PROGRESS AND PROSPECTS OF INDIAN ENGINEERING GOODS EXPORTS - Free Essay Example

CHAPTER II PROGRESS AND PROSPECTS OF INDIAN ENGINEERING GOODS EXPORTS INTRODUCTION The importance of exports to economic development has been well documented in empirical as well as theoretical literature. A number of studies have examined how exports are beneficial for economic development of an economy. A common point among them is that, exports may lead to greater capacity utilization, economies of scale, incentive for technological improvement and efficient management due to competitive pressure abroad. The interest in the relationship between exports and economic growth has led to emergence of two schools of thought, namely export led growth (higher export leads to higher economic growth). Although India has been following an import substitution strategy for long, exports promotion has always got the attention of the policy-makers and planners. Export promotion strategy became more pronounced in India particularly after the new economic policy (NEP) of 1991. It is a fact that although Indias share in world exports is less than 1 per cent today, its share in total GDP of the country is more than 11 per cent which is a substantial percentage that can play an important role in ushering faster economic development to the country. Exports from India constitute agricultural and allied commodities (10.10%), ores and minerals (5.29%), manufactured goods (73.40%) (Such as engineering goods, gems jewellery, chemical products and so on), crude oil and petroleum products (8.5%) and others (2.64%). Engineering industry has significance to the economic development of the country. Engineering goods industry constitutes the prime mover of industrial growth in Indian economy as it has played a pivotal role in industrial resurgence of India since the advent of independence, especially after the adoption of the Mahalanobis capital goods oriented strategy from the second plan onwards. The following facts highlight the very significance of the Indian engineering industry in Indian economy. The engineering goods industry enjoys 30.5 per cent weight in the index of industrial production, 29.9 per cent share of total investment in all industry, 33.5 per cent share in the value of output of all industry, 37.1 per cent share in valued added by all industry. 30.6 per cent share in employment of all industry, and 62.8 per cent share in number of foreign collaborations (EEPC). Further more, recently it has emerged as a major exporting sector and also provides technical know-how and consultancy services to a number of African and Arabian states. As per the data available for the year 2004-05, engineering industry has emerged as the single largest item of total Indian exports pushing aside gems jewellery export which had been dominating Indian export basket as the single largest item for some time now. Thus engineering industry is reckoned as an engine of economic development and one of the dynamic sectors of the Indian economy. DISTINCTIVE CONTRIBUTION TO THE EXPORT EFFORT Indian engineering exports have shown phenomenal growth over many years and are making a distinctive contribution to the overall export effort. The up trend in the export of engineering goods during half a century of our independent existence is a reflection of the progress achieved by the engineering industry over the years. Engineering industry is now exporting an increasingly wide variety of light, medium and heavy engineering goods. Engineering goods exports have grown by leaps and bounds from a mere Rs 5.16 crore in 1956-57 to an impressive and all time high of Rs. 73,800.39 crore in 2004-05. Thus they have grown over many hundred folds in Rupee terms. They have been among the most dynamic elements of Indias exports, and have accounted for the largest increment (in constant prices) of Indias exports during 1960-61 2004-05. Besides, there has been a marked shift in the commodity composition as well as direction of engineering exports over the years. Developed market of the west now accounts for about 40 per cent of the total engineering exports in 2004-05 as against the 9 per cent in 1960-61. The progress of export of engineering goods vis-a-vis total exports from the country for select years can be better judged from Table 1 Table 1 ENGINEERING EXPORTS VIS--VIS TOTAL EXPORTS (in Crores) Rs. Crore Year Total Exports Engg Exports % share of Engg Exports to Total Exports 1956-57 977 5.16 0.5 1960-61 1,011.65 10.31 1.0 1970-71 1,535.16 115.76 7.5 1980-81 6,710.70 874.17 13.0 1990-91 32,552.00 4,245.00 13.0 1996-97 118,817.32 17,481.75 14.7 1997-98 130,100.65 19,580.14 15.04 1998-99 141,603.53 18,444.47 13.10 1999-00 159,288.92 22,154.23 13.91 2000-01 201,684.93 30,887.95 15.31 2001-02 209,729.06 33,193.99 15.83 2002-03 255,799.55 43,625.94 17.05 2003-04 294,143.23 56,802.83 19.31 2004-05 356,795.46 73,800.39 20.68 2007-08 133926.23 2008-09 173801.7 Increase in 2008-09 by 29.77% (Source: Ministry of commerce and industry) DGCIS, KOLKATTA. The figures in Table 1 indicate that engineering goods exports have shown commendable performance on the export front over the years and it is steadily increasing over time. The percentage share of engineering exports in total exports increased from a mere 0.5 per cent in 1956-57 to a respectable 15.3 per cent in 1992-93 and again to 20.68 per cent in 2004-05, emerging as an important and single largest item of export basket in India. All these are a reflection of increased acceptability of Indian engineering products in developed countries market, aggressive marketing strategy, entry into new markets and promotional role of engineering export promotion council and more liberal policies of the Government especially after 1991. Average Annual Growth Rate Engineering exports have been registering a much higher annual average growth rate than total exports during the decades of 1960s, 70s and 90s. The average annual growth rate of engineering as well as all Indias exports is depicted in Table 2. TABLE 2 AVERAGE ANNUAL GROWTH RATE Period Total Exports Engg. Exports 1956-57 to 1960-61 1.15 19.3 1961-62 to 1970-71 4.64 29.71 1971-72 to 1980-81 16.36 23.99 1981-82 to 1990-91 17.10 16.8 1991-92 to 2000-01 20.083 29.35 2001-02 to 2004.05 