Post WTO challenges and Strategies for India's Foreign Trade

By

Prof. R.K. Gupta

BE Mech. Hons, MBA, F.I.E.
Professor & Director
S.A. Jain Institute of Management & Techology (AIMT)
Ambala City-134 003
E-mail: [email protected] Website: www.aimtambala.com

Abstract:

As we are heading for 6th Ministerial conference of WTO scheduled in Hong Kong on 13th December, the
WTO regime is likely to take forward surge by adopting consensus on many issues involved in
multilateral Trade Agreement.

The Three distinct parts of WTO are: GATT, GATS (for services sector) and TRIPs (For Intellectual
property rights)

There are going to be significant changes in International business environment and thereby domestic
environment in India changing directions of exports, rules of game and competitiveness of Indian
exports. On review of various developments in International Marketing environment and achievements
of Indian export industry, it is felt that many established beliefs have to be brushed aside and some of
important export marketing strategies will have to be adopted to gain advantage in globalised market
that is slowly but surely emerging.

Some issues are discussed below that include, concept of labor productivity, sectoral approach and
collaborations, Brand India marketing approach, services sector significance in export pie of future, need
for innovation, investment in technology and domestic R&D, acquisitions and strategic alliances needed
abroad and special focus for SME exporters to sustain themselves in globalised market. More and more
Indian traditional resources will have to be used to innovate products with distinct India advantage (for
example blending traditional and old Indian garment fashion to contemporary styles).

Localization within globalization has to be adopted to drive better export performance in international
markets.

The concept of only Indian firms having export performance from India will be replaced by just Indian
exports, as more and more MNCs would launch operations from India like in any other territory that
offers unique advantage to firms in some factor of production ( Low labor and infrastructure cost in
India for a few years at least). Therefore identity of exporters will cease to have meaning and it wont
matter who is exporting from India- an Indian owned company or a foreign MNC, so far as Indian
exports keep moving move up. There is bound to be more liberal movement of Financial as well as labor
capital and low cost advantage of India will diminish in 7-10 years period from now. Indian firms
therefore would have to think in terms of labor productivity rather than merely low cost of labor and
evolve as world-class organizations.

World Class Organizations:

What is a world-class organization? There are so many definitions in literature. But Following could be
simple criteria for a WCO.

1. Add or innovate new products/features to at least 1/3rd of existing product portfolio, every year.
2. Have high turnover ratio of inventory exceeding 80 and going above 100.
3. Spend at least 50 % of time in manufacturing or service activities in Value addition component of
total time.
4. Try to be among top 5 competitors in your product/activity area globally.
5. Invest in R&D from 5-20% of turnover or projected turnover
6. Be a slim organization
7. Delivery commitments are at least 95% on time every time.
8. Modular design of products to offer range, variety and customized products within ambit of mass
production.

Small and Medium organizations not up to mark as per above criteria will have to operate in Indian
products like Cultural products, tourism, manually intensive product lines, polluting products like
Forging, casting and cycle tyre and tubes.

GVC (Global Value Chain) concept

Global value chain indicates that MNCs will outsource labor, raw material, logistics and allied services
like research, packaging etc where they will find advantage and exports will cease to have meaning of
having manufactured goods from one country itself.

Process Innovation – improving the efficiency of transforming inputs into outputs

Product innovation – improving quality and differentiated products and up gradation of models
Functional innovation – new ideas like contract manufacturing, outsourcing of marketing networks and
production logistics
Inter-chain innovation – moving to new and more profitable product segments

Competitive Performance

We define competitiveness as "continually sustained increases in productivity…also characterized by

increasing export shares…" With the blurring of boundaries between domestic and global markets,
competitive arena has extended into the export markets and competitiveness in domestic market has
spillover effect on exports. The preference for trade-based measures of competitiveness also owes to
the fact that trade data are easier to obtain than the firm-level and industry-level productivity, which
are difficult to calibrate and are infrequently compiled.

