steven-p-warner

[steven-p-warner]

From 'hurried changes' to 'stable hopes'

Recent months have got the Indian exporters hopeful. The numbers – performance and FTP-related – have given them reasons to pin their expectations on the Union Budget.

Steven Philip Warner President (VMPL) & Editor-in-Chief The Dollar Business

A cursory look at India’s exports numbers in the past 17 months, and a casual observer could well brand it a ‘mini golden age’ of India’s performance at the ports. India’s unusually vast tribe which thrives at convincing foreign buyers with its produce is seemingly convinced about its nation being a frontrunner to nudge past the $300 billion finish line this fiscal. It's impressive that despite the multi-textured troubles (like demonetisation, a hurried GST implementation, lack of digitisation, failure to implement 24x7 clearance facilities at ports, delayed FTP revision, etc.), the anxieties are washed away by numbers that indicate a bounceback to the 2013-14 days for India’s exports. But a New Year presents newer challenges.

We saw some encouraging revisions to MEIS and SEIS announced in the month of December last. WTO could have a problem with that, given its rules that allow a nation to give direct incentives to its exporters. This year itself, think tanks in the government ranks should start formulating various ‘adjusted, indirect and yet transferable’ incentives schemes that are (a) industry specific to avoid a one-size-fits-all assumption, (b) as flexibile in terms of utility to the EXIM community as the current ones, including transferability and usability, and (c) effective enough to replace the ‘on-the-face’ incentives when the WTO comes knocking.

We have to get rid of the GST refund menace. A new year, but the same old problem won’t do. As per some estimates, India’s exports community has begun the year with a backlog of about Rs.1.85 lakh crore in pending IGST and ITC refunds. Of these two, ITC refunds account for about 85% of the total backlog, and it is shocking that one significant reason why the refunds have not been processed is the very ‘conflicting criteria for calculation of ITC refunds’. Such an inefficient, unsure mechanism jeopardises the present of India’s exporters, especially those lakhs for whom these refund delay mean blockages of precious working capital.

Next come the states. For years now, we’ve witnessed a flurry of opinions and announcements to make Indian states responsible for national exports. The states were even advised to conclude on state-level export policies. So far, only 14 states have prepared their drafts. The Niti Aayog must discuss and decide on a blueprint for incentivising states that indulge proactively in growth of India’s exports. Special subsidies can be offered to states who meet a minimum performance criteria. But the question here is – who decides what criteria? Hopefully, the Centre has this question sorted in its head.

Recent months have got the Indian exporters hopeful. The numbers – both performance and revised FTP-related – have given them enough reasons to pin their expectations on the Union Budget. It’s time for the Centre to shift focus slightly away from fiscal prudence and provide tax sops and alternative incentives for exporters through technological upgradation and modernisation schemes. While the government has unleashed a battery of measures to aid India’s exporters and manufacturers in the past year, there is no denying the fact that 2017 has been about a rise in exports despite scuttled plans and unexpected new realities.  Our exporters are paying the price of 'hurried changes' last year. 2018 will bring in more 'stable hopes'. And with more hope comes more expectations.

Doubt you not – 2018 will be a consequential year for India’s foreign trade. A government, chosen by popular vote five years back, has an opportunity to become the popular champion of the common Indian exporter.

[steven-p-warner]

Can India afford a trade war now?

Steven Philip Warner | October 2017 Issue | The Dollar Business The recent Modi Cabinet rejig was certainly not a last-ditch effort to save the next General Elections. A popular political outfit led by a seasoned statesman, and dominant in close to 68% of India’s regional territories, is not affected with the “sitting on the fence” syndrome as far as populism goes. And the moves made have largely been debated. Controversial they’ve been by design perhaps. But bearing enough firepower to be discussed… demonetisation, verbal and physical spats with neighbouring nations (even across international forums), GST implementation (considered premature by many), demonetisation, shuttling bureaucrats, delays in FTP release, and so many more.  The recent Cabinet rejig is one amongst such much-discussed acts. More so for the exim community.

During a time when exporters were waiting for some encouraging news in the form of post-GST Drawback Schedule and FTP revisions (the new Drawback rates are out now and there’s nothing much to celebrate about if you were hoping for anything “extra”; the FTP isn’t out still!), what happened was far removed from what was expected. (Pure Modi-style!) Our Commerce & Industry Minister was given charge of the Defence Ministry. I’m not speaking of some bureaucrat’s reputation being built bigger; just amused at how even this political move has drawn a straight line connecting “trade” with “war”. Literally! Not that we are expecting a trade war. Are we? In terms of good neighbour-bad neighbour episodes, India is all over the Asian map at present. And despite all the “I’ll shoot you” threats that Trump has been giving China for months now (we know he’ll do nothing much there), Indian exporters and importers are more worried about how an India-China trade war will hurt them. The highly dramatised military standoff between India and China at Doklam plateau (Sikkim) saw India retaliating to the Chinese military and verbal belligerence with trade tactics. Almost immediately, it imposed anti-dumping duties on 93 Chinese products! Whether there will be a Chinese counter-trade attack is to be seen. If that happens, it could mean China losing a few winks and India suffering insomnia. Why the damage differential you ask? In value terms, India imports from China almost 5x of what it exports to that nation. But there are three schools of thought as far as such a trade war goes.

There are only two differences between China Inc. and the Communist Party of China – how we write them and how we pronounce them. Chinese investment being suspended as a result of the trade war could imply suspension of billions of dollars worth of investment in India's infrastructure.

