy significantly, due to the tough and long regulatory procedures in the market. With China’s mega procurement plan for drugs providing new opportunities, it is a good time for the Indian pharma industry to capitalise. BY DR ISHMEETA SINGH

he Indian pharmaceutical industry is the largest supplier of cost effective generic medicines to the developed world with 35.2% share of exports destined to US followed by 3.8% to UK & South Africa. But while Indian pharma players have successfully grabbed opportunities with offpatent drugs in US, they have been unable to crack the code for the second largest economy – China. This would classify as a major opportunity missed, since China is one of the largest importers of pharmaceuticals with a share of

4.5% in world imports. But it sources its drugs mainly from US and EU, while India’s share in this pie is a meagre 0.1%. India’s exports of pharmaceutical products in 2018 were recorded at US$ 14.27 billion. On the other hand, China imported US$ 27.90 billion worth of pharmaceutical products during the period. India’s exports to China, however, stood at just US$ 38.99 million. It has been further observed that products exported by India are similar to the products imported by China, thereby indicating huge potential to raise

14 | India business & trade • July 2019

that figure. China also exports US$ 8.86 billion worth of pharmaceutical products and has emerged as the leading supplier of APIs by volume. Although China’s active pharmaceutical ingredients (API) manufacturers are major exporters, the share of finished pharmaceutical products (FPPs) is less significant so far. Currently, around 97% of the drugs sold by local Chinese manufacturers are generic. About 80% of the drugs sold in the Chinese domestic market are generics, with foreign-owned

companies supplying almost all of the innovator (i.e. patent protected) products. Pharma is a highly lucrative avenue for India, helping it address concerns of high trade deficit with China, which for the past three years has been over the US$ 50 billion mark. In addition to this in May 2019, China announced that it has exempted import tariffs for 28 drugs; hence pharmaceuticals exports could be a savior for India in bringing the trade deficit with China to lower levels. The only major obstruction in entering the pharmaceutical market in China is its regulatory system. China strengthened its GMP regulations and has separate regulations for exipients, packaging and labelling. In addition there is a regulatory regime covering pharmaceutical distribution and conduct of clinical trials. But recently, China has agreed to accelerate the inspection and approval procedures of drugs, opening huge scope for the Indian pharma industry. In this respect, talks between the two governments are taking place to ease and enhance exports from India to China. In addition to this, another factor that plays an important role is that US is one of the main exporters to China and in present scenario of US-China tariff hikes, India has

CHINA’S IMPORT PARTNERS OF PHARMACEUTICAL PRODUCTS IN 2018 19.4%

24.4%

8.6% 5.0% 16.7%

5.3% 5.7%

Germany

United States of America

France

Italy

Sweden

Ireland

Switzerland

Japan and U K

Others

Source: ITC Trade Map, Import share in percentage

great opportunities to tap. Indian pharma firms have been wary of investing too much of their energies in China due to lengthy approval processes. The Yunnan province, for instance, invited expressions of interest from Indian pharma firms earlier this year. However, there was no response from Indian companies by the time the deadline ended. China’s National Medical Products Administration (NMPA) takes 3-5

1,200

1,000

800

600

400

200

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: ITC Trade map, Import and Export values in US$ Billion

INDIA’S EXPORTS AND CHINESE IMPORTS OF PHARMA PRODUCTS IN 2018

China’s import from World

8.27%

6.6%

years on an average to register a product, a process that involves a cost of around US$ 58,000 per drug. Sun Pharma Chairman Dilip Shanghvi, however, claims that China holds vast potential and the time is right to tap it. China has launched an extensive drug procurement programme across cities, which is leading to drops in prices and providing opportunities to the Indian pharma industry. Approval times are coming down fast, as China aims to bring new drugs to its patients as quickly as possible. Dr Reddys and Cipla are also expanding in the region. The government has called for a clear roadmap from China on opening its pharma market for Indian firms. Meanwhile, China is also under heavy public pressure at home due to the high prices of genric and cancer drugs. Given this window of opportunity, it is an opportune time for the Indian pharma industry to capture the Chinese market to both diversify its market exposure and reduce its trade deficit.

India’s Export to the world

July 2019 • India business & trade | 15

US-India: Much more to review beyond GSP The bilateral partnership is important to both nations, and a spirit of reciprocity needs to be honoured by the US in trade talks. BY CATR

he Generalised System of Preferences (GSP) assures non-reciprocal, duty-free tariff treatment on certain products imported into the US from designated beneficiary developing countries (BDCs). The US, EU, and other developed countries have implemented similar programs since the 1970s to promote economic growth in developing nations, in consonance with WTO’s vision. Given this context, the US action of removal of GSP benefits to India is at loggerheads with its WTO obligations. It violates the fundamental principle of non-

discrimination as it discriminates between developing countries. The US has said that India is not giving market access to its companies and has raised serious concerns over capping of prices of certain medical devices and pharmaceuticals. It is also seeking market access for its dairy products. Trump has cried hoarse over India’s ‘high tariffs’ on US exports like motorcycles and whiskeys. Clearly, Trump wants to rebalance the bilateral trade equation, which is presently in favour of India. Total exports by India to USA in 2018 were at US$

Indian PM Shri Narendra Modi and US president Mr Donald Trump

16 | India business & trade • July 2019

54 billion, while imports were just at US$ 33 billion. Moreover, India’s market has huge potential, especially for large American tech companies like Amazon, Flipkart (under Walmart), Netflix, Google, Uber and Facebook. However, the Indian government’s position on issues like data localisation have made it hard for these companies to operate. Trump is obviously wary of India’s ambitions to build indigenous companies in e-commerce, search, fintech, cab hailing, foodtech, etc, in a manner similar to China. India has rightly argued that GSP benefits are “unilateral and

50 40 30 20 10 0

2009

2010

2011

2012

2013

India’s Exports to USA

2014

2015

2016

2017

India’s Agri Exports to USA

non-reciprocal in nature extended to developing countries”, and that they cannot be used for advancing Washington DC’s trade interests and non-discriminatory benefits. US has a history of wielding tariff concessions in a ‘carrot & stick’ manner, as was the case with the regime change in Chile in the 1980s. India was the largest beneficiary of the GSP program in 2018 with US$ 6.35 billion in imports to the US given duty-free status. India’s top GSP exports to the United States in 2018 included motor vehicle parts, ferro alloys, precious metal jewellery, building stone, insulated cables and wires. Out of US$ 51.6 billion of exports to US by India, US$ 6.35 billion worth of exports will be affected, which will hardly be significant. Also, most of the exports are of intermediate goods not produced in the US. Since they are low in the manufacturing value chain, US would also stand to lose its competitiveness, which will be reflected in coming months. SHOE ON THE OTHER FOOT? Besides India should also highlight inconsistencies and nontransparency in US trade policies; an issue much larger than GSP. As many as 11,012 ‘Made in India’ food products were rejected by the USFDA from 2014 till February 2019. According to the USFDA website, the agency has refused entry to 13,334 Indian products, which includes bakery products, fried snacks, spices, basmati rice, fisheries and herbal products, over

2018

35 30 25 20 15 10 5 0

2009

2010

2011

2012

2013

India’s Imports from USA

INDIA HAS ARGUED THAT GSP CAN’T BE USED FOR ADVANCING US TRADE INTERESTS AND NONDISCRIMINATORY BENEFITS. the last five years. Going by USFDA rejections data – India tops the list of rejections followed by China. These rejections are given as number of consignments rejected, and each rejected consignment may or may not be the shipment as a whole. There is no clarity on this issue. Also values are not assigned to rejected consignments, which leaves no scope for estimating the percentage of rejected food and pharma products out of total exports. India needs greater transparency to be able to calibrate its exports in accordance with the market. Moreover, the USTR has published a damning report criticizing India as one of the toughest countries in the world for protection and enforcement of IP. The US has also sought to discredit the Indian pharma industry by alleging that India and China are

2014

2015

2016

2017

2018

Source: ITC Trade Map; All figures in US$ billion

INDIA’S TOTAL AND AGRI EXPORTS TO US Source: ITC Trade Map; All figures in US$ billion

INDIA’S TOTAL AND AGRI EXPORTS TO US

India’s Imports of Agri from USA

the largest sources of counterfeit drugs to the US. India has strongly countered these charges. The same goes for H-1B visa, where regulations are only becoming tighter. New regulations like providing evidence that the employee is required, has the requisite specialisation and will work on the same specialisation for the duration of the visa have made the requirements more complex. According to CARE Ratings, number of visas approved for top five Indian IT companies came down by 49% YoY in 2018 to reach 22,429, led by Infosys, HCL America, TCS, Tech Mahindra Americas and Wipro. Given these realities, while India should be open to discuss the concessions that US seeks for its companies, it is important to clearly express that the US-India trade relationship hasn’t really been a one-way street in its favour, the way Trump has constantly tried to present. US imposed an extra levy of 25% on steel and 10% on aluminium products last year. India acted with significant restraint before slapping retaliatory tariffs on 28 high value US products. Already, American producers in sectors like almonds, apples and waltnuts have expressed strong displeasure at this development. The bilateral partnership is important to both nations, and a spirit of reciprocity needs to be honoured in trade talks. A hostile equation certainly does not benefit either country.

July 2019 • India business & trade | 17

India, subsidies & WTO:

Breaking the vicious cycle

Instead of regularly resorting to ‘fire-fighting’ subsidies, India needs to boost long term competitiveness through measures like focussing on high value products; linking Indian producers with global value chains, investing in trade facilitation & trade infrastructure measures and equipping the industry to hold long term investment. BY PREETI KUMARI

ndia has been on the receiving end of a number of cases at the WTO, wherein other members have questioned its subsidy policies to specific industries. In March this year, Guatemala initiated a dispute complaint against Indian sugar subsidies. The US has accused India of contravening the GATT norms under the Jawaharlal Nehru National Solar Mission (JNNSM) for solar cells and solar modules concerning certain measures relating to domestic content requirements. Then again, US has challenged the Merchandise Exports for India Scheme (MEIS) as being against WTO norms. Barring three commonalities : India, WTO and subsidies, all the issues raised by the countries are different. It is a common misconception that WTO in it’s regulation is a homogeneous body. A STEP BACK IN TIME Following the Uruguay round of negotiations in 1986-94, the world entered a rule-based trade order – a system in which no country holds a monopoly on the pretext of its size or institutional or financial capacity; each member of the WTO has only one vote. However WTO is not governed by a common law/agreement terms like the constitution of the country. WTO functions through various

agreements such as Agreement on Agriculture (AoA), General Agreement on Tariffs and Trade (GATT), Agreement on TradeRelated Investment Measures (TRIMS), Agreement on Subsidies and Countervailing Measure (ASCM), etc. These agreements cover various aspects of trade and services. Few of these agreements deal with countries’ commitments to prune trade barriers and establish a conducive environment to trade. Regular agreements are a testimony to the success of WTO. The volume and variety of agreements show that no 2 cases filed under a distinct agreement can be similar. India has been dragged in the WTO Dispute Settlement Body on various occasions. Few of the prominent cases are: Export subsidies, primarily MEIS scheme - 2018: US alleges that India’s export promotion schemes are inconsistent with Agreement on Subsidies and Countervailing Measures (ASCM) since it provides subsidies contingent upon export performance. It claims that India has long surpassed the conditionality of below US$ 1,000 GNI at constant 1990 dollars to continue availing the benefits accorded to annex 6 countries under Special and Differentiated Treatment. Furthermore, Indian products have achieved export

