Exports Downturn

Exports Downturn
by Prayaag Akbar

“Asia’s recoveries from previous downturns have been led by a rebound in exports to the rich world. This is unlikely in the near future.” – The Economist, Troubled Tigers, January 29, 2009

The Indian export sector is bracing itself for the mother of all crash-landings, come the new financial year in March. Industrialists may see a dip in their profits, but they can live with a downturn. By March 10 million workers, both men and women, will face the more searing loss of lay-offs or job loss. Can they live without their wages, which already hover close to the basic subsistence level? Over 150 million work in the exports sector in India and it is the largest provider of jobs after agriculture. It is these people whose livelihoods are now under threat.

As banks crash around the world and behemoth corporations cut their financial budgets to amounts they would previously allocate to corporate “getaways”, many industry watchers assert that the Indian export sector – which saw a decline of 22% in volume in January alone, according to a survey conducted by the Commerce Ministry – would only really begin to feel the effects of the crisis in March, when most of the current contracts run out. After March, expect an even more significant level of job loss in employment-intensive export industries like garments, leather and jewellery. Jobs are even expected to be lost in the capital-intensive IT sector because of the decline in demand for the services of industry leaders like Infosys and Tata Consultancy Services.

While India is not as reliant on exports as other Asian economies like Singapore, Malaysia and its primary competitor in the region China, Indian exports still constitute more than 20% of the Gross Domestic Product [GDP] of the nation. It is also considered one of the most employment-intensive sectors of our economy, providing jobs for the poor across the country: leather workers in Calcutta, Chennai and Kanpur, garments workers in the National Capital Region, Tiripura and Navi Mumbai, diamond-cutters in Gujarat, and so on. The volume of exports has been declining since October 2008, when they crashed by 12.1%, followed by a 9.9% crash in November. With January’s 22% crash – the largest single-month crash in volume since India opened its trade borders in 1991 – concern is spreading throughout the export sector.

The Federation of Indian Export Organisations (FIEO) has conducted a number of studies into the depth of the crisis for Indian exporters. Covert spoke with Mr Anand Seth, the Deputy Director General of the FIEO, about their findings: “We already know that by March 2009 10 million jobs will be lost all over the country, both in regular and contractual labour. But export orders usually run until March, so we are expecting a huge level of job loss after that. It could very easily be another 10% a month for some time if fresh orders do not come in.

“We had an expected trade target of $200 billion for this year. Now it looks like we will only be getting $160 billion worth of trade. Apart from the jobs that have already been lost, we should also count the jobs that would have been created by the trade we have lost out on. That would be at least another 3 million well-paying jobs for the people of India. As always, it is the labour-intensive industries that are hit the most, it is the poor who will lose their livelihoods.”

Mr Seth also points out that at such a time government inaction is harming India’s prospects of remaining competitive in exporting to the First World. He says, “Two steps are essential: China has just announced a 15% tax rebate across the board for exporters. India needs to do something similar urgently. Second, the duties we have to pay need to be alleviated to help the industry out.”

Garment Exporters

Over an informal conversation one evening in New Delhi, an extremely successful exporter of shorts and shirts to department stores in the United States [who asked for his name to be withheld] was blunt in his assessment: “I’ll tell you very honestly, after March I am going to sack 80% of my workforce. There’s nothing I can do about it. With orders falling so drastically I’m tempted to stop this whole exports thing and rent out the land my factory is on. I’ll earn a whole lot more money.”

On the 5th of February, the top brass of the apex body for apparel export, the AEPC (Apparel Export Promotion Council), met the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia, at his office on Parliament Street in New Delhi. They presented him with a set of recommendations they feel would revive their industry at a time when it is urgently demanded. Amongst other things, they asked the Planning Commission to exempt them from fringe benefit tax, a privilege that has already been extended to the IT industry, for the government to provide interest-free loans for investment in machinery, for zero percent duty for import of capital goods and for a section of the funds allocated to the rural employment guarantee scheme be earmarked for the apparel sector.