School of thought #1 – India shouldn’t worry First, such a trade war will mean minor disturbance in the immediate term and will have a positive impact on India in the long run. What is interesting is that while India predominantly exports “raw materials and intermediate goods” to Chinese, mostly meant for B2B buyers (which it could as well to manufacturing hotspots like Vietnam, Mexico, Thailand, Poland, Canada, markets across EU, USA, etc.), what it buys from China are mostly “finished” goods, a big proportion of which is for B2C buyers. The advantage of being in India’s shoes in such a situation is threefold. One, as a supplier of raw materials, you are either at a geographical advantage or in control of a factor that may be exclusive to you and there is a good chance of discovering buyers for your raw materials elsewhere (who will process the materials to manufacture goods for consumers across other parts of the world). Two, as a buyer of finished goods, the products being rolled out of Chinese factories would be customised for the typical Indian consumer. And that may not actually suit the wants of consumers across other foreign markets.    Three, in the long run, if China does place a ban on exports to India, 'Make in India' should flourish. Call this the magic of import substitution industrialisation!

School of thought #2 – India should worry This one is driven by fear. Again, three aspects. One, agreed that there are no alternatives to many Made-in-China products in the Indian market yet. Indian exporters, manufacturers and consumers who buy industrial machinery and other consumer goods from China could get hurt by a trade war between the two. Two, there are only two differences between China Inc. and the Communist Party of China – how we write them and how we pronounce them. There is no doubt that Chinese investment being suspended as a by-product of the trade war could imply non-creation of millions of jobs in India and temporary suspension of billions of dollars worth of investment in our country’s infrastructure. (By infrastructure, I mean both factories, offices and roads.) Three, India may be one-sixth of the world, but it also has that big a population and is that well interconnected with Global Inc. China is known to be a market that’s guided by a vision of self-interest, and always on the offense. With a trade war could come a hurricane called “cyber-terrorism” that is least expected but could do much damage to a growingly connected India, or even some form of a China-influenced sanction from WTO.

School of thought #3 – Why even bother thinking? This ideology is that such a trade war is “…just another storm in the same ol’ tea cup!”. For some, trade wars mean a fancy economic term that’s minimal in influence. For them, the Suez canal closing for a month will have a far greater impact on India’s exports and imports than a real year-long trade war with say, China. It’s hard to counter that argument going by how diplomacy often gets the better of such bitterness. But actually, even imagining the perils of a trade war may be a trivial task. Trump has been threatening China and Mexico forever. There is no trade war yet. India and Pakistan have forever been quarrelling. Yet we’re seeing more goods crossing the borders each year. Capitalism gets the better of geopolitics. The problem however is – if there is a “visible” trade war, it will be damaging (despite the benefits). Let me take you back to the 1930s, when the US Tariff Act of 1930 (the Smoot-Hawley Tariff Act) was passed and implemented by USA. Tariffs on imports were raised across 890 product categories (in comparison to the previous Tariff Act of 1922). Within two years, the value of imports to and exports from US fell by 40% each, and world trade dipped by about 65% in four years. China is to the world today what US was in 1930s – there are some rough similarities from a world trade perspective. And given that mankind has grown mature since the Smoot-Hawley Tariff Act episode, I doubt if China will want to experiment with a trade war. Almost the same argument holds for India. The idea is clear. It’s not whether India can afford a trade war. India shouldn’t. There are enough headwinds for our importers and exporters for now. And we can’t have them suffer on margins and production plans, just because your visiting foreign diplomat burnt his tongue with the Indian masala tea served with honest intent. Who will win from a trade war that India engages in? That only time will tell. What we do not need time for is to conclude on who will lose.

[steven-p-warner]

Every Movement Isn't Progress

Like even Harvard Business Review equates Indian innovation to "jugaad", strictly in line with this thought, we have the FTP being worked upon to play saviour to exporters. So, first we hurt and then we heal. Is't?

Steven Philip Warner | September 2017 Issue | The Dollar Business India's foreign trade community. I think it's time we change that to India's foreign trade business community. "Business" being that needed addition. India's exporters are now quite getting used to "outbursts" that appear less thought through. High time they get a rational, plan-on-paper to work with.

Fine. Ours is still an imperfect union, bound by the trust that we will always improve. Until November last, until demonetisation struck, much working capital was floated around in the form of cash unaccounted for. Then, exporters learnt overnight that "moral" wins over "business". Even the most unwilling of moral policemen will agree that our exporters were affected negatively for a brief period.

Then came GST. It strummed the deepest chords of grievance and resentment amongst the exports business community, especially those in the MSME segment, who now have their working capital locked up, thanks to the 'pay first, refund second' rule under GST. (As per industry estimates, exporters' working capital in excess of Rs.1.85 lakh crore could get stuck due to upfront IGST duty payments per year.) The new tax regime has brought in newer headaches for exporters. The doing away of upfront IGST payment exemption on export-related imports and local sourcing results in a reduction of import duty benefits under the current FTP, including those which exporters earlier enjoyed under DFIA and Adv. Auth. schemes. The limit on scope of usage and increase in tax incidence on duty credit scrips gives rise to concerns that exporters may fail to use the scrips within the validity period of 2 years. Restrictions on Advance Release Order facility under both EPCG and AA schemes will further ensure that a significant portion of an exporter's working capital remains blocked, thus raising cost of capital. Even EOUs, EHTPs and STPs have been at the receiving end.