18 | India business & trade • July 2019

competitiveness (export share in world trade > 3.25% for two consecutive years) in most products for which MEIS has been rolled out. Hence, India does not have the grounds to continue availing benefits under ASCM. Sugar subsidies, 2019: Australia, Guatemala and Thailand have accused India of distorting the global sugar market by providing price support in contravention to the Agreement of Agriculture’s Aggregate Measurement of Support (AMS) clause. Under Agreement on Agriculture (AoA), developing countries can give agricultural subsidies or aggregate measurement of support (AMS) of up to 10% of the value of agricultural production. However, these countries claim that the methodology of calculation of subsidy used by India is flawed and non-transparent. Australia has stated that as the

world’s second largest sugar producer and fourth largest exporter, the dynamics in India’s sugar market have significant implications for global prices and trade. Solar cells and modules, 2013: The US has alleged that certain measures of Jawaharlal Nehru National Solar Mission of India are in contravention to the GATT, wherein a country is required to follow nondiscrimination obligation between imported and domestically produced goods with respect to internal taxation or other government regulations. Factually, subsidies are used extensively by both developing and developed nations. However, in the case of India, the causal effect of a policy is always very evident. Reason being that India has not learnt the right lessons from the success stories of Asian tigers and China who relied heavily on

infrastructure development and easy access to liquidity for supporting the industry rather than fire fighting through export-focused subsidies. Even as an immediate break from subsidies may be unfeasible, India needs to learn the right lessons to boost long term competitiveness i.e. focus on high value products that will determine the future of trade; link Indian

INDIA HAS NOT LEARNT THE RIGHT LESSONS FROM THE SUCCESS OF ASIAN TIGERS

producers with global value chains; invest in trade facilitation and trade infrastructure measures and equip the industry to hold long term investment. High logistics costs in India speak volumes about the inherent lack of industrial infrastructure in the country. Infrastructure development should be the top most priority of the government. In the absence of adequate industrial infrastructure, subsidy support creates a nation of merchants rather than manufacturers. The current government indeed is moving in this direction through policies like Sagarmala, Inland waterways Development Policy, Bharatmala etc. This is the strategic path that India has to tread to be a dominant player in global trade, consistent with its growing economic influence. Otherwise, India will continue to be embroiled in one or the other exportfocussed subsidy case at WTO.

July 2019 • India business & trade | 19

Rate cuts: Inadequate defence against macroeconomic distress India’s savings rate plummeted to 30.3% at the end of March 2018, pulled down by slow growth in household savings. Rate cuts alone may not be enough to revive growth. BY CATR

he recent cut in short term lending (repo rate) by RBI by 25 basis points is a soft signal to improve liquidity in Indian economy without compromising on inflation targets. As we know, the consumption rate has declined in last few quarters, leading to a pessimistic macroeconomic environment. After a sharp upsurge in the March 2019 round, consumer confidence fell once again in May 2019. The current situation index (CSI) compiled by RBI, which had entered optimistic territory after a gap of two years in the March 2019 round, returned to pessimism; and

the future expectations index (FEI) slipped from its all-time high in the March 2019 round. There are many parameters, which are impacting India’s macroeconomic foundation, ranging from automobile distress to truncated savings rate. It is critical for policy makers to address these issues before it takes the shape of an economic slowdown for India. The descending spiral in automobile sales continued in May 2019 as lackluster retail offtake forced manufacturers to cut production in order to adjust to market demand. Data from the Society of Indian Automobile Manufacturers (SIAM) revealed a decrease of 8.62% in total domestic sales as compared to figures from May 2018. Non-banking finance companies are aggravating the sullen macro situation as currently, there are about 11,400 shadow banking companies in India with an aggregated balance sheet worth US$ 304 billion and with loan

20 | India business & trade • July 2019

portfolios surging at nearly twice the pace of banks. But this fact isn’t about major NBFCs; instead it’s about the principal players of the breakdown and there is none bigger than the leading infra finance company Infrastructure Leasing and Financial Services (IL&FS). The liquidity crisis that shook NBFCs (non-banking finance companies) and HFCs (housing finance companies) almost broke the back of the real estate sector, as accessing capital from lenders got a lot tougher. Now, if we consider the aviation distress of Indian economy, the situation is only getting worse. Loads of debt and fare wars, excessive parking and landing charges, high aviation fuel prices, rupee depreciation and inefficient operations have been the millstones around the Indian aviation sector. Australian aviation consultancy CAPA (Centre for Asia Pacific Aviation) anticipates that Indian carriers will lose an aggregate of US$ 550 million to US$ 700 million in the financial year 2020. One wonders if Jet Airways, which is teetering on the brink of bankruptcy, is only a sign of things to come. With world trade going through a slowdown, India seems to be the relative bright spot with a decent growth rate of 5.8% (which is revised). To maintain it, India needs to drive growth in consumption, investment and exports. The RBI is concerned about the shrinkage in the volume of trade. If exports

don’t accelerate faster, GDP growth may slacken. If in addition we see the rise of protectionism, then India will face more problems on the export front in goods and services. India also needs to ensure that growth drives greater well-being for all and access to bank credit for small and medium enterprises and start ups. SAVINGS RATE NOT HELPING India’s savings rate plummeted to 30.5% in FY 2018 compared to 36.8% in FY 2008, pulled down by slow growth in household savings. Households, private corporations and the public sector are the three channels of savings. According to India Ratings, during 2011-12 to 2017-18, the share of the household sector in total saving was 60.9%, while private corporations accounted for 35%, and the remaining 4.1% was from the public sector. Household savings are majorly channelized by banking and other non-banking financial entities, which are the main source of investment funding in India. Thus, a further reduction in household savings can impact the economy adversely as it can be observed currently. Despite the cut in repo rate, no relief has been provided to home and auto loan borrowers. Not all bankers are looking at a possible reduction in the

INDIA’S SAVINGS RATE PLUMMETTED TO 30.5% IN FY 2018 FROM 36.8% IN FY 08 interest rate. Hence, there is less easing for home or auto loan EMIs. Also, the demand for home and auto loans continues to be sluggish, hence there is little scope for reduction in interest rate, according

INDIA’S SAVINGS RATE (IN %) 35

34.64

33.88

33 A3 32.12

32.02

31.09

30.25

30.03

1/1 2012

1/1 2013

1/1 2014

1/1 2015

1/1 2016

Source: Economic Survey 2017-18

1/1 2017

1/1 2018

to the banks. Credit to deposit ratio of banks has been at around 77% or more since January 2019. Banks have to maintain a cash reserve ratio (CRR) of 4% with RBI and an SLR of 19% through investments in approved government securities. After making these adjustments, banks are lending nearly all the deposits they have, and are unable to reduce interest rates. They clearly need new deposits. The lowering of rates has only benefitted the new borrowers and not the existing borrowers, including those who have taken home loans on floating interest rate. If old borrowers want to take advantage of the new rate, they will have to switch, for which they will have to pay 0.25-0.5% of the outstanding amount as a fee. Since the government is talking about inclusive growth, it is well known that access to loans is still difficult for poor farmers without adequate collateral. Better rural roads as well as mobile banking should make bank financing accessible to the remote areas. What we need is better infrastructure for banks in villages; otherwise access to much-needed credit will be denied to those most in need. Perhaps the optimal way to start out would be to concentrate on attracting foreign capital largely into infrastructure. To ensure that, the government must frame easier rules & regulations and commit to leaving them untouched.

July 2019 • India business & trade | 21

H-1B – the wrong bargaining chip for US? The Trump administration would actually be well advised to further liberalise and expand the H-1B visa programme instead of tightening it. BY CATR

fter the GSP benefit withdrawal by US and tariff impositions by India, another chapter on India-US trade hostilities threatened to unravel towards the end of June amid reports that US was planning to fire an H-1B salvo against India. The US was considering caps on H-1B visas at 10-15% for countries that compel foreign companies to store data locally, according to the report. However, the US state department later clarified that it was not considering such a provision. A state department spokesperson affirmed that the H-1B visa was getting reviewed, but it did not have a country-specific dimension. Even India denied having received any communication from US in this regard.

Despite this clarification, it is undeniable that successive tightening of H-1B visas by the US over the past few years is real. And it has a direct link with India as well, considering that Indians take up around 70% of these temporary work visas in the US. In particiular, Indian IT companies widely use these visas to bring their workers to the US for client projects. Indian IT firms witnessed a 43% decline in their H-1B visa approvals between 2015 and 2017. Last year, the US introduced a provision that would lead to more permits for those with a master’s or higher degree from a US institution of higher education. The number of candidates for advanced US degree exemption is capped at 20,000, while the general category has a

22 | India business & trade • July 2019

cap of 65,000. Moreover, paperwork and compliances have successively got more and more complex over time. Denial rates for both new and continuing visas have increased under the Trump administration. The President signed the ‘Buy American, Hire American’ executive order in the first few months of his tenure, and had promised to revamp the H-1B programme. This tightening is compelling companies like TCS, Infosys and Wipro to hire US citizens and subcontract workers, resulting in increase in subcontractor cost, on-site localisation and investment. Infosys has admitted that subcontracting work and hiring local citizens have impacted its margins by 50 basis points. It is also expecting that its cost will remain

elevated until it could do projects with its own employees. A US-based think tank has added that the share of H-1B visas to Indian companies in FY 2017 equaled a minuscule 0.006% of the 160 million US labour force. US Citizenship and Immigration Services has found that Infosys saw a drop of 57% in visas in 2017 while Wipro registered a steeper fall of 61%. This movement of low-cost skilled labour from India will have direct bearings on the margin by inflating the wage bill. But there is a counter impact on the US as well. India’s computer programming consulting and related activities i.e. information service activities contribute US$ 125.4 million to US output of information service activities (WIOT). Margin pressures and barriers against Indian IT companies will automatically impact competitiveness of the US. Industry body NASSCOM has analysed that wages would simply increase costs for US companies that use the services of the Indian IT industry to innovate and grow. This could compel companies to take jobs outside the US, hence impacting its economy. Already, it has been found that a number of IT companies and professionals are shifting their focus to Canada, which currently has a more liberal regime for IT professionals under its Global Skills Strategy Programme. Research by American Immigration Council has stated that H-1B workers complement US workers, fill employment gaps in many STEM occupations and expand job opportunities for all. It counters the general perception that the programme is detrimental to the interests of American natives. In fact, between 1990 to 2010, the increase in STEM workers through H-1B has been found to be positively correlated with an increase in wages for collegeeducated Americans across 219 US cities. A 1% point increase in foreign STEM workers’ share of a city’s total employment is linked with a rise in wages by 7-8% points to both STEM

RESEARCH BY AMERICAN IMMIGRATION COUNCIL CONFIRMS THAT H-1B WORKERS HELP CATALYSE GROWTH & EMPLOYMENT

and non-STEM college-educated natives, and 3-4% points for noncollege educated Americans. The National Foundation for American Policy has admitted that the limit on H-1B visas has not changed since 1990s. Since this limit was set in the pre-internet and smartphone era, it is way too low and dated for the present requirement for high-tech skilled workers. So the Trump administration would actually be well advised to further liberalise the H-1B visa programme instead of tightening it. Use of H-1B visas as a bargaining chip for its trade talks with India will be detrimental to its interests.

