Cancelled Hopes

As orders are scrapped, supply chain is disrupted and global demand slumps, Indian exporters struggle to remain in business

In his 42-year career, Gurugram-based Raj Kumar Malhotra, owner of a star export house specialising in handcrafts, has never seen a more severe business disruption. His company, Asian Handicrafts Pvt Ltd, which makes thousands of customised textile-based handicraft gift items - boxes, photo frames, ornaments, home accessories - targeting festival sales in US and European markets has seen its production and delivery plans go awry. "Fifty per cent orders have been cancelled outright. Another 25 per cent are on hold without confirmed delivery dates. A third set of 20 per cent say they will buy, but when and where, and at what price, they are not certain. The remaining (5 per cent) are yet to firm up their plans," says Malhotra. With 95 per cent of his products custom-made, Malhotra, who has since 1976 bagged a dozen national awards for record exports in his category, is taking the full brunt of the economic distress that is unfolding because of the coronavirus pandemic.

The proof of Malhotra's testimony is export figures for April and March, the two months when economic activity come to a screeching halt due to lockdowns globally, including in India. Handicraft exports plunged 91.84 per cent to $11.53 million in April from $141.3 million in the same month a year ago. In March, they were 27.9 per cent lower than the $171.13 million in March 2019.

The overall merchandise exports did not fare any better. In April, India recorded a 60.28 per cent decline in merchandise exports to $10.36 billion as compared to $26.07 billion in April 2019, the steepest fall in 25 years. India got into the lockdown mode in the fourth week of March. The month's exports were 34.57 per cent lower at $21.41 billion.

Only drugs and pharmaceuticals, and iron ore, registered growth in April. In March, only iron ore was in the positive territory. The most affected are labour-intensive sectors like leather, apparel, handicrafts, carpets.

"Overseas clients don't wait. When they know your factories are locked in April, they will cancel orders till June. We saw cancellation of 50 per cent orders," says Ravi Seghal, Chairman, Engineering Export Promotion Council of India (EEPC). Seghal, Joint Managing Director of Kolkata-based Carnation Industries - a foundry-based engineering goods manufacturing company, says even when customers return, they may renegotiate prices "if they have tapped other sources in the meantime and got better prices." He says opening of factories in May will not lead to increase in production as several other problems will still be there. "The government allowed partial opening of units from the first week of May but our units were in a containment area. We have just got the permission. Even after you open, you wont get more than 25-30 per cent labour right away. Many of them cannot travel until local trains resume operations," he says. "It will take until June to really open up."

The Noida Special Economic Zone (NSEZ), which exports Rs 9,000 crore worth of goods each year and employs over 50,000 people, is perhaps the biggest example of how lifting the lockdown is meaningless if there is a containment zone nearby. For several weeks, none of the 262 manufacturing units in the NSEZ, except 15 that produce essential items like medical goods, were allowed to function, despite the central government issuing clear instructions for permitting operations in access controlled zones such as SEZs with safety precautions and up to 50 per cent employee strength. The reason: there were Covid positive patients some 1.5 kms away. "The administration did not give permission to operate the units," says Vilas Gupta, Managing Director of Taurus Englobe, which functions from the NSEZ. Gupta is also the regional chairman of the Export Promotion Council of EoUs and SEZs. Technically, over 30 per cent of India's $2.7 trillion economy was allowed to function from April 21. But that did not help exporters.

With cancellation of orders, slump in global demand, Covid lockdown and supply chain disruptions all hitting at one go, it's a perfect storm for Indian apparel manufacturers. A. Shaktivel, founder of Poppys Knitwear, Tiruppur, and Chairman of the Apparel Export Promotion Council (APEC), says approximately $4 billion (Rs 30,000 crore) worth of orders are at stake in his sector. "We are not receiving payments for goods we have sent. There are a lot of cancellations. A lot of stocks are left. On top of it, we are not able to produce and export. It's a really bad situation," he says.

Apparel as well as handicraft sectors are facing cancellation of orders by big global brands. However, nobody is willing to accuse any particular buyer as the crisis is global. "We are in regular talks with the Ethical Trading Initiative (an international network of buyers and sellers) to help us out, our Textile Minister Smriti Irani has also appealed to buyers to not cancel orders but take delivery later. So, we are negotiating with buyers. But situation of buyers is also grim with all stores in Europe closed," says Shaktivel. According to him, demand is unlikely to come back soon, and the industry is planning to restart gradually.

In fact, there are different implications for orders of different periods. There may be some hope for July and August, or later, as factory operations are allowed in Lockdown 4.0. However, May and June orders are unlikely to be honoured. "Depending on the delivery period, there is some hope," says Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations (FIEO). According to him, order cancellations across merchandise export sectors range from 50-60 per cent, while for sectors such as apparel, leather (footwear), handicraft and carpets, it is over 80 per cent. "In just two months, roughly $25 billion worth of export orders have been cancelled," says Sahai. The mass cancellations due to slump in demand is not only impacting the viability of Indian exporters. It is casting doubts over the financial health of suppliers too. "Let us say an overseas buyer placed an order in January and asked for delivery in May. You have to see his current financial soundness before dispatching the order. Companies in the US and Europe are going bankrupt," says Sahai. "We are telling exporters to go ahead with their orders after taking insurance cover."

FIEO President Sharad Kumar Saraf says India can expect revival in exports from the third quarter of the fiscal depending on conditions in international markets. "With major global players, including the US, the UK, Canada, Japan, Germany, France, Austria, Spain, the Netherlands, Italy, Sweden and Bangladesh providing bailout or financial packages to their industry to sail through these difficult times, one can expect good news on the international trade front," says Saraf.

According to the apex exporters body, the government should provide specific incentives to help exporters tide over the crisis caused by the cancellation of 70-80 per cent orders to avoid big job losses and NPAs. "Exports may be provided additional incentives under the Merchandise Exports from India Scheme like 2 per cent across the board and 4 per cent for labour-intensive sectors. The rollover of forward cover without interest and penalty and automatic enhancement of limit by 25 per cent to address liquidity challenges should be allowed. There should also be an Export Development Fund and various reforms measures including ease of doing business for marketing of Brand India products across the globe and boost to foreign direct investment in the country," says Saraf.

What is certain is that post-Covid businesses can never operate in the same fashion again. As and when demand improves, customers will be back. At least that is the hope that is driving exporters. Malhotra of Asian Handicrafts has good words for the Export Promotion Council of Handicrafts (EPCH) for looking beyond Covid. "The council is planning a virtual trade fair in July. A total of 2,000 exporters from India may get to display their products online to buyers from key overseas markets. The EPCH has also prepared a Covid compliance manual for member companies to follow. We are gearing up for the change," says Malhotra about the future of cancellation-hit exporters.

@joecmathew