Trade hurt by sanctions and bank restrictions
Ganesh Kumar Gupta, President of the Federation of Indian Export Organizations has enumerated key issues and challenges of export sectors, including the movement of rupee and cost of credit.
The World Trade Organization (WTO) has downwardly revised the 2018 and 2019 forecast for the global trade, putting it at 3.9% from earlier forecast 4.4%, and 3.7% from earlier 4%, respectively.
This is in-line with revised forecast for the global economy at 3.1% for 2018 and 2.9% for 2019. The revised forecast has factored the growing trade tensions, flight of capital from emerging economies, rising crude prices, volatility in currencies, etc.
The sanctions on Iran, USSR and banking restrictions on Libya, Lebanon, Syria, etc. have equally influenced such revision.
Since Indian exports have always been influenced by the growth in global trade, the downward revision does not augur well for the future. However, Indian exports have been encouraging despite headwinds in global economy. We are on our course to achieve export growth of 15-20% despite some hiccups.
Movement of Rupee
Rupee has been quite volatile in this fiscal depreciating by about 14% with the prospect of further weakening. The limited intervention by Reserve Bank of India (RBI) has not been able to contain the volatility as it is a global phenomenon. The rising crude prices, northward movement of Fed rates in US, pullout by FIIs (Rs.92,000 crore pulled out during April-Sept 2018 and Rs.17,181 crore in past 5 sessions), increasing CAD which is expected to touch 3% of GDP as estimated by IMF are bound to put pressure on Rupee.
Contrary to general perception such depreciation has not benefited exports to the extent anticipated for various reasons:
A. Many currencies like Argentinian Peso, Brazilian Real, Russian Ruble, South African Rand, Turkish Lira, etc. have depreciated at much faster pace giving increasing competition to India in Agri & Metal exports as well as in Textile sector.
B. A lot of exporters have already hedged their risk and thus the depreciation has not affected them in any way.
C. The import intensive sectors of exports have equally suffered due to hike in import prices due to depreciation.
D. Buyers from Africa, Middle East, Latin America, Asia are generally asking for discounts adversely affecting exports and exporters.
E. Exporters taking credit in foreign currency are being asked to surrender the equal differential in cash owing to exchange rate fluctuation.
Availability and Cost of Credit
The immediate concern of the export sector is with regard to flow of credit from the banking sector. Even getting renewal of limits is taking abnormal time with huge documentation requirement. The export credit declined by 26.4% in the financial year ending March 2018. The decline in the first quarter of the current financial year stood at 21.1% and for the month of June, it touched a high of 42.7%.
Technically, export credit is under the priority sector landing through a complex mechanism. For domestic banks, the target is incremental export credit over the corresponding date of preceding two years up to 2% of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure which is higher subject to a sanctioned limit of up to Rs.25 crore per borrower to units having turnover of up to Rs.100 crore.
The cost of credit is also an issue as interest rates are moving northward and with inflation touching an all-time high in last 14 months, further hike in the interest rate is expected.
Unfortunately, the benefit of interest equalization of 3% is not being given to the merchant exporters who contribute to over a third of country’s merchandising exports and the services sector which is approximately two-third of merchandise exports. Even PCFC finance has become costlier with LIBOR touching about 2.7% and hedging cost between 3.5 to 4%.
GST Refund blunting competitive edge of exports
The liquidity of the sector is further stressed with the blockage of funds in GST refund. While refund process has improved in last 6 months or so, yet the refund can only be claimed after manufacturing of goods and exports with a lead time of about 3-9 months depending on the production cycle.
Even in most advanced countries including EU having VAT regime in place, an exemption has been provided on inputs required for export production.
Are the interest rates in India less than in EU? Or the refund process is more efficient in India as compared to EU or Indian exporters more technology savvy than European exporters.
If EU has worked out an exemption regime for exports, there must be some merit in it and we should also provide the same so as to provide level playing field for exports. The exemption under few export instruments has now been extended till 31st March 2019.
There too the inputs are subject to pre-import condition which affects the inventory management of the exporters also discouraging the domestic procurement of inputs by him. The exemption from GST should be provided on inputs required for export production to provide necessary competitiveness to exports.
Electronic Processing and payment of ITC Refund
At present, ITC refund is partly electronic and partly manual. The exporter files refund application at the portal, takes a print out along with acknowledgement and carry it to GST authorities in hard copy along with required documents which too varies from authorities to authorities.
The physical interface adds to the transaction time and cost, and best be avoided. GSTN may be asked to develop a complete EDI processing for ITC refund as has been done for IGST Refund so that there is no human intervention in the refund to make it seamless.
Retrospective Amendments affecting Exporters
Rule 96 (10) of CGST Rule was modified on 4 Sept 2018 with retrospective effect from 23 October 2017. The amendment covers EPCG holders, Advance Licence holders, EOUs and Merchant exporters making them ineligible to claim IGST refund on exports.
Such amendments put exporters into huge problems as a lot of them have already claimed IGST refund for past 9-10 months by making clear declaration on the shipping bills. It would not be possible to get the GSTR amended so as to change the IGST paid exports to free of IGST. This involves revision of GSTR of all months and is a herculean task as even revision of one month’s GSTR is practically impossible.
Restriction on Iran
Exporters are at a complete sea with regard to exports to Iran. We hope that once the issue of oil import is decided, some mechanism will be carved out for payments for exports transactions. However, few other issues also needs to be looked into to facilitate trade with Iran.
i) Set off/adjustment of export receivable against import payable from the same entity in Iran. Though the RBI guidelines allow such transactions, which are also recognized in the Foreign Trade Policy, but banks are not clear whether this facility is applicable for exports/imports to/from Iran.
ii) Banks are not agreeing to remit funds to exporters to their branch offices/subsidiaries established in Iran. This is resulting in closing of the branch offices/subsidiaries of the Indian entities in Iran which will further jeopardizes India’s exports prospects to Iran.
iii) Exporters shipping to Afghanistan or CIS countries through INSTC route consign the goods to Bandar Abbas (an Iranian port). Such goods are further transported through rail/sea/road to Afghanistan and Central Asian countries.
However, Indian banks are not entertaining such documents resulting in stoppage of exports to Afghanistan/Central Asian countries through INSTC route which otherwise takes lesser time and is more cost effective.
US-China Trade War an Opportunity for India
The imposition of tariff on a range of products by China on US and vice-a-versa has provided India an opportunity to increase its exports to two major economies particularly where India was competing with US in China or with China in US.
However, this will require a time frame of 3-12 months for the transition.
In respect of China, while tariff advantage will come to India as some concession has also been given under APTA by China to India, the market access still remains a challenge particularly in Agriculture products, Pharma and IT.
Bilateral discussions are moving in positive direction and we hope the meetings on the sidelines of China International Import Expo in Shanghai during 5-10 Nov 2018 will hasten the process.
Indian companies will also have to look into capacity creation in some of the products to meet the rising demands in these economies. fiinews.com