July 2019 • India business & trade | 23

Logistics in India: From barrier to catalyst The future of the logistics sector depends not only on the continued development of requisite support systems but also on the capability of the service providers to adapt themselves. BY CATR

ith the rise of globalisation, the synergy of international trade and transport logistics has already become general direction and central theme of development for the global economy. Also, the expansion of the logistics industry has fetched support and attention, not only because it is a kind of progressive management technique or a good business practice on its own, but also since it has gradually become a vital index to estimate the competitiveness and level of modernisation of a nation at the macro level. Although, the contribution of logistics to the national output in a country may not be as high as other sectors, the role that logistics plays in catalysing economic activity cannot be undermined. One

well-known connection between transport and logistics and national development is the facilitation of international trade, which, under appropriate circumstances, delivers several other beneficial economic and social outcomes. The Department of Commerce, Government of India was allocated the responsibility of “Integrated development of Logistics sector” and a separate logistics division was created within the Department in 2017. Currently, Indian goods are less competitive in the world market as logistics costs of exports are very high in the country. India’s logistics costs account for around 14% of GDP as compared to 8-9% for US or Europe, according to McKinsey Research. That is a major reason why India’s share in world trade remains relatively low at around

24 | India business & trade • July 2019

1.7% for exports and 2.6% for imports in 2018. On the Logistics Performance Index rankings in 2018, India still stands at a low rank of 44. As a signatory to the Trade Facilitation Agreement (TFA) at WTO, India seeks to expedite the movement, release and clearance of goods across borders, launch a new phase for trade facilitation reforms all over the world and create a significant boost for commerce and the multilateral trading system as a whole. The governance of logistics can act as a positive catalyst for improved trade. Public policies relating to trade logistics are crucial as the efficiency of logistics depends on well-designed government policies. Effective trade logistics is also related to institutional aspects

of logistics such as government regulations, firm-level administrative & operational procedures, supply chains and national trade procedures for inward and outward movement of goods. The rapid expansion in international trade volumes as noticed over the last two decades also demands streamlining of cumbersome, costly and timeconsuming trade procedures at the level of bureaucracy. These can create an environment for corruption to arise, which can lead to further inefficiencies. FUTURE OF LOGISTICS IN INDIA The logistics industry in India is evolving rapidly and the interplay of infrastructure, technology and new types of service providers will define whether the industry will be able to help its customers reduce their logistics costs and provide effective services. Changing government policies on taxation and regulation of service providers will play an important role in this process. Coordination across various government agencies requires approval from multiple ministries and is a roadblock for multi-modal transport in India. Logistics performance has recently received attention in the context of benchmarking initiatives globally to assess the

INDIAâ&#x20AC;&#x2122;S LOGISTICS PERFORMANCE INDEX OUTLOOK

Country

India

LPI rank

Year

2018

LPI score

3.18

Customs rank

Customs score

Infrastructure rank

Infrastructure score

International shipments rank

2.96 52

2.91 44

International shipments score

3.21

Logistics competence score

3.13

Tracking & tracing score

3.32

Logistics competence rank

Tracking & tracing rank

Timeliness rank

Timeliness score

3.5

Source: World Bank

ease of doing business in different countries. Inefficiency of logistics and transportation services is increasingly being seen as a major contributor to high import costs and long delays. At the firm level, the logistics focus is moving towards reducing cycle times to add value to their customers. Consequently, better tools and strategies are sought by firms to enhance their

INEFFICIENCY OF LOGISTICS AND TRANSPORTATION SERVICES IS A MAJOR CONTRIBUTOR TO HIGH IMPORT COSTS AND LONG DELAYS

decision-making. Logistics performance is positively impacted by the management strategy of the supply chain and has a direct impact on marketing performance, which in turn influences financial performance of manufacturing firms. An effective transport system can be achieved through an efficient use of transport modes, terminals, warehouses and other resources. It also requires understanding and availability of options as well as freight support & logistics service selection decisions. The biggest enhancement to the growth of the Indian logistics industry has been the burgeoning consumer demand, particularly in the Tier 2 and 3 regions of the country. India is also undergoing a significant retail boom with rising purchasing capacity of the middle and upper-middle segments of the population. This is being further fuelled by ground-breaking growth in e-commerce, since logistics is the most critical ingredient in the success of an online business. Several MNCs from a wide range of industries have shown growing interest in setting up world-class manufacturing facilities in India to cater domestic & export markets. However, with infrastructure largely under-developed and incapable of catering to a growing economy, logistics management in India becomes quite convoluted. The dismal condition of infrastructure directly translates to higher turnovers, pushing up operating costs and reducing efficiency. Complex regulatory compliances & limited adoption of technology have resulted in increased documentation and inability to effectively service customers. The future of the logistics sector depends not only on the continued development of requisite support systems but also on the capability of the service providers to adapt themselves and make optimal utilisation of technologies. Moreover, there needs to be better coordination in infrastructure planning and simplification of tax regimes across regions.

July 2019 â&#x20AC;˘ India business & trade | 25

India-Ukraine: Need for a balancing act India’s trade deficit vis-a-vis Ukraine has surged from US$ 0.97 bn in 2008 to US$ 1.87 bn in 2018. CATR analyses product categories where India should negotiate tariff reductions. BY CATR

he 4th Meeting of IndiaUkraine Working Group on Trade and Economic Cooperation (IU-WGTEC), under the India-Ukraine Inter-Governmental Commission on Trade, Economic, Scientific, Technical, Industrial and Cultural Cooperation was held in New Delhi in April, 2019. During this meeting, India and Ukraine signed a protocol that deals with review of trade and cooperation in the fields of small and medium entrepreneurship, technical regulation, PPP and investment. Ukraine wants to explore the Indian market for agriculture while India wants to capture the Ukrainian market in various sectors with emphasis on leather, tobacco, gems and jewelry and tea.

Ukraine has great economic potential as a developing country, since it possesses a relatively cheap labour force and favourable climatic conditions, which make it very attractive for foreign investors. Ukraine’s main trading partners are Russia, EU and China. It prominently exports ferrous and non-ferrous metals, fuel, petroleum products, cereals, animal or vegetable fats and oils, iron and titanium ores and concentrates, electrical machinery and equipment, rape or colza seeds, soybeans and other oilseeds and oligeneous fruits and machinery and mechanical appliances among others. Ukraine’s major imports are petroleum oil and oil from bituminous minerals, petroleum gas and coal, machinery

26 | India business & trade • July 2019

and mechanical appliances, electrical machinery and equipment, vehicles, plastics and articles and pharmaceuticals among others. A look at the import basket indicates huge potential for Indian exporters. It has been seen that India’s exports to Ukraine have stayed relatively flat from US$ 0.43 billion in 2008 to US$ 0.4 billion in 2018. On the other hand, imports have increased at a brisk pace from US$ 1.49 billion in 2008 to US$ 2.28 billion in 2018. As a result, the trade deficit has also surged during the period from US$ 0.97 billion to US$ 1.87 billion. The main product contributing to this deficit is sunflower seed oil, as India imported US$ 1.83 billion in 2018. This CATR research endeavours

to identify products that could be helpful for India to increase its exports if it manages to reduce tariffs by entering into a trade agreement with Ukraine. The top twenty products selected in the table below have been formulated after considering various factors. We can observe from the table that India has a very low share in the Ukrainian market in almost all the 20 products. If we ponder upon India’s export growth to Ukraine in 2017-18, fish & crustaceans and natural or cultured pearls have performed astonishingly. In the same period, rubber and articles, organic chemicals, inorganic chemicals, footwear, cereals and edible vegetables have also performed quite well followed by miscellaneous chemical products, oilseeds, leather, sugar and products. In the table on the right, we present our analysis on the Indian products that have high upside export potential to Ukraine. In this regard, we assume two scenarios with India tapping 25% and 30% of unexplored potential in Ukraine. The figures indicate gain in export value in both scenarios in US$ million. It can be observed that apparels, footwear, leather and rice have the highest potential upside if tariffs are reduced. If we increase exports in the specified products mentioned below we can expect a gain of US$ 85.5-102.6 million. The figures could be higher if we increase the product range to other products such as machinery and mechanical appliance, vehicles and electrical and other equipment among others. Further delving into the countrywise import data gives a deeper insight into the reasons behind India’s low share in Ukraine’s imports. It can be inferred that Ukraine is sourcing most of the high potential products (from India’s perspective) from Russia, Europe and China. India is facing high tariffs mainly on footwear, apparel, leather, vegetables and sugar as compared to European countries. Ukraine and EU have provisionally applied their deep and comprehensive FTA

INDIA’S EXPORT POTENTIAL PRODUCT WISE TO UKRAINE Products

Chemicals

Scenario 1 (Assuming India taps 25% of the market)

Scenario 2 (Assuming India taps 30% of the market)

8.55

10.26

25.40

Ferrous metals

Metal products

4.33

30.48 5.19

Rice

4.43

5.31

Fish and shellfish

5.55

6.66

Coffee, tea, mate and spices

4.78

5.73

Jewellery and precious metals

2.38

2.85

Apparels

9.93

11.91

Skin, leather and products

3.18

Rubber and plastics

10.83

Fruits

1.05

Carpets

0.53

Vegetables

0.73

Footwear

Sugar

Total

3.81

12.99 1.26 0.87

0.63

3.67

4.41

85.5

102.6

0.2

0.24

Source: Calculations based on data from ITC Trade Map, Export values in US$ million

Shri Bidyut Behari Swain (right), AS, FT (CIS), Department of Commerce with Mr. Oleksiy Rozhkov, Director of Directorate for International Trade and Economic Cooperation and European Integration, Ministry of Economic Development & Trade, Ukraine.

(DCFTA) since January 1, 2016. This agreement facilitates both sides with relatively open markets for goods and services based on predictable and enforceable trade rules, resulting in lower advalorem tariff on EU products. The Government of India has to negotiate hard to ensure easier access for Indian exporters to Ukraine in these product categories. The trade deficit is already quite high and has been increasing over the years. Moreover, Ukraine is

seeking access for its areas of strength like agricultural products, which could further lead to a rise in imports for India. Tapping the Ukrainian market for these product categories will address the trade deficit, albeit to a small extent. However, to make a significant dent, India will have to aggressively tap the market for 40%+ share in the long run and also include more products in its basket, as this analysis is from a short run perspective.