Like even Harvard Business Review equates Indian innovation to jugaad, strictly in line with this policy, we have the FTP being worked upon to play saviour to exporters. So, first we hurt and then we heal? We have every kind of logic floating around as to how the FTP should be that movement on paper that will help Indian exporters break the shackles of stagnation. Mind you – every movement isn’t progress! This revision has to be more than just jugaad for Indian exports! The fine print will need to be altered for it to have consequences far beyond renamed schemes.

With GST coming in, a big percentage of Indian exporters feel their costs will rise because they have been forced to transition from a “literally tax free” to a “tax-onall-products” regime. And this when non-tariff trade barriers remain a silent bother, inverted duty structure and high cost of borrowing for export credit are prevalent, lack of a national plan for manufacturing clusters and absence of any strategy to link even the existing export temples to ports coexist, and fall in exports in traditionally strong segments (like agriculture, textile, etc.) and to a market like Africa are present realities.

Indian exporters need an FTP that’s symbolic of multiple factors – freedom (from domestic dependence), justice (to exporters), imagination (of reaching beyond the targeted 5% world exports share), ambition (of being able to bully China and Trump), enduring (of being a policy that’s likely to stay put for many months), and inspiration (with a belief that the government is on their side!).

It’s high time we treat India's exports community like India's exports ‘business’ community. And if this business community doesn’t win, the nation loses. This is an especially delicate moment for India, one that needs more than just “movement”; one that needs “progress”.

[steven-p-warner]

'Modi'fied perception

You don’t outrightly challenge the quality of a nation or its products whose prime representative is open to a conversation. Would you doubt the quality of a brand if its CEO were to meet you and sell the idea or product?

Steven Philip Warner | June 2017 Issue | The Dollar Business

The question of whether perception matters seems an academic one. Yet, it’d be hard to dismiss the fact that in an age where everyone is busy thumb-wrestling with their smartphones, it’s perception more than anything that aids decision-making. In foreign trade and policy, the truth is no different. Whether it be outcomes of individual or foreign policy experiments, the decision-maker of today is ever so influenced by what he perceives to be the truth; caring little if it really is. That India’s exports have risen for the seventh consecutive month in April 2017 despite the rupee appreciating and in an atmosphere of rising trade protectionism gives birth to a perception. It’s a positive one for India’s exports. And more remarkable is the perception that’s being formed from India's recent defiant foreign policy stance, symbolic of a nation in control of its fate, yet ethical to dedicate itself to becoming anti-North Korean and anti-oversmart China or over-terrorised Pakistan. And more than trade numbers, it’s the adoption of a new modus operandi by the Indian government that makes for a good reason to believe why our global trade market share should rise beyond the 5% level by 2020. Of course, implementation of GST, storming into an era of Open FDI regime, dismantling of FIPB, revamping of FTP, adoption of a policy of rupee trade deals to facilitate ease of doing trade and reducing volatility pressures on Indian exporters, etc., are important to ensuring a stronger ‘Brand India’ at the ports. But how the Modi government has conducted itself in the past three years is how world buyers are imagining Made in India to be. The perception now matters. First, you don’t outrightly challenge the quality of a nation or its products whose prime rep is open to a conversation. Would you doubt the quality of a brand if its CEO were to meet you and sell the idea or product? Second, what the Modi government has achieved through its portrayal of strength is established a trust for Made in India around the world. (If the government has the spine on foreign policy matters against superpowers, the nation’s exporters must be sharing some of the courage and ethics, right?) India boycotted the One Belt One Road (OBOR) summit held in China in May this year. Reason – OBOR will go against the “sovereignty and territorial integrity” of India. Critics complain that India has possibly denied itself benefits of something as big as OBOR. But ask Modi, the new age leader, and he will perhaps retaliate, "China who?" Then, there are other loud similar acts that help portray a strong image for India, especially amongst those willing to conduct trade with ‘fair and strong-willed’ nations. India’s recent ban on exports of all goods (except food and medicine) to North Korea is another sign that shows how the nation is hell-bent on doing trade with the right partners, even if it comes at the cost of writing off about $200 million in foreign trade with a stroke of the pen. Taking the ban one step further is the announcement of a freeze order on all assets held in India by the North Korean government. Kim Jung Un who? At the same time however, India isn’t one shade scared to do what it feels right. The uranium deal with Australia and attempts to strengthen ties with Russia are clear instances. [India cares little if Russia is blamed for rigging the US elections and masterminding WannaCry!

India in 2017 is a nation with a clear intent in world policy and trade. As per a McKinsey study, this “positive perception” helps. [“A strongly positive nation brand will boost perception of quality of the products exported from that country…”] Shockingly, India’s value as a country brand has fallen in recent years. As per FutureBrand’s Country Brand Index, it stood at #23 in 2010 and has fallen to #50 today. But we are sure that with strong decision-making at the Centre, India will fare better on this chart in 2020. Till then, our policymakers should continue doing what's 'right' – whether it be to defy a rogue state like Pakistan or anger a couple of elements at WTO.

