What the Sri Lankan crisis means for Indian exporters
Sri Lanka’s $51 billion default and its current economic crisis could present an opportunity for Indian tea and textile exporters. Yet it will not be easy for India to fill the gaps in global supply. Mint explains why.
What causes demand displacement?
Tea and textile exports have long been Sri Lanka’s strength. Textiles and clothing account for more than 50% of its overall exports, while tea accounts for 17%. Financial difficulties and subsequent power cuts in Sri Lanka, which sought international aid, made it difficult for Colombo to meet its export orders. The country’s exports began to falter during the covid-19 pandemic and only worsened after running out of foreign currency to buy fuel. The sharp rise in crude oil prices following Russia’s invasion of Ukraine added to his problems. Buyers around the world are now looking for alternative suppliers.
Can India close the tea supply gap?
According to tea exporters, India is well placed to capture the markets of countries that import orthodox tea, that is, leaf tea produced using traditional methods. Besides strengthening its footprint in Iran, the Sri Lankan economic crisis could open up new markets such as the United States, Turkey, Iraq, China and Canada. India is currently working on a strategy to exploit supply gaps. This includes exploring alternative payment mechanisms for trade with the sanction-hit Russian and Iranian markets, in addition to marketing and brand promotion activities in Europe and North American countries.
Is there an increase in new orders for India?
According to India’s Textiles Secretary, UP Singh, some orders have already been placed with companies in the textile cluster in Tirupur, Tamil Nadu. Indian exporters are receiving more inquiries from the UK and EU, mainly for woven goods, shirts, T-shirts and baby clothes. Orders are also being placed from Latin America, the United Arab Emirates and Australia.
Are there any constraints for Indian exports?
Indian exporters may face high customs duties. Turkey, for example, has a 145% import tariff for tea. Sri Lanka managed to circumvent this problem by setting up a packaging plant in Turkey. India has no such arrangement. Additionally, only a few ports are open to receive shipments. As for textiles, headwinds include high cotton prices. The Indian government last week scrapped the basic 5% tariff on cotton imports, but it is unlikely to bring prices down significantly as raw material costs are rising at worldwide.
Could the gains made be permanent?
We are not sure yet. Indian textile exports are subject to import duties of up to 9-10% in some Western countries. However, India has successfully negotiated duty-free access for its textile exports in the recent Free Trade Agreements (FTAs) it signed with the United Arab Emirates and Australia. Similar FTAs could be signed with the EU and the UK. This can lead to some gains. India, on the other hand, is aiming for a bigger share of the international market by supporting businesses through its production-linked incentive scheme.