July 2019 • India business & trade | 27

COVERSTORY

RCEP: before

RCEP

last before the

leap

the last leap The RCEP deal is expected to precipitate a flood of goods imports in the Indian market, with relatively little gains on the export front. India should be well aware and prepared for the repercussions if it wishes to sign on the dotted line. BY ABHISHEK JHA

ith growing protectionist trends and rising trade tensions, the global environment has become highly volatile for business. In such a scenario, multilateral trade deals are considered highly critical to bring some element of certainty for exporters and also provide greater opportunities for market access. The Regional Comprehensive Economic Partnership (RCEP) is one mega trade agreement that has been a topic of intense debate over the past few years. This deal was initially planned as a counter to the now defunct Trans-Pacific Partnership, and is being negotiated between ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and the six Asia-Pacific states with which ASEAN nations have free trade agreements in place (Australia, China, India, Japan, South Korea and New Zealand). RCEP member countries cover half the world population, 30% of world GDP and a quarter of world trade. Their aggregate economic size is projected to be half of the world’s GDP of US$ 0.5 quadrillion by 2050 in PPP terms. The regional grouping has several countries including China, whose economies are among the most export competitive in the world. HOBSON’S CHOICE? Negotiations on the RCEP have entered the sixth year, with lack of consensus on major issues. India has been reluctant to significantly reduce customs duties on the maximum number of goods traded with RCEP countries. India’s position on this mega trade agreement is rather tricky, because of the presence of countries like China, with whom it already has a huge trade deficit. Moreover, the trade deficit with the ASEAN region has only increased since the signing of the FTA, which came into effect on January 1, 2010. In FY 2010-11, India’s trade deficit with ASEAN countries was US$ 4.98 billion, which increased

RCEP MEMBER NATIONS COVER 50% OF GLOBAL POPULATION, 30% OF WORLD GDP & A QUARTER OF WORLD TRADE to US$ 21.8 billion during 201819. Moreover, 10 RCEP nations accounted for 64% of India’s trade deficit in 2017-18. India has been particularly resistant due to its sensitivities on agriculture and labour-intensive homegrown industries. RCEP could

30 | India business & trade • July 2019

have a negative impact on sectors like steel, pharma, e-commerce, food processing etc, which the Indian government wants to develop indigenously. India is already facing challenges from Singapore (financial and technology hub), Australia & New Zealand (agriculture and dairy) and South East Asian countries (plantations). Some RCEP proposals also threaten India’s position on e-commerce and TRIPS at the WTO. One key concession demanded by India is greater mobility for its services professionals through measures like visa fee waivers and an RCEP business travel card. RCEP countries have rejected these proposals due to fears of job losses and migration. However, a report by IIM-Bangalore, ICRIER and Centre for Regional Trade has also affirmed that the potential gains for India in services exports will only be in the range of US$ 2-10 billion, and

RCEP leaders at the 2nd Regional Comprehensive Economic Partnership (RCEP) Summit, Singapore, 2018

will not compensate for the rise in imports, especially from China. India is also demanding tougher Country of Origin norms, which are opposed by 13 countries including Australia, Japan and New Zealand. India’s concern stems from the negative impact of cheap imports that take unfair advantage of FTAs. An instance is the influx of cheap imports from China that are rerouted through the South Asia Free Trade Pact or The Duty-Free QuotaFree window from Bangladesh. On the positive side, RCEP will potentially provide increased market access to some of India’s key export sectors and promote investment. It would also facilitate integration of Indian companies, especially MSMEs, into RVCs and GVCs. Furthermore, it will compel countries like China to adopt a rule-based framework as opposed to their currently opaque and discriminatory trade policies.

COST-BENEFIT MISMATCH Among the RCEP members, the level of trade by each member with the rest has varied quite significantly. At one end is Australia, whose exports to RCEP countries exceeded three quarters of its total exports and whose imports from these countries accounted for two thirds of its total imports in 2017. At the other extreme is India, whose exports to RCEP countries comprise only 18.33% of its exports and mports make up 29.74% of its total imports, making it the least integrated with the RCEP region. The level of trade of ASEAN countries with other RCEP members adds up to 58.26%. China’s trade with RCEP members was almost a third and for both Japan and Korea, the shares exceeded 40% of their global trade. While China, India, Japan and New Zealand all had deficits in their intra-RCEP trade, the percentage share of India was also

the highest. RCEP has the potential to generate global income gains of US$ 286 billion. This reflects, on one hand, the economic scale of RCEP; its member economies have the largest combined GDP among all alternatives as mentioned—and on the other, the relative weakness of RCEP provisions. RCEP members are more competitive than complementary in economic structure and no single economy is accepted as a natural leader. In addition, many prior trade agreements cover trade among RCEP countries—the requirement for membership in RCEP is that each economy must have an agreement with ASEAN and RCEP provisions are unlikely to exceed in quality FTAs already in place. Still, RCEP could lead to improved followup agreements in the future, like other ASEAN agreements, yielding greater long-run benefits.

July 2019 • India business & trade | 31

TABLE 1: INDIA’S AVERAGE EXPORTS TO RCEP COUNTRIES Countries

2003-05

Australia Brunei

2006-08

2015-17

682

1,106

1,719

2,541

3,359

134

125

Cambodia

2009-11 2012-14

306

China

4,616

9,138

14,843

14,860

10,329

Japan

2,004

3,231

4,538

6,499

4,285

Indonesia

1,212

Korea, Dem. Rep. Korea, Rep.

116

2,136 619

4,653 304

5,342 182

3,254

1,051

2,853

3,986

4,456

3,817

Malaysia

992

2,072

3,626

4,643

4,876

New Zealand

104

277

225

307

317

Lao PDR

Myanmar

102

Philippines

390

Singapore Thailand

Average RCEP (16 countries)

175

641

312 835

713

3,699

3,222

10,507

12,473

516

1,309

2,592

5,391

1,013

2,027

2,206 3,171

1,021 1,454

7,124

1,512

1,342

3,515

883

Vietnam

3,917

8,907 6,477 3,224

Source: Estimation based on WITS Database (US$ million)

TABLE 2: INDIA’S AVERAGE IMPORTS FROM RCEP COUNTRIES Countries

2003-05

Australia Brunei

China

Indonesia

2015-17

7,917

12,739

11,245

10,832

262

467

883

555

6,611

23,934

42,449

54,669

64,670

2,991

6,120

8,724

10,939

9,971

2,442

Korea, Dem. Rep.

2009-11 2012-14

3,495

Cambodia

Japan

2006-08

4,961

251

10,420 55

14,746 62

14,109

Korea, Rep.

3,395

6,227

10,172

13,180

13,798

Malaysia

2,182

5,948

6,697

10,251

9,038

128

346

596

666

557

Lao PDR

Myanmar

New Zealand

Philippines

Singapore Thailand Vietnam

Average RCEP (16 countries)

420

165

806

203

1,189 396

105

1,368 435

2,506

6,797

7,187

7,298

228

997

2,518

829

1,578

2,136 4,134

3,924 6,639

188

946

568

7,117

5,552

5,808

8,371

8,849

3,309

Source: Estimation based on WITS Database (US$ million)

32 | India business & trade • July 2019

TRADE PATTERN WITH RCEP Table 1 shows India’s trade relation with RCEP countries since the year 2000. India’s total trade with these countries taken together accounted for more than one-third of its total trade in 2017. According to the WITS simulator, India’s imports may increase by a whopping US$ 29 billion annually during the post-RCEP period, implying a revenue loss by as much as 1.3% of GDP. The increase will be the highest from China followed by South Korea and Japan. At the commodity level, India’s import is likely to experience the highest increase in machinery, electrical and mechanical equipment (HS84 and HS85) followed by ships, boats and floating structures (HS89), animal or vegetable fats and oils (HS15) and wood and articles of wood (HS44) from these RCEP participants. India’s exports are likely to increase by just US$ 5.5 billion annually in comparison, with the highest increase in exports to China followed by Vietnam and Thailand. A relatively low growth in exports will widen the trade deficit, which was estimated at over US$ 108.5 billion in 2018. At the product level, export is likely to be highest in ores, slag and ash (HS26) followed by cotton (HS52), raw hides (HS41) cereals (HS10) and vehicles (HS87). These top 5 products would account for more than half of India’s rise in exports to the RCEP bloc in the post-tariff elimination period. NAVIGATING UNCERTAINTY In order to protect its interests, India had proposed a three-tier tariff reduction mechanism under which the RCEP countries are categorised based on the level of trade imbalance and existence of free trade agreements. The first tier proposes 80% trade liberalisation for ASEAN countries of which 65% would be implemented immediately and the remaining 15% would come into effect in the course of 10 years. The second tier proposed 65% trade liberalization for South Korea and Japan with which India already

has free trade agreements (FTAs). In the third tier, India has agreed to 42.5% trade tariff reduction to China, Australia and New Zealand. In return, these countries will offer India 42.5%, 80% and 65% tariff line reductions respectively. This three-tier approach aimed at protecting the interest of domestic manufacturers, as a single tariff approach can result in Indian markets being flooded by cheap imports from China and other RCEP countries. However, India removed this provision later, with the expectation of getting a better bargain for its services sector. However, as discussed earlier, services is unlikely to make up for the expected deficit in agriculture and manufacturing trade, even in the unlikely event of RCEP members agreeing to India’s demands. Let’s take the case of agriculture. Indian agricultural exports to RCEP members remained at US$ 10.5 billion in 2018, which haven’t surged much in past three years. In fact, it is anticipated that India might be hurt because of few reasons. Firstly, Australia’s export competitiveness in dairy, wheat and meat products, and New Zealand’s role as a major global dairy exporter accounting for 30% of global dairy exports, make Indian agriculture and dairy sectors totally susceptible. India already has trade agreements

TABLE 3: AVERAGE IMPORT TARIFFS IMPOSED AND FACED BY INDIA DURING 2015-2017. Countries/ RCEP partners

Australia

Import tariff imposed by India (avg. 2015-17)

Import by India in US$ million (avg. 201517)

11.0

10,822

Cambodia

1.0

Indonesia

Import tariff imposed by RCEP countries on India (avg. 2015-17)

Export from India to RCEP countries in US$ million (avg. 2015-17)

3.0

3,601

11.1

5.3

14,101

4.2

3,419

Korea, Rep.

5.2

13,650

6.4

4,804

Malaysia

4.7

9,022

4.9

3,999

Brunei

Canada Japan

Lao PDR

Myanmar

New Zealand

Philippines

2.3 9.8 6.5

3.2

2.1

4,098 9,732

188 946

11.6 4.7

Singapore

4.9

Vietnam

5.3

Thailand

555

5.3

0.9

2.4

0.7

4.0 3.3

3,114

4,938

860

552

2.7

7,094

0.0

6,284

3,303

6.1

2,835

566

5,785

3.7

3.6

420

1,504

2,619

Source: Wits Database, World Bank.

with 12 nations out of fifteen other RCEP nations making this clear that much upside may not be possible. From Table 4, it is clear that at the present tariff rate on agricultural products, imports of India from the rest of the RCEP countries are over

twice its exports to these countries. Several other countries, including Australia, Brazil have also challenged India’s agricultural subsidies, which they argue, are inconsistent with the WTO’s Agreement on Agriculture (AoA).

July 2019 • India business & trade | 33

INDIA’S TRADE FLOWS WITH RCEP NATIONS 200

150

100

2011

2012

2013

2014

2015

2016

2017

2018

-50

-100

-150 Indis’s exports to RCEP

Indis’s imports from RCEP

Trade balance

Source: ITC Trade Map, figures in US$ billion

TABLE 4: AVERAGE IMPORT TARIFF (ON AGRICULTURAL PRODUCTS) IMPOSED & FACED BY INDIA (2015-2017) Countries/ RCEP partners

Import tariff imposed by India (avg. 2015-17)

Import (HSAgriculture) by India in US$ million (avg. 201517)

Import tariff imposed by RCEP countries on India (avg. 2015-17)

Australia

36.9

1,567.3

1.4

Cambodia

16.6

4.2

13.2

Brunei

0.0

China

31.3

Japan

33.2

0.1

0.0

Export (HSAgriculture) from India to RCEP countries in US$ million (avg. 2015-17)

237 18 9

585.8

13.5

903

9.0

4.5

426

12.9

43.9

478

23.2

2,174.0

1.9

882

New Zealand

35.0

80.6

1.6

Singapore

33.0

Indonesia

21.2

4,750.1

Korea, Rep.