Rakesh Vaid, chairman of the AEPC, elaborated to Covert on the extent of the job crisis that is affecting the textile and clothing export industry of India. He asserts, “We have already lost 5 lakh jobs in the industry. But this is just the beginning, because right now most exporters have contracts that go until March. However there has been a sharp decline in the number of new contracts being signed from abroad. By April I anticipate the figure will be more than 1.5 million jobless people all over the country – and even that could be an underestimation.”

The question now is what steps the government take to ensure that such a large number of people are not left without a regular source of income, especially because in this economic climate it seems no industry is in the position to be able to hire labour. Mr Vaid adds, “we have asked the government to give us power at industrial prices, rationalise the stricter labour laws, provide genuine exit options and allow us to introduce schemes where we can link wages to productivity. Now it is up to them.”

The Deputy Secretary General of the AEPC, Vijay Mathur, explained the pervasive impact such widespread unemployment will cause. “In the north there will be job losses in our big centres like the National Capital Region, Ludhiana and Jaipur. In the south Bangalore, Navi Mumbai and Hyderabad are sure to be hit. But what of a place like Tirupur (near Coimbatore) that is one of our largest centres and where a large part of the economy is dependent on textile export?” Mr Mathur goes on to explain that it is always the poorest and most unskilled workers who suffer the most, because the maximum job losses are in the mass products sector. Job losses will be highest amongst those textile labourers involved in making the cheap T-shirts, trousers and clothes sent abroad in bulk orders. Workers higher up the value-chain have a greater degree of protection because higher-value orders have not fallen as drastically.

Mr Mathur adds, “At this rate we will lose even more business to Bangladesh, which has already overtaken us in terms of volume. The important thing is for the Government to act now! They can’t take their time over this because February is the time we usually book our orders. If they don’t provide the exemptions and increase in drawback rates we are looking for then they should be prepared to face massive layoffs.”

Rohan Bhargava, who runs Delhi-based Viraj Exports, an export house that supplies to large-scale buyers in Europe like Tesco, spoke to Covert on the issue: “It’s natural for us to suffer some consequences. Retailers are ordering less and less pieces, though people doing business with Europe (like us) are better off than those trading with America. People are shutting down factories all over. There are huge exporters who are doing small jobs here and there instead of the bulk work they are accustomed to just so that they can keep their factory running. I haven’t seen anything like this before.”

Leather Industry

Leather is another of India’s major exports that relies heavily on skilled and unskilled labour. The tune within this industry again seems to be one of caution until March, as exporters await the impending loss of contracts. Agastya Chopra of Anca Leathers, a Mumbai-based exporter of leather bags, clarified that they had not been hit yet because they were booked at full capacity until March. He explained: “Most of our buyers are from England and Australia. By this time we usually have a few orders coming in and we start our development work towards fulfilling the order. But this year we just haven’t received any orders. It’s a tricky situation. Our leather is all sourced from Calcutta. Now that everybody is feeling the pinch I’m sure people will already be losing jobs there.”

The three major centres of leather production in India are Chennai, Calcutta and Kanpur. The industry has been seeing a month-to-month decline in volume demanded of drastic proportions. There has been a 30% loss of trade since September 2008. Industry insiders were expecting trade to grow substantially from the $3.5 billion it was last year, but now they are resigned to the figure remaining at that level, or even decreasing.

Mr Habib Hussain, Chairman of the Council for Leather Exports, outlined the scenario for Covert. “The industry is not in major crisis yet, but there are signs that it is coming. Everyone is already planning for a drop of 30% in demand from last year, which will have an effect all the way down the production chain. Kanpur, which specialises in footwear, has already been hit very badly and Calcutta and Chennai are not far behind.

“There are 2.5 million people employed in the industry. We have already seen 70,000-100,000 job losses in the industry. It’s hard to estimate because many factory owners don’t own up to the number of people they have laid off. But after March you will see this number shoot up – I would say 300,000 – 500,000 jobs will be lost in the organised sector alone.” If the number reaches that level over 1/5th of the poorest workers in the leather industry will be left jobless.

