How SME Exporters Could Prep-Up For Trade Wars
In India’s quest to become an export-led growth economy once again, it's domestic Small and Medium Enterprises (SMEs) have a big opportunity at hand.
Photo Credit : Bloomberg
The US and China are locking horns over trade concerns that have led to a full-blown trade war worldwide. While trade wars are largely detrimental for global trade, an unusual opportunity has arisen for nations such as India.
India is less integrated into global manufacturing supply chains compared to other Asian peers. This has made India the only major Asian nation that’s growing its export share since the start of the tariff wars, according to a report by Bloomberg. The report added that India’s exports edged higher by 1.71 per cent in the first quarter of 2019 as against 1.58 per cent in the fourth quarter of 2017.
Additionally, from 2018, when the trade war began, modest gains have been made by Indian SMEs in capturing the international market, which otherwise is highly competitive and difficult to permeate. This has continued in FY 2019-20, with a large increase in exports to the US as well as China in the April-August period.
In India’s quest to become an export-led growth economy once again, it's domestic Small and Medium Enterprises (SMEs) have a big opportunity at hand. Since the start of the trade war in April 2018, overall exports to the US grew by 9.46 per cent year on year in FY19, and to China by 25.6 per cent year on year. In the current financial year, FY19-20, exports to the US have grown by 2.93 per cent from April-August, and by 10.69 per cent to China for the same period. The time to act is now.
The top sectors that are seeing increased exports include electronics, textiles, jewellery, leather products, ceramics, meat and dairy products, and medicines, among others, and commodities including mineral fuels, gold and diamond. For example, India has leveraged opportunities from the trade war by exporting more plastic, cotton, inorganic chemicals and marine products to China.
While competing with the best in the world, how can Indian exporters ensure goods are produced and exported without interruptions in financial liquidity?
Being aware is often the first step towards preparing for the international market. For first-time exporters, the challenge lies in finding trustworthy importers. To enter into a trade, it is important exporters opt for financial assistance from market players who have already financed shipments across multiple countries. This exposure will help exporters get better pricing and wider choices to sell at a competitive rate.
Awareness of the government’s recently announced measures such as an extension of Interest Equalization Scheme to all exporters and Loans under Credit Guarantee Fund Trust for MSMEs for export-oriented MSME units that fall under Rs 5 crore market capitalization bracket and reduced annual guarantee fee is also crucial.
A simple solution lies in easy credit without elaborate collateral requirements and available quickly without lengthy processing times.
The government’s moves to help SME exporters from India are very welcome. However, the current liquidity crisis among Indian banks has made it difficult for traditional financial institutions to fund the sudden spurt in demand for export finance. For SMEs to take full advantage of the burgeoning global trade war, it’s crucial they reach out to industry enablers who ensure seamless credit flow solutions to the sector.
In this time of economic conflict caused by protectionist trade policies, Indian SMEs could get competitive prices for their products, which were otherwise being shipped by countries producing cheaper alternatives. Over time, they could leverage the same to get balanced trade opportunities globally. Collateral-free credit will ensure an active export cycle without added pressure on the exporter.
Paperless and transparent documentation
It is an interesting time for SMEs to test their efficiency and increase output. As the monopolies of China and the US over certain products are broken, Indian SMEs can aim at increasing output to beat Vietnam and Thailand, both of which have been among the biggest benefactors of the trade war but lack the scale of exports that India can offer. India’s ability to leverage the opportunities provided by the tariff war will depend on how quickly exporters can add to their capacity. This could be achieved by adopting technology-led means for exports.
The government’s recently announced sops for exporters to aid end-to-end digitization of the export process could prove to be catalysts. However, SMEs can also benefit from working with progressive fin-tech startups that enable transparent documentation digitally with the help of artificial intelligence and machine learning. The better the adoption of digital processes, the more agile SMEs will find their operations.
India intends to expand the scope of the Export Credit Insurance Scheme by the Export Credit Guarantee Commission to offer higher insurance cover to banks lending working capital for exports. This could help prepare SMEs to maximize advantage from global uncertainty. However, to fully leverage the Indian government’s tax incentives and refunds, choosing services that enable protection against buyer bankruptcy could be useful. Exporters need to be fully aware of their rights and ensure protection from fraud by collaborating with partners who are trusted by relevant investors and have a history of successful trade deals.
According to the Commerce Ministry study, as much as 151 domestic products including diesel, X-ray tubes and certain chemicals have an outright opportunity to displace US exports to China. Similarly, 203 Indian goods like rubber and graphite electrodes have the opportunity to displace Chinese exports to the US.
Amid such a lucrative market opportunity, seeking industry support for factoring, post-shipment finance and finding the right set of investors is paramount. SMEs should ensure they partner with established industry leaders for a seamless export cycle to avoid inconsistencies and ambiguity. A partner with widespread reach -- both domestic and international -- can enable the SME to fully leverage the opportunity.
Make in India
In the past, India’s exporters have been heavily dependent on the import of cheaper raw materials from either China or other developed countries. It might be a good time for SMEs to mull building their own domestic capabilities by manufacturing in India.
As India benefits from investment flow diverted amid the trade war, India could potentially benefit from manufacturers looking for an alternative base. Tying in with the government’s ambition, Made in India products using raw materials procured or manufactured in India can assist in bolstering long-term exports.
With no end in sight to the US-China trade conflict, and companies increasingly looking at India as a suitable alternative to set up manufacturing, the Indian exporter stands a good chance to explore global opportunities and develop a robust network worldwide. Policymakers and other stakeholders need to ensure they do all they can to help exporters capitalize on this opportunity as much as possible.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.