28.2

Malaysia

Lao PDR

Myanmar

Philippines Thailand Vietnam

14.3 9.9

26.1 20.1 28.9

0.8

767.1 43.1 73.1

202.2 323.9

4.8

6.1

4.5

681

293

6.2

260

13.9

262

0.0 9.2

289 569

Source: Wits Database, World Bank.

34 | India business & trade • July 2019

Thus, competing with these RCEP economies could be daunting. The newly elected NDA government under Prime Minister Shri Narendra Modi will have to take a call on the terms at which an RCEP deal would be acceptable to India, or whether it makes sense at all. Now that mega trade negotiations are being pushed as an umbrella, India has to find the germane equation to extract the optimal benefits from this megatrade deal and minimise the fallout. If RCEP has to be more fruitful and successful, a great deal of planning and strategising is critical. India has to become more competitive for the concessions it secures to translate into realizable market access. It should also secure sufficient flexibilities to ensure that domestic players have a fair playing field in being able to withstand competition. India has to remain firm on its position on factors like import tariff reductions, rules of origin and service sector liberalisation in RCEP negotiations, even if it comes at the cost of the deal itself.

“Metals and capital goods should be kept out of FTAs” Near zero or zero import duty rates provided to India’s FTA partners have gone against the spirit of FTAs and hit India’s domestic industries. There should be a level playing field for all regions of the world and similar import duties should be paid by all the trading partners equally.

MR YATINDER SURI MD & Country Head Outokumpu India

mport duties are walls designed to protect interests of domestic manufacturers against stiff and unfair competition posed by foreign manufacturers. However, near zero or zero import duty rates as provided to India’s FTA partners have rather gone against the spirits of the FTAs and hit India’s domestic industries like aluminium, steel, copper and capital goods. For instance, in the case of steel, more than 50% (sometimes, up to 75%) of the domestic imports are met by imports from India’s FTA partners who have exemption from payment of import duties. In our view, there should be a level playing field for all regions of the world and similar import duties should be paid by all trading partners equally. If India is importing 100 kg of aluminium from a country, for instance, it should also be allowed to export at least 70 kg of aluminium to the same nation. This, however, does not happen most of the times. Such anomalous policies are

creating a chain of other problems like NPAs with the banking sector, crippling the growth of Indian industry and the economy. Due to the stark rise in NPAs and bad loans, a number of banks in India are shying away from lending capital to Indian industry for new investments. They have also enforced credit limits. The downstream manufacturers have to compete on costs, which pushes them to source cheaper metals from overseas. While there is a high cost of capital in India, with about 12% interest rate, the same in Japan is near zero and in South Korea, it’s below 6%. Added to this are the high logistical costs in India and unfair competition created by low prices of metals from FTA countries. The recent currency depreciation in South Korea has led to further drop in import prices into India, which will push Indian producers to match the lowest price. They will continue to bleed financially. Another factor behind the demand and investment slowdown is that the government has not been able to uplift the share of the manufacturing sector in India’s GDP. Though the current government envisaged a 25% contribution by the manufacturing sector to India’s GDP by 2025, the growth has stagnated to 14-16%. If you look at our competitors like China and South Korea, manufacturing accounts for

more than 40% of their GDP. As a result, a lot of their aluminium, steel, copper, etc. get consumed by industries in their own country. Production level has gone down too; the recent victim of this scenario being the automobile sector in India. Furthermore, many downstream end-product producers turn to inferior quality metals because of their lower costs. Thus, they are creating a problem for the primary metal producers. There needs to be a total ban on use of defective and non-standard products. I believe that metals and capital goods should be removed from free trade agreements to ensure that our companies do not become NPAs due to low price offers as a consequence of near zero duty enjoyed by FTA countries. Unfortunately, the government hasn’t done much to help the industry. Our Make in India has failed due to FTA countries ruining our metals and capital goods sectors. In fact, it should take a cue from regions like US & Europe that are known for their quick and proactive steps to introduce safeguard/ protectionist policies. In the context of Regional Comprehensive Economic Partnership (RCEP) too, I would strongly advocate that metals and capital goods should be kept out of the gamut of negotiations in order to avoid dumping of these products from South Korea & China.

July 2019 • India business & trade | 35

POLICY FOCUS

Protecting the oil of the 21st century

India’s skepticism towards free flow of data across borders is logical. Data is an invaluable resource, and could be leveraged as a tool for future negotiations at the WTO. BY CATR

actually, India did not sign any regional trade agreement in last five years, and this is attributable to a number of reasons. There are several regional trade agreements, which are still being negotiated like RCEP, IndiaAustralia CECA (comprehensive economic cooperation agreement), India-EU and India-Brazil. Some trade policy experts support trading off merchandise trade vis-a-vis service trade. According to these experts, it is absolutely feasible to open our markets in return for our services exports. There is no doubt about the competitiveness of some of India’s

services exports like ICT, healthcare, education and other business services. But since it is non-tangible, especially through mode 4, there might be some reservations on this very idea. This approach is anticipated to get repeated in the coming years with respect to e-commerce policy negotiations. Since India is not a part of global e-commerce policy discussions and has decided to come up and frame its own e-commerce policy, there will certainly be discrepancies that will show up on negotiating tables in the coming years. According to Indian experts,

developing countries do not possess any chance of reaping benefits from global e-commerce norms being discussed by a limited group of 75 nations. India’s concern stems from the absence of a domestic policy as well as free data flow being pushed by the US and Europe. Moreover, Indian policy makers are also sceptical towards developing and least developed countries, as the draft global e-commerce policy has a mandate to lower duties and ease restrictions on services trading. Another issue that has rankled developed countries, particularly the US, is the data localisation requirement, which is the most vital concern for India. DATA: NATIONAL TREASURE In the context of e-commerce, data is any specific type of information transformed into a binary digital format that is feasible and effective to store, process and transfer across various devices, platforms, borders and servers. Data is a valuable resource for any individual, entity, corporation or a Government. It has a real and quantifiable value, that can be utilised to aid decision-making and strategising for that particular organization. Data engendered by activity in one domain or sector can facilitate a competitive edge for a new opportunity in another sector or domain. Monetisation of data is a lucrative business model adopted by many corporations to generate profits by analysing, processing and utilising data. Thus, access to data has developed as

36 | India business & trade • July 2019

DRAFT E-COMMERCE POLICY The government seems to be stepping cautiously on the matter, given US opposition to the proposed data localisation norms. A number of MNCs like MasterCard, Google, Facebook, etc. have protested against India’s data localisation norms. In light of the surging importance of data protection and privacy, the National E-commerce Policy aims to control cross-border data flow, while enabling sharing of anonymous community data; e.g. data collected by IoT devices in public spaces like automated entry gates or traffic signals. Categories like data not collected in India, data flows through software and cloud computing services, B2B data shared among business entities under a commercial contract and data shared internally by MNCs are exempted. Localisation rules are also stringent in countries like Germany, Russia and Nigeria. In China, regulation covers ‘critical information infrastructure’ on all aspects of daily life. and not just personal information. The e-commerce rulebook got squeezed for companies with foreign investment, compelling players such as Flipkart, Amazon, Walmart and others to rework their business strategies in the country. The e-commerce draft policy is still in the discussion phase and will be finalized in a year. Due to the

MOBILE DATA TRAFFIC (EXABYTES PER MONTH) 90 80

70 60

40 29

30 20 10 0

Source: CISCO, 1 Exabyte = 109 GB

a foremost factor of success for an enterprise in the digital economy. Developed nations like the US have called for a “non-discriminating” approach in the treatment of digital products, which is seconded by economies like South Korea and Singapore. With a consumer base of 1.3 billion, India provides immense business prospects for foreign digital products. Thus, it is impossible for India to give a green signal for the removal of the data localisation clause and sharing it across borders. Data is at the core of India’s new e-commerce, as it can unite other developing countries to strengthen India’s position at WTO.

19 13

CY 2017

CY 2018

CY 2019

sensitivity of stakeholders related to e-commerce, the Government of India pulled back the initial draft released in February. E-commerce presents huge opportunity for India to empower 70 million SMEs and make them an

DIGITAL DATA GENERATED IN INDIA IS EXPECTED TO REACH 2.3 MILLION PETABYTES BY 2020

CY 2020

CY 2021

CY 2022

integral part of its digital economy. India is expected to be one of the largest destinations of commercially useful data in the world. Digital data in India is expected to reach 2.3 million petabytes in 2020 (1 petabyte = 106 GB) compared to 40,000 petabytes in 2010. Furthermore, the existence of ‘network effects’ signals that in the era of data, the larger the number of firms, the greater the access to potential data sources and likelihood of successful utilisation. It’s indispensable for India to leverage data as an instrument for future negotiations instead of just giving it away to giant economies. UNCTAD has also warned developing nations against premature commitment to e-commerce rules, stating that the influential actors in this debate are driven by ‘narrow business interests’.

July 2019 • India business & trade | 37

Impact of scrap use on energy efficiency of Indian steel industry Recycled scrap is largely used in steel manufacturing globally and actively encouraged in India as well. But research indicates that promoting scrap-use in the Indian context may not be energy-efﬁcient unless overall factor productivity of the scrap-using plants is also improved.