Product and Process Adaptations

Product adaptation and innovation are key factors in export success. Studies reveal that companies,
which have invested in, and are willing to innovate on their products for a specific export market, are
most likely to succeed.

An exporter of cars from India to the US market would have to make the necessary changes
in the steering assembly, (to right hand drive) so that the car can be driven on US roads.

The innovations need not be restricted to manufacturing processes, but can also involve packaging
designs and other tools of marketing communication. Export is not only about bundling a product into a
box and letting the shipper do the rest. Exporting is an expensive but lucrative proposition; departments
across the company might have to make changes in their operations to meet the demands posed by
international marketing. The manufacturer and marketer have to ensure that internal, micro and macro-
economic environments and their factors are taken into account when instituting an export strategy.
These, along with the motivation to adopt exports, will have a direct impact on performance.

Myth of labor cost advantage:

Country like India has tremendous labor cost advantage as far as daily or monthly wage rates are
concerned. But there are severe limitations due to poor quality of training and skills, non-professional
approach, low productivity and too many labor laws.

There is already as high as 38-40% attrition rate in BPO Call center industry and HR experts have failed
to tackle this despite several experiments in HR models including higher salaries.

The MNCs that set up shop in India pay quite high wages thereby, giving upward thrust to wage rates in
India and general increase, which is already evident.

As the labor market is deregulated and there is increased mobility of labor in global markets this
advantage will disappear in due course or at least minimize.

Many other low cost countries like china, Mexico, Turkey, SAARC region neighbors, some north African
and Latin American countries are moving fast on learning curve and will offer tough competition to
Indian exporters in low cost labor advantage.

The Indian Industry would thus do well in intellectual labor areas like R&D, healthcare, IT products,
high-end and low-end education and many such services.

The real income in western countries is already falling while real labor cost will rise in countries like
India erasing much of low cost advantage of labor.

TRIPs and R & D

The product innovation, product patents and process patents in India are abysmally low. Similar is
situation of academic and fundamental research in India not only in terms of quality and citation index
but also utility value.

We have already amended our Patent Act, which will severely limit maneuverability of Indian
manufacturers. In Pharmaceutical sector the advantage is not inherent in India but in US market where
a number of generic drugs are going to be off patent by 2008. This has opened large market possibilitie
for Indian drug Industry and can be exploited by strategic takeovers and marketing alliances overseas.
That is what some of Indian Drug companies have done and are doing (example Ranbaxy).

India products and India Brand

Branding today is most important marketing asset. Made in India Brand or India Label must be
developed in international market through concerted efforts and plans by Indian Government and
Industry associations, jointly. The scheme launched by Vajpayee government with initial investment
outlay of Rs 5000 millions is not much effective and therefore exporters in particular sector should
come forward to have join marketing efforts and to promote Brand India {IT has done it by continuously
delivering high quality and cheaper services, aggressive marketing and establishing overseas network}
Stop looking towards Government

Indian Industry as well as exporters are used to seeking rebates, incentives and permits from
Government. They have thrived under quota regime (Particularly in Garments sector under MFA). Due
to WTO provisions the incentives and subsidies are bound to crash in coming times. Exporters should
make joint sectoral efforts to increase competitiveness of Indian produce and services. For example in
leather or processed food sectors.

Marketing Collaborations and Acquisitions

Today the best route to international market development is acquisitions abroad in target markets
segments and strategic alliances forged overseas to leverage marketing competence and network of
partners (Example is Marketing tie up of Vardhaman with Marubeni of Japan). Another example is LN
Mittal led Ispat Group that capitalized on privatization spree of sick PSUs in Europe and elsewhere and
turning them into productive assets. But such acquisitions cannot be called exports from India unless
these projects repatriate a part of foreign exchange earnings to India. It is unlikely in current FEMA
Regime.