17.00 25.59 From Table 2 it is clear that engineering exports had registered an impressive growth rate of 29.71 per cent during 1961-61 to 1971 to 72 which marginally declined during 1971-72 to 1981 to 82. However, engineering exports sharply declined to 16.8 per cent during 1981-82 to 1990-91. This slowdown in engineering exports is accounted for by stagnation of engineering exports during the early 1980s, especially the negative growth rate of -4.78% in the year 1985-86, which was an offshoot of industrial recession on developed countries and near completion of construction activities in Middle East. However, the position improved since 1985-86. Then onwards, engineering exports have grown at a faster rate. Economic liberalization of 1991 was a major boost to the engineering exports. It has opened new vistas, opportunities as well as challenges. A few factors that gave fillip to the development of Indian engineering exports under new regime are: adoption of export policy resolution, conferring priority to exports, recognition and concession to export houses and EPZ, liberalization of imports, relaxation of investment and licensing policies, priority to software and hardware technology parks and so on. It is to be remembered that although there has been a quantum jump in the all India exports after liberalization of 1991, there has been a large slowdown in all India exports since 1995-96. After reaching peak annual growth of 20 per cent in 1995-96, it had slipped to low growth rate in 1997-98 and 1998-99. This slowdown in total exports has in fact affected engineering exports also evident from the figures for 1996-97 and 1998-99. This slow down can be explained by slow growth rate of world export demand, South East Asian financial crisis and consequent overvaluation of Indian Rupee, reducing exports to these countries which account for nearly 15 per cent of the total Indian engineering exports and also reducing the competitive edge of Indian engineering exports in the world market, since some of these countries are major competitors of Indian engineering exports. However, total exports exhibited a sharp turn around since 1999-2000. Bulk of the rise was contributed by a volume increase in exports. This acceleration in exports reflected buoyant global demand coupled with improvement in world commodity prices in 2000 and the revival of world trade following the Asian crisis. Besides various export facilitating measures announced by the Government, significant gains in selected sectors like textiles, engineering goods, electronics goods, chemicals, leather leather manufactures, ores minerals and petroleum products also contributed to this strengthening of exports. The exchange rate of Rupee remained relatively stable in real effective terms during 2000-01 suggesting a broad retention of the competitiveness of Indias exports in global market. ITEMWISE DISTRUBITON OF COMPOSITION Engineering exports now consist of a wide variety of items such as iron steel, machine tools, machinery instruments, manufacture of metals, project goods, Ferro alloys, aluminium products, transport equipment, residual engineering items, management technical services. During the initial period, Indias engineering exports consisted mainly of steel, pig iron based items, consumer products like casting, buckets, drum, tubes, trunks, hand tools, builders hardware, lock, pad lock, steel furniture, aluminium, brass copper utensils, electric fans and batteries. However, over the years there has been substantial diversification in the export of engineering products, especially after the mid seventies. A close look at the change in composition of engineering exports during 1960-61 to 1996-97 highlights the forward march of engineering industry exports. Table 3.a and Graph 1 depict the changing composition of Indian engineering exports during 1960-61 to 1996-97. TABLE 3.a CHANGE IN COMPOSITION OF ENGINEERING EXPORTS (1960-61 TO 1996-97) (US$ Million) Items Year (1960-61) % Share Year (2007-08) % Share Capital Goods 2.70 12.46 1,370.83 32.69 Primary Metals 6.69 30.85 1,406.56 33.54 Non-ferrous Metals 2.89 13.33 309.53 7.38 Consumer Durables 9.40 43.35 928.03 22.13 Management Consultancy Services 0 0 177.54 4.23 Total 21.68 100 4,192.49 100 GRAPH 1 Table 3.b exhibits the percentage of share of major engineering goods, as per the latest data available for 2004-05 TABLE 3.b SHARE OF ENGINEERING GOODS Sr. No. Engineering Goods % Share 01 Machinery and Instrument 21.30 02 Manufacture of Metals 20.00 03 Transport Equipments 17.2 04 Iron Steel bar and primary and semi finished iron steel 22.14 05 Electronics 10.7 06 Non-ferrous metals 4.6 07 Aluminium products 1.10 08 Ferro Alloys 1.11 09 Project Goods 0.29 10 Machine tools 0.98 11 Residual engineering goods 0.42 From table 3 it is understood that there has been marked shift and significant changes in the composition of the engineering exports in last four decades. The most significant change has been in the export of capital goods whose share in total engineering exports increased from 12.46 per cent in 1960-61 to 32.69 per cent in 1996-97, which is a symptom of the marked progress by engineering industry. Thus, capital goods sector presently occupies a pride position. The primary steel which accounted for 30.85 per cent in 1960-61 has marginally increased to 33.54 per cent in 1996-97. On the other hand, the share of non ferrous metals has come down from 13.33 per cent to 7.38 per cent. More significantly, the share of consumer durables has declined from 43.35 per cent in 1960-61 to 22.13 per cent in 1996-97. Lastly, the management and consultancy services that account for zero percentage in 1960-61 has started making its presence felt by contributing around 4.23 per cent in the year 1996-97 . All these show the increasing significance of capital goods exports as well as management and consultancy services, while the significance of non ferrous metals and consumer durables have been reduced. DESTINATION OF INDIAN ENGINEERING EXPORTS Indian engineering products are exported to a large number of developed and developing countries of the world. A close look at the destination of Indian engineering exports shows that there has been substantial diversification in the destination of