Impact of Covid-19 on India’s International Trade: Strategies and Policy Perspectives

Ø Former Senior Trade Economist Analysis World Trade Crash in 308 page Report for Exim Bank

Ø Sees Revival in 2021 – Pharma Sector to Boom

Ø Agri Prices Hold

Ø China Fastest in Rebound

There are a bunch of issues and policy suggestions, some for the nearer term and some for the longer term. However, COVID-19 is a constantly developing and changing phenomenon and policymakers have to keep their eyes open and ears close to the ground and make quick and suitable changes in policies and strategies.

Report Highlights:

· Impact of Covid-19 on India’s External Trade: General and by Major Sectors

· Impact of COVID-19 on India’s International Trade

· COVID-19 Related Disruptions for India:

· Impact of COVID-19 on India’s Trade with Major Markets including QUAD and by Major Sectors – A Comparison with China

· COVID-19 and Trade Measures by India and Other Major Trading Partners of India: A Comparison

· Merchandise Trade Measures by Some Other Major Trading Partners of India

· Services Trade Measures by India in the wake of COVID-19

· Services Trade measures by Some Other Major Trading Partners of India

· Trade-related IPR Measures in the wake of COVID-19

· Impact of COVID-19 on Some Important Merchandise and Services Export Sectors

· Sector-wise Impact of COVID-19 for Merchandise Exports

· Sector-wise Impact of COVID-19 for Services Exports 

· COVID-19 and India’s International Trade: Export Prospects, Opportunities and Trade Strategies/Policy Suggestions

· Opportunities in the Context of COVID-19

· General Opportunities

· Sector-Specific Opportunities

· Trade Strategies and Policy Suggestions in the context of COVID-19 Pandemic

· Logistics related Issues and Policy suggestions

· Major Foreign Trade, Tax-Related and Other Issues and Policy Suggestions

· Agriculture and Related Exports

· Textiles and Garments Sector

· Engineering Exports

· Pharmaceuticals Exports

· Electronics including ICT Hardware Exports

· Leather and Footwear Exports

· Chemicals Exports

· Gems and Jewellery Exports

· Marine Exports

· IT-BPM Sector Exports

· Shipping Services

· Tourism Sector

· Telecom and Digital Communications Sector

· Issues and Policy Suggestions related to Exports

· Two side effects of the contractions in global trade emerged during the lockdown.

· Strategies and Policies Related to Trade Diversion and Self-Reliance

· Strategies and Policies to face Emerging Trade Restrictions and Market Access Challenges

· Inter-Sectoral Linkages

· Implementation of Strategies and Policies

· Implementation in the Nearer Term

· Implementation in the Longer time period

· Conclusion

[By Dr. H.A.C. Prasad, Former Senior Economic Advisor]

Global Trade Scenario Following the Pandemic: Overview

The COVID -19 crisis which has come out of the blue is worse than the Great Depression as the Economic Crisis is due to the Health Crisis and the World has to fight against an unknown enemy. The extent of fall in World Trade however is more or less similar in both situations. While World export growth reached the lowest level by falling steeply by 32.1% in 1932 during the Great Depression, after which recovery started, growth in total World Trade of goods and services fell steeply in April 2020 by 24.0%, with growth reaching a trough in May 2020 of -26.3%, due to COVID-19 crisis after which recovery started. World Services trade growth was still lower at -29.1% resulting in the growth of World trade (Goods and Services) falling by 26.3%.

While World Trade Volume (Goods & Services) is expected to contract by 10.4 % in 2020, it is expected to pick up in 2021 by 8.3%. Contact-intensive sectors and tourism-intensive and remittance-dependent countries are likely to be more affected by the pandemic.

Impact of Covid-19 on World Economy and Trade of India’s Major Trading Partners:

While World Trade growth fell steeply in April-May 2020, World GDP growth also saw a fall with growth in the quarter ending June 2019 at -6.9%, World GDP growth is projected at -4.4 percent in 2020 and at 5.2 percent in 2021.

Trade of all major trading partners of India was affected by COVID-19 particularly in April, May, June 2020, while for India the impact on trade started in March 2020 itself when restrictions and lockdown started. The impact on China was early in January and February 2020 with even trade data being not available for these months. China seems to have coped up with the crisis though the situation is still volatile.

In the case of Merchandise Trade of the World, the monthly growth rates of the top 10 products of World Trade at the two-digit HS level with a share of above 60% in World Trade in 2019, shows that high negative growth started from March/April 2020 for most of them, though for some items like electrical machinery and equipment (HS Chapter 85) and machinery, mechanical appliances, nuclear reactors (HS Chapter 84), it started in January 2020 itself. Only in the case of Pharmaceutical products (HS Chapter 30), there was continuous positive growth till July 2020. In August 2020 there was a small negative growth and in October 2020, negative growth was high as in the case of other items as well, when the second wave of COVID-19 started in western countries. A similar analysis for the major trading partners of India like the USA, the EU, China, Japan and ASEAN shows that the ASEAN is the only major country/grouping among the ones examined where green shoots of export growth have not yet appeared in major items. However, in October 2020, there was high negative export growth even for developed market economies besides developing market economies because of the second wave of COVID-19 though the impact was not felt in some countries like the US and Japan.

In the case of World services trade, while all categories of services have a negative growth rate in Q1 and Q2 2020, Travel is the worst hit with export growth in Q2 2020 at -82.2% followed by Transport at -31.9% and Other commercial services at -15.1%. The impact of the pandemic which started in Q1 2020 aggravated in Q2 2020 with a further fall in the export growth of different services. A similar analysis for major trading partners of India like the US, the EU, Japan, China and ASEAN, shows that the pandemic severely affected services exports of all the major trading partners except China where the negative growth of total services exports was small and it was mainly Travel which was affected.

Thus the COVID-19 pandemic has affected World Trade in both goods and services and also in major sectors of major trading partners of India, though the impact on sectors and countries varies.

Impact of Covid-19 on India’s External Trade: General and by Major Sectors

Impact of Covid-19 on the Indian Economy:

Like other economies, the Indian economy has also been badly affected by COVID-19. In Q2 2020, India’s GDP growth fell by 23.9%. While positive agricultural growth continued at 3.4%, Industrial growth fell by 38.1%. Services sector growth also fell by 20.6%. In Q3 2020, GDP growth fall softened to -7.5% with agriculture growth being the same as in Q2 2020 of 3.4%, Industrial growth at -2.1% and services growth continuing to be negative at -11.4%.

Impact of COVID-19 on India’s International Trade

India’s merchandise exports of 324.3 billion in 2019 grew at a negative rate of -0.18%. Thus even before the pandemic, India’s export growth was marginally negative. As per DGSI&S data, with the Pandemic, export growth which was positive at 3.3% in February 2020 fell steeply by 34.3% in March 2020 reaching a low of -61.0% in April 2020. In subsequent months, it became less negative and even became positive in September 2020. But after that, it has again become negative in October and November 2020, though export growth was marginally positive at 0.1% in December 2020.

India’s Merchandise import growth was also negative at -5.6 % in 2019 and became slightly positive at 3.6% in February 2020. In March 2020 it became negative at -28.0% reaching a trough of -59.7% in April 2020, and thereafter becoming less negative with even a positive growth of 7.6% in December 2020.

India’s Services exports grew by 8.3% in 2019 and continued to be positive till March 2020. In April 2020, services export growth plummeted to -8.9% reaching a trough of -10.8% in July 2020, and even in November 2020, it registered negative growth.

India’s services import growth was also positive at 11.5% in 2019 and grew robustly from September 2019 to February 2020 with a growth of 12.8% in February 2020. But in March 2020, it became negative reaching a low of -21.7% in July 2020. Even in November 2020, import growth was highly negative.

COVID-19 Related Disruptions for India:

Disruptions in merchandise trade due to COVID-19 have taken place both from the demand side and supply side. While imports from a country by other countries are usually considered to reflect the demand for the exports of a country, in the present case it is difficult to distinguish between demand-side and supply-side disruptions with the data. This is because the Pandemic was world-wide and lockdown and supply chain disruptions were all-pervasive with less scope for trade diversion in the initial stages. However, it will help to see the extent to which India was affected by these disruptions.

The import growth of the major export partners of India shows that while the disruptions in trade due to the Pandemic were present world-wide, the months and intensity of the impact on India and by major countries varied. The import growth of the World and major countries from India was more negative than from their import growth from the World, particularly at the peak of the pandemic and lockdown during March to May 2020. After that, it was less negative in the case of World imports from India compared to World imports from the World, while in the case of the imports of other countries from World vs India it varied.

Services import growth of the World (from the World) became continuously negative from January 2020, and highly negative particularly from April-October 2020. World’s services imports from India continued to be positive till March 2020 mainly due to Telecommunications, Computer and Information Services and Other Business Services and became negative from April to October 2020. But the extent of negative growth of the World from India was much less compared to its negative growth from the World.

Bilateral Services Trade shows that the major countries/country groups which imported India’s services are the US, the UK, the EU, Singapore, the Netherlands, Australia, Japan, Switzerland, Canada, and Sweden. The major services exports of India to the US, are Computer Services and other business services; to the UK, other Business services and Travel; to the EU, other business services and Telecommunications, Computer and Information Services; to Singapore, other business services, Telecommunications, Computer and Information Services; etc. However, only 2019 data is available for some countries and for some others it is even older. Since the latest data on imports of services from India by India’s major services markets, are not available, to gauge the impact of the pandemic on India’s services exports to major markets, the total import growth of services by major services markets of India has been considered for different quarters as a proxy. Services import growth rates of all the major markets of India were highly negative in Q2 2020 and naturally, their import growth from India could also have been affected.

