Export/Import Updates!
August 3, 2021

4 Problems Exporters in India Face, and Their Solutions

India hopes to triple its exports to $1 trillion by 2025. In an indication that the country is on the right path in pursuit of this dream, Indian exports for the April-June 2021 period rose to an all-time high of $95 billion, an 85 percent jump year-on-year. This is a special achievement, given that this period marked India’s battle against a deadly second wave of Covid-19.

While this is great news, it is still a struggle for exporters in India to send their goods overseas. Many of the difficulties they face have been around for years, decades even. Unless these are urgently addressed, India might never reach its full export potential.  

In this piece, we discuss the key challenges Indian exporters face and suggest solutions to these problems.  

Click here to read about India’s Foreign Trade Policy.  

Challenge 1: Inadequate infrastructure

Infrastructure remains India’s weakest link. In data firm Statista’s ranking of 100 countries based on the quality of their infrastructure in 2019, India’s score was 68.1. To put this in perspective, top-ranked Singapore scored 95.4 while bottom-ranked Bolivia was 10-odd points behind India, at 57.1. Infrastructure extends to multiple sectors such as power, communication, water, and waste. But for international trade, it is transport infrastructure that is the most important. India’s under-developed transport infrastructure poses many problems to exporters, chief of which are:

  • Congested ports – India’s major ports have a serious congestion problem. This might be due to high cargo volumes, but infrastructural deficiencies – such as container and equipment shortages, outdated navigational aids, lack of technical expertise, and poor port maintenance – are just as much to blame. Outside Nhava Sheva, India’s second busiest port, truck lines can extend for 10 km on any given day. A key indicator of a port’s efficiency is turnaround time, or the time it takes a ship to enter, unload, load, and exit the port. Turnaround time at India’s major ports averages 2.59 days against a global average of 0.97 days, according to the Economic Survey 2020-2021. With 95 percent of India's trade by volume transported by sea, clogged ports are a huge hurdle to trade flow.  
  • Congested roads – India’s roads also carry a major chunk of its freight traffic (67 percent in 2017, as per the latest available figure). India’s road traffic is among the worst in the world, thanks to a large population and poor road conditions. In 2020’s TomTom Traffic Index, which ranked 416 cities based on traffic congestion, four Indian cities made the top 20. Mumbai ranked second, Bengaluru sixth, Delhi eighth, and Pune 16th. Losses attributed to road congestion in India are significant. A 2018 report commissioned by cab hailing company Uber found the cost of traffic snarls in four Indian cities – Delhi, Mumbai, Bengaluru, and Kolkata – to be worth $22 billion a year in terms of fuel consumption, productivity loss, pollution, and accidents.    
India’s roads carry 67 percent of its freight. Construction of roads and highways has been impressive in recent years but traffic remains a problem spot.
India’s roads carry 67 percent of its freight. Construction of roads and highways has been impressive in recent years but traffic remains a problem spot.
Image by Bishnu Sarangi from Pixabay

 

  • Lack of connectivity – Exporters in land-locked states are hampered by a lack of connectivity to gateway ports. It takes 46 hours to move a shipment from a warehouse in Delhi to a port, three times longer than in other countries. Bihar, Jharkhand, Himachal Pradesh, Uttarakhand, Jammu and Kashmir, and the North Eastern states suffer from poor hinterland connectivity. The transport of agricultural produce – among India’s top exports – suffers from poorly built link roads connecting farms with main roads.
  • Outdated rail equipment – The Indian Railways is among the world’s five largest rail networks and is perfectly suited to carrying freight. Every day on average, 8,479 freight trains transport three million tonnes of freight. However, India’s rail network is hobbled by infrastructural problems such as outdated equipment, the absence of a modern automated signalling system, and a shortage of rakes (a rake is a collection of coaches). This has resulted in loading delays, poor service, and overall inefficiency.

