National Council of Applied Economic Research
Opinion: Sanjib Pohit
Cutting logistics costs and complying with exacting European product standards will go a long way in boosting shipments
India is the EU’s ninth largest trading partner with 2.4 per cent of the bloc’s overall trade. Bilateral trade (in both goods and services) touched €115 billion in 2017.
EU exports to India have grown from €24.2 billion in 2006 to €45.7 billion in 2018. India’s exports to the EU have also risen steadily from €22.6 billion in 2006 to €45.82 billion in 2018 with the largest sectors being engineering goods pharmaceuticals gems and jewellery other manufactured goods and chemicals. Trade in services has also trebled between 2005 and 2016 reaching €28.9 billion. India is among the few nations that run a surplus in services trade with the EU.
India has been negotiating a broad-based trade and investment agreement with the EU since 2007. After several rounds of talks the negotiations for a comprehensive Free Trade Agreement (FTA) were suspended in 2013 due to a gap in the level of ambition between the EU and India.
Policy-makers here fear that an FTA will not help India to make inroads in EU’s market and the gains will minimal However the failure to sign an FTA has not reduced the bonhomie between the two partners. In the recently concluded 15th Summit of India and EU the broad consensus that emerged is to strengthen the EU-India Strategic Partnership.
Despite the positive vibes between the two sides the moot question is India’s exports in the competitive EU market are not doing well even in products where we have competitive advantage relative to peers. Take agricultural commodities apart from processed rice the share of India in EU’s import is invariably less than 3 per cent. Even in processed rice the share of ASEAN countries is more than double that of India even though India’s production is way above that of ASEAN.
EU imports more marine products from ASEAN than India despite its longer coastline. A tiny country like Bangladesh exports more labour intensive products such as apparels and leather products than India. Even in pharmaceutical sector where India is a strong players its presence in the EU market is not as that of ASEAN countries or China. Even though India has a modern petrochemical sector EU imports more by-products of same (chemicals rubber plastic products) from China and ASEAN than India. Surely there is a deeper problem why India is not able to penetrate EU’s market.
The key factors
At the outset import tariff is no more a barrier for exports for any country. So a lower share of India’s export in the EU market may arise due to the following factors:
High production cost in India leading to higher import cost in EU market compared to other countries
High logistics costs and poor connectivity that make Indian exports uncompetitive;
Inefficiency in trade facilitation measures leading to high cost of export or consignments being rejected which has spill-over effects;
India’s exports being subjected to higher para-tariff in comparison to other countries;
India’s exports not meeting the stringent European standard. In the past quite often Indian products have been rejected/banned due to failure to comply with EU standards and this legacy is affecting India’s exports.
Reducing production cost takes time as it is influenced by multiple factors including the cost of capital. With regard to Points 2-5 government intervention may play a major role: Every rupee saved in logistics/trade facilitation measures matters a lot in keeping the production cost low and thereby increasing the competitiveness of the economy. Moreover in the case of perishable items each hour wasted in transportation increases the risk of consignment being rejected.
Take the case of export of floriculture/fruits from the Pune region via Mumbai airport. As a recent NCAER study on ‘Logistics Costs’ indicates the journey from Pune to Mumbai a distance about 150 km normally takes about 7 hours which is significantly more than the flight time to Europe. Also an exporter may have to send consignment by air from Pune to Mumbai at high cost to meet the export deadline if the cargo is expected to reach the Mumbai metropolitan region when movement of truck is prohibited in the city. Direct connectivity from Pune to Europe could tilt the balance in favour of exports to EU.
In the past Indian products have been rejected/banned due to failure to comply with EU standards. In this respect the Chinese export strategy could offer lessons. China produces similar goods for exports with price differentials concomitant with different standards. Thus for the EU market they produce goods complying with European standards at higher price than what they produce for African/Indian market. This way they protect their brand value and manage costs too.
Indian producers do not pay as much attention to complying with specific market standards as managing with jugaad. This mind-set needs to change if India plans to penetrate the EU market in a big way.
The writer Sanjib Pohit is Professor at NCAER. Views expressed are personal