An examination of the growth rates of India’s principal export commodities shows that while all items were affected by the pandemic and lockdown, Agri and Allied items and ores and minerals, some manufactures like chemicals and related products, Textiles, Transport equipment and even Gems and Jewellery are showing green shoots.

The quarterly data for services exports by major service sectors show that India’s services exports have been relatively less affected by the pandemic than merchandise exports as the major exports are computer and IT services, though there are sectoral differences.

Impact of COVID-19 on India’s Trade with Major Markets including QUAD and by Major Sectors – A Comparison with China

In the case of Merchandise Exports, to see the impact of COVID-19 on India’s exports in major markets, particularly the QUAD in comparison with China’s exports to these markets, import data of these markets, sector-wise at a 2-digit level has been compiled and compared. There are many big ticket items under Codes 84 and 85 in India’s exports to QUAD and other major markets of India where trade diversion from China to India is possible. In the case of QUAD(3)’s imports from India, there are 4 items in the list of QUAD’s imports from China where positive growth in all quarters and also high growth in most of the quarters can be seen in QUAD’s imports from India, but not from China where there is negative growth in the last few or most of the quarters. They are Automatic data processing machines (Code 8471), Electrical transformers (Code 8504), Telephone sets, etc. (Code 8577), Monitors and Projectors, etc. (Code 8528), and Insulated including enamelled or anodized wire (Code 8544). Telephone sets, etc. (Code 8577) is another such item with high positive growth in the last 3 quarters 2019 Q4 to 2020 Q2 in QUAD’s imports from India, but negative growth in all quarters, in QUAD’s imports from China. Thus, there are signs of trade diversion from China to India in QUAD’s imports. This needs strengthening of the QUAD.

On the merchandise import side, China’s imports from QUAD and other countries were not much affected by the pandemic. This could be because there was no national lockdown in China as in India. It could also be due to China’s calculated policy to not limit imports much from other countries, lest it could affect their exports to these countries and also their supply chains which were providing inputs for their manufacturing exports.

In the case of services exports and imports, the composition of services exports to QUAD by India and China differs. Telecommunications, computer and information services is the major service export category of India, followed by Other Business Services and Travel, while Other Business Services, followed by Transport and Travel are the major services exports of China. The composition of services imports from different sources by India and China shows similarities in the import baskets of these countries from the US and Australia, while there are dissimilarities in terms of the importance of services in the import baskets from Japan, the EU, the UK and the Netherlands. India is a relatively small services market compared to China for the different countries.

COVID-19 and Trade Measures by India and Other Major Trading Partners of India: A Comparison

Merchandise Trade Measures by India in the wake of COVID-19

In the wake of the COVID-19 crisis, countries across the World have taken many measures including trade measures. The ITC and WTO have listed out many such trade measures taken by different countries in the context of the COVID-19 crisis. Unlike some other countries like China, the USA, Brazil, Russia, etc. in the case of India, all the listed major merchandise trade measures are on an MFN basis and not specific to any country. Some major trade measures of India are the following.

Liberalizing Measures: These include lifting the import ban on medical ventilators; extension of timeframes for automatic registration number generated under SIMS (Steel Importing Monitoring System) for Iron and Steel imports; tariff exemption on certain medical supply products; and tariff reduction on medical or surgical instruments and apparatus.

Restrictive Measures:

· Licensing or Permit requirements to export medicaments/drugs: This measure which is still active has been flagged as restrictive by ITC. Though restrictive it was done to safeguard the citizens of India and was due to exigencies arising from COVID-19.

· Export Prohibition of medical supply products, masks, ventilators, textile raw materials for mask production: While the ITC has termed this measure as restrictive, it was again due to medical exigencies and was only a temporary measure. The measure was fully terminated by 16/9/2020.

· Suspension of signing new contracts by Indian Rice Traders: The ITC has termed this development as a restrictive measure of licensing or permit requirements to export and states the measure is still active. This is a totally wrong classification as the step to suspend signing new contracts was taken by the rice traders due to supply chain constraints and not any restriction by the Government. In fact, signing new contracts resumed a few months after suspension.

· Export prohibition of alcohol-based hand sanitizers: While the ITC has termed this as restrictive, this temporary measure was to make adequate supplies available for the citizens during the crisis and was due to medical exigencies.

· Export prohibition of Hydroxychloroquine: While the ITC has termed it as restrictive, this measure was taken more out of anxiety to have adequate stocks of a possible medicine to fight the mysterious disease.

· Export restrictions on certain diagnostic instruments, apparatus and reagents: This is a need-based restriction for India and also a potential opportunity to increase production.

· Import ban on military equipment: Though the start date is given as 9/8/2020, the details are yet to be worked out. This is part of India’s strategy of ‘Atmanirbhar Bharat’.

· Export prohibition of onions: While the ban has been lifted from January 1, 2021, India needs to find a lasting solution for this and have a stable Agri Trade policy, lest it loses established markets.

· Some other trade measures implemented by India: These include prohibiting exports of Textiles, raw materials for masks and coveralls (from 13 July 2020) which include the non-woven fabric of 25 to 75 GSM and meltdown fabric of any GSM; and prohibition for exports of medical coveralls of all classes and categories (from 21 July 2020) except surgical drapes, isolation aprons, surgical wraps and x-ray gowns. These are due to considerations of medical necessity.

Thus, while many of India’s trade measures are categorized as restrictive by the ITC, they are not really restrictive in the real sense of the term and some have already been terminated.

Merchandise Trade Measures by Some Other Major Trading Partners of India

In the case of the USA, there were 2 liberalising measures specific to China and Malaysia and one general measure. All the other major trade measures of the US are restrictive in nature and are on an MFN basis. These include licensing or permit requirements to export respirators, surgical masks and surgical gloves from 3/4/2020 which is still active; export prohibition of 5 types of personal protective equipment (PPE) without explicit approval by FEMA from 3/4/2020 to 31/12/2020; Presidential Memoranda allocating to domestic use certain personal protective equipment; and Initiation of an investigation by the USITC aiming at identifying imported goods related to the response to COVID-19 pandemic, their source countries, tariff classifications and applicable rates of duty which appears to be a potential restrictive measure.

In the case of China, the liberalizing measures include tariff reduction on certain imports from the US by exempting from additional 10% ad valorem tariff increase from 28/2/2020 to 27/2/2021 which is a reverse trade war measure; and the temporary import tariff reduction on medical supplies, raw materials, agricultural products and meat which is still active and applied on an MFN basis from 6/2/2020.

China also implemented many trade facilitation measures. These include among others nine exceptional facilitation measures for agricultural products including three categories of agricultural administrative approvals (license renewal, simplification of approval procedure and optimization of approval process) to prevent the further spreading of the pandemic; and optimizing the application and updating process of electronic keys and encouraging enterprises to apply for and update electronic keys online from 6/2/2020.

However, China also applied some restrictive measures, some exceptionally harsh. These include the conformity assessments for medical supply products from 31/3/2020 by new certification and inspection requirements which are still active; ban on the export of test kits, medical supplies by firms not licensed to sell at home from 1/4/2020 which was downgraded on April 26, 2020, to export restriction upon authorization and is still active; and the import ban (from coronavirus-hit countries) on frozen meat, fish and seafood implemented on 17/8/2020 by China’s southern Guangdong province which was relaxed by allowing certain countries to resume exports to China on 19/08/2020 and is also still active.

Other countries also implemented trade measures, some liberalizing and some restrictive, which were similar to the ones implemented by India.

Most of the items where there is some sort of temporary restrictions or liberalization by different countries including India are mainly medical-related items or agricultural items that are important to fight the pandemic or were needed from the food security point of view. Items needed to build the economy or for self-reliance are limited in number. There are many cases of misclassification of these measures as restrictive for India by ITC. There are also some cases where the countries have tried to use potential export opportunities by such measures.

Services Trade Measures by India in the wake of COVID-19

Some trade measures were taken by India for the services sector in the wake of the COVID-19 pandemic. While some are common for other sectors also, some are specific to services. These include the amendment to the policy to curb takeovers or acquisitions of Indian companies as a result of the pandemic on 18^th April 2020; the RBI relaxation by which Banks were allowed to maintain a lower level of liquidity in March-April 2020; the RBI authorizing Banks to deal in offshore non-deliverable rupee derivative markets (offshore NDF rupee market); and another liberalizing measure of relaxing the guidelines for Other Service Providers (OSPs) on 13 March 2020 in Telecommunication services and issuing the Guidelines for OSPs on 5/11/2020 wherein no registration certificate will be required for OSP centres in India.