exports. Up to 1980s, the major destinations of Indias emerging exports were Asia and Africa. However, in the early eighties, the trend has changed substantially with share of Europe, Australia and North America increasing substantially. During the eighties, East European countries emerged as a big market for Indian engineering products, whose share has declined after the disintegration of erstwhile Soviet Union. Fortunately, this shortfall has been compensated by larger exports to developed countries. Region wise / Country wise export of Indian engineering goods between 1956-57 and 2004-2005 is shown in Table 4 and Graph 2. TABLE 4 DESTINATION OF ENGINEERING EXPORTS : REGIONWISE (1956-57 TO 2004-2005) (Rupees Crore) Region 1956-57 1990-91 1998-99 2004-05 Asia 3.76 (73.9) 975 (27.9) 5681 (30.8) 22041.68 (29.87) Africa 1.2 (23.3) 351 (10.0) 1410 (7.64) 3195.21 (4.33) Europe Zero 1410 (40.3) 4017.07 (21.7) 16680.99 (22.60) N. America Zero 40.00 308.34 (1.67) 834.82 (1.13) Total (incl. Others) 5.16 (100) 3500 (100) 18444.14 (100) 73800.39 (100) Note:- Figures in the brackets show percentage shares Table 4 reveals that there is a steady decline of Indian engineering exports to Asia and Africa from 96.2 per cent in 1956-57 to 34.20 per cent in 2004-05. At the same time, engineering exports to Europe and North America which were less than once per cent in the mid fifties now account for 39 per cent. This is a pointer to the diversification of market for Indian engineering products and growing acceptability of our products in he developed world. The important countries that account for the major chunk of our engineering exports in 2004-05 are: USA (16.4%), UAE (6.60%), UK (5.23%), China (4.80%), Singapore (4.52%), Germany (4.2%), Italy (3.76%), Sri Lanka (2.67%) and Belgium (2.65%). These countries account form more than 50 per cent of Indian engineering exports. Estimate of Indias Exports of Thrust Products in Thrust Markets (Unit: US$ Mn.) Thrust Markets 2004-05 2009-10 Country Imports India Exports Indias Est. Share % India Exports Indias Est. Share % Key Thrust Markets North America USA 313.703 990 0.32% 2.359 0.36% Canada 54.333 25 0.05% 56 0.07% Mexico 12.955 30 0.23% 65 0.36% Europe Germany 116.342 261 0.22% 619 0.27% France 69.292 71 0.10% 172 0.14% UK 84.428 418 0.5% 934 0.61% Italy 48.551 134 0.28% 277 0.32% Asia China 49.345 446 0.90% 1.836 0.80% Japan 24.49 93 0.38% 261 0.58% Thailand 10.173 133 1.30% 278 1.45% UAE 9.313 321 3.45% 1.155 4.43% Singapore 5.016 114 2.27% 322 2.71% Sub-total: Key Thrust Markets 797.941 3.037 8.330 Other Thrust Markets 95.477 326 0.34% 880 0.46% Grand Total: Thrust Product Exports to Thrust Markets 893.418 3.362 0.38% 9.210 0.49% Indias Exports of Thrust Products in other non-thrust markets 1.460 3.809 Indias Exports of Thrust Products to the World (Thrust + non-thrust markets) 4.822 13.019 Est. Total Exports of Engg. Products from India 13.296 27.415 Share of Thrust Product Exports to Thrust Markets in Indias Engg. Exports 25.29% 33.59% ENGINEERING SERVICES THE EYE OF OPPORTUNITY Indian IT industry was evolving -from a low-cost, back office, destination into a preferred supplier of high-end engineering services. And firing the imagination of the Indian IT industry is the huge market opportunity that makes a compelling business case for companies to seriously evaluate the engineering services domain. With the market potential for outsourced engineering services estimated at between $ 7 and 12 billion, Indian vendors have barely scratched the surface. The value of work currently undertaken by these players is estimated to be a mere $ 400-500 million, according to Nasscom. Demystifying engineering services In simple terms, engineering services augment or manage processes associated with the creation of a product or service, as well as those associated with a product or asset. This not only includes design elements of the product or services itself, but also infrastructure, equipment and processes engaged in manufacturing or delivering them. Engineering services outsourcing is the practice of sourcing some or all of a engineering services find applications in verticals such as automative, aerospace, minerals and metals, FB, plastics and paper. Newer verticals are likely to emerge strongly in near future. These include utilities, chemicals, pharmaceuticals and medical equipment. Showing the way Four categories of stakeholders are seeking to exploit the opportunities thrown up by the engineering services market. Engineering services is not just design. Engineering services offers end-to-end services, including conversion, drafting, modelling for product definition, modelling for analysis, product design, analysis, prototyping, testing and validation, tooling and even limited manufacturing of prototypes. PLM refers to the entire product life cycle management after production to see if there are bugs or errors. The errors are then removed. Industry estimates peg the market potential for process engineering, asset management and industrial embedded systems at over $5 billion, taking the total outsourced / offshore market potential to a whopping $ 12 billion. Automative design accounts for a bulk 65-70 per cent of the market, followed by aerospace at 15 16 per cent, and electric/electronic machinery design at 10-12 per cent. Other key vertical segments considered good targets for outsourced engineering services include utilities and pharmaceutical companies. The biggest opportunity within engineering services is the automative segment where the potential offshore outsourceable components close to $ 4. 