In a conversation with FE Aspire, Srivastava speaks on the current state of MSME exporters through the prism of trade, ease of doing business, China Plus One strategy, domestic barriers and more.
"People thought that China Plus One would gain momentum after the US imposed steep tariffs on China. Now, when tariffs are being reduced, which I think will further go away, the China Plus One strategy will be as good as dead for me." (Source: prhandout)
MSMEs in India, when it comes to exports, don’t just cross borders but also try to overcome certain barriers that are more about homegrown hurdles and less about geopolitical events. From complex Quality Control Orders (QCOs) to high input cost, the everyday reality for small exporters is about “self-inflicted wounds”, according to Ajay Srivastava, Founder at research firm Global Trade Research Initiative. In a conversation with FE Aspire, Srivastava speaks on the current state of MSME exporters through the prism of trade, ease of doing business, China Plus One strategy, domestic barriers and more. Edited excerpts below:
In what ways do you see geopolitical tensions and regulatory barriers impacting MSME exporters?
More than geopolitics, small firms suffer more due to internal regulations. Quality control orders hurt the interests of small exporters such as those in the steel sector. For instance, they import steel grades that are not produced in India from China, on which the government imposes QCOs. These are not issued to the manufacturers to supply. Large firms don't have such problems. They get their manufacturers registered, and they get the QCO also, but small firms suffer in many sectors. So, the small sector is hurt more by our internal decisions, which are India’s self-inflicted wounds.
When you refer to self-inflicted wounds, are you pointing to specific missteps in policy or execution?
Let's take the example of steel, wherein it is said that a lot of steel is being dumped in India. However, if you see the figures, steel imports constitute only 6 per cent of steel consumption, more than half of which is done by the large firms. Imposing an anti-dumping duty on steel imports increases the price of the imports. This leads to an increase in the domestic price by large firms, but MSMEs are not able to buy at the international price and are unable to make products which are internationally competitive. In the long run, this hurts MSMEs.
On the other hand, certain steel grades, for which QCOs are not applicable as of now, should be allowed to be imported without QCOs. However, the government mandates importers to get a no objection certificate (NOC) for such imports. This seems like another challenge for MSMEs. Their consignments wait at customs, incur additional costs, which ultimately hit our economy and growth rate.
MSMEs sometimes find it challenging to voice their concerns due to various reasons. Hence, I think while small firms suffer like large firms, their immediate sufferings are more because of self-inflicted wounds.
How do you assess the trade tensions between India and Bangladesh?
Our exports are double our imports from Turkey while exports to Bangladesh are five-six times more. Earlier, Bangladesh was a bigger supplier of garments to the global market than India was, despite its limited means, but after last year’s regime change (with the fall of Sheikh Hasina’s government) and the upsurge of extremist groups in the country, their exports and industry are expected to suffer. Bangladesh is basically going the Pakistan way. Indian exports and industry don’t have this problem, and neither are our MSMEs facing this kind of challenge. Bangladesh has put restrictions on imports from India, but it won’t have any major impact on India’s overall export basket.
Could the temporary US-China tariff truce dampen momentum around the China Plus One strategy?
Apple coming to India and a surge in our solar panel exports are the result of the China Plus One strategy. However, unfortunately, for China Plus One, we were reliant on China. We imported all the inputs from China to become China Plus One, but the base of China Plus One was always China, not only for India, but also for Vietnam, Thailand, Cambodia, etc. So China Plus One was never an independent and big thing. It was a superficial concept from the very beginning, and now it has been weakened.
People thought that China Plus One would gain momentum after the US imposed steep tariffs on China. Now, when tariffs are being reduced to 30 per cent, of which I think 20 per cent will further go away and would be similar to the tariff rate other countries face, the China Plus One strategy will be as good as dead for me.
Do you agree that the oft-cited 45 per cent MSME export share includes contributions via large enterprises, and doesn’t reflect standalone MSME exports?
I agree. I think the 40-45 per cent figure has been stated for more than a decade. So, it has lost all its relevance. The figure has to be revisited. Having said that, we expanded the definition of MSME to cover firms with a turnover of up to Rs 250 crore in 2020 and now Rs 500 crore. This way, the 45 per cent share may automatically fit into the MSME definition as the majority of businesses in India would fall under the MSME category.
However, I see enterprises getting demoted at some level with the revised definition. If I were a small unit earlier, I might now become a micro unit and if I were a medium unit, I might now be a small unit. So, more units are downgraded because of the revision in the definition.
What critical barriers must be addressed to enhance MSME export performance?
First of all, the easiest thing to do is to identify self-inflicted wounds. For instance, check where QCOs are hurting genuine MSMEs. Second, our cost of input is becoming very high. If I'm making something, I need the inputs at an internationally competitive price. If there are high import duties on inputs, then you cannot expect me to export and sell even in the domestic market, as the domestic market is open for everybody through free trade agreements (FTAs). Third, clearance at customs and logistics, toll taxes, etc., increases the cost of the inputs. Fourth, the power should be uninterrupted for units of all sizes. There has to be more discussion on the challenges faced by MSMEs.
What are the key export opportunities available to Indian MSMEs in the current global market?
It is clear that MSMEs aiming for mass production may not do well, as large firms will undercut them in pricing. They should go for niche products which are labour-intensive such as auto components, garments, shoes, handicrafts, etc. However, they will have to differentiate via design, marketing, etc. So, those doing niche products can do well, and e-commerce can be the right route here.
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