Services Trade measures by Some Other Major Trading Partners of India

In the case of the US, the measures include a major restrictive measure related to Non-immigrant Visa, wherein starting from June 24, 2020 to end of 2020, the US suspended entry of foreign nationals in certain non-immigrant Visa categories by the “Proclamation Suspending Entry of Aliens who present a risk to the US Labor Market following the Coronavirus outbreak”; a liberalizing measure related to Air Transport Services wherein the US waived its slot – use requirements on 11 March 2020 upto 31 May 2020 for US and foreign airlines that operated affected flights; and other measures related to Telecommunications which are either liberalizing or facilitating measures including the $200 million telehealth program, the $100 million connected care Pilot Program, the “Keep Americans Connected Initiative”, the altered regulations for Rural Health Care and E-rate programs of the FCC and the Special temporary authority (STA) by FCC to T-Mobile USA on 15 March 2020 to use additional spectrum in the 600MHz Band to meet increased customer demand for broadband during the pandemic and a similar STA for US Cellular on 18 March to meet increased customer demand for mobile broadband

In the case of the EU, the restrictive measure affecting all sectors including services is the EC's new guidelines from 25/3/2020 for screening FDI in companies and critical assets located in the EU.

In the case of China, the measures include the circular on 10/2/2020 requiring local departments to provide necessary services for Foreign-Invested enterprises and Investment Attraction work which is a pro-active measure worth emulating by India; and the People’s Bank of China, cutting the Required Reserve ratio by 1 percentage point on 3 April 2020 with a cut of 0.5 percentage points from April 15 and May 15 each time, for rural credit cooperatives, rural commercial banks, rural cooperative banks, village banks, as well as city commercial banks operating solely within provincial-level administrative regions which is also worth considering by India where rural cooperative banks face liquidity issues.

In the case of other countries, measures similar to that of India were taken. For example, the UAE lifted restrictions on Voice over Internet Protocol (VoIP) on 24 March 2020. It decided to allow certain VoIP applications so as to facilitate WFH (Work From Home). Permitted applications include Microsoft Teams, Skype for Business, Google Hangouts Meet, CISCO Webex and Zoom.

One important thing to be noted is the liberalizing/facilitative measures in Telecom Sector by different countries including the USA emphasizing broadband services. India needs to give serious thought to using its potential in Broadband services.

Trade-related IPR Measures in the wake of COVID-19

Some IPR Measures by India include extending certain deadlines for patent, design and trademark matters on 19/3/2020. The US and to some extent Taiwan have been very proactive regarding IPR measures in the wake of COVID-19 like the prioritized Examination Pilot Programs for Patents, certain Trademark and Servicemark applications and waiving petition fees in certain situations considering COVID-19 as an extraordinary situation by the US. India can also consider adopting some of these measures.

Impact of COVID-19 on Some Important Merchandise and Services Export Sectors

India’s General and Trade-related Measures for The Economy in Response To COVID-19

COVID-19 has impacted all sectors of the economy. In response to COVID-19, the Government of India in May 2020 announced ₹20 lakh crore to Atamnirbhar Bharat Abhiyan to make the country self-reliant. Detailed measures under the economic package of Rs. 20 lakh crore equivalent to about 10% of India’s GDP was announced subsequently in five tranches which included measures for different sectors.

While many of the general measures also help the trade sector of India, some specific trade-related measures were also taken. The Government introduced several relaxations and extensions in deadlines etc. with regard to compliances mandated under its schemes and activities. The key relaxations include the extension of the Foreign Trade Policy (FTP) 2015-2020; extension of IGST and Compensation Cess Exemption; extension of validity of Registration cum Membership Certificate (RCMC); extensions related to merchandise Exports from India Scheme (MEIS); extension of the validity period of all Status Holder Certificates; inclusion of some FTAs in the Digital Platforms and issuing Digital Signatures; accepting scanned documents to get REX number to avail EU-GSP; forming a Committee to determine ceiling rates under Remission of Duties or Taxes on Export Product (RoDTEP) scheme; enhancing the sanctioned limit to the eligible under priority lending norms by RBI; extending the Interest Equalization Scheme on Pre and Post shipment credit; increasing the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks; extending the realization period of export proceeds; extending validity of all the Authorized Economic Operator (AEO) certificates, announcing the Nirvik (Niryat Rin Vikas Yojana) scheme; amending SEZ law under which trusts are allowed to set up units in special economic zones; exemption of customs duty for health-related items; extension of the period of validity of existing Export Performance Certificates; facility to file Form GSTR-3B and GSTR-1 through electronic verification code (EVC); exemption for the exporters from enforcement of the provisions of automatic caution listing; liquidity facility for Exim Bank of India by extending a line of credit of Rs. 15,000 crore; extension of the time period for payment for imports; and disallowing some levies/charges for Shipping Companies.

Sector-wise Impact of COVID-19 for Merchandise Exports

1) Agri and Related Exports: Like other sectors, Agri Exports were also affected by the Pandemic. All flights and container movements were at a standstill in April-May 2020 period. The perishable products suffered due to the non-operation of sea containers. The freight charges by Cargo flight operators increased. Exports of almost all agricultural items were affected with very high negative growth in March/April 2020 except Fresh Vegetables. However, from June 2020 onwards exports of most of the Agricultural items picked up. Total exports of Agricultural and allied items (including plantations) registered positive growth from June 2020 onwards with growth in October 2020 at 43.4%. The major export item, Rice (Basmati) registered negative growth only from March to May 2020, while Rice (other than Basmati) registered negative growth only in March 2020.

2) Textiles and Garments Exports: The apparel sector is one of the highly impacted sectors. With a long value chain, spread across continents, the sector has seen a multiplier effect of the interplay of the challenges of various stakeholders and countries. Textiles and allied products have been registering high negative growth since March 2020, but the negativity has been falling during July-August 2020. Though the Indian textile and apparel factories have resumed operations with the starting of the unlock process since May 2020, they have been able to function at only around 50% of the capacities due to lack of workers and demand for the manufactures. With signs of improvements, there has been an encouraging increase in September 2020 export value of Textiles & Garments by 13.8% and also in October 2020 by 9.4%.

3) Engineering Exports: India’s Engineering exports, one of the major export sectors of India, which registered negative export growth in 2019-20 of -6.1% was also affected by COVID-19 with export growths in March, April and May 2020 being highly negative at -42.7%, -64.6% and -23.9% respectively. The situation has improved since then with even positive export growth in July and September 2020. While almost all the engineering goods were affected by the pandemic, major items like Transport equipment with a share of 31% in 2019-20 registered high negative growths of -60.4%, -65.0% and -40.8%, -38.9% in March, April, May, June 2020 respectively. Machinery another major subcategory of engineering goods with a 37.5% share also registered high negative growth in April 2020, though in September and October 2020, there is some positive growth. Base Metals with a share of 31.4% was relatively less affected with negative growth only in April and May 2020 and positive growth till September 2020. In October 2020 however, there is a marginal negative growth. Though the external situation is challenging, there are early signals of pick up in industrial activity in some countries, mostly in North America resulting in pick up in Engineering exports.

4) Pharmaceuticals Sector: In the case of Pharmaceuticals, prices of raw materials and packaging material increased by 3-4%. Around 25-30% extra freight charges were also paid during the Lockdown. The global business was down by 15% against expectations for the year. Though activities were delayed, they are regaining momentum now. Before the Pandemic, the export graph was trending upwards. Once the pandemic set in and the lockdown was imposed, exports slowed down and the graph moved downward. Now it is back to normalcy and the situation is as good as prior to Covid-19.

5) Electronics including ICT Hardware Sector: Electronics hardware exports, which were badly affected in April and May 2020 with -69.4% and -44.4% growth respectively are yet to show positive growth with October 2020 export growth being still negative at -10.2% and cumulative export growth for April-October 2020 being -23.3%. Major components of electronics exports like Telecom instruments, Electronics instruments, Electronic components and also computer hardware peripherals though with a small share, continued to register negative growth in October 2020, while consumer Electronics started registering positive and good growth from June 2020 to October 2020.

6) Leather and Footwear Exports: India’s export of leather, leather products and footwear during April – October 2020 declined by 36.8%. The decline was almost uniform in all major items. However, in October 2020, the negativity in export growth of leather and related products was less at -14.8 %. Europe and the USA are the major markets for leather, leather products and footwear exported from India, accounting for 70% of exports of these items. These markets have been adversely affected by the COVID 19 Pandemic which led to lockdowns and market closure in February 2020. The Pandemic and the lockdowns significantly affected the Spring – Summer 2020 sales in the overseas markets. According to industry sources, the leather, leather products and footwear sector lost export orders to the tune of US$ 1 billion due to the Pandemic. On the supply side (i.e. supply of raw materials and inputs), the import of inputs was affected in January 2020 and February 2020 as the industry imports components and inputs from China. However, the supply chain was restored in April 2020.

7) Chemicals Sector Exports: Chemical exports excluding Pharmaceuticals were mainly affected by the pandemic and lockdown in March and April 2020 and continue to register negative or low growth. However, Chemicals exports including Pharmaceuticals was relatively less affected in March and April 2020 and recovered quickly with positive growth from June 2020 to October 2020. Drug Formulations, Biologicals the major item in Pharmaceuticals and also Chemicals exports registered negative growth only in March 2020 and in most of the later months registered more than 20% positive growth. Bulk drugs and drug intermediates also registered positive growth from May 2020 to October 2020. Organic Chemicals, the second major chemicals sector item registered relatively high negative growth in March and April 2020 and continued to register negative growth in the subsequent months with -21.7% growth in October 2020.