8 billion. This is followed by aerospace segment with a market potential of $1 billion, construction and heavy machinery space where the potential stands at $ 800 million. The opportunity in the medical segment is about $ 300 million. India leads the outsourcing market when it comes to auto-sourcing with 24 per cent of auto manufacturing giving it the thumbs up for outsourcing. Bigger automotive markets such as China and Mexico lag behind at 15 per cent and 13 per cent respectively, while other locations such as Brazil, Thailand and Philippines corner less than 10 per cent, of the actual outsourcing markets. Opportunities and challenges India is a significant player in the overall offshorable outsourcing market for engineering services in the Asia-Pacific region today, China and Taiwan could emerge as formidable rivals in coming years. Indias advantage lies in its reputation and ability to deliver technology services to global customers at great value and high speed. India also has a tremendous pool of engineering and scientific talent, which can be tapped for the sector. Access to cutting -edge technology through global alliances with product companies, availability of prototyping and testing facilities, and sourcing domain skills through collaboration with the domestic industry are some of the advantages Indian vendors will have. Engineering services involves significant investments in software and design tools, making more investment intensive than vanilla IT services Some areas of application Product Engineering The services offered extend from the early stages of idea generation, through engineering analysis and design, virtual simulation, documentation and conversion, prototyping and production, testing, knowledge based engineering and PLM solutions. Process Engineering Process engineering entails the use of computational tools and techniques at the plant design stage to optimise expenditures Capital or Operational and achieve efficient production of products and services. Plant automation Plant automation broadly comprises engineering design and development of automation systems that facilitate the management and execution of day-to-day production activities and their associated information to be shared across the organisation in real-time for analysis and decision purposes. Specific services offered include Control System Integration; Process and Production Optimisation; Manufacturing Execution Systems. Enterprise Asset Management (EAM) Traditionally asset management services have been restricted to managing the life-cycle cost of assets. However, technology now enables integration of maintenance activities and functions with plant control systems, MES, CAD/CAM, ERP and SCM. Today, EAM services comprise product implementation, monitoring and maintenance, process assessment and re-engineering, interface development and system integration. EAM helps companies manage physical assets production plants, capital equipment, vehicle fleets, and facilities complexes over the complete asset life cycle. In conjunction with powerful reporting and analysis, EAM capabilities enable you to reduce operating costs, better manage capital expenditure, and improve asset utilisation. PROBLEMS OF ENGINERING EXPORTS So far as the paper has dealt with a general scenario of the engineering goods exports that does not mean that engineering goods exports are free of problems. Like any other item of export, engineering goods are also facing a number of problems, prominent among them are discussed below. Stiff Competition Indian engineering exports have been facing stiff competition from other countries. China, Mexico, Hungary, Czechoslovakia and Korea which have emerged as the fastest growing engineering export countries provide formidable challenges and fierce competition to Indian engineering exports. And recently, the South East Asian financial crisis which was under way since mid 1997 had put our exports at receiving end due to overvaluation of Indian Rupees, curtailment of Indian import by these countries (this is because 15% of total engineering exports is accounted for by these countries). Therefore, it has reduced the competitive edge of Indian exports in the world market. However, recently there has been tremendous improvement in export performance. This may be attributed to the revival of South East Asian economies, increase in the world export demand, etc. Technological problems Technological competitiveness of Indian engineering goods sector is low. Some of the Indian exporters are still at disadvantage in International market vis-a-vis their counterparts in terms of product design, finish, specific features, performance and raw materials substitutes. India can be product of having the second larges scientific and technical manpower in the world. But his advantage due to high availability of quality engineers and scientists is lost partly due to brain drain and partly due to stagnation of skill sets of scientists and engineers within India. Although Indian firms are capable of achieving high levels of precision, they are unable to provide high quality products due to lack of supporting process, technologies such as precision measuring, material engineering and process control. High cost of Industrial Inputs The engineering industry mainly uses raw materials of domestic origin. The raw materials price index has risen faster than the machinery price index. It is difficult of engineering manufacturers to pass on the rise in prices to the consumers thereby impacting their profitability. Similarly the quality of raw materials is also not up to the international standards and it in turn affects the quality of final products. Barriers Another major problem is protectionism by developed countries. Developed countries have always tried to block the products from developing countries through barriers both tariff and non tariff. Recent hike in the tariff of Indian steel by the US is a case in point. This will definitely affect the steel exports from India. Infrastructural Bottlenecks A recent study by CII and World Bank has found that although India has the advantage of cheap labour, this advantage is nullified by infrastructural bottlenecks. Infrastructural bottlenecks are the major problem hindering both domestic and exports production. The quality of infrastructure (transport, communication, and power) is poor, thus affecting competitive delivery schedule and increasing operating costs. The delivery time of locally made engineering goods in many cases is 1.5 to 2 times longer than in industrialized countries. Companies tend to lose orders on delivery schedule. The inland transport is slow although the rail road density is the highest in the world. The cost of electric power is comparable to that in other nations, but reliability is poor. Overall infrastructure inadequacies are estimated to translate into 5 per cent cost disadvantage of Indian engineering manufacturers