T APARNA SAWHNEY, Professor of Economics, Centre for International Trade and Development, Jawaharlal Nehru University

According to Metal Bulletin Research, ferrous scrap usage in India is expected to expand to 22.36 million tonnes by 2023, and increasing scrap imports to 7.37 million tonnes. Per capita steel consumption in India is also expected to rise significantly from 68 kg in 2018 to 160-180 kg in 2031.

he metal scrap industry owes its genesis and growth to the essential fact that steel can be recycled infinitely without affecting its material properties. The average recycling rate of steel today is 85%, and it is one of the most recycled metals globally. According to estimates, around 670 million tonnes of scrap was recycled in 2017 across the world. According to data for 2017 from Metal Bulletin Research, India imported 4.38 million tonnes, or 26% of the 16.82 million tonnes of total scrap it consumed in 2017. Ferrous scrap usage is expected to expand further to 22.36 million tonnes by 2023, and increasing scrap imports to 7.37 million tonnes. Per capita steel consumption in India is also expected to rise from 68 kg in 2018 to 160-180 kg in 2031. While steel production is energy-intensive, modern energy management systems recycling steel scrap have reduced energy intensity of steel production in the world. Recycling of steel accounts for signiﬁcant energy and raw material savings: estimated to be over 1,400 kg of iron ore, 740 kg of coal and 120 kg of limestone saved for every 1,000 kg of steel scrap converted into new steel. Production of secondary steel (using scrap) is estimated to utilise 74% less energy as compared to the production of steel from iron ore. In India too, scrap recycling

38 | India business & trade • July 2019

to enhance energy efficiency has gathered momentum at the policy level. The Energy Conservation Act of 2001 provides the institutional framework to reduce energy intensity of the economy, whereby standards, regulations and norms have been implemented. The Bureau of Energy Efﬁciency, established in 2002, under the Act, facilitates the implementation of different initiatives for energy

conservation and efficiency. It is implementing the National Mission for Enhanced Energy Efficiency (NMEEE) under the National Action Plan on Climate Change 2008 to promote energy conservation in the industrial sector. The NMEEE identified nine energy-intensive sectors of the country for target energy-efficiency norms to achieve a low carbon path for the economy, including iron and steel, a key infrastructure development industry. India is the third largest steel producing country after China and Japan. But energy consumption of Indian iron and steel plants is much higher than steel plants abroad. Data from the Ministry of Steel estimates that integrated steel plants require 6-6.5 Gigacalories per tonne of crude steel compared to 4.5-5 Gigacalories per tonne in steel plants abroad. This is attributed to obsolete technologies, old operating practices and poor quality of raw materials. Since recycling of steel scrap offers significant energy saving, it is pertinent to understand whether recycling strategy has enhanced

energy-efficiency in the Indian iron and steel industry during the last two decades. To ascertain the impact of recycling of steel scrap on energy efficiency, we tracked the energy intensity of Indian steel plants during the period 1999–2014, to determine whether scrap-use provided energysaving benefits. Our analysis examines the energy efficiency and total factor productivity of Indian steel plants, distinguishing between plants that use external scrap and those that do not use external scrap an input in the production process. Our research concludes that energy intensity of production in the

EXTERNAL SCRAP USING STEEL PLANTS IN INDIA ARE ARE FOUND TO HAVE LOWER FACTOR PRODUCTIVITY

iron and steel industry has indeed been declining over time, especially in the integrated steel plant, but less so in other (non-integrated) steel plants. It is important to note that the negative time trend in energy-intensity we observe for the sample with large integrated steel plants re-confirms the observation in the existing literature that energy efficiency has improved in the industry since the late 1990s. After controlling for plant characteristics and location, we find that energy intensity in plants that used external scrap is significantly higher than those which did not or those, which used less scrap in the material mix. In a robustness check of this phenomenon, we examine the total factor productivity of steel plants in order to measure the overall factor efficiency of plants recycling scrap versus nonscrap users. Our analysis of total factor productivity gives the same qualitative result, whereby externalscrap using plants are found to have lower factor productivity than nonscrap users. While recycling has been identified as one of the key drivers of improvement in energy efficiency in the iron and steel industry, we do not find support for this phenomenon for the Indian iron and steel manufacturing industry. Our analysis suggests that external scrap using steel plants in India are less efficient in total factor use as well as in energy use. The lower energy-efficiency of the plants using scrap may not be energy saving due to the other factors, like poor quality of raw material, that our analysis has not been able to capture. This has important implications for the strategy to encourage growth in secondary steel production in India, as envisioned in the National Steel Policy 2017. Going forward, the government intends to strongly encourage scrapbased steel manufacturing in order to save energy. However, promoting scrap-use may not be energyefficient unless the overall factor productivity of the scrap-using plants is also improved.

July 2019 • India business & trade | 39

FOCUS PRODUCT

Getting back to the drawing board India’s apparel exports have recorded the fourth successive year of weak growth/de-growth in 2018-19. Despite China’s declining competitiveness, India has been unable to grow its market share, and risks inviting further turmoil unless urgent measures are taken. BY VIRAT BAHRI

pparel exporters are headed for difficult times ahead, due to a decline in demand from major markets. Although exports were showing promise in the beginning of 2018-19, there was subsquently a decline in both volume and value terms, according to a report by Drip Capital, which analyses macro trends and proprietary data of the top 100 apparel exporters which

40 | India business & trade • July 2019

posted business of US$ 32 billion for the year till date. During 201819, exports of readymade garments from India were valued at US$ 16.37 billion, a decline by 3.5% YoY. Fall in demand from the UAE has proved to be a huge setback, since it is a major market for Indian apparel. A number of manufacturing units have now been set up in free market zones in UAE, leading to increase in raw material imports over finished

goods. During 2018-19, exports of apparel and clothing to UAE (chapters 61 and 62) reached US$ 2 billion, a sharp drop considering the corresponding figure of US$ 2.82 billion for FY 2017-18. Exports to US have increased by 7.8% to US$ 4.2 billion, but exports to EU for these chapters have decreased by 3.4% YoY to reach US$ 6.3 billion. Indian exporters are now diverting their attention towards other markets witnessing strong growth like the US, UK, Chile, Israel and Japan to counter the reversals in markets like France, Sri Lanka, Middle East and Sudan. PERSISTENT STRAIN Last year, an ICRA report affirmed that 2018-19 will continue to be the fourth consecutive year of weak growth/degrowth for the Indian apparel sector, with a de-growth of 4-5%, following a similar de-growth of 4% in 2017-18; and low growth rates of 1% and 3% in FY 2015-16 and FY 2016-17 respectively. This is despite a revival in the global apparel trade, which grew by 6.1% YoY in 2018. A major cause of this has been the growth in imports by EU, which accounts for twofifth of international apparel trade. The turbulence was also linked to the transition to GST, changing positions on export subsidies and

APPAREL EXPORTS FROM INDIA REACHED US$ 16.37 BILLION IN 201819, SUFFERING A DE-GROWTH BY 3.5% YOY. rupee appreciation, which affected the industry’s standing in a highly competitive global market. While the GST issue is getting sorted out, a new challenge confronts Indian exports, which has major ramifications for the textile sector. The US filed a case against India at the WTO, alleging that India’s subsidies were harming US companies. Its complaint earmarked five schemes, including Merchandise Exports from India Scheme (MEIS) and Export Promotion Capital Goods Scheme (EPCG). The US argues that since India has recorded per capita gross national income (GNI) > US$ 1,000 for three consecutive years, it is no longer eligible to provide these

subsidies. The US, which is India’s top export market, has also removed India from its list of beneficiaries under GSP, which will have (albeit marginal) impact on some apparel exports. Bangladesh and Vietnam are emerging as important nations for apparel exports due to their low labour costs, and are aggressively capturing the emerging opportunities due to China’s declining share in the international market. Even India’s imports are increasing from Bangladesh and Vietnam, due to which the government increased import duties on over 330 textile items last year. Bangladesh fully exempts customs duty, due to which Chinese fabric is coming duty free to India via Bangladesh in the form of garments. Apparel imports by India from Bangladesh have risen sharply by over 80% from US$ 201 million in 2017-18 to US$ 365.3 million in 2018-19. Ms. Chandrima Chatterjee, Advisor at Apparel Export Promotion Council, expains the reasons, “Of late, there has been an increase in India’s garment imports, especially from markets like Bangladesh. India has a Free Trade Agreement with Bangladesh, which allows it to enjoy zero duty on imported garments. With a 20% lower cost of production, such imported products have a

July 2019 • India business & trade | 41

TOP EXPORT MARKETS FOR INDIAN APPAREL 4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0

UAE

Germany

2017-18

distinct price advantage, prompting retailers in India to choose cheaper imported garments over those manufactured within the country. The cost advantage is on account of lower wage cost, cost of other inputs and better access to imported fabric from China.” Besides this, imports have also risen from Hong Kong and Sri Lanka. Rahul Mehta, President, Clothing Manufacturers Association of India, opines, “While this trend is worrying indeed, it is certainly not a situation to panic about. The total amount of imports (about US$ 1 billion) is not very significant when one looks at the country’s total consumption. However, if left unchecked, this development could create severe problems in the future.” MISSING THE BUS? One major area that is impacting India’s apparel exports is the lack of trade agreements. Due to the slow progress of the Doha round, a number of trade agreements have been signed leading to zero or preferential tariff arrangements between member countries. India does not have any FTAs with major apparel import destinations like EU, US and UAE, which severely impacts its competitiveness. The Economic Survey 2016-17 projected that successful conclusion of FTAs with EU and UK would lead to increase in apparel exports by US$ 1.48 billion and US$ 603.3 million respectively. For instance, in a category like

France

Spain

2018-19

INDIA DOESN’T HAVE ANY FTAS WITH MAJOR APPAREL IMPORTING DESTINATIONS LIKE EU, US AND THE UAE T-shirts and singlets, which accounts for 16% of India’s apparel exports, the US imposes a tariff rate of 32%. For silk shawls and scarves, the US imposes 11.3% on India, while the Republic of Korea faces zero tariffs due to an FTA. This could get worse, as the US is now resorting to a wide range of protectionist measures. In instances like the Comprehensive

42 | India business & trade • July 2019

Economic Partnership Agreement with Japan, the latter is not a major export destination for apparels. Moreover, it is alarming that despite the agreement in August 2011, India’s share in Japanese apparel exports increased initially, but later declined and is now stagnant. Meanwhile, India’s market share of Japanese apparel imports continues to languish at 0.09%, compared to China (6.46%), Vietnam (1.17%) and Bangladesh (0.34%). India is currently negotiating the Regional Comprehensive Economic Partnership (RCEP) with ASEAN members, Australia, China, India, Japan, Republic of Korea, and New Zealand, which could lead to zero tariffs between member countries. However, this may also lead to a sharp rise in imports from nations like China, Vietnam and Republic of Korea, which currently face a Most Favoured Nation (MFN) tariff of 25% in India. Vietnam is gaining ground in the US, and is expected to do even better if the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement are successfully concluded. Bangladesh has similarly leveraged GSP to increase its market share in EU from 7% in 2001 to 20% presently, even as India stays at 6-7%. These developments are indeed worrying, considering that the EU accounted for 37% of India’s apparel exports in CY 2018. Around 90% of India’s garment

INDIA’S APPAREL EXPORTS 17.60 17.40 17.20 17.00 16.80 16.60 16.40 16.20 16.00 15.80 15.60 15.40 2014-15

2015-16

2016-17

Source: Department of Commerce. All figures in US$ billion, data is for Chapters 61 and 62

2017-18

manufacturing units are in the unorganized sector, and 78% employ less than 50 workers. This implies that most of them are too small to implement significant technology upgradation and have to continue to compete at the bottom of the value chain. This is further exacerbated by high logistics costs of around US$ 7/km in India compared to US$ 2.5/km in China and US$ 3/km in Sri Lanka. Dr Amita Batra, Professor, Centre for South Asia Studies, JNU, asserts, “India needs to enter the space that is getting vacated by China in the garments and apparel global supply chains. There is a need to tap the potential of our labour and incorporate modern technology to expedite production

“INDIA NEEDS TO ENTER THE SPACE GETTING VACATED BY CHINA IN GLOBAL APPAREL SUPPLY CHAINS.”

capacity, bring down the cost of production (power and logistics etc) and bridge the skill gap.” The Drip Capital report also makes the case for incentivizing textile exporters to upgrade to better technology by expansion of the Credit Link Capital Subsidy Scheme for Technology Upgradation and the Technology Upgradation Fund Scheme. The WTO permits such schemes for technology upgradation, and leveraging them becomes extremely important due to India’s declining labour competitiveness. The industry also continues to be dominated by the small-scale sector. Around 78% of apparel and leather firms in India employ less than 50 workers and only 10% employ more than 500. Aggregating smaller players into clusters and moving towards integrated textile units is also critical, so that they may develop the muscle to get back into the reckoning in the international market. In the present scenario, a number of international buyers are adopting the China+1 model, wherein they ensure that they remain active in one country other than China. India should take advantage of this shift, more so because it is one of the few countries that have production capacities across the value chain.