8) Gems and Jewellery Exports: India’s Gems and Jewellery exports growth which has been decelerating since the beginning of the financial year 2019-2020 on account of various domestic as well as global challenges, was severely impacted by the pandemic. This is apparent, as there was a fall in G&J exports by 11.6%, 20.1% and 41.0% in the month of January, February and March 2020. For the full fiscal 2019-20, Gems and Jewellery exports fell by 10.8%. The highest fall in G & J exports was in April 2020 by 98.7% followed by May 2020 by 69.0%. After that, the extent of negativeness is becoming less with growth in October 2020 at -21.3%. Overall, both demand and supply got choked which led to a decline in production, employment, sales/exports, income resulting in a highly adverse situation for the entire Gems and Jewellery Sector. However, exports have started to regain momentum now.

9) Marine Exports: COVID 19 pandemic led to a fall in demand in the foodservice segment which in turn was due to the closure of restaurants, canteens, institutional catering, etc. Demand is yet to stabilize in the major markets. Production and exports were affected due to shortage of labour, lack of transportation facility, less availability of refrigerated containers, difficulties in sending export documents due to non-availability of courier services, difficulties in clearing containers in importing countries, scarcity of raw materials, packaging and labelling materials. Limited cargo flight availability and huge logistics costs due to COVID-19 had a significant impact on exports of high-value products like chilled and live products. Marine export growth during April - September 2020 declined by 25.0% in quantity terms and 19.2% in dollar value terms compared to the same previous period.

Sector-wise Impact of COVID-19 for Services Exports 

1) IT-BPM sector: IT-BPM services in 2019-20 registered a good growth of 7.3% in domestic product and 8.1% of exports of the IT-BPM sector. However, the latest data is not yet available, except the BOP data for Exports of Telecommunications, Computer and Information Services which shows negative growth of 0.9% in Q2 2020 and positive growth of 7.7% in Q3 2020. The Impact of COVID-19 on the performance of the IT-BPM sector as per NASSCOM Industry Review August 2020 which is based on the quarterly results declared by the top listed India-centric IT-BPM companies comprising over 46% of the Industry shows that revenues bottomed out for most companies in Q2 2020 declining by 6% on a ‘QoQ’ basis and net margins also declined. Digital revenue grew by 1.5% sequentially, resulting in ‘digital’ accounting for an even larger share in the total revenue at 44.1% during the quarter. The on-site-offshore revenue mix continued to shift to off-shore which registered a slight increase from 63.3% share in Q2 2019 to 64% in Q1 2020 and 64.4% in Q2 2020. In Q2 2020 all the geographic markets declined on Q on Q basis as well as on annual basis, though North America with 62% of Industry share in 2019-20 demonstrated relative resilience with growth at -5.2% (QoQ basis) and -3.6% (YoY basis). The Indian market declined the highest at -17.3% (QoQ) and -18.9% (YoY). Like markets, all the major verticals were down both sequentially and on an annual basis. Travel and Hospitality was the worst-hit pulling down the growth of Emerging Verticals to -8.8% (QoQ), and -4.7% (YoY). BSFI (Banking, Financial Services and Insurance) was the most resilient with growth falling only by 3.2% (QoQ) and 1.7% (YoY).

2) Shipping Services: The steep fall in World merchandise trade due to the pandemic and lockdown mirrored in the steep fall in the Baltic Dry Index, which fell to a low of 393 in May 2020, which was slightly higher than the low in 2016 of 290 clearly indicating the impact of COVID-19 on both merchandise trade and Shipping services. It has now picked up and in September 2020, it remained steady at 1725 which however is below the recent high of 2378 recorded in August 2019.

The impact of COVID-19 on India’s Merchandise Trade and Shipping services is also reflected in the traffic handled at Major Ports. The total traffic handled in Major Ports of India during April-November 2020 fell by 10.7% over the corresponding previous period. Except for Mormugao port with 17.6% positive growth, the traffic declined in all Major Ports. The Indian EXIM container trade was also severely affected by COVID-19 as India’s import volumes dropped 26%. As a result, several port calls were cancelled, and services were withdrawn or merged. However, normalcy is expected to return by the end of the year with EXIM volumes returning to pre-COVID-19 levels.

3) Tourism Sector: International Tourist Arrivals (ITAs) declined by 65.5% for World, 60.1% for USA, 84.1% for China and 53.5% for India in H1 2020. International Tourism Receipts (ITRs) also fell sharply for most of the countries, though the fall for India is relatively less at -8.9%. While the fall in growth of ITAs for India at -53.5% in H1 2020 is comparable with other countries, the fall in growth of ITRs of -8.9% in H1 2020 is relatively lower than in other countries. The Systemic Risk Survey carried out by the RBI which has been presented in its Financial Stability Report, July 2020 has identified five sectors which are most affected by the COVID-19 pandemic. Within these five sectors, the tourism & hospitality sector is the one which is most affected where 90% of the respondents foresee a bleak business scenario for at least the next six months.

4) Telecom and Digital Communications (Broadband) Sector: COVID-19 has cast a shadow on the Global and Indian economy and has demonstrated the importance of digital readiness. As countries go through a prolonged phase of lockdown, people are virtually connected and are working from home, with the digital infrastructure provided by Telecom Service Providers (TSPs) being the only link. The pandemic also led to some positive developments. In India, the wireless data traffic which was around 6,900 PB (Petabyte) per month, before the COVID-19 outbreak, increased to around 8,280 PB per month in the initial weeks under COVID-19, mainly due to the surge in Video Traffic. This is an increase of almost 20%. The data Consumption per subscriber per month increased to 12.4 GB in April & May 2020 from 10.3 GB per month in previous months. Certain key things pending also came to the fore which otherwise would have been stuck in the rigmarole of administrative procedures. One such thing is the work related to Digital Communications Networks where a lot of work continued during the pandemic thanks to the large connectivity available. The pandemic also showed the paucity of connectivity in rural areas and galvanized the government to work in this direction.

COVID-19 and India’s International Trade: Export Prospects, Opportunities and Trade Strategies/Policy Suggestions

Prospects and likely scenario for India’s exports of goods and services

India’s total exports of goods and services growth were highly negative during March, April and May 2020 with the highest negative growth in April 2020 of nearly -40% with the lockdown imposed in response to the COVID-19 crisis. However, green shoots have started to appear.

In the merchandise goods sector, quarterly growth figures show that many sectors are slowly moving from the Negative Growth Zone to the Positive Growth Zone. Six items that were in the positive zone in Q3 2020 continued to be in the positive zone in Q4 2020 (October-November). They are ores and minerals (which has been in positive zone in all 4 quarters 2020 Q1 to 2020 Q4); Agri and allied products; Articles of stone, cement and glass; Sports goods; Paper and related products; and Chemicals. Textiles and allied products have moved to positive territory along with Optical and Medical instruments needed in the fight against coronavirus.

In the case of the services sector, three important sectors have moved to the positive zone in Q3 2020. Some sectors like Telecommunications, Computer and Information Services and Other Business Services moved to negative growth territory only in Q2 2020 with a marginal negative growth quickly to rebound in Q3 2020. Even Transport moved to positive territory in Q3 2020 after two-quarters of negative growth. Charges for the use of intellectual property, n.i.e. is the only service sector that was in positive territory in all the four quarters from Q4 2019 to Q3 2020.

The Economic Survey 2020-2021 has projected a V-shaped recovery in the GDP growth of the economy. There is a similar V-shaped recovery in merchandise exports of India. This is similar to the V-shaped/U-shaped recovery in world trade and trade of some developed countries like the USA and the EU. As per the WTO, a 9.2% decline in the volume of World merchandise trade for 2020, followed by a 7.2% rise in 2021 is forecasted.

In line with the WTO forecast, India’s export performance could be better than expected in 2020-2021. Exports are expected to rebound, despite some hiccups in 2021, firstly due to the base effect and then actual growth as exports are also slowly limping back to normalcy with the lockdown being removed and not likely to be imposed. Thus, while supply-side constraints are slowly going, demand has to pick up in the case of merchandise exports. As regards services, some services like Tourism are in limbo as limited passenger Air Transport is allowed only in some Air Travel bubbles on a reciprocal basis, though scheduled cargo flights are allowed even for foreign airlines from six Indian cities. IT services which showed resilience even at the height of the pandemic are likely to perform better in 2021.

Opportunities in the Context of COVID-19

COVID-19 has also thrown open opportunities for India on the trade front. Some general and some sector-specific.

General Opportunities

The first major opportunity is the possibility of Trade Diversion away from China to India by major countries. There are indications of countries diverting trade from China to other countries including India. The overdependence of countries on China in key areas of manufacturing was exposed with the total cut off in supply chains following the lockdown in China and later due to transportation bottlenecks. The China +1 policy is a direct result of this as countries realized the follies of a single-sourcing model. This will be a real opportunity for India if it gears up to utilize it. However, this opportunity may turn out to be a myth for India as China has quickly responded to the situation resulting in its exports quickly rebounding with continuous positive export growth from June 2020 and the export growth at a high of 21.1% (YoY) in November 2020. This rebound has happened also because of its increase in exports to even developed countries. China also followed a very balancing act of not limiting its imports, particularly from major developed countries.

The second major opportunity for India is the possibility of greater exports of Pharmaceutical items and the possibility of being the manufacturing base for providing the vaccine to the World. While India’s Pharmaceutical exports withstood the crisis with export growth of above 10% from May 2020 onwards, India which has been very active in finding and manufacturing a vaccine has already approved two COVID-19 vaccines. India has also started to send the vaccine to other developing countries as a goodwill gesture. Even some developed countries have sent/are sending requests to India for the vaccine. China is also said to have developed its own vaccine from Sinovac and Sinopharm, two companies in China. In the case of China’s pharma exports, while there were doubts about purchasing medical equipment and pharmaceutical items from China by the advanced countries, exports of China of these items did not suffer.