Challenge 2: Low credit access

A long-standing complaint of exporters in India is the lack of access to trade finance and export credit. This is especially true for Micro, Small, and Medium Enterprises (MSMEs), even though they account for close to half of India’s total exports. The financial support Indian exporters receive is far less than in other countries. In 2018, export credit agencies doled out $7.6 billion in funds in India while the figure for China stood at $39.1 billion. According to the Trade Promotion Council of India, these are the factors standing in the way of exporters availing of trade finance:

  • High cost of finance – Banks and lenders pay a high price to comply with various financial security rules such as Know Your Customer (KYC), Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT). They often pass on the cost burden to their customers, making trade finance expensive for small exporters.
  • High collateral – To avail of trade finance, an exporter must provide a large collateral, which might be impossible for MSMEs. Additionally, banks are hesitant to lend to MSMEs, viewing them as a credit risk.        
  • Complex procedures – Exporters might also be discouraged to go in for trade finance because of complicated application procedures and heavy documentation requirements.
  • Lack of information – Often, exporters fail to apply for trade finance simply because they don’t know about the export credit schemes and products available to them or the institutions that provide them.    

To know more about post-shipment finance for exporters, click here

You might also be interested in our guide to export incentives  

Challenge 3: Document-heavy process

Exporting comes with the complexities of dealing with unfamiliar buyers in foreign lands, different trade laws and practices, and numerous documents. However, the process in India is said to be more time-consuming and cumbersome than in many other countries, partly due to a high documentation requirement. Indian exporters must prepare a large set of documents for each stage of the shipping process. These are the pre-booking, booking, post-booking, and discharge stages. They must remember that different types of cargo require different types of documents. Food and pharmaceutical items, for example, require the submission of health and safety certificates. It is also important to plan ahead because certification authorities at Indian ports are not available round the clock or on all days of the week.      

While the number of mandatory documents required for exports in India has been reduced to three – the Bill of Lading, Commercial Invoice cum Packing List, and Shipping Bill – the list of additional documents can be long. Furthermore, all paperwork must be filled accurately and completely. Even the smallest document error can result in delays and added expenses.                  

Read our guide to the shipment planning and documentation process here

For documents required for export customs clearance, click here  

Is your international freight management time consuming? Cogoport will manage your end to end freight so you can focus on your business

Challenge 4: Trade barriers

Former US President Donald Trump once called India the “king of tariffs”. Average import duty rates in India are higher than in most developed and emerging economies. This has led to protests not only from countries that export to India (such as the US) but also from Indian exporters who are dependent on imported inputs and raw materials for their finished products. These are the tariff and non-tariff trade barriers impacting Indian exporters:          

  • High import duties – According to the World Trade Organisation, India’s Most Favoured Nation (MFN) applied import duty rate averages 13.8 percent and is the highest of any major economy. A 2019 US government report says India has some of the highest import duties. It cites agricultural products, which attract an average duty rate of 113.5 percent. Because they pay a high price for imported inputs, Indian exporters are forced to mark up their final products. This makes them less competitive in the global market. Indian textile exporters, for example, lose out to their Bangladeshi counterparts because of high import duties on inputs such as synthetic fibres.          
  • Tariff inconsistency – Apart from high tariffs, Indian exporters who import their inputs must keep up with frequent rate adjustments and tariff escalation. New duty rates are usually announced in the Budget which is presented in February of each year. The Budget of 2021 announced higher duties on a wide range of products, including farm produce, electronic and auto parts, fabrics, chemicals, and plastics. Sectors affected the most by escalating tariffs include textiles, cement, electronics, and capital goods.
  • Non-tariff barriers – These can take the form of regulatory compliances such as safety and quality standards and certifications, packaging, labelling, and testing requirements. Another type of non-tariff trade barrier is restrictions on the export of certain goods. These include ‘restricted’ goods and items that can be exported only through State Trading Enterprises. To trade in such goods, exporters are required to acquire special licences and meet certain conditions. Trade barriers add to exporters’ cost and time.        