THE CHINA FACTOR Under the Multi Fibre Agreement between 19702004, trade in textiles and apparel was governed by quotas, which benefitted emerging producers like Bangladesh over incumbents like India and China. As quotas began to get phased out, China’s share of the textile trade ballooned disproportionately at the cost of industries in many developing countries. As a result, China’s share in global textile output grew from 12% in 1995 to 47% in 2017. Despite its cost advantage now eroding gradually, China remains the dominant player, and its share is being taken up by countries like Bangladesh, Vietnam, Ethiopia and Turkey. However, as McKinsey points out in its report – The State of Fashion 2019, the shift has not happened at a very huge scale. The labour differential is not as high as it was between China and the developed world in the previous decade. Moreover, shifting of capital intensive operations like cultivation of raw materials and weaving is prohibitively expensive. China is also using its Belt & Road Initiative to deepen connections with producers in other developing countries and expand its market. Now the country is planning a major shift to technology-intensive manufacturing and moving towards the higher end of the value chain.

July 2019 • India business & trade | 43

“India needs to diversify its apparel basket” MR RAHUL MEHTA, President, Clothing Manufacturers Association of India and MD, Creative Lifestyles Pvt Ltd

Mr Rahul Mehta, President, Clothing Manufacturers Association of India and MD, Creative Lifestyles Pvt Ltd, talks about the surge in garment imports from low cost destinations, India’s competitive position in the global trade and the urgent need to diversify into categories like formal wear, sportswear, outdoor wear and winter wear. Q. A recent report collated by the Clothing Manufacturers Association of India (CMAI) has depicted an increase in garment imports by 47% and a 5% decrease in exports during April 2018-February 2019. One key factor is the rise in imports from Bangladesh. What are the major factors prompting retailers in India to opt for imported garments?

India has a lot of smaller production units and factories owing to the high cost of spaces and the tendency to prevent unionism. As a result, big retailers like Reliance and Aditya Birla cannot place bulk orders conveniently.

Rahul Mehta (RM): While it is true that there has been an overall decline in India’s garment exports for the period April’18-February’19, apparel exports started picking up since October last year. Coming to the rise in imports of garments made in Bangladesh, there are a number of reasons for this development: Before the implementation of the GST regime, Indian importers had to pay a countervailing duty of about 5-7%, which drove up the costs of these garments. With the GST having subsumed this duty, apparel from Bangladesh has become cheaper for the Indian importers by 5-7%. Bangladesh has the advantage of having lower minimum wages (about 60-70% of those in India). This has the effect of reducing the cost of production and making

44 | India business & trade • July 2019

clothing cheaper. Another factor, which makes Bangladesh competitive is the fact that it enjoys the import of duty-free fabrics & garments from China. The availability of cheaper fabric, too, brings down the manufacturing costs. Lastly, India has a lot of smaller production units and factories owing to the high cost of spaces and the tendency to prevent unionism. As a result, big retailers like Reliance and Aditya Birla cannot place bulk orders conveniently. For instance, if they want to procure 100,000 pieces, they’ll have to source them from 10-15 Indian garment producers, whereas they can procure the same easily in Bangladesh by placing the order to 1-2 firms. Having said that, there’s one thing that needs to be noted about the current development – that while this trend is worrying indeed, it is certainly not a situation to panic about. This is due to the fact that the total amount of imports (about US$ 1 billion) is not very significant when one looks at the country’s total consumption. However, if left unchecked, this development could create severe problems in the future for India.

Q. How do you view the competitiveness of Indian apparel exports in the current international scenario vis-à-vis competitors like Vietnam? RM: The fact that Vietnam is not a cheap production source and is geographically a small nation creates limits on its growth & expansion in comparison to India. However, the fact that it has attracted huge investments, technology and skills training from China, has certainly created a beneficial scenario for Vietnam. With the right kind of policies and initiatives, India is sure to do well and grow more than Vietnam. Q. What are the key markets where Indian exporters have successfully penetrated in the past, and new markets you are trying to explore? RM: US & EU together comprise the top markets for Indian apparel exporters (65%). There’s also a lot of potential that can be tapped in Japan, Australia, South America & Middle East. However, there’s one bottleneck that needs to be taken into account – India only specializes in the production of low to mid-range cotton casual wear. It is peculiar by its absence when it comes to formal wear, sportswear, outdoor wear and

“VIETNAM HAS ATTRACTED HUGE INVESTMENTS, TECHNOLOGY & SKILLS TRAINING FROM CHINA” winter wear. India needs to actively explore these areas if it aspires to increase its garment exports beyond 5-10%. Q. How can Indian apparel exporters successfully integrate with global value chains, and what has been the progress so far in this regard? RM: Like I said, India needs to diversify its product basket. It also needs to pay attention to compliance and sustainability-related issues and make sure that its manufacturing practices fall within the gamut of accepted social & legal regulations. Q. Please share with us any significant non-tariff barriers that Indian apparel exporters have

faced in the international market. RM: There are not any major non-tariff barriers faced by Indian exporters in international markets except for the concessions meted out to competitors like Bangladesh due to their LDC status. Q. How have FTAs/PTAs signed so far helped Indian garment exporters? Which are the major FTAs/PTAs you are eying in the coming future, and concerns on these, if any? RM: They have not really helped us because India has trade agreements with countries, which were in a better position to export garments to us than import from us. Ten years back, the agreement with EU could have been a game changer for India; but it did not materialise as expected. Q. Any major export benefits you perceive from the on-going USChina trade war? RM: India could fill the void created by China in the US market. However, US could treat India in the future like it is treating China in the wake of its protectionist measures. But the silver lining is that at present, the confrontation between India-US is not as serious as the one between US-China.

July 2019 • India business & trade | 45

FOCUS MARKET MEXICO

India’s new crown jewel in Latin America? Indo-Mexican trade has grown sharply in the past, with the latter emerging as India’s largest trade partner in Latin America. However, India’s trade deficit is quite high and tariffs remain a significant barrier to exports, necessitating corrective measures. BY CATR

46 | India business & trade • July 2019

exico has been prominently in the news over the past few months, especially with the entire debate on US President Donald Trump’s plans to build a wall across the US-Mexico border. The impasse between Republicans and Democrats over funding for the wall led to the longest US government shutdown in history. Simultaneously, US, Canada and Mexico are on the verge of negotiating the USMCA agreement to replace NAFTA. Mexico became the first country to ratify USMCA on June 19, 2019. Mexico is the second largest economy in Latin America, with a GDP of US$ 1.15 trillion in 2017 (World Bank). GDP growth in 2018 was moderate at 2.2%; small improvements of around 2.5% and 2.7% are expected in 2019 and 2020 respectively, according to IMF estimates. The economy is currently in a weak phase due to the afterimpact of last year’s elections. Mexico’s economy is highly dependent on the US, its largest trading partner and destination for 80% of its exports. US also accounts for 46.4% of Mexican imports in 2017 followed by China (17.64%)

and Japan (4.33%). The country’s economy is highly diversified, as it is driven by hi-tech industries, oil production, mineral exploration as well as manufacturing. Agriculture accounts for 3.42% of Mexico’s GDP and employs over 12.97% of the country’s active population (World Bank). Mexico ranks among the world’s largest producers of coffee, sugar, corn, oranges, avocados and limes. Cattle farming and fishing are also important activities in the food industry. It is also the world’s fifth largest producer of beer and its second largest exporter. After becoming a part of the North American Free Trade

Agreement (NAFTA), Mexico tried to diversify its trade to other regions and signed some FTAs and PTAs with several economies like Japan, Colombia, EU, Chile, Israel, Peru etc. Many economists and policy makers argue that the Mexican economy had to suffer due to US dominance in the eclectic paradigm. BUSINESS ENVIRONMENT Mexico is ranked 54 on the World Bank Ease of Doing Business index

July 2019 • India business & trade | 47

for 2019 with a score of 72.09. During 1999-2017, manufacturing industries accounted for a lion’s share of accumulated FDI in Mexico (49%) followed by services (14%) retailing (8%), mining (5%) and media & telecom (4%), according to PROMÉXICO. The country is known to be the most competitive aerospace manufacturing hub in America and is also the 7th largest producer of vehicles in the world. High value-added manufacturing industries account for around 45% of total FDI to Mexico. Mexico’s total exports in 2018 stood at US$ 450.53 billion, growing by 10% in value terms over the previous year. Top exports were vehicles (US$ 115.51 billion); electrical machinery and equipment (US$ 81.92 billion); machinery, mechanical appliances, nuclear reactors, boilers (US$ 75.4 billion); and mineral fuels & mineral oils (US$ 29.71 billion). Imports for 2018 reached US$ 464.3 billion led by electrical machinery and equipment and parts thereof (US$ 94.9 billion); machinery, mechanical appliances, nuclear reactors, boilers, etc (US$ 77.46 billion); mineral fuels, mineral oils, and products of their distillation (US$ 46.33 billion) and plastics & articles thereof (US$ 25.3 billion). However, Mexico has also

INDIA-MEXICO BILATERAL TRADE

4.9%

5% 4%

3.7%

3.37%

3% 2.4%

2% 1% 0% Production

MEXICO IS KNOWN TO BE THE MOST COMPETITIVE AEROSPACE MANUFACTURING HUB IN AMERICA

TOP FIVE EXPORTS FROM INDIA TO MEXICO (2018) 1800

1713.10

1600 1400 1200 1000 800 600 340.93

400

266.54

200

203.33

187.23

0 Vehicles other than railway/tramway rolling stock.

Organic chemicals

3.84% 3.5%

Aluminium and articles thereof

48 | India business & trade • July 2019

Machinery, mechanical appliances, nuclear reactors, boilers parts thereof

Electical machinery and equipment, parts therof

Source: ITC Trade Map; all figures in US$ billion

Consumption

been known in the past for policy unpredictability. For instance, Mexico’s new left leaning president Andrés Manuel López Obrador cancelled work on a new US$ 13 billion airport for Mexico city, which was almost 30% complete, citing corruption, and irregularities. This was received negatively by global markets, increasing borrowing costs for Mexican debt and causing a rapid decline in the currency. INDIA-MEXICO TRADE RELATIONS India and Mexico benefit from strong historical parallels and similar geo-climatic conditions, biodiversity, physiognomy, people, country and family values. Mexico was incidentally the first Latin American country to recognise India after independence in 1947. Indo-Mexican hybrid varieties played a critical role in India’s green revolution in the 1960s. India’s exports to Mexico were recorded at US$ 3.84 billion in 201819, growing at a CAGR of 11.5% since 2013-14. Imports stood at US$ 5.6 billion during the year, growing at a CAGR of 8.7% since 2013-14. After a visit by Indian PM Mr Narendra Modi in 2016, the two countries decided to upgrade their bilateral relations to the level of strategic partnership. With a total trade of US$ 9.42

billion in 2018-19, Mexico has overtaken Brazil (US$ 8.21 billion) as India’s most important trading partner in the Latin American region. Top product categories exported by India to Mexico include motor vehicles for the transport of persons, aluminium, copper, parts & accessories of vehicles; tubes, pipes & hollow profiles; fittings, iron, steel; motorcycles & cycles; organic, inorganic, heterocycl. compounds, neuclic acids, articles of apparel, of textile fabrics, nes. India is the second largest supplier of motorcars and other transport vehicles to Mexico after the US. Some of the major brands exported include Volkswagen India’s ‘Vento’, General Motors ‘Beat’, Ford’s ‘Figo’ and ‘Figo Aspire’ and Maruti Suzuki ‘Ciaz’. An analysis of the potential for exports by Centre for Advanced Trade Research (CATR) lists products which India already exports to Mexico, where there is scope for further escalation (as indicated in Table 1). Top product categories imported by India from Mexico apart from petroleum & crude oils include telecommunication equipment; automatic data processing machines; steam turbines & other vapour turbines; parts & accessories of vehicles and chemicals. Non-oil imports rose by 65% yoy in 2018. Overall the tariff rates are minimal for those commodities, which Mexico imports like electrical and electronic equipment, machinery and instruments, automobiles etc. Still there is a difference in the tariff rates applied to economies with which they have trade agreements and with India. For instance, the tariff applied on motor cars and other motor vehicles principally designed for the transport of persons is 35% for Indian exports and nil for the US. The story is similar for motorcycles, where Mexico applies a tariff of 15%. Given this disadvantageous position, India needs to urgently take steps to exploit available opportunities to enhance its exports and secure a bilateral free trade agreement in mutual interest.