The third major opportunity for India is in Digitization with WFH becoming a lasting feature and social distancing likely to continue for some more time. Indian IT industry has shown the way even during difficult times and has not only adapted to the changes quickly but even helped other sectors to adjust to the new normal of greater digitization.

Another major opportunity for India is the possibility of higher trade opportunities from QUAD and other developed countries as there are indications of trade diversion by many trading partners of India from China to India. For this, strategic trade alliances may be needed. In the merchandise goods sector, the opportunities are in the three ‘E’s’, Electrical, Electronic and Engineering, as is evident from the indications of trade diversion of items under codes 84 and 85.

Investment including Export related Investment is another possible opportunity with countries shifting lock, stock and barrel their production bases from China. Already in some sectors, such developments are visible as in the case of the interest shown by a Taiwanese company in Footwear, Japanese companies in the marine sector, etc.

Sector-Specific Opportunities

In the Agri and related sector, there is greater demand for fresh vegetables, non-basmati rice, wellness food items like spices including turmeric, chilli, organic products and nutracereals like millets.

In the textiles and clothing sector, there is a huge demand for PPE kits like gowns, respirators, face masks, safety-footwear harnesses, eye protection gear and gloves. India has completely revamped its production of PPE kits. Restrictions on the import of Textiles and Clothing from China by the USA on products made from Xinjiang cotton on account of forced labour practices is an opportunity India should use particularly when US-China trade tensions have aggravated. The growing demand for MMF though not a consequence of the pandemic is another opportunity. The recent measure in Budget 2021-22 of rationalizing customs duty on raw material imports for manmade textiles could help in this regard.

In the case of Engineering goods where India is a close competitor to China, COVID-19 has provided an opportunity as developed countries are moving away from the single-sourcing model. In the light of COVID-19, engineering goods like medical instruments, pharmaceutical machinery, agricultural machinery, automotive engineering, metals and machinery, electronic parts and components offer considerable opportunities.

The pharmaceutical sector is one sector where COVID-19 has opened up many opportunities for India including the supply of vaccines. Producers of Pharmaceuticals of different countries, who hitherto sourced inputs from China are trying to shift their sourcing to other countries. China dominates global supplies of API with a 40% share and India can be a preferred supplier for certain products. Domestic producers and exporters, dependent on China for sourcing are also trying to source domestically.

In the case of the electronics Sector, COVID-19 has resulted in a ‘New Normal’ with greater use of ICT benefitting the electronics hardware sector. Opportunities are there in telemedicine, WFH devices, networking devices, broadband services, medical electronics, automated products, DIY devices and even defense goods.

In the case of leather and footwear exports, there are opportunities for attracting investments with foreign companies like a Taiwanese footwear company evincing interest in investing in India.

In the case of the gems and jewellery sector, COVID-19 has provided exporters and manufacturers a unique opportunity to digitally transform the sector. India is already one of the largest sourcing partners of the US for gold jewellery products. The recent withdrawal of the preferential treatment to Hongkong by the US can provide a level playing field for India and thus open up further opportunities in the US market.

In the case of marine products, opportunities have come to India with investors shifting base from China.

In the case of the IT-BPM sector, COVID-19 has opened up opportunities galore in different digital products needed for digital transformation. The emerging tech space areas are high-speed infrastructures like multi-cloud/hybrid-cloud, virtual workspace technologies, high availability systems, platformization of services, technology convergence, etc.; Data, AI, IoT, and cybersecurity, etc. Despite the downturn in some traditional labour-intensive, less digitized industries such as manufacturing, retail, travel, hospitality, etc., the IT sector will be impacted minimally as demand is increasing in areas like Pharmaceuticals and Government and heavyweight sectors for which IT has become more critical like Telecom and Banking, Financial Services and Insurance (BFSI). The new normal of WFH has led to greater demand for computers and many companies are replacing PCs with laptops. This provides an opportunity to the IT and Electronics sector.

In the case of shipping services, COVID-19 has clearly shown that strengthening the Indian shipping sector for India’s trade is very important. This is an area where the ‘Atmanirbhar Bharat’ policy is very relevant as opportunities are there not only for the export of shipping services but also for domestic shipping and also saving foreign exchange. The recent announcement in Budget 2021-22 of launching a scheme to promote flagging of merchant ships in India by providing subsidy support to Indian Shipping companies in global tenders floated by Ministries and CPSEs is likely to help.

In the case of tourism, the worst-hit sector by COVID-19, opportunities could come only when the COVID-19 vaccine is successful and the pandemic situation eases. But even when normalcy returns, social distancing norms, safety, sanitisation, digital transactions, etc. will be more important. The fortunes of the tourism sector are also linked to the fortunes of the aviation sector where the passenger flight services, are allowed now by India only under the ‘Air Bubble’ arrangements.

Telecom and broadband sector has emerged as the invisible force behind keeping the citizens connected during the pandemic. The sharp rise in the use of digital tools, including video-conferencing, cloud-computing and electronic payment puts the telecommunications sector in the focus in facilitating this ‘new normal’. Broadbanding is going to be the next sunrise sector. While mobile Broadband served the immediate WFH needs, with growing traffic and reverse migration to villages, fixed broadband becomes important. Thus, there is great scope domestically for broadband infrastructure and services. In the case of exports, India can become the Fibre manufacturing capital of the world.

Trade Strategies and Policy Suggestions in the context of COVID-19 Pandemic

These can be seen under the following headings.

1) General Trade Strategies

Logistics related Issues and Policy suggestions

· Increase in Sea Freight: The Sea Freights have increased by 30-100% due to COVID-19 in the last few months resulting in Indian Businesses becoming less competitive than those of China. There is a need to resolve this issue at the earliest.

· Unrelated Shipping Charges: Shipping Companies are charging and recovering various unrelated and unregulated costs that are not relevant to the services provided. Many of these charges are far in excess of those mentioned on their websites and there is no uniformity in such charges. There is a need for regulations to ensure that all such charges to be levied and recovered at the destination port should be mentioned on the B/L as done by Sri Lanka & Bangladesh. Recently the Indian Government has also decided to regulate freight charges as per the new provisions in the draft Merchant Shipping Bill 2020 on similar lines. This could atleast lead to greater transparency.

· Shortages of Containers for Export Shipments: Booking and Container shortages at ports like Mundra Port have created chaos amongst Indian exporters over the last few months. Getting the container booking from the Shipping lines is a problem these days as demand is much higher than the supply of container bookings. While it is necessary to streamline things at Mundra and other Ports, the long-term solution however is to increase the capacity of Indian Shipping for India’s Trade.

· Short-time Validity of Container Bookings: Shipping lines are issuing the container bookings with very short time validity (only for 3 days from the date of booking) for the vessels sailing minimum after 2 weeks with gate opening 7 days before the vessel sailing date. If the Indian exporters wait for container lifting, loading and delivering to the container yard considering gate opening dates of the vessel, then the booking expires and the shipping companies do not issue revalidated booking once booking expires. So the Indian exporters have no choice other than to lift the container in advance and bear the additional charges by the shipping lines which makes exports less competitive.

· Issue of Demurrage Charges at Airports: Post lockdown, a lot of export shipments, are lying at various Indian Airports as they could not fly out of India since Govt. of India had stopped all International flights. On such export shipments, huge demurrage has been incurred and the Airlines are not ready to pay the demurrage charges to the terminal operator. While for shipping, demurrage charges have been waived 100% for Exim trade through the port, in the case of aviation, half of the demurrage charges were waived by the Indian government in April 2020.

· Need for Automation and Digitisation: While India’s Ports and Shipping are way behind many developed countries in automation, COVID-19 has highlighted the need for speedy action on this front. One suggestion in this regard is the use of RFID tags for easy tracking and identification of export consignments along with automation of logistic clearances and payment systems.

Major Foreign Trade, Tax-Related and Other Issues and Policy Suggestions

· Relaxation in Export Obligation for import under Advance Authorisation. Exporters are facing issues with the utilization of the input which they have imported duty-free under Advance Authorization for export orders, as per the provisions of the Advance Authorization. In situations of order cancellation, the exporter is faced with the unintentional inventory pile up as also burdened with failure to fulfil the Export Obligation which would, in turn, require the exporter to refund the customs duty saved on the value of imports, along with interest. A one-time relaxation in fulfillment of Export Obligation may be given to exporters who have imported the inputs but their export order has been cancelled due to COVID -19.

· Issue of Cancellation of Export orders or delay in payment: Due to COVID-19, many overseas buyers cancelled or postponed confirmed export orders and are also holding back or indefinitely deferring the payment for goods already shipped/ready-to-ship and asking for hefty discounts. Also, several buyers are filing for Chapter 11 Bankruptcy. Buyers are also not making payments for goods where delivery has already taken place and existing shipments are on hold either on ships or are lying in the warehouses/factories/ports. The exporters have already claimed Duty Drawback for the shipped goods. Now, if the Buyer does not pay for the shipped goods, exporters have to repay the Duty Drawback with interest. So there is a need to consider a one-time waiver from the refund of Drawback claimed against shipments made from November 2019 till atleast March-April 2020.