IT Industry

And where does all this leave the golden child of Indian industry, our much-vaunted Information Technology sector? While the Business Process Outsourcing (BPO) corporations that kickstarted the IT revolution in India have been positively impacted by the recession, as they are still able to provide their services at a cost that Western firms can afford, they no longer dominate the infotech industry as they once did. Our IT industry provides a whole range of services that they export across the world. Companies like Tata Consultancy Services and Infosys have clients that include Citigroup, Ferrari, American Express and some of the largest corporations in the world.

Nasscom, the lobby body for the IT industry, recently announced that export growth projections needed to be cut by 5 - 7% for March 2009 after unexpected contractions in the global economy. As IT budgets are trimmed and discretionary spending is curtailed all over the world, our software and information export companies are suffering as demand falls. Mr Priyadas, President of the software specialist GuildSoft, explains how his business has suffered: “the long-term effects of this crisis for IT companies will be even more than when the dotcom bubble burst in 2001. One of my biggest clients is Panasonic. Two days ago I received a message that they are $1.1 billion in the red. After hearing that, how can I expect them to renew their contract with me after March?”

Job losses are expected as the effects of reduced spending percolate through the industry. A financial manager for American Express, who asked not to be named, told Covert that they are cutting their spending on IT companies because it is easier to do that than lose jobs. “Banks and other financial institutions use the services of IT consultancies all the time. But when times get tough we can cut this expenditure down because it’s a discretionary expense. Last year, we paid TCS $104 million, Accenture $100 million and Infosys $78 million. This year we are paying TCS $45 million, Infosys $40 million and Accenture only on an “as-used” basis.” Export revenue is sure to fall quite dramatically as demand for the services of these leading IT companies falls.

As the Indian economy soldiers its way through the worldwide financial recession, it is the producers of those goods and services that were in such high demand at the same time last year that are suffering. India’s booming economy had convinced manufacturers, IT wizards and exporters of all kinds that they should ramp up their production levels to match demand. Now that demand has fallen, it is those jobs that were created in the past few years that are most at threat. With the general election taking place in the months directly after March – when things are expected to be at their worst – the Government will need to take a number of prudent steps to ensure they are not out of work themselves.

Satyam Shows We Need Bankruptcy Laws

One thing the Satyam case has shown quite clearly is that India needs a proper set of bankruptcy laws that will deal with cases like this. While the Government response to the Satyam crisis has been sensible and measured, the various stakeholders in large corporations – employees, shareholders, customers and suppliers – should not have to rely on the government of the time making the correct response. Bankruptcy laws, like the Chapter 11 regulation in America, allow large corporations that have suffered for whatever reason to survive, sometimes through much-needed restructuring.

Strengthening Dollar is No Help

Exporters are supposed to benefit from a weak rupee as the dollar price for their products or services falls as the value of the Indian currency declines, thus increasing demand. With the recent weakening of the rupee against the dollar – at the time of writing it was close to its all-time low – exporters were expected to clean up, but this has not been the case. Habib Hussain of the Council for Leather Exports explains why: “last year, when we were taking orders it was Rs 38 for 1 US dollar. Most exporters fixed their contracts at a forward price of Rs 42 for 1 USD because no one anticipated that the rupee would go down so much. Even though it now has, we are not the ones who are benefitting.”

Rural Unrest

It is not only corporate/urban India that is suffering in these credit-crunched times. Sources point to a high level of dissatisfaction in rural India because of the failure of the winter rains to come this year. Winter rains are considered essential to the healthy development of Rabi crops like foodgrain, oilseed and pulses. Punjab, Bihar, Uttar Pradesh and parts of Northwestern India have been worst affected, as deficient winter rain meant several wheat regions in the north were unable to get sufficient rain during the usual sowing and post-sowing period.