By the same logic more and more MNCs will take over exports from India setting up base here taking
advantage of FDI route and enforcement of WTO to dismantle TRIMs.

Defend Domestic Markets to be Internationally Competitive

The peak duty rates on average have come down in India and will be further slashed in line with WTO
commitments. Besides, bilateral agreements with many countries like Singapore, for instance, will see
quite low rates in range of 10-20 % on most of goods. India will also have to open up agricultural
market under AoA of WTO and reduce tariffs while holding current level of agricultural and farm
subsidies.

In free global markets therefore, Indian exporters would do well to defend their products first in
domestic market and carry out product innovations to enter segmented overseas markets. One cannot
succeed in global markets without acquiring strength in domestic markets against onslaught of imported
products.

The export processing costs in India are very high (12-20%) and infrastructure of roads, power, and
other facilities is very inadequate. The ports are clogged with poor facilities and there is huge delay in
exports clearances. This will seriously limit global competitiveness of Indian products.

Similarly Indian exports in basic agro-products may not materialize significantly because 1. The
domestic condition of agriculture in India is abysmal with small land holdings, poor mechanization, lack
of harvesting techniques, poor quality of seeds, low productivity of farms and under developed irrigation
system. Market access mechanism under WTO may rather cut into Indian domestic markets. Indian
products, which are already competitive like tobacco may, do well but there is little scope for developing
commodities exports from India in current situation. 2.India is already way below allowed subsidies and
there are not very high tariffs in developed countries on imports of agro products. So how Indian
exports can take boost in this sector?

Services sector is Bright

Due to inherent advantages of large talent pool, analytical mind of Indian experts and low capital cost
involved Indian services exports should be emphasized. In future India's increasing share in export
markets will come from this sector of economy and naturally.

Besides India should capitalize on its Traditional Knowledge field, biodiversity, Folk arts, designs, and
Geographical indications of origin (GiO) products to boost exports and inward traffic in health, cultural
and heritage tourism and boost to tertiary health care and high education sectors, besides, Information
technology.

Here too India can easily move up value chain and boost revenue through product innovation,
infrastructure facilities and aggressive marketing

Internet marketing

This is age of Internet. Several techniques of e-tailing, e marketing, SEO (Search engine optimization)
and CRM functions can be easily done through internet tools. The wider access to customer segments in
global markets and modular and localized availability of services can be profitably handled through
Internet or online marketing. This will become a sizeable portion of Global marketing sdp3end of WCOs.

High bandwidth, convergence of technologies and excellent infrastructure is must for availing the
benefits of this technology.

Can India become logistic hub of Major MNCs trading in Global Markets?

India is bound to loose out to several strategically located countries like Turkey, Germany, North African
countries, China, Sri Lanka, Bangladesh and other such in Textiles and clothing due to their closeness to
major consuming markets of US, Canada and EU and a combination of low labor cost and good
infrastructure. However due to rising technology base and liberalized economy resulting in Market
Access may offer opportunity to India as outsourcing and assembly hub for several capital goods and
Consumer durable industry products, provided Government focuses on this area with larger efforts and
favorable policies. World-class ports and Airports with SEZs have to be developed further deregulating
economy and cutting down bureaucratic harassment, delays and corruption. We have to fast reach
computerized governance system with full transparency.

Conclusions

To conclude India has tremendous possibilities in boosting export revenues from India in services
sectors provided it invests heavily in infrastructure, reforms its administrative system, puts a hold on
corruption and takes up aggressive marketing in global markets.

Many old beliefs would have to be shed and new approaches to accessing world markets and
strengthening domestic markets will be required simultaneously. Then India can well climb on to 3-4 %
share in world trade. Presently USA having 5% of population has 1/3rd of global wealth, whereas China
and India having 2/3rd of world population have merely 5.5 % of wealth. China has clearly taken the
lead in terms of FDI and GDP growth rates becoming manufacturing hub for most of MNCS in the world.