· Reforms in ECGC Insurance: Reforms in ECGC can be considered like the immediate implementation of NIRVIK (Niryat Rin Vikas Yojana) Scheme announced in Budget 2020-21; expanding the terms of ECGC to consider COVID-19 as a “force majeure” situation; reducing the time taken by the ECGC for approval of export limits on the “buyer” which is rather long to not more than 2 weeks; reducing the time taken to resolve/settle the claims to not more than 2 weeks; and increasing ECGC cover outstandings for MSME exporters from 80% to 90%.

· Suggestions related to Payment norms and Exports Benefits: COVID-19 has led to instability in the World as there are business disruptions in every country. While exporters are facing problems in collections, buyers are requesting them to relax the payment norms. But Indian companies are bound by the RBI guidelines to collect the money from the buyers. Therefore, the Indian government could relax the collection norms for exporters and also allow exporters to provide additional discounts to the buyers.

· Speedy Finalization of Rates under the RODTEP scheme: The RoDTEP (Remission of Duties or Taxes on Export Products) scheme has come into effect from 1 January 2021. This is WTO compliant as it is product-based and a fully automated refund module will be created for manufacturing/service sectors through Form GST RST-01. It will be strictly based on input taxes paid. While the scheme has been implemented, the rates have to be notified.

· Resolving the issue of flagging exporters as RISKY Exporters: In GST, if the exporter has paid the IGST through utilizing the input-output credit which is availed fraudulently through GST return, the exporter is identified as a ‘risky exporter’. Once an exporter is classified as ‘Risky’, their IGST/ DBK, etc. are stuck which causes liquidity problems. Also, their consignments are subject to 100% examination which increases transaction costs, shipment delays and possible loss of business. So, a lot of care and caution is needed in tagging exporters as Risky exporters.

· CAROTAR 2020 and Faceless Assessment. CBDT has recently issued customs (Administration of Rules of origin under Trade Agreements) Rules 2020 making it incumbent upon the importer to possess sufficient information as regards the manner in which the country of origin (CoO) criteria including the regional value content and product-specific criteria specified in the RoO in the Trade Agreement are satisfied. The new rules have posed challenges, as foreign suppliers are not likely to share confidential information like the process, origin, profit margin, etc.

· Trade Fairs/Exhibitions: To provide support for virtual buyer-seller meets and virtual exhibitions, the MAI scheme needs to be modified.

· Identifying NPAs/Stressed Assets: The Special Mention Accounts (SMA) was introduced in 2014 by RBI to identify those accounts that have the potential to be NPAs/ Stressed Assets. There is a need for suitable relaxation at present, given the fact that COVID-19 could have turned many healthy investments/loans to NPAs.

· Issue of Forward Contracts: Many Exporters have lost huge amounts by booking forward contracts. There is a need to consider waiving the penalty on forward covers imposed by certain banks.

2) Some Major Sector-Specific Trade Strategies and Policy Suggestions

Agriculture and Related Exports

· Addressing logistics and transportation issues is important as many agricultural items are perishable or have limited shelf life. Particularly high freights due to COVID-19 is affecting Rice exports.

· Addressing new restrictions in major markets like quota restrictions in Indonesia for Meat and Rice products, high import duty for Mango pulp/puree, etc. in the European market, health certificates for green chillies by EU, TRQ for sugar exports to the USA, and new sanitary norms by Middle East countries on Rice imports from India, intended to be at par with EU norms.

· Tapping the potential for ‘Safe Spices’ exports with sustainably produced MRL (Maximum Residue Level) compliant spices.

Textiles and Garments Sector

· Support for Automation and Digitisation to tap the opportunities in medical-related textiles and garments.

· Making India a Production Centre for the World: India has the potential to be a production centre and sourcing base for the World. The recent measure in Budget 2021-22 of launching Mega Investment Textiles Parks in addition to PLI scheme could help in ‘Make in India’.

Engineering Exports

· Tapping the potential for a shift in global supply chains from China by attracting foreign companies shifting base - lock stock and barrel - from China and diversifying India’s sourcing destination beyond China.

· Moving towards local sourcing by assisting in infrastructure, building mega industrial units as in China and also focusing on the existing engineering clusters in India.

Pharmaceuticals Exports

· Facilitating investors shifting base from China and becoming an alternative sourcing destination for Pharmaceuticals. For this, more API (Active Pharmaceutical Ingredients) manufacturing units and more spend on R&D and new inventions is needed.

· Becoming the COVID-19 Vaccine manufacturer and provider of the World as India is one of the few countries which can provide vaccine to the whole World at reasonable prices.

Electronics including ICT Hardware Exports

· Becoming the global hub of Electronics repair services by allowing seamless exports of spares, allowing global stores and dispatch centres to the World to be set up in India, addressing e-waste due to imported non-repairable units, allowing imports for repairs of products manufactured in India beyond 5 years, etc.

· Making Electronic Component Hub a reality, by allowing component hubs to freely import and export at whatever market price at the moment when buy-sale happens and calculating duty at the time of dispatch to DTA instead of the time of import.

· A consortium of component companies, design companies, R&D companies and manufacturing companies could also be created to enable the Electronics System Design & Manufacturing (ESDM) sector to move together in one direction and create more opportunities for everyone.

· Expediting roll out of National Policy on Electronics 2019 like SPECS, PLI and EMC 2.0.

· Developing a Star Rating for all tech products indicating the percentage of indigenization as a guide to the Indian consumer on the lines of the green label.

· Making India a production centre for the World in the light of realignment of GVCs by various policies like allowing for a blanket 7 years instead of the 5 years for imports for the repair of all non-industrial and 10 years for industrial products; allowing the second-best option of direct connects to key ports linked to global electronic supply chains as India does not have and unlikely to have Transit hubs in the near future; and supporting global R&D centers to engage with Indian manufacturing ecosystem, from design to manufacturing cycle in areas like PCB design, Injection molding and metal forming for electronic subsystems.

· Tapping the Potential Areas: India has excelled in Software and now is the time to reboot the Electronics hardware sector. There are many potential areas and opportunities in the electronics hardware sector like telemedicine, health tech, work from home products, medical electronics, networking devices, rural BPO and IoT based support activities. do-it-yourself kits, no-touch devices, quick design skills, homeland security, surveillance, environment-friendly products like e-vehicles; 5G and broadband, and Industry 4.0. India can also focus on the Design & Packaging of electronics and components like mould designs / mould engineering which will also reduce dependence on China.

· Identifying high volume products – High volume products include Set Top Box, Education Tablet, Smart Meter, Handheld POS, Wifi Router, Enterprise Switch & Router, Ultrasound M/c, Blood Count M/c. For these, a Chip to Product Programme could be launched. This will result in India having 70% + value addition in Indian Products within a short span of say, 18 months.

Leather and Footwear Exports

· Having a dedicated cargo ship to the US atleast once a week as at present transportation time from India to West Coast of USA takes 55-60 days as the ship goes to many ports before reaching the final destination, whereas China’s dedicated ships take only 14 days.

· Creating Plug-and-Play model clusters (ready to use factory sheds) with all required infrastructure and support services like testing labs, design studios, etc. and establishing good Port connectivity.

Chemicals Exports

· Setting up a dedicated Industrial Park for Dyes and Dye Intermediates.

· Handholding the Chemicals industry especially on the environment front.

Gems and Jewellery Exports

· Extending the time limit for completion of exports in COVID times as exporters are unable to complete exports within 90 days of import of Gold for exports. Earlier before 2017, it was 120 days.

· Extension of time for payment of the gold loan by G&J exports and also forwarding the fixed value of gold for the loans as cashflow is affected due to Covid-19 and repayment of loan may fall.

Marine Exports

· Addressing the Antibiotic residue issue in the case of India’s exports to the EU and Japan and other trade barriers. The trade barriers specifically applied to India needs to be negotiated.

· Making Technological changes like modernizing fishing harbours to international standards, online trade platform for direct marketing of aquaculture products to avoid middlemen, etc.

· Making India a production centre for the world by measures like R&D support, strengthening the mechanism of traceability and residue-free product, framing suitable land leasing policies, fast track clearance of SIP (Sanitary Import Permit), and strengthening cold chain infrastructure, etc.

· Value Addition: Currently the share of value-added products coming under chapter-16 is only 6%, whereas the share of competing nations like Thailand is 64% and Vietnam 26%. Many major seafood trading firms are interested to shift their value addition/reprocessing works to India. There is a need to have Business Incubation Centres for Value Addition, better exploration of the air connectivity for exports and upskilling of workers. The proposed PLI Scheme by NITI Aayog for incentivizing the processing units for increasing production of Value Added Products in the fisheries sector needs to be considered.

IT-BPM Sector Exports

· Addressing requests by clients for deferred payments, discounts and reduction in billing rates to reduce their costs with an open mind without invoking any contract breach grievance or mandating services purchase by clients.

· Embracing the new normal of greater digitization, and new practices like remote connectivity, working from home, collaboration and better leverage of technology like high-speed secure infrastructure, multi-cloud/hybrid cloud, virtual workspace technologies, high availability systems, platformization of services, technology convergence, Artificial Intelligence (AI), Internet of Things (IoT) and cybersecurity.

· Need for a shift in the focus of IT sector from increasing IT sector exports to overall exports with the help of IT. For example, the IT sector can help other sectors like the construction sector in facing the crisis with concepts like the construction of houses with a digitally enabled workplace, digitally enabled smart and cheap houses in villages suitable for WFH and providing Broadband in all villages.