[steven-p-warner]

Feeding dogmatism to the dogs

The disproportionately high levels of assets in relation to earnings (foreign assets, considered volatile by shareholders) is the big problem with MNCs, much unlike the case with 'only exporting' firms. Steven Philip Warner | April 2017 Issue | The Dollar Business Sometimes, a shocking incomprehension is a better teacher for change than a whiteboard marker-waving genius. And often, changes come about by questioning conventions, even those that have become traditions of thoughts. In an era of globalisation, one such tradition thrives – the ‘multinational company’ model. [You don’t need a referendum to conclude on that.] This dogmatism has come to characterise both market economics and society. It is understood to be the governing school of thought that ensures capitalistic success on both fronts – corporate and individual! In vogue, this dogmatic certainty has developed traits that makes it irrefutable as say, religion. How do you prove the existence of God? You don’t. You believe. Similarly, those who harp about how MNCs are doing justice to Friedman’s flat world, will go far as to throw Rene Descartes’ process of painstaking reasonings (to achieve absolute certainty) out of the window if the philosophy of MNCs having become a ‘soggy’ idea is put forth. But, as I said earlier, sometimes, a shocking incomprehension is a better teacher… There is obviously little logic or science that can convince a dogma-drunk human, who spends hours buried up to his neck in sand to cure his rheumatism, that the beach isn’t really a hospital or the onlookers nurses. That’s not the effort here. My objective is not to challenge the therapy or slice out the inseparable. The idea is to present a better alternative – or talking about that man on the beach, suggest a reputed orthopaedic (over spending days in a process that was proven to be effective by Egyptians some centuries back). And in this case, not proving a concept of globalisation like MNCs to be flawed, but to present a better alternative to step onto foreign shores. Exports. Talk about international trade, and acronyms like FDI and MNC come to mind; what after years of these concepts being drilled into our heads. But cracks have started appearing on the fortress walls of these popular corporations built on the ideologies of FDIs and MNCs. These mighty citadels of modern capitalism are now feeling vulnerable, and there are signs of distrust in the very ‘equity and investment-based’ model they have relied on for decades. In the past decade, cross-border investments by MNCs have stagnated ($2.1 trillion in CY2006 and CY2015). Actually, in ten years leading to CY2016, their investments in foreign assets have fallen by 40%. There is another problem. Over the years, profits of MNCs have been on a downslide. As per a McKinsey Global Institute report, for the big MNCs, “profits are not only shrinking but also becoming more uncertain. Since 2000, the return on invested capital has been about 60% more volatile than it was from 1965 to 1980.” McKinsey has estimated that corporate profits of the MNCs could shrink from the current 9.8% of global GDP and 5.6% of revenue to 7.9% and 4.7%, respectively by 2025. [That’s an oops moment for blind followers of ‘MNC priests’.] "The disproportionately high levels of assets in relation to earnings (foreign assets, considered volatile by shareholders) is the big problem with MNCs, much unlike the case with 'only exporting' firms"

Are we paranoid? Perhaps just practical. A few reasons. Powerful digital platforms brought alive by the “Internet of things” have been feeding a growing monster (monster for traditional brick-and-mortar firms, a friendly giant for consumers globally) called ‘e-commerce’. Profits are gradually shifting from heavy industry to idea-intensive sectors that revolve around R&D, IPR, services, software and algorithms (and which can be delivered without setting up local facilities). Costs have possibly bottomed out for MNCs – which makes their accountants pinch themselves at the harsh reality called lowered ROCE. Availability of low-cost labour is fast becoming a thing of the past (even in China, Vietnam, Bangladesh and India). Interest rates have fallen to historically low levels across most countries, leaving no further room for hammering borrowing costs deeper into the ground. Also, the big tax-rate decline that we’ve since across most nations since the 1990s seems to have bottomed out and most MNCs have already massaged their tax bills to give their profit muscles the maximum relief possible.

The return on equity (ROE) of the top 700 multinationals (as per FTSE) has dropped from a peak of 18% to 11% in a matter of a decade. “The returns on the foreign operations of all firms have fallen, too, based on balance-of-payments statistics. For the three countries which have, historically, hosted the most and biggest MNCs – US, Britain and the Netherlands – ROE on foreign investment has shrunk to 4-8%. The trend is similar across the OECD. Multinationals based in emerging economies, which account for about a seventh of global firms’ overall activity, have fared no better,” states an EIU-OECD research. All these make grounds for an argumentative businessman that not too far into the future, ‘non-equity-based globalisation’ (pure exports minus FDI on foreign soil) may remain one of the most efficient ways to creating a global company. For profit-and-productivity focussed firms, this symbolises the re-emergence of the ‘international company’ at the cost of the MNC format.

"MNCs are valued at a discount of 9% to 17%. And in stark contrast is the fact that 'only exporting' firms are valued at a premium of about 4% due to their higher market value and lower asset size"

