MSME exports drop for two years in a row, exporters positive on outlook

© Jocelyn Fernandes
MSME exports drop for two years in a row, exporters positive on outlook

Exports by small businesses started declining before the pandemic due to a stagnation in manufacturing and a global slowdown and worsened after the Covid-19 outbreak. However, exporters are optimistic about exports growing in the current financial year provided the new variant of the coronavirus isn’t disruptive.

Micro, small and medium enterprises (MSMEs) shipped out goods worth $155.91 billion in FY20, which was 1.8 percent lower than $158.76 billion a year earlier, minister of state for commerce and industry Anupriya Patel said in Parliament in response to a question, citing data from the Directorate General of Commercial Intelligence and Statistics.

MSME exports dropped 7.64 percent to $143.99 billion in FY21 due to the pandemic. India exported MSME products worth $90.8 billion in the first half of this financial year.

Export challenges

Federation of Indian Export Organisations director general Ajay Sahai attributed the drop in MSME exports to stagnation in overall manufacturing and the global slowdown prevailing before the pandemic, apart from other factors.

“In the export market, one has to be competitive both in terms of quality and price, which most exporters lack,” Sahai said. “The main challenge in MSME exports is the problem of consistency in production and quality.”

Sahai observed that although domestic MSMEs have benefitted from the anti-China sentiment and local manufacturers received larger orders, especially in engineering and chemical goods, efforts are needed to leverage this shift.

“R&D as a percentage of our exports is very little. It needs to be incentivised. A tax deduction of 200-300 percent should be given on R&D instead of 100 percent,” said Sahai.

The MSME sector is said to be the second-largest employment creator after agriculture, providing jobs to an estimated 110 million people. MSMEs contribute 30 percent of India’s GDP and account for 48 percent of exports.

According to Suranjan Gupta, executive director of the Engineering Export Promotion Council of India, there is no dearth of orders with MSMEs in engineering goods. However, higher freight rates and steel prices in the past financial year pose challenges.

He said freight rates have tripled and are hurting exporters, especially the smaller ones, apart from causing liquidity problems.

“The excessive collateral requirements by banks for MSME exporters, requirements for a term loan for capital goods investment, should be looked into,” Gupta said.

Gupta said that exports declined due to the imposition of various safeguard measures by the Trump administration, which were followed by the European Union, a key market for engineering goods.

Handicrafts hit

The value of handicrafts shipped from India declined marginally to Rs 25,270 crore ($3.3 billion) in FY20 from Rs 25,548 crore in FY19, according to data from the Export Promotion Council for Handicrafts (EPCH).

RK Malhotra, chairman of EPCH, attributed the decline in exports to lack of orders during the slowdown in 2019 and the withdrawal of incentives.

“Various incentives like the Merchandise Exports from India Scheme (MEIS) and duty-free import provisions for the handicraft sector have been withdrawn, which should be restored,” Malhotra said.

MEIS provided rewards to exporters in sectors that generate employment and increase India’s competitiveness. Under the scheme, the government gave out scrips or provisional certificates, which exporters used to offset infrastructure and export-related costs.

The scheme was withdrawn on January 1 this year and replaced with the Remission of Duties and Taxes on Exported Products (RoDTEP). Malhotra said the rates for handicrafts under RoDTEP – in the range of 0.01 percent to 2.4 percent – were not up to expectations.

Handicraft exports rose 1.62 percent to Rs 25,680 crore in FY21.

Optimistic outlook

Export associations told Moneycontrol that they are positive about the outlook for exports. However, the emergence of the new Omicron variant of the coronavirus is a matter of concern.

“It is too premature to say how the new variant can impact exports, but the news is definitely a little worrying,” said A Sakthivel, chairman of Apparel Export Promotion Council.

Both Sahai and Malhotra noted that MSME exports appear promising in this financial year and are expected to grow provided the threat of the new variant does not escalate.

“We expect growth in handicraft exports by 20-25 percent this year, but only if the new variant remains under control,” said Malhotra.

Rupee depreciation

The depreciation of the rupee over the past few weeks, which should improve the competitiveness of India’s exporters, hasn’t benefited them much.

“Rupee depreciating is slightly beneficial considering other prices have gone up but what exporters want is a stability in the rupee because that helps in their costing and hedging,” said Gupta.

The rupee weakened to a 20-month low against the US dollar on December 15. However, exporters noted that it will not have a very positive impact on outbound shipments.

Malhotra noted that a weaker rupee is not essentially good for the handicrafts sector because it also depends heavily on imports of embellishments, which have now become more expensive.