The solutions

1. Infrastructure overhaul: India has made progress with road construction in recent years. But its maritime infrastructure still requires work. Here’s what India is doing and needs to do to improve its transport infrastructure:  

  • Modernise and expand ports – In 2015, India introduced the SagarMala Programme with the objective of a) modernising existing ports, b) developing new ones, c) enhancing port connectivity, and d) ushering in port-linked industrialisation. The 574 projects in the programme have a 2035 deadline. India desperately needs more ports. It has only one transshipment port, Kochi, and depends on Colombo, Singapore, and Port Klang in Malaysia for the transshipment of outbound goods. The proposal for a new transshipment hub in the Andaman and Nicobar Islands, therefore, comes as welcome news.    
  • Reduce turnaround time – Reducing the time it takes cargo to enter and leave India’s ports from the current 2.59 days is critical to easing the export process. The government’s plan to reduce turnaround time to one to two days (the global average) by 2022-23 is a step in the right direction.
  • Improve road connectivity – India is currently building 30 km of highways in a day. This ties in with the objectives of the BharatMala Programme, which aims to build new roads, develop 9,000 km of economic corridors for better connectivity between manufacturing centres and export hubs, and improve port connectivity.
  • Indian carrier company: An indigenous shipping line is the solution to India’s container and equipment shortages, says the Federation of Indian Export Organisations (FIEO). The FIEO believes a home-grown carrier will also be able to control container rates, which have spiked in the past year due to the equipment crunch and port congestion.    
The Kochi port is India’s only transshipment port. The majority of India’s exports are transshipped through ports in Colombo, Singapore, and Malaysia.
The Kochi port is India’s only transhipment port. The majority of India’s exports are transhipped through ports in Colombo, Singapore, and Malaysia
Photo by Kingsley Jebaraj on Unsplash

2. Improving credit access

In the last two years, the Indian government has assured exporters of a reduction in credit insurance premiums, faster disbursal of funds under the Export Credit Insurance Scheme, easing of documentation requirements, and lower interest rates and premiums for small businesses. The assurances came in the wake of a 45 percent fall in export credit disbursal by public sector banks in 2018-2019. Despite the promises, export credit access in India remains muted. There is a need to actively promote financial assistance schemes among exporters. The Agricultural and Processed Food Products Export Development Authority (APEDA) suggests that the various export promotion councils can hold workshops with exporters to raise awareness. Furthermore, the Trade Promotion Council of India recommends the following steps to be taken by financial institutions to improve credit access:

  • Create a single window system so all applications, documentation, clearances, approvals, and discrepancies can be resolved at a single point. This would save exporters both time and money while availing of credit.  
  • Come up with export credit products customised for the needs of MSMEs.

3. Simplification of processes

In 2015, India reduced the number of mandatory documents required for exports (and imports). However, the paperwork burden remains high due to the need for supplementary documents. The Organisation for Economic Cooperation and Development (OECD), in its 2019 economic survey of India, suggests reducing the number of export documents further. It also calls for cutting down documentary and customs compliance time. This recommendation is in line with the Indian government’s National Trade Facilitation Action Plan, which aims, among others, to cut cargo release time for export shipments at ports by 24 hours through initiatives such as:

  • Releasing shipments before customs duty has been finalised
  • Restricting new pre-shipment inspection requirements
  • Lowering the penalty for customs breaches that are voluntarily disclosed by the trader  
  • Reducing the number of documents and digitising their submission            

4. Cutting tariffs

The general view on India’s policy of charging high import tariffs to protect domestic industries is that it is counter-productive. Not only does it make local manufacturers less competitive, it harms the prospects of exporters who require imported inputs. In its latest Trade Policy Review for India, the World Trade Organisation called for tariffs to be reduced and made more simple and predictable. It held that frequent rate adjustments created uncertainty for traders. India’s main trading partners, such as the US, have also called for tariff cuts. So have players within the country. The Confederation of Indian Industry (CII) recommends a graded move towards competitive tariffs in the next three years and has suggested three tariff slabs – zero percent to 2.5 per cent for raw materials, 2.5 percent to 5 percent for intermediates, and 5 percent to 7.5 percent for finished goods.

There is also a view that India should refrain from increasing tariffs on its exports, the argument being that goods produced in the country are largely for domestic consumption.

Editorial Team
Editorial Team
Customer success manager
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