TABLE 1: PRODUCTS WITH POTENTIAL FOR EXPORT ENHANCEMENT TO MEXICO

1. Shrimps and prawns, frozen, in shell or not, including boiled in shel 2. Fruits of the genus Capsicum or Pimenta, dried, crushed or ground 3. Mucilages & thickeners derived from locust beans & seeds or guar seeds

4. Automobile car transport people exceeding 1500 cm3 but displacement or : a cylinder capacity exceeding 1,500 cm3 but not exceeding 3,000 cm3 5. Motor cars and other motor vehicles principally designed for the transport of persons, incl. station wagons and racing cars, with spark-ignition internal combustion reciprocating piston engine of a cylinder capacity > 1.500 cm ³ but <= 3.000 cm ³ (excl. vehicles for the transport of persons on snow and other specially designed vehicles of subheading 8703.10): Motor cars 6. Aluminium, not alloyed, unwrought: Ingots

7. Motor cars and other motor vehicles principally designed for the transport of persons, incl. station wagons and racing cars, with spark-ignition internal combustion reciprocating piston engine of a cylinder capacity > 1.000 cm ³ but <= 1.500 cm ³ (excl. vehicles for the transport of persons on snow and other specially designed vehicles of subheading 8703.10): Motor cars 8. Motor vehicle parts nes

9. Motor-cycles, incl. mopeds, with reciprocating internal combustion piston engine of a cylinder capacity > 50 cm ³ but <= 250 cm ³: Other 10. Unwrought aluminium: aluminium alloys: billets

11. L ine pipe of a kind used for oil or gas pipelines, having circular crosssections and an external diameter of > 406,4 mm, of iron or steel, longitudinally submerged arc welded: Other 12. Tractors (excl. those of heading 8709, pedestrian-controlled tractors, road tractors for semi-trailers and track-laying tractors): Oth er 13. Separate chemically defined organic compounds, n.e.s.: Other

14. Bumpers and parts thereof for tractors, motor vehicles for the transport of ten or more persons, motor cars and other motor vehicles principally designed for the transport of persons, motor vehicles for the transport of goods and special purpose motor vehicles, n.e.s.: For tractors Source: Centre for Advanced Trade Research (CATR); TPCI

July 2019 • India business & trade | 49

FOCUS IMPORT

Rejuvenating the India coffee story Despite the visible rise in out-of-home coffee drinking culture, India’s coffee consumption hasn’t really come up to speed. A programme to boost the popularity of the beverage in India could be critical to fortunes of coffee growers globally, especially in the current milieu. BY CATR

nternational coffee growers are in dire straits at present due to the dual impact of declining coffee prices and increasing labour costs. The International Coffee Organisation estimates that around 25 million farmers grow coffee in 60 countries, and over 90% of these are small growers, who are currently compelled to sell their produce well below the cost of production. This has pushed several of them into deep debts, and some have even abandoned their farms to migrate to the cities. According to ICO statistics, the world consumes 1.5 billion cups of coffee every day, with the average price of a cup at US$ 3.1 in the US, US$ 4.60 in Shanghai, US$ 6.24 in Copenhagen and US$ 3-4 in Bangalore and New Delhi. But growers do not get even 5% of this value. Moreover during coffee year

50 | India business & trade • July 2019

2018-19 (October-September), coffee production is expected to exceed consumption for the second year in a row, with the differential at 3.41 million bags. Production growth was highest in South America, with output rising by 4.4% YoY to 80.42 million bags in 2017-18. On the other hand, consumption growth was strongest in Asia & Oceania (4.4%). The monthly average ICO composite declined from US 97.5 cents/lb in March 2019 to US 93.33 cents/lb in May 2019. India is a major stakeholder on this front, as it is home to 300,000 coffee farmers. In 2018, India’s coffee exports showed a positive increase of 2.2% in unit value to Rs 164,733 per tonne (source: Coffee Board). However, this comes on the back of a decline in exports by 7.6% yoy to 350,195 tonnes. Coffee production is getting increasingly unviable in India due to shortage of

INDIA’S TRADE FLOWS WITH RCEP NATIONS 200 Source: ITC Trade Map, figures in US$ billion

labour, rising labour costs as well as vagaries of climate change. In order to address the situation, the World Coffee Producers Forum has devised a strategic roadmap to focus on coffee consuming countries in the world. India plans to launch a five-year coffee consumption campaign in collaboration with major coffee brands like Nestle and Starbucks, along with Government of India and other stakeholders. A special entity will be created to execute the campaign, which will be mostly funded by international roasters, and kickstarted by mid2020. The target audience for this campaign will be 450 million people, comprising mainly of school and college students. Mr Anil Kumar Bhandari, president of India Coffee Trust and chairman of the Private Sector Consultative Board of ICO, comments, “It is like catching them young, before students get involved with colas, carbonated sugar drinks or liquors. We have to create a generational change and build a coffee culture. The campaign will be managed in consultation with parents, teachers and school/ college managements. We will also rope in sugar companies, dairy brands into it.” The campaign will have the active involvement of Carlos Brando,

150 100 50 0 -50 -100 -150 2011

2012

2013

India’s exports to RCEP

PER CAPITA COFFEE CONSUMPTION IN INDIA IS AT 100 GMS, COMPARED TO AROUND 4 KG IN THE US

GLOBALINDIA’S COFFEE TRADE PRODUCTION CONSUMPTION TRENDS FLOWSVS WITH RCEP NATIONS 170,000 165,000 160,000 155,000 150,000 145,000 140,000

CY 2014

CY 2015 Production

2014

CY 2016

CY 2017

2015

2016

India’s imports from RCEP

CY 2018

Consumption

Source: International Coffee Organisation; figures in ‘000 60kg bags; *Preliminary estimates

2017

2018

Trade Balance

the brain behind Brazil’s popular coffee campaign that successfully pushed coffee exports in the country in 1990. The plan includes importing excess coffees from Brazil, Vietnam and Columbia, subject to the Government of India waiving the import duty of 105% on coffee. India has been viewed as a highly lucrative market for coffee players, prompting an aggressive growth push from the likes of Tata Starbucks, Nestle, Unilever and Café Coffee Day. However, per capita coffee consumption in India is still stagnant at 100 gms, compared to US (4 kg) and Finland (9 kg). Total consumption is estimated to have grown at a low CAGR of 2.3% since 2010 to reach around 110,000 tonnes in 2018. Coffee drinking remains concentrated in the southern markets of Tamil Nadu and Karnataka, which account for 85% of total consumption. Apparently, the youth in the non-traditional markets does love to visit cafes, but does not seem to have a penchant for consuming coffee back home. In such a scenario, if the campaign to boost consumption is successful, it will be beneficial for Indian coffee producers as well, since they will have the benefit of a lucrative market on their home turf.

July 2019 • India business & trade | 51

What’s the latest

@ TPCI

Thaifex - World of Food Asia

PCI organised the India Pavilion in association with the Ministry of Commerce & Industry, Government of India and Embassy of India, Bangkok at the 16th edition of Thaifex - World of Food Asia in Bangkok from May 28 – June 1, 2019. A total of 45 member exporters were part of the India Pavilion. Organised by Koelnmesse Gmbh and Department of International Trade Promotion Ministry of Commerce, Thailand, Thaifex is one of Asia’s leading food & beverage trade shows with participation by over 2,200 exhibitors from 130 countries and 60,000 trade visitors. The TPCI trade delegation included exhibitors mainly from biscuits, confectionaries, dried vegetables, spices and heath food, etc. Some of the participants included Royal Import & Export, Shreeji Nut Butter, The Good Life Company (TGL Co.), Ankur Chemfood Ltd, Kravour Foods Private Limited, Ezeebee Overseas Pvt. Ltd, etc. TPCI ensured effective participation for its member exporters by enabling them to explore valuable synergies with their counterparts in the Thai market. Participation in Thaifex

is expected to get them business orders worth US$ 30 million (around Rs 210 crore) from global buyers. This data has been ascertained from spot bookings by trade show participants.

June 2019 Event: Thaifex - World of Food Asia Sector: Food & beverages Date: May 28-June 1, 2019 Venue: Impact Muang Thong Thani, Bangkok, Thailand

52 | India business & trade • July 2019

1. Official inauguration of Thaifex 2019 2. India Pavilion organised by TPCI at Thaifex 2019 3. Smt Suchitra Das Smt. Suchitra Durai, IFS, Ambassador of India in Thailand, inaugurating the India Pavilion 4. Smt. Suchitra Durai interacting with member exporters along with Shri Sandip Das, Director, TPCI 04

FOOD CHEM

Department of Commerce Ministry of Commerce and Industry

India’s Largest B2B Sourcing Trade Fair for Food & Health Ingredients 08 | 09 | 10 January, 2020 India Exposition Mart, Greater Noida

KEY FEATURES

BUYER SEGMENT

500+

Global Hosted Buyers From 40 Countries

1000+

Top Food Processers & Distributors from India

Co-located Trade Shows

• • • • • • • • •

Dairy Bakery and Confectionary Sweets and Snacks Ready to Cook & Ready to Eat Spices Pulses, Grain, Rice, Sugar & Oil Tea & Coffee Beverages FMCG

Contact NUPUR R LOKHANDE Mobile: +91-8287900310 Email: info.ifc@tpci.in

SAURABH CHOPRA Mobile: +91-9205883418 Email: exhibitor.ifc@tpci.in

www.indusfoodchem.co.in TRADE PROMOTION COUNCIL OF INDIA 9 Scindia House, 2nd Floor, Connaught Circus, New Delhi - 110001, India Phone: +91 (11) 40727272 | Email: tradefair@tpci.in

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& 09 January, 2020