The superiority of ‘exports-focussed’ firms over MNCs is also proven in academic research. In a extensive research by Harrison and Click (of the US Federal Reserve Board) lasting 14 years and involving over 42,525 firm years, the experts conclude using significance analysis that capital markets penalise MNCs by “putting a lower value on the equity of multinational corporations than on otherwise similar domestic corporations”. MNCs are valued at a discount of anywhere between 9% to 17%. And in stark contrast is the fact that 'only exporting' firms are valued at a premium of about 4% due to their higher market value and lower asset size! So the disproportionately high levels of assets in relation to the earnings they generate (“foreign assets” that are generally considered volatile by shareholders whose values are subject to vagaries of policy and other macroeconomic changes in both the host and parent nations) is the problem with MNCs, unlike the case with 'only exporting' firms. Exporting firms are therefore far superior to MNCs in terms of efficiency and valuation, and that should serve a clear message to large companies and MSMEs around India. But having made that comparison, is there proof that the ‘exports-focussed’ model is also superior to a company that focusses solely on the domestic market? This piece is not a suggestion to attempt an escape from the ambiguities and anxieties that accompany investments on foreign shores. It is also not to glorify everything that’s build around the business model of serving everything “domestically” mainstream. You would have read on Buddha’s realistic middle-path doctrine. Perhaps foreign trade today is much like what he preached. There is a downside to adoption of the MNC model. [Ever imagine why virtual offices are in fashion these days?] At the same time, keeping your business confined within national boundaries isn't wise. There is some sort of reformist, capitalistic animus associated with exports. Does it boost profits? Recent history of domestic firms that have moved to exports confirm the obvious. 82% businesses experienced a positive impact on their bottomline (profits) after two years of exporting. Businesses that export, grow by almost 30% in just two years, claims a report titled, ‘Export to Expand’ by Prof. Robert Blackburn of the Kingston University, UK. A study conducted by Barclays puts it straightforwardly that, “Beyond business growth, almost nine in ten (87%) businesses identify other benefits to exporting, including having greater confidence in the longevity of the business (44%), increased productivity (37%), stronger innovation (28%) and a longer lifespan for their products and services (27%).” There is enough literary evidence that firms that indulge greater in exports (or imports) have a higher greater probability of survival. After studying the participation of Indian firms in foreign trade, Prof. T. N. Srinivasan of Yale University, concluded that “exporting firms are significantly larger, more productive and more profitable than non-exporting firms.” A study by Megha Mukim of the London School of Economics, titled, ‘Does exporting increase productivity? Evidence from India’ that used data for about 20 years and covered over 8,000 manufacturing firms in India concludes that “Exporting is associated with a jump in productivity, both within industries and within firms… Entry into export markets has a positive effect on firm performance…” There are many compelling reports that prove how export entrants become more productive once they start exporting and that the productivity gap between exporters and their domestic counterparts increases further over time. And the observations are not just confined to India. Across the world, economics continues to play a similar game; US, Denmark, UK, Sweden, Kenya, Vietnam, Spain, China, Portugal, Australia, Slovenia, EU…the list is long. It rewards those who avoid the bait of complacency (read: staying domestically-focussed) and overlook the lure of being over-ambitious to the extent of being ostentatious (read: jump to become an MNC without testing waters with exports first). And in this lies a lesson for Indian MSMEs – Look before you leap. But do leap! Modern economics is no religion. There is nothing as ‘blind faith’ in capitalism. There is no strategy that’s dogmatic and worth investing in at the same time. Don’t distrust the MNC model or foolhardily undermine domestically focussed businesses. But remember, there is always a third option – one that’s no sugar rush… try an export-oriented approach to test international waters. That’s what some of India’s exporters have done. It makes them deserving of a place on the cover of this issue. They're the 'Stars of a Globalised India'.

[steven-p-warner]

Hail Aristotle!

If state governments are demanding 'morally right' and sizeable share in tax earnings (under GST), they should also be made equally and individually responsible to build on the nation’s forex chest.

Steven Philip Warner | March 2017 Issue | The Dollar Business “The whole is greater than the sum of its parts,” stated a confident Aristotle some 23 centuries back. Seems, India is still betting on this popular ancient Greek's thought. Disruption can take many forms. A nation’s exports bandwagon is susceptible to any form of disturbance, political being one. India is no different. In recent weeks, we've been witnessing two ‘in-the-making’ events that will have a bearing on India’s exports in the immediate months and years to come.

First, the manner in which State politics (the ongoing war of ascension, especially in India’s most populous and sixth-most populous states) is proving to be the most controversial reality-show in the current era, is symbolic of a democratic republic nation, little united in political will to achieve long-terms goals (leave alone on the exports-manufacturing and services-exports fronts). How state politics is shaping up in India proves that the country's geography is not the only thing that's split; its mental health too is. (Our school children could tell you that.) And that's not good for an India that promises to become the next export powerhouse. We spoke of Donald Trump forgetting his near-celebrity class and manufacturing disturbing speeches and baseless accusations during his recent campaign. We see nothing less (actually, worse) in state politics in India today. [We are not politically inclined, but for the sake of selfish, state politics, you just cannot call a country’s democratically elected-by-popular-vote Prime Minister a “donkey” or a “psychopath” or a “terrorist”. You cannot. Period!] And those responsible for setting such wrong examples of forceful disruption and bearing such deliberate loose-tongues are the hallowed heads of India’s states. [Wow!] It’s not that political campaigns cannot get critical. But the manner in which 'name-calling' is happening is proof that “respect” amongst regional leaders in India (which naturally is important for the country to progress in exports and otherwise) is missing. The word 'dread' would apply here. An observation here: If you look at how India’s top 10 populous states have fared in exports in recent times, you’ll be shocked to learn that going by their performances until the first half of last year (as reported by DGCIS Kolkata), none of them will end FY2017 with higher merchandise exports as compared to FY2015. UP, Maharashtra, Bihar, West Bengal, MP, Tamil Nadu, Rajasthan, Karnataka, Gujarat and Andhra Pradesh – in total, their goods exports will drop by about 30% in two years, and that’s indicative of how serious and busy state politics and domestic affairs have kept them, while their contributions to nation-building have fallen from the trees.