· Piggybacking IT hardware on software to make India a composite provider of IT.

· Streamlining ‘Blended’ Workplace policies for OSPs, firms in SEZs and STPIs with work equipment regulatory norms as suggested by the NASSCOM.

Shipping Services

COVID-19 has taught a lesson to depend more on Indian Ships. The facts like the foreign lines hiking freight charges during the crisis, shortage of containers for India’s trade and short validity of container bookings by foreign lines-all point out to the crying need for strengthening the capacity of Indian ships for India’s trade. Further, Indian Ships are also ageing with the average age of a ship at 14.4 years, compared to 9 years in Japan,12.2 years in China and 12 in Singapore. With prices for ships falling in August 2020 (YoY) by 3.7 % for liner vessels and by 2.5 % for Tankers and Bulk Carriers, this could be an opportune time to strengthen Indian Shipping. Some policy suggestions to strengthen Indian shipping include formulating an Integrated and focused Maritime policy; setting up a Maritime Development fund (MDF) which has been approved by the Committee of Secretaries and needs traction to make long term funds available to help the acquisition of ships; reversing the recent contentious regulations favoring foreign flag vessels like the orders permitting foreign flag vessels to transport Exim laden containers, Agri products, horticulture, fisheries, animal husbandry commodities and fertilizers between two or more Indian ports without obtaining a license from DG, Shipping; and strict implementation of the recent Public procurement policy which states that orders below Rs. 200 crore have to be floated among Indian companies only.

Strongly opposing the contentious EU-ETS which intends to bring shipping into a regional market-based measure.

Tourism Sector

· Setting up a Tourism COVID-19 Fund to enable Tourism businesses to support their employees and their operating cost.

· Multi-Year moratorium of both interest and Principal for loans and making available credit against forex earnings for both tour operators and hotels.

· Restoring Air connectivity to tourist source countries. The present air bubble arrangement of passenger flights needs to be gradually expanded taking note of the safety considerations till normalcy returns.

· Following Travel-friendly standardized quarantine policies which ensure passengers are pre-tested at the point of embarkation as per WHO guidelines and only the ones with positive symptoms are quarantined and not all incoming travelers.

· Following a policy of “Revenge Tourism” as done by China by encouraging domestic tourism in a big way to make good the loss in international tourism.

Telecom and Digital Communications Sector

(i) Issues and Policies related to Domestic Manufacturing

· Implementing the National Digital Communications Policy expeditiously by continuing the passion and focus that was seen during the lockdown following the pandemic.

· Rationalisation of statutory levies and taxes viz LF, SUC, GST, Input Tax Credits, etc. as India’s spectrum prices are very high compared to other countries.

· Optimum Spectrum Pricing as the Government was unable to sell spectrum in its last auction due to high price.

· GST related: Refund/adjustment of accumulated GST input credit of over Rs. 35,000 crores or at least allowing the GST input credit to be used as collateral against loans from banks/financial institutions.

· Liberalization of Satcom for remote areas to be speedily connected as currently only 20-25% of our mobile towers are connected by fibre which is woefully below global standards. Lack of fibre connectivity can be overcome by liberalizing Satellite connectivity. The announcement to this effect by the government needs to be converted into a policy.

· Enhancement of Scope of IP1 registration to include sharing of both active and passive infrastructure instead of only passive infrastructure as at present. This will help fiberisation, a key requirement of 4G and 5G.

· Creating and manufacturing strong Digital Communications Network by rationalization of Right of Way (RoW), Fiber First initiative of Government, open public Wi-fi networks and opening E&V bands.

· Support for Startups & MSMEs: Besides setting up a fund for Telecom Startups/MSMEs carved out of Startup India fund, there is a need to relax restrictive conditions of financial schemes like minimum 50 employees, minimum turnover of Rs. 10-60 crore as laid down by SIDBI and also restrictive tender conditions as in the case of a recent BSNL tender including very high eligibility criteria.

(ii)Issues and Policy Suggestions related to Exports

· A strong Export-oriented strategy in the light of shifting global supply chains by inviting global OEMs to invest in setting up units in India and also setting up global manufacturing hubs even if it is out of India in global locations as done by China.

· Making India the Fibre manufacturing Capital of the World by Foreign Trade Policy support in the form of 10% BCD and removal of any relaxations for FTAs, incentivizing design-based and complex manufacturing of fibre by ensuring the quality preform is created in the country, etc.

· A strategy combining manufacturing of optical fiber and exports coupled with providing Broadband services through project exports which can be key to future export growth.

· Other Telecom manufacturing like WiFi and backhaul equipment, digital transmission and distribution equipment, Satellite terminals and handsets, etc. Indian software companies can be leveraged effectively to get into product design, support network-based software, firmware, OS and App software.

· Preparing for 6G by kickstarting early-phase R&D of 6G and Auxiliary Technologies. A 6G High-level Forum should be formed. Substantial and sustained contribution in the standardization, as well as Standard Essential Patents (SEPs), is needed for India to become self-reliant in 6G.

3) Strategies for greater supply chain integration and relevance of GVC integration

COVID-19 has shattered not just the global value chains (GVCs) but the supply chains themselves, thus revealing the fragility of the modern supply chains. National and Multinational companies faced an initial supply shock due to the lockdown and other restrictions like strict sanitisation, etc. This was followed by a demand shock as country after country forced people to stay at home. Businesses and individuals found it difficult to procure basic products and materials, thus exposing the fragility of the modern supply chain system.

Recent data from Tradeshift, suggests the effects of the initial shock may continue to linger for the coming months. In China, domestic and international trade transactions suffered a week-on-week drop of 56% beginning mid-February 2020. The United States, United Kingdom, and Europe followed suit, with a combined initial drop of 26% at the beginning of April 2020, and a continuing decline of 17% in late April 2020. Furthermore, trade has flattened in every region affected by the lockdown. Overall weekly transactions on the Tradeshift platform since March 9th were down by an average of 9.8%, compared to pre-lockdown figures, with a pronounced decline in invoices and orders since the end of March 2020. However, in Q3 2020, Trade activity picked up. Transaction volumes across the Eurozone and in the US have rebounded in Q3 and are approaching pre-lockdown levels while the UK activity remains depressed. Trade activity in China also failed to recover to its pre-COVID-19 levels and remains very volatile.

Two side effects of the contractions in global trade emerged during the lockdown.

· One is that it takes longer to settle an invoice, reversing a previous trend of faster payments. According to Tradeshift’s data, businesses took an average of 36.7 days to settle an invoice in 2019, whereas in the first quarter of 2020, average payment terms have risen 1.7% to 37.4 days.

· Secondly, the lack of orders going through the supply chain was building up to another tidal wave with new orders slowing and invoices dropping off.

For India in the case of global supply chains, freight cost increased and supplies were also affected as China was the key supplier. However, being less globalized than other advanced countries and having a large domestic source of supply could have helped India.

India’s domestic supply chains were also affected due to lockdowns in different states, logistics problems and reverse migration to villages. More expenditure was incurred at all points of the global chain. The squeeze in cash flows affected the MSMEs which form a sizeable portion of India’s exports and Manufacturing.

Diversifying the supply chains, instead of relying only on China is a hard lesson to be learnt from the crisis. While countries like India came out with a self-reliance policy (Atmanirbhar Bharat), developed countries came out with China+1 sourcing plans. A number of countries also started moving portions of their supply chains back home. While the import substitution model may not be the solution, globalization with a single-sourcing model is risky. Multiple sourcing or China +1 or 2 along with domestic sourcing wherever possible could be the ‘New Reality’.

Besides diverse sourcing, digitization will be the key to building stronger, smarter supply chains and ensuring a lasting recovery.

India needs to act fast to attract the supply chains moving away from China while creating supply chains for its products both domestically and in friendly countries or in the region.

4) Strategies and Policies Related to Trade Diversion and Self-Reliance

One of the major impacts of COVID-19 on World Trade was the disruptions in supply chains. While China was the major sourcing destination for most of the advanced countries and also India, COVID-19 in China and lockdown led to supply disruptions from the Chinese side. The public sentiment in most of the countries was against China which is supposed to result in Trade diversion away from China.

While China’s export sector recovered quickly. India’s export growth continued to be negative even in November 2020, though in December 2020 it was marginally positive. Similarly, China’s Services export growth was positive in July and September 2020, while India’s Services export growth has been continuously negative since April 2020.

However, in the imports of some major items (at the 2 digit level) by major markets from China and India, there are indications of Trade Diversion. For example, US imports from China of Electrical Machinery and equipment (Code 85) was negative in 2019 and all 4 quarters from 2019 Q3 to 2020 Q2. But US imports of these items registered positive growth from India not only in 2019 but in all 4 quarters from 2019 Q3 to 2020 Q2 with high positive growth in 2020 Q1 of 78% and growth of 18% in 2020 Q2. This could be an indication of trade diversion of US imports of Electrical Machinery from China to India. Only in another major item, Pharmaceutical products (Code 30) growth in imports of US from India and China were both positive in 2020 Q2 with higher positive growth of 46.6% from China compared to 8.6% from India. This is one major US import item which had positive growth from both China and India in 2019 and almost all quarters from 2019 Q3 to 2020 Q1. While the share of China in US imports is higher than that of India for total and also Code 84 and 85 imports, the share of India is higher in the case of Code 30 imports at 6.2% in October 2020 compared to 1.6% of China. Similarly, in the case of Australia’s imports from India, Apparel and Clothing, both knitted and non-knitted were showing better growth performance than Australia’s imports from China.

Further in the US imports from India at the 4 digit level with a share of 0.5% and above there are some items where there are indications of trade diversion. For example, Telephone sets, etc. (Code 8517) has a high share of 12.8% in US imports from China, while its share in US imports from India is only 0.5%. But in the case of this item, growth in US imports from India has turned positive in 2019 Q4 and become very high in 2020 Q1 and 2020 Q2 at 192.3% and 173.8% respectively, while growth in US imports from China of this item has been negative in 2019 and all the 4 quarters 2019 Q3 to 2020 Q1. Similarly, in the case of imports of Engines and motors, etc. (Code 8412), growth in US imports from India has been positive in 2019 and all 4 quarters 2019 Q3 – 2020 Q2 with very high growth in some quarters, whereas growth in the US imports of this item from China was negative in 2019 and low or negative in the 4 quarters 2019 Q3 to 2020 Q2.

There are also some items in the US imports which have a share of 0.5% and above in its imports from China, but not from India. Among these items, for some items like Automatic data-processing machine (Code 8471) with a share of 9.64% in US imports from China, Electrical transformers (Code 8504), Monitors and Projectors (Code 8528) and Insulated including enabled or anodized wire (Code 8544), US imports from India has suddenly shown high positive growth in most of the 4 quarters from 2019 Q3 to 2020 Q2 indicating some shift in US imports from China to India. In the case of Australia’s imports from India also, in Telephone sets, etc. (Code 8517), import growth from India has been high during 2019 Q4 and very high in 2020 Q1 and 2020 Q2.

Thus, there are many items in Code 84 and 85 where India also has a competitive advantage but not a high market share like China. Some extra effort by India to push exports of these items to countries like the US and Australia can pay rich dividends.

India also needs to shift from its overdependence on China for imports and also aim at local sourcing. The policy of ‘Atma Nirbhar Bharat’ of India is one such initiative.

Meanwhile, China seems to continue its liberal imports policy from developed countries, with its imports in 2020 Q2 growing by 5.7% from the USA, 0.1% from Japan, 1.3% from QUAD (3), 5.7% from Singapore and even by 5% from India.

So while opportunities for trade diversion from China should be tapped and local sourcing explored, liberal import policies with major trading partners including forming strategic trading blocks with groups like QUAD could help India. But this needs to be done with great speed.

5) Strategies and Policies to face Emerging Trade Restrictions and Market Access Challenges

Trade restrictions by countries including India have been increasing over the years. However, since the onset of COVID-19 many trade-facilitating measures were also taken. The trade measures of G20 are divided into (1) Regular non-Covid related measures and (2) Measures taken in the context of COVID-19. As per the WTO’s latest biannual monitoring report on trade measures, during the period 16 October 2019 to 15 May 2020, G-20 economies implemented 154 new trade and trade-related measures, 95 of them trade facilitating and 59 trade restrictive. Of these measures, 93 (about 60%) were linked to the COVID-19 Pandemic. Of these 65 facilitated trade and 28 restricted trade. Other than COVID-19 related measures, 61 trade and trade-related measures were implemented, of which 30 are trade facilitating.

Most of the regular trade remedy actions are related to anti-dumping initiations followed by CVD initiation.

Most of the trade measures in the merchandise sector introduced as a result of COVID-19 by different countries including India were medical-related or agricultural items. There were temporary restrictions or even liberalization in the case of medical-related items. Some of the measures in the merchandise trade sector have sunset clauses and are temporary. The ones which may last long, need to be negotiated.

In the services sector, the major restrictive measures introduced as a result of COVID-19 were related to curbing takeovers or acquisitions of local companies by foreign companies, particularly Chinese companies; and restrictive visa measures by the US. But most of the other measures were liberalizing particularly in the financial sector. India needs to emulate the measures related to broadband services to tap this potential sector. Even China’s measure of providing services to facilitate FDI by the different local Departments of Commerce is worth emulating.

While many of the COVID-19 related restrictive measures may be phased out, the ones likely to remain need to be negotiated by India. FTAs with major strategic partners could also help in tackling restrictive trade measures.

6) Strategies and Policies related to FTAs in the wake of COVID-19 crisis

Studies have shown that most of India’s FTAs have been more beneficial to its FTA partners than India. There are also examples of some FTA partners giving more concessions to countries with which it has other FTAs more than nullifying any concessions given to India by them.

The strategic regional forum of India with QUAD countries could be taken forward to the level of some form of economic and trade grouping. There are indications of Trade diversion from China to India by these countries. India needs to quickly utilize the opportunity to see that Trade diversion to India coupled with Investment diversion to India becomes a reality as many foreign investors are planning to move lock, stock and barrel from China. The sector-specific issues/ experiences regarding India’s FTAs differs between sectors.

On the lines of zero-budgeting, a careful but quick review of existing FTAs along with concluding new useful FTAs with major trading partners of India is important. Negotiations in Indo-US, Indo-UK and Indo-EU FTAs should be brought to a logical conclusion at the earliest. If necessary India should not hesitate to terminate some less useful FTAs or make them more useful for India atleast at the time of renewal.

7) COVID-19 and the role of Trade-related Institutions like the WTO

COVID-19 has led to a debate as to whether there would be a Bretton Woods like situation and what will be the role of existing International Institutions like WTO, G-20, etc. With some signs of the crisis subsiding, the initial talk of fundamental reforms in International institutions seems to have subsided and the issue of the formation of new institutions may be less relevant now. However, serious thought needs to be given in the WTO, G20 and other Trade institutions to emerging challenges like the following.

· The first such issue is the growing digital trade in the wake of social distancing, which will need a whole set of new rules. On the digital economy, the G-20 leaders expressed their support for fostering an open, fair and non-discriminatory environment and for protecting and empowering consumers while addressing the challenges related to privacy, data protection, IPR and security.

· The second major issue is related to providing Health and Medical supplies particularly the Vaccine to the World at a reasonable price. The usual principles of business or profit motive will have to be given up for this purpose. World institutions need to work to provide this at reasonable rates with only a small markup above costs. Even ways to subsidise costs by International bodies can be worked out to make it more philanthropic in nature. India has taken suo moto action in shipping COVID-19 Vaccines free of cost to some countries as a goodwill gesture.

· The Issue of rights over IPRs, the third important issue follows from the second issue. In fact, India’s and South Africa’s Joint Proposal at WTO was on temporarily waiving the intellectual property and patent rights on COVID-19 vaccines, medical devices and protective kits in the TRIPS agreement. However no consensus could be reached and deep divisions emerged, though it has been retained in the Agenda for future negotiations.

However, with countries moving from a single-sourcing model to China+1 model and local/regional sourcing and more clamour for strategic FTAs, it is to be seen whether the role and importance of multilateral trade institutions will remain the same.

8) Inter-Sectoral Linkages

COVID-19 has brought to the fore the inter-sectoral linkages between some important sectors. The pharmaceutical sector and healthcare sector is the first and foremost such combination of merchandise and service sector with great potential. Biotech and R&D are also related to this. India is competitive in all these sectors and any export strategy should consider these sectors together. The second major combination is hardware, software, telecommunications and broadband sectors. India’s competence in software and telecommunication services should now be extended to broadband services and IT hardware where many initiatives have been taken. This will be a powerful growth propelling combination where local sourcing and domestic supply chains can develop promoting both domestic industry and exports. Telecommunications equipment and Broadband Services can also be exported through Project exports.

Thus future trade strategies and policies should not be formulated in silos but should be combined policies considering the strong interlinkages between merchandise sectors with merchandise sectors, merchandise sectors with services sectors and services sectors with services sectors.

Implementation of Strategies and Policies

The implementation of the different strategies and policies can be broadly divided into (1) policies for implementation in the nearer term (6 months to 1 year) to pick the low hanging fruits and (2) policies for the longer time period (2 to 3 years).

Implementation in the Nearer Term

These include most of the logistics related issues and policies; many Foreign Trade and Tax-related issues; GST and IT related issues; finance and banking related issues/policies besides many sector-specific issues and policy suggestions.

Implementation in the Longer time period

Policies for implementation in the longer time period include digitization and Automation in Indian Ports and Shipping and using RFID tags for easy tracking and identification of export consignments; liberalization to the extent possible of all procedures related to exports where government benefits/refunds are not involved; strategies related to Greater Supply Chain integration; fundamental reforms in International institutions; forming strategic Trading blocks like QUAD and utilizing the opportunities of Trade diversion from China by assisting even at local govt. levels; concluding useful and strategic FTAs along with reviewing existing FTAs; marketing and Virtual Trade Fairs through reforms in MAI; some sector-specific measures of a long term nature; and formulating a comprehensive strategy in some areas like Pharmaceuticals, Healthcare, Biotechnology and R&D where there are inter-sectoral linkages and adopting a combined inter-sectoral strategy for Hardware, Software, Telecom and Broadband services.

Conclusion

Thus there are a bunch of issues and policy suggestions, some for the nearer term and some for the longer term. However, COVID-19 is a constantly developing and changing phenomenon and policymakers have to keep their eyes open and ears close to the ground and make quick and suitable changes in policies and strategies.