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View: Impact of COVID-19 on exports will be worse than the financial crisis of 2008.


Date: 04-04-2020
Subject: View: Impact of COVID-19 on exports will be worse than the financial crisis of 2008
By Pushkar Mukewar

Even before the Indian government could wake up to the realities of the COVID pandemic, the Directorate General of Foreign Trade (DGFT), probably, had an epiphany. With the country’s exports showing no signs of a meaningful recovery, India’s premier foreign trade agency issued a circular on 26th February, vide which it reduced the average Export Obligation (EO) for exporters who had availed authorisations under the Export Promotion Capital Goods (EPCG) ..

Now, in the post COVID-19 world, however, such steps don’t seem to be even a drop in the ocean as global trade and commerce equations are surely headed for a never before seen reset.

Bend in trend
In the last half-century, at least, it’s impossible to turn the history pages and find any parallel with the economic, trade and commerce turmoil that COVID-19 has put the world in. However, September 2008 provides some indications for what we might be headed for. With the American investment banking giant Lehman Brothers’ bankruptcy freezing the financial world, the month saw India’s trade go through a trend reversal that took years to undo.

While every single month, during the 12 months preceding September 2008, had seen India’s merchandise exports grow by double digit percentage points from a year-ago period, the Lehman bankruptcy saw the country’s exports drop year-on-year every single month, during the following 12 months, sometimes by as much as 34% from the corresponding month in the previous year.

If this doesn’t make the next few months look worrisome enough, there are two factors that are only likely to make matters worse. One, while going into the Lehman crisis, India’s exports were on a rampage, growing in double digit percentage points year-on-year for several years; in the present day, the country’s exports have barely budged over the last five years. Secondly, while the financial crisis of 2008 affected all countries at the same time, this time around, China is up and running when  ..

Policy paralysis
While the short run repercussions of the COVID-19 pandemic on India’s trade are somewhat foreseeable, it’s long to medium term fallout are anything but it.

For starters, India’s Foreign Trade Policy (FTP) is in a spot. Late last year, almost all export incentive schemes under the FTP were ruled World Trade Organisation (WTO) non-compliant by the global trade regulator. And while the Indian government has appealed against the ruling, it deep down knows that they were indeed nothing, but export subsidies and hence WTO non-compliant.

Hence, to replace such schemes, in particular ones like the Merchandise Exports from India Scheme (MEIS), the government has now approved a new scheme named Remission of Duties and Taxes on Exported Products (RoDTEP), which it claims is WTO-compliant. While the finer details of this new scheme and the remission rates under it are yet to be notified, the scheme essentially aims at refunding taxes and duties like Value Added Tax (VAT) on fuel that is beyond the ambit of the Goods and Services Tax  ..

Intuitively, this raises a major issue. Given what the RoDTEP attempts to refund, the rates under it are unlikely to be comparable to the MEIS rates of as much as five percent available until now. So, even if RoDTEP manages to pass through the WTO’s lenses, which in itself looks to be a herculean task, the scheme is unlikely to give the kind of price competitiveness that MEIS used to give to Indian exporters.

At the same time, with the FTP 2015-20 all but thrown out of the window by the WTO and the new FTP’s uncertain timetable, Indian exporters might just end up grappling in the dark on the policy front even as they deal with the after effects of the pandemic.

Lost in transit
Another, most likely fallout of the COVID-19 pandemic is that countries are increasingly likely to adopt more and more protectionist measures. While countries, particularly those exporting finished manufacturing goods, with established export markets, are likely to wade through such an environment, those like India that are dependent on intermediate and agricultural exports and are on the lookout to tap newer markets, are likely to find the going tougher.

With India in a lockdown and a large chunk of its workforce, particularly those employed in Micro, Small and Medium Enterprises (MSMEs), back in the hinterlands, there’s another major concern. Even if demand from existing export markets were to come back in the medium to long run, it’s unlikely that our exporters would be in any position to cater to them. And with competitors only too willing to pounce on such an opportunity, India runs the risk of losing some of its export markets permanently.  ..

Silver Lining
While the gloom and doom surrounding COVID-19 is palpable, the crisis might also throw up some great opportunities for India. There are already reports of several Western manufacturers looking at moving their factories out of China. Many Indian chemical producers have gone on record at having received enquiries from Western manufacturers who earlier never used to look towards India as a source. Tapping these opportunities, however, will require some serious inno ..

Source:- economictimes.indiatimes.com

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