I juxtapose the above matter with the second development where work is on in full-swing, and is expected to conclude sometime in March if everything goes as planned – that of necessary, constructive changes being incorporated in India’s Foreign Trade Policy 2015-2020. In my recent meetings with top government officials in charge of this exercise, much seems to be happening behind the scenes to ensure that India’s run of rise in exports for five consecutive months (until January 2017) is a sustainable one. We have one recommendation though – let there be a change that incentivises the states to contribute greater to exports and puts in place a measurement system that gives each state credit based on the origin of exports (rather than just port of final exports). A minimum performance critera could be put in place in proportion to a well-constructed metric that could be a combination of various factors (like the number of employable individuals, educational institutions, land and other physical assets available for manufacturing and services activities and export-related infrastructure, etc.). It’s no secret that the Centre has for years been requesting the states to formulate their respective export promotion policies to support its efforts. It’s time to proactively ensure that states actually graduate beyond draft policies, have the state assemblies finalise the policies and place it before the Centre for final approvals or feedback. And it’s not a case of the states just dealing with land, electricity, water, etc. If the states are demanding a logical portion in tax earnings (under the GST regime), they should also be made equally and individually responsible to add to the nation’s forex revenues.

As per a study by TDB Intelligence Unit, for the first time since China adopted its “exports-led GDP growth” policy – that was about 38 years back – this year, India is expected to record a higher exports to GDP ratio than China (refer to chart titled, ‘Exports to GDP ratio - India may surpass China in 2017’). To translate - China could lag India in terms of its “dependence on exports” starting CY2017. One, it will mark a relative shift in China’s focus on its domestic economy. Two, and more importantly for India, this will signify a greater reliance on exports ('exports intensity') and therefore a need to grow exports by leaps through adoption of various progressive measures, of which, one is digitisation (not just in the form of EDI tor trade promotion, but also encouragement of e-commerce platforms and digital marketplaces for exports), and the other being proactive accountability of the states, which should be enforced in the most urgent sense.

In challenges lie great opportunities. TDB Intelligence Unit conducted another set of analysis and concluded that while our dependence on the largest consumer market (USA; in terms of Household Final Consumption Expenditure) has been rising in recent years, that on the second largest, China, has been falling (refer to chart titled, ‘Indian exporters' falling dependence on China?’). China on the other hand has been consistent in ensuring that USA and India contribute growingly to its exports base. Between Q4, 2011 and Q3, 2016, China’s contribution to India’s exports fell from 7% to 2.9%, which that of USA’s grew from 11.3% to 16.6%. [During the same timeframe India’s and USA’s contribution to China’s exports grew.] These findings carry a message. Don't ignore China. Not yet. We cannot falsely assume that the dragon has suddenly developed weak jaws; especially with US walking out of TPP and NAFTA, RCEP taking shape, and when you consider that “China running out of steam” is practically a perception that is largely influenced by trade on the merchandise front. Look, reality is subjective. China is still heavy enough to continue its dominance on world exports and at the same time, is taking initiatives to not only develop its services exports potential but also consumption capacities of its citizens. India on the other hand – given new initiatives by the government – has to understand that the days of micro-multinationals are here and its home-grown small set-ups and MSMEs have to be enabled and encouraged to conduct trade overseas, even if that means something as challenging as exporting to China! And that is where state governments will have an important role to play, because as we said before, irrespective of whatever initiatives are announced by the Centre – land, water, electricity and human capital still come under the purview of the states. And if economic growth is being sidelined for the sake of 'verbally roadside, and ugly politics', every initiative taken by the Centre and those by one of the most responsible governmental bodies in modern day India like DGFT – will make their way out of the window. 

For India to take on newer challenges from emerging exporting nations and become both a land dependent on higher exports intensity and micro-multinationals, the on-battleground disrespectful and rather self-centred verbal exchanges at the state levels need to give way to constructive time in state assemblies being spent on formulating state export policies. Then, for Indian exports, "The whole will forever remain greater than the sum of its parts".

[steven-p-warner]

Living in denial

EU and US could well become the ‘new low-cost centres’ in manufacturing in the next decade. For exporters in India, China Vietnam and other developing nations, this could mean 'new competition'. Steven Philip Warner | August 2017 Issue | The Dollar Business