vis--vis foreign manufacturers. High Transaction Cost The export transaction costs for Indian engineering goods industry are among the highest in the world. Heavy transactions costs not only increase the prices of the final export products, but also result in inordinate delay in export fulfilment, thus affecting export competitiveness. According to available studies, total cost of transaction of engineering goods in India works out to be around 10 per cent of total export earnings. STRATEGY FOR EXPORT PROMOTION In the light of the discussion of numerous problems faced by engineering exports, it is necessary to evolve a scientific strategy, which should aim not only at consolidating the gains achieved so far but also in promoting higher exports of engineering products. Formulation of such strategy will enable engineering industry to sustain the extreme competition in international market. Various measures envisaged under this strategy are listed below: Engineering EPZs and SEZs There is strong need for establishing separate engineering exports processing zones and export oriented units. A few engineering items with highest potential have to be selected for development in these special processing zones. The locations of the export processing zones are to be identified where there is a large concentration of these items. We have already established general export processing zones as well as agricultural export processing zones. Establishment of separate zones for engineering products will enable them to overcome the problems of infrastructure and raw material shortage. In addition it can attract more foreign direct investment into the production and export of engineering products. Technological Up gradation Up gradation of technology and modernization of plant and equipment are prime requirement for export oriented units. New industrial policy (1991) and various announcements there after as well as export import policy provide a number of incentives such as automatic permission for foreign technology agreements in high priority industries, no permission needed for hiring of foreign technicians, foreign testing of indigenously developed technologies, liberal import of capital goods, raw materials and components, liberal import of second hand capital goods with a minimum life of 5 years without license etc. Further, a number of other steps like offering these units a deferred payment facility for purchase of capital goods and machinery (as this would reduce much of the burden of modernization), partnership with technical institutions like IITs for product adaptation and technological up gradation, accreditation of testing laboratories in India by overseas agencies to enable them to offer test inspection certificate / marking of products etc. can be thought of. Selectivity approach While most of our competitors export a few selected products, we have concentrated on too much products. For instance, China, Mexico, Korea, Hungary, Czechoslovakia which have emerged as fastest growing engineering export countries, it is observed that 85 per cent of engineering export were contributed by fewer product categories as compared to that of India. In 2002, the number of categories contributing to 85 per cent of engineering export for these countries was Mexico 10, Hungary 13, Korea 18 and China 20 while that of India was 26. Facing numerous problems due to lack of raw material and infrastructural deficiencies, most of engineering units can hardly match overseas requirement in terms of technology, quality and cost. In the light of the above, we must concentrate on selected or thrust products and give them a full policy package and incentives and other contemporary inputs required for exports production. The Engineering Export Promotion Council Strategy Paper for growth to engineering exports from 2005-06 to 2009-2010 prepared by A. F. Ferguson Co. had identified 19 engineering products as thrust products for export development. These include : commercial vehicles (luxury buses and high horse power trucks), electric power equipment and parts (transformers and static converters), automobile parts (part of motor vehicles), instruments (medical. surgical instruments, optometry instrument and X-ray equipment), prime iron and steel (flat rolled products of stainless steel), other industrial machinery (printing and processing machines, transmission shafts, electric furnaces), IC engines and parts (compression ignition and electrical ignition type IC engines), electric manufactures (electric filament or discharged lamps), aluminium products (alloyed and unalloyed aluminium ingots, aluminium plates and sheets and strips including electrolytic grade aluminium ingots, aluminium foils, etc), other non-ferrous metal and products (primary copper, FRC cooper, oxyg en free copper, high dimension CC rods [16 mm and above ]), other chemical plant (centrifuge including centrifugal dyers, machinery for working rubber or plastics), electric wires and cables (insulated wires, electric conductors and optical fibre cables, wires and cables of oxygen free copper), heating and cooling equipment (refrigeration and air conditioning including commercial and industrial), tractors and agricultural equipment (tractors, trailers and agricultural machinery), cranes, lifts and winches (parts suitable for pulley tackle, hoists and construction, excavating machinery), industrial casting (moulding boxes for metal foundry, transmission shafts), steel pipes and tubes (seamless pipes and tubes of iron and steel), cutting tools and tubes (seamless pipes and tubes of iron and steel), cutting tools (hand saws and blades for saws of all types, grinding stones and grinding wheels), bicycles and parts (high end bicycle and high end bicycle parts). Market Diversification Till early 1980s, the main destination of engineering exports (about 70%) was Asia and Africa and since then Europe and America emerged as a major destination. And there are a number of markets with high potential for engineering goods exports. EEPC strategy paper has identified 28 thrust markets for those selected thrust products. These are : China, Hong Kong, Indonesia, Iran, Japan, Malaysia, Oman, Philippines, Russia, Saudi Arabia, Singapore, South Korea, Turkey, UAE (Asia), Austria, Belgium Czechoslovakia, France, Germany, Italy, Netherlands, Norway, Poland, Sweden, Switzerland, UK (Europe), Australia, South Africa (Africa), Canada, Mexico, USA (North America), Argentina, Brazil, Chile (Latin America). We must rigorously follow these markets so that a recession in one market would not affect overall export. This may not be an easy task, more so in sophisticated areas like engineering goods. In addition to the visits of delegations abroad for market studies, manufactures of engine ering items should actively participate in international fairs aboard, introduce our manufactured and semi manufactured products to the customers, distributors, dealers, and importers of Indian engineering goods may be invited to visit our engineering factories at as frequent interval as possible. These visits can be arranged by the Engineering Promotion Council and various sub associations of engineering goods / products like Machine Tools Manufacturers Association etc. The Government should render helping hand by extending financial assistance for such visits. Sales Promotion Effort, Prompt Delivery and After Sales Services For furthering the export of engineering products, India must evolve an aggressive sales promotion effort. It can be done through advertisement, trade fairs, specialized trade fairs, brand promotion (Made in India brand), distribution of technical catalogues (giving comprehensive information about our products). Further, commercial intelligence should be made available to Indian exporter as frequently as possible so that they keep updated of the current trends and requirements. The activities of various agencies that provide market intelligence such as EEPC, CII, ITPO, etc. should be coordinated and centralized so that better results are possible. Along with the sales promotion effort, strict adherence to delivery schedules is crucial for the success of Indian engineering exports. As foreign buyers have option to procure their requirement from anywhere in the world, we must ensure that we are accurate more than 100 per cent in timely delivery of our products. The arguments of failure of delivery due to the disrupted sailing, power cuts, strikes or lockouts do not count or provide any leverage to the affected party in a competitive world. Warehousing and total logistic support in overseas market to be provided for timely delivery of our products. Further, after sales services and customer care effort is highly indispensable for the smooth growth of engineering exports. This has been one of the neglected areas in India due to our protected market. Of course, now the environment has changed under the forces of globalization and liberalization and foreign companies are rigorously following after sales services and provide customer care support. Therefore, Indian engineering exporters have also to rigorously follow the after sales services and customer care support. This can be accomplished by customer care centre and providing incentives to overseas collaborations. Support to Small Scale Units Small scale engineering exports still constitute around 40 per cent of total engineering exports. For the continued contribution of these units to the exports sector, they must be provided with the production and exports incentives, support for adoption of latest technology, advisory services, and market support to sustain the competition in the international market. Increasing the investment ceiling and dereservation of major small scale units can go a long way in overcoming the hurdles in the way of modernization and faster growth of these units and hence higher contribution to total engineering exports. Further, adequate finance must be made available to these units. Due to the high risk involved in lending to these units, banks were reluctant to lend to them. Involvement of Large Scale Units Just to reap the economies of scale in production, we must look beyond the domestic market. Although exports can be increased by providing incentives to small scale industrial units (SSI) units, there is limit to growth. There is a need for involving large units in exports activities. The exports intensity figure is still very low in India especially for large units. Hence, it is necessary to gradually increase the exports intensity ratio of Indian products by involving more and more large scale units and exporting more from the existing units. Free Trade Area / Preferential Trade Agreement (FTA / PTA) We must explore the possibility of setting up Free Trade Area / Preferential Trade Agreement with other countries where our exports have largest concentrations. For instance, FTA / PTA with Brazil and Mexico as Latin America represent a fairly large latent market for Indian auto components which will provide a fillip to our engineering exports. Out effort to establish free trade area with ASEAN countries will be a big boost to engineering exports. We have to identify some potential engineering products in these markets and vigorously export them. Joint Venture and Foreign Direct Investment Another area which needs special emphasis is establishment of joint ventures and foreign collaborations in engineering production. It is also imperative to attract more foreign direct investment into the engineering sector. This will enable attraction of more sophisticated technology (which is of utmost importance of high technology products like engineering products), better management technique, modern marketing strategy and exploration of more foreign markets. Penetration of engineering products in developed countries would require good dealer networks, availability of range of products, after sales services etc. This is possible only if MNCs and joint venture units have presence in India on their own or in collaboration with Indian companies. FDI is therefore essential to promote export of engineering products. Indias engineering export basket If we compare China, Mexico, Korea, Hungary, Czechoslovakia which have emerged as fastest growing engineering export countries, it is observed that 85% engineering exports were contributed by fewer product categories as compared to that of India in 2002. The number of categories contributing to 85% of the engineering exports for theses countries was:- Mexico (10 categories, relatively medium technology/ value addition) Hungary (13 categories, relatively medium technology/ value addition) Korea (18 categories, relatively low to medium technology/ value addition) China (20 categories, relatively low technology/ value addition) While in case of Indias engineering exports, top-26 categories accounted for about 85% of Indias exports in year 2002. This is primarily attributed to low value and some medium value and fragmented engineering export product base for our country. Value added products Engineering exports from India currently suffer from low value addition. Typically, exports of engineering products fall in low-value addition category. As seen from the above, currently most of the engineering products exported from India fall in low and low to medium value addition, which leads to thin margins in export markets. As a fall out of this, it can be seen that most of the product categories have reported exports less than US $ 500 Mn. in 2003-04. Of all engineering export categories, Only 2 product categories have exports exceeding US $ 500 Mn. and they are; Prime Iron and Steel (incl. Pig Iron), and Commercial Vehicles The key focus of Indias engineering exports should be to increase exports of higher value-added products instead of intermediate goods/ low-value items. For example, most of the aluminium exports from India are of Ingots and to some extent rolled products. However, exports of value added products like Aluminum Foils, Aluminium rolled sheets of low thickness, and Aluminium Alloy Wheels are insignificant. Degree of value addition is medium to high in certain Capital Goods categories like Commercial Vehicles (especially, in Passenger Cars), Tractor and Agriculture Equipment, Two/ Three Wheelers, Auto Parts, Engines, Compressors and Pumps. In most other categories value addition is low. Focusing on value added products would increase realization of exporters in export markets. Indias objective should be to move towards higher value-added products with focus on increasing total value of exports of the product category in next 5 years viz. 2005-06 to 2009-10. Share of thrust products in Indias engineering products exports In year 2004-05, Indias engineering exports were about US $ 13.29 billion. Of this, share of thrust products (mostly existing thrust products) was about 36% (about 35% in 2003) while other products (i.e. non-thrust products and management/ technical services) accounted for the rest, viz. about 64% of Indias total engineering It is estimated that non-thrust products would account for about 64% of the engineering exports in 2004-05. More than 40 categories would contribute to these exports, which clearly indicates that exports in this segment are fragmented and average value of exports per product category is relatively small in comparison to thrust product categories which are relatively finite in nature (i.e. 19 product categories) that would account for about Hence, in future to achieve significant position in engineering export domain and enhance Indias export performance in this sector, it is important to focus on exports and put significant effort on Thrust Products (about 19 product categories), which are finite in numbers. This would also help in channeling efforts of all stakeholders on various aspects like technology and quality improvement, enhancing scales of operations, creating adequate supply capacity, attracting private investment (including FDI), cluster development, etc. and would enable harnessing true potential of engineering sector in export markets. Thrust markets vis--vis current markets of India Having analyzed the need for increased focus on the Thrust Products vis--vis the current export products basket of India from the point of view of the growth in exports it is equally important to see whether there is inadequate focus on the identified focus markets vis--vis the current export markets of India. Indias share of thrust products imports by thrust markets (which, accounted for about 59% of the world engineering product imports in 2003) was low (typically, less than 1% in most of the thrust markets). Collectively Indias share in world imports of thrust products in existing major thrust markets was under 0.31% in the same year. On the other hand, the markets like Philippines, Chile, Saudi Arabia, etc. wherein India has high share of imports of thrust products, these markets have limited import potential and represented an insignificant percent of world imports of thrust products in 2003. Hence in order to achieve the growth at the target rate of doubling Indias engineering products exports (which amount to a growth rate of about 15% p.a.), there is a need to focus on identified thrust markets and increase in these thrust markets over the next 5 years. Snapshot of Indias share of exports to identified thrust and current markets Top Descriptions for Indias exports of Thrust Products Worlds top importing countries of Thrust Products Countries where India has highest share of Thrust Products Imports Thrust Countries Share of Indias exports of Thrust Products Share in World Imports (%) Thrust Countries Share in World Imports (%) Indias Share (%) in imports of that country Thrust Countries Country share in world imports of thrust products (%) Share of Indias exports in the Countrys Imports of Thrust Products USA 29.19% 20.58 USA 20.59 0.26 Philipinpines 0.00 6.03 China 13.16% 2.65 Germany 7.7 0.18 Chile 0.01 4.2 UK 12.20% 5.65 UK 5.65 0.39 UAE 0.55 3.23 UAE 9.92% 0.55 France 4.62 0.08 Saudi Arabia 0.04 2.25 Germany 7.68% 7.70 Canada 3.83 0.04 Singapore 0.33 2.03 Thailand 4.14% 0.66 Italy 3.26 0.22 Malayasia 0.19 1.46 Italy 3.96% 3.26 China 2.65 0.9 Thailand 0.66 1.13 Singapore 3.67% 0.33 Belgium 1.81 0.15 China 2.65 0.9 Japan 2.76% 1.69 Japan 1.69 0.3 Australia 0.07 0.69 Netherlands 2.24% 1.05 Spain 1.38 0.08 North Korea 0.00 0.67 France 2.09% 4.62 Netherlands 1.06 0.38 Turkey 0.07 0.66 Malayasia 1.57% 0.19 Mexico 0.92 0.17 Hong Kong 0.26 0.50 Belgium 1.54% 1.81 Thailand 0.66 1.13 Iran 0.04 0.48 Hungary 0.86% 0.49 UAE 0.65 3.23 Indonesia 0.15 0.39 Mexico 0.85% 0.92 Hungary 0.49 0.32 UK 5.65 0.39 Canada 0.77% 3.83 Singapore 0.33 2.03 Netherlands 1.05 0.38 Other Thrust Markets 0.00% 0.00 Other Thrust Markets 0 0.5 Other Thrust Markets 0 0.19 Total Thrust Markets 100.00% 55.98 Total Thrust Markets 57.29 0.31 Total Thrust Markets 11.72 0.31 Thrust products and thrust markets matrix The analysis of thrust products and their corresponding thrust markets in the above sections has indicated that Indias engineering exports could grow at a higher rate, by focusing on the correct mix of products and markets. Thus, going ahead, the strategy should be built on the appropriate combination of products and markets. A thrust product and thrust market matrix, for the existing and new products and existing and new markets for the years 2004-05 and 2009-10. Penetration of Indias Thrust Product Exports in Thrust Markets 2004-05 to 2009-10 Thrust Products (All figures in US $000) Existing Thrust Markets % to Indias tot. TP Exp. New Thrust Markets % to Indias totl. TP Exp. Total % to Indias totl. TP Exp. Existing Thrust Markets % to Indias tot. TP Exp. New Thrust Markets % to Indias tot. TP Exp. Total % to Indias tot. TP Exp. Existing 3051820 49.4 232156 3.8 3283976 53.2 8061882 61.9 637822 4.9 8699705 66.8 New 61594 1 16635 0.3 78229 1.3 471174 3.6 39142 0.3 510315 3.9 Total 3113414 50.4 248791 4.1 3362205 54.5 8533056 65.5 676964 5.2 9210020 70.7 Analysis of the above matrix shows that the share of the new products (although small) has started to increase in both the existing and new markets from 2004-05 to 2009-10. But larger volume of exports is seen coming from the existing Thrust Products exports to both the existing markets and new markets. Hence, it would be important to concentrate on Existing Thrust Products in existing and new Thrust Markets in the short term to long term while building competency in new Thrust Products and exporting to existing and new Thrust Markets in the medium term and long term. In existing thrust markets, the growth and increase in market share would come from the share of existing competitors. This is because, the existing thrust markets are developed and would experience lower growth compared to developing economies. There is potential for rapid growth in potential/ new thrust markets, where India has low market share currently. Hence complemented marketing efforts are needed in existing and especially the new markets. Growth rate (CAGR) in Existing and New Thrust Product Exports (2005-10) Thrust Products CAGR% from 2004-05 to 2009-10 based on the largest growth rate of 15% p.a. Existing Thrust Markets New Thrust Markets Total Existing 21.40% 22.40% 22% New 50.20% 18.70% 46% Total 22.30% 22.20% 22% The estimated growth in Existing and New Products growth rate in order to achieve the target growth rate of 15% p.a. in overall Engineering Products Exports from India. As can be seen from the exhibit the thrust products would be required to contribute a higher growth rate of about 20% p.a. over the Strategy term period from 2004- 05 upto 2009-10 so that 15% p.a. overall target growth in exports can be achieved. The growth rate of new Thrust Products is expected to be much higher at 46% p.a. International marketing strategy changing share of Indias thrust products exports in future The share of Thrust Products in Indias Engineering Products exports was at US$ 4.82 billion (36%) in 2004-05. With the targeted growth of 15% p.a. in Indias overall engineering products exports; the share of thrust products is estimated to increase to US$ 13.02 billion (47%) by 2009-10. Exhibit 2.12 shows the changing share of Thrust Products exports in future. Considering the optimistic potential for exports this share is expected to increase to 52% by year 2009-10. Estimated Changing share of Thrust Products Exports as per Target Growth Rate Products 2004-05 2005-06 2007-08 2009-10 Estimated Thrust Products Exports from India (US$ Bn.) 4.82 6.18 8.95 13.02 Estimated total Engineering Products Exports from India (US$ Bn.) 13.3 15.54 20.49 27.42 % Share of thrust products Exports 36% 40% 44% 47% CONCLUSIONS AND SUGGESTIONS Engineering industry thus is making substantial contribution to the national development by way of value addition, employment and export. Not only the share of engineering exports has jumped from 0.5 per cent in 1956 -57 to 20.68 per cent in 2004-05 but also there has been a marked shift in commodity composition and direction in the engineering exports. It is observed the engineering exports have recorded a much higher growth rate than total exports in almost all decades. Another noteworthy feature is that importance of capital goods and technical and services has gone up while that of non-ferrous metals and consumer durables has come down. Analysis of destinations of export shows that shares of Asia and Africa have dwindled while that of Europe and North America has increased over the last four decades. Important problems that the engineering exports are facing are: Competition, poor technology, infrastructural bottlenecks, high transaction costs, etc. A few suggestions that may be in order are : Providing more incentive for exports by way of tax exemptions through both tariff and non-tariff measures, diversification of products as well as markets, instilling more competition through liberal import of capital goods and raw materials, developing technological capabilities and adoption of more advanced technology, more active role by EEPC, greater attention to marketing brand building and customer services , improving the quality of the engineering products, timely delivery, setting up of more engineering joint ventures, reduction in transaction cost, strengthening and upgrading of the production potential and export orientation of engineering SSI sector by developing SSI export industry in a dereserved manner, more liberal and flexible labour laws, improved dissemination of information and extension of regional focus in boosting engineering exports to the desired extent. Last but not the least the spirit of understanding and cooper ation between captains of industry and government officials is the need of the hour in the changed business environment under globalisation and liberalization. To compete internationally, there should be strict check over quality and prices and careful monitoring of changing requirement, cost control through constant R D, prompt delivery of sche