Crisis in world trade seems to be evolving into big opportunities. And since March this year, the air seems far pleasant than it did during a punishing 2016. The situation is akin to construction cranes once again stippling the skyline over buildings left unfinished. The excitement is obvious. But the momentary relief does not indicate that our brush with uncertainty is over. And that’s the bitter truth about foreign trade. There are far too many countries, product and service categories, sanctions, sovereign rules and mindsets to consider. In this territory, ‘being at peace only symbolises living in denial’. No pre-tested fact, formula or notion is permanent. Here, old ways don’t survive. Consider this observation – why exports grew at a furious pace until 2008, then got silent for two years before it picked up again and then, since mid-2014 has been relatively sluggish is an occurrence not many have well-based theories to explain. And those who do will either link it to financial market sentiments or China! But where’s the time-tested truth that explains this gyration? There is none. In foreign trade, no fact or theory validated in the past remains constant. There is always change in the making. One such theory is on technology. Traditionally, it was believed that technology cannot disrupt global trade and exports. (Affect it will. Not disrupt.) Today, it has and how! Gone are the days when Indian farmers would sow seeds depending on whether the skies look blacker than grey. From supplies to logistics to generation and processing of shipping bills – technology is fast emerging the cruel-but-honest decider in the war between labour and capital. Even in the manufacturing value chain, the tale is no different. 50 years ago, about 70% of global productivity could be attributed to labour. Today, its share is down to 58%. With a 42% share, capital-aided technology is gradually eating into the human share across manufacturing and services sectors. There was a time when China, as a relatively labour-abundant economy, opened up to trade. It did well for three decades. Today, even within its borders, machines have replaced humans, and robotics and technology are at the forefront of decision-making and implementation. Today, China’s strength clearly isn’t humans. Globally, automation will possibly account for more than half of the manufacturing and services output by 2025, and this will have a bearing on global trade, and especially on how a developing market like India deals with this issue of technology taking charge of the production cycle. In the long run, you could find the low cost-advantage of a manufacturing hotspot like India fading due to greater automation of manufacturing processes in the First World markets. As costs of automation fall relative to manufacturing wages and global industrial production becomes more technology-dependent, a hub like India will have to write-off advantages that it currently counts on. So EU and USA could well become the ‘new low-cost centres’ in manufacturing in the next decade. For exporters in India, China and Vietnam, this could mean 'new competition'. While India’s policymakers are working to include revisions in its Foreign Trade Policy, they will have to consider the ongoing battle against stagnation that India’s exporters are engaged in. Thought needs to be spared for the fact that there is nothing more elastic than a nation’s exports during a time when Trump and China are sending mixed signals on a daily basis, and when technology may enable a return of Europe and America’s factories which will help them relive the erstwhile glory days of the Industrial Revolution. (Imagine technology rewinding the prowess of exporting nations to the early 19th century days!) India’s revised FTP will have to be made liberal enough to enable that big leap for its exports in case ‘trade protectionism’ and ‘technology ghosts’ get harsher. Pre-2008, trade was easier perhaps. No real reason why, but it was. Today is a different ballgame.

[steven-p-warner]

Trump’onomics: Proving Darwin wrong!

If Trump does plan to bring back jobs from China, Vietnam and India to US, he will have to reduce American wages by about 80-85% to ensure the same level of competitiveness. Is he willing to do that?

Steven Philip Warner | February 2017 Issue | The Dollar Business

Outcomes of the immediate last General Elections in three nations that matter most to an Indian exporter-importer are perhaps the most obvious evidences of how paradoxical the current situation is in this globalised market. Three nations: America, China and of course, India. While India saw its single-most popular nominee in many decades chosen to the nation’s corner office, and China (and its citizenry) was given no choice to decide on who was their Mr. Favourite, America saw its least-loved campaigner take the oath of office! [Wollah!]

Even on Presidential inauguration day, media channels around the world used words like “unbelievable”, “surprising”, “shocking”, “untrue”, and the likes, to get a grip of America, The White House and the world to be. And that’s purely because the man in charge of arugably the most influential nation in the world still – we say that because of how capable US is to finger-and-hand-twist power bodies like the Bretton Woods twins, NATO, UN, etc. – has a habit of saying whatever he feels makes that “moment” great with little respect or consideration of the ramifications of his eccentric vocal expressions. And when every time he talks about “how he forced those who hated him to concede”, we end up imagining how he may just force devastating changes on the natural pattern of trade and policy relations for not just America but the whole world. His ever-defiant ego is one representation of an independent thinking and unilateralist, who thinks his way, likes doing things his way, cares least about traditions, and has the audacity of announcing that values are for suckers and Russia a friend in public!

Historically, American presidents have been about “light-hearted caricatures”. Trump is all about “serious jokes”! [I remember one Jimmy Fallon show in the third week of January where he jests that “as per a recent survey, 70% of respondents said that the person they’d like to see at Trump’s inauguration function was “A New President”!] Historically, American presidents have been about experience in politics. He has been one about experience with controversies. Historically, American presidents have been about sober tongue and silence post-electoral college results. He has been one about taking his tweet count to newer highs. Historically, American presidents have been less about impulse (unlike the current class of Russia’s Putin and Turkey’s Erdogran). This one is about a constellation of ‘off-the-cuff’ impulse revolving around a heck of a gravitational ego. Historically, American Presidents are about playing “caring global daddies”. He’s not a world policeman – he’ll carpet bomb at will, mind you, but he’ll not sing lullabies to other sobbing Head of States. Historically, American Presidents are almost sure of what they say. He speaks against immigrants and H-1B Visas, while his very better Slovenian-born half is an immigrant herself! Somehow, this less popular, outlandish candidate becoming president has proven Darwin wrong. (Organisms evolve; yes?) The confusion however is – who’s the subject of defiance to Darwin’s Theory here – Trump or America’s voters? Or maybe most Americans decided that as Trump enjoyed shooting bizarre remarks during his campaign tours, they had a right to finger the wrong button on voting machines, hoping everyone else would choose the politically-logical candidate. Problem is – they all thought alike! So it happened. Trump won. America was surprised. And the world was shocked. And while Republicans and his supporters hope that he will keep his promise to build a wall, other nations who have big stakes in foreign trade (and their exporters and importers) still hope that he'll keep his promise, declare the election results “rigged by illegal immigrants” and step down!

Speaking of promise, some indication of how Trump becoming president could impact world trade and policy is obvious from his tweets. Like I said before, historically, American presidents have been about “silence post-results”. He has just made Twitter his hometown. But what percentage of those 140 characters emanated from his left-brain is questionable.

A quick analysis will give you a fair idea of how going forward, this Statesman will influence America’s road to greater or lesser global trade integration and impact millions of exporters across tens of other exporting nations that thrive on supplying manufacturing produce and rendering services to the world. Let us analyse some of his theories (of Trump’onomics) supported by 'his' tweets and understand what they mean when put under two scanners: Trump’onomics and Global Economics.

Trump’onomic theory #1: The world is celebrating his victory. Related tweet: “The world was gloomy before I won - there was no hope. Now the market is up nearly 10%...”

Analysis as per logical economics: For Trump, perhaps world market means just the American market. American stock exchanges behaved like reckless teenagers on hearing that he’s won the elections, but the fact that stock markets in the world’s top two populous nations (China and India) have fallen since Nov 8, 2016 (till Jan 20, 2017; including BSE, NSE, Shanghai Stock Exchange and the Hang Seng) proves how sound his theory of global markets is! (Yes, since Nov 8, the Russian index MICEX has appreciated by 10% to 2,200 points; is Russia the new world for Trump?)

Trump’onomic theory #2: Building a wall to celebrate a border is a symbol of a defiant and great neighbour, one which your neighbour will want and reciprocate by paying for it willingly!

Related tweets: “We must build a great wall between Mexico and the United States! Mexico will pay for the wall!”

Analysis as per logical economics: What inspires Trump to build the wall is a mystery. Five issues come to mind. First, Trump’s campaign rhetoric about illegal immigration and insistence that the US needs to build a border wall is hard to understand if one goes by the falling number of illegal immigrant apprehensions of Mexican nationals at US borders in the past seven years (the count has fallen by 62% since 2009, to 192,969 in CY2016) and the reduced count of illegal immigrants since its 2007 peak. Second, forgive Trump if he is drawing inspiration from The Great Wall of China, but can someone please tell him that the Wall cannot be actually seen from the moon? There are three more facts that don’t make The Great Wall of China a fitting comparison or inspiration. One, the Great Wall is within China, not on its border. Two, China paid for its own wall over centuries. And three, the Wall was meant to stop invaders, during the BC era when passports and Visas were non-existent. Talking about making Mexico pay for it – the nation’s political leaders, including both its current and former presidents, have already confessed that it is far too short on funds or willingness to do so. Going by Mexico’s economic situation, the only way in which Trump can force money out of his neighbour is by levying a double digit tax on remittances from Mexicans working in US. But if Trump were to push any federal tax on remittances down the US Congress’ throat, it would have to be applied to all foreigners in US; taxing just Mexicans would be discriminatory. And mind you, if Mexico was to fund this plan of Trump, it will have to bow down to other security measures that Trump has on mind. How about funding toilet papers for US border patrol agents next?

Trump’onomic theory #3: Reduce outsourcing to 0%. Related tweets: “Make in USA or pay big border tax! The Democrats are most angry that so many Obama Democrats voted for me. With all of the jobs I am bringing back to our Nation, that number will only get higher. Car companies and others, if they want to do business in our country, have to start making things here again. China has been taking out massive amounts of money from US in a totally one-sided trade. We will bring back our jobs.”

Analysis as per logical economics: Alright! Before this objective of Trump makes Obama look villainous, here’s the real story. When Obama took over, America’s unemployment rate was 7.8% (Jan 2009). When he left, it was down to 4.7% (Dec 2016). So, Obama has silently reduced unemployment rate to almost half. With such silence can Trump do too. But he won’t! That’s not his style because he’s just about learning to become a political figure! Back to Trump’s objective. The millions of jobs he wants to bring back to America was lost decades ago. And since then, more than borders, there is a new virus that’s doing the damage which he probably needs to be educated on – technology! What Trump intends to do is bring back 7 million jobs lost since the early 1980s back to America! Good morning Mr. President: FYI, all jobs aren’t being replaced by cheaper ones in China or Vietnam or India. Microchips, AI and smarter softwares have arrived. And therefore technically, you can’t bring back all the jobs lost! Confirms Wharton management professor Ann Harrison who writes in a Wharton Public Policy paper that, “If you try to understand how so many jobs have disappeared, the answer that you come up with over and over again in the data is that it’s not trade that caused that — it’s primarily technology. 80% of lost jobs were not replaced by workers in China, but by machines and automation.”

"Forgive Trump if he is drawing any inspiration for his 'border wall' from The Great Wall of China, but can someone please tell him that the Chinese Wall cannot actually be seen from the moon?"

Now I’ll tell you what will happen. If Trump forces Apple to shift 100% of its iPhone and GM, Ford and Chrysler to shift 100% of their car-making assembly lines to US, it will actually force the non-American consumer to opt for cheaper alternatives to the American brands, which in turn will mean that first, the jobs went and now the company and brand themselves will! Minus Apple, the likes of Samsungs and LGs will roll in wealth. Minus GM, Rolls Royce and Ford, the Audis, Suzukis and BMWs will. Yes, if Trump's goal is to bring back manufacturing jobs, he can. But they won't be the same jobs US lost decades back. Instead of using the rod, he can incentivise and make American manufacturing plants look appealing for even Asian firms! And what if I told you that the very belief that America has lost jobs created by manufacturing is one wrongly founded? As per an Economic Policy Institute (EPI) research paper, US' manufacturing sector supported approximately 17.1 million indirect jobs in US, in addition to the 12 million persons directly employed in manufacturing, for a total of 29.1 million jobs – or more than 21% of total US employment in 2013. Here’s my final question on this theory: If Trump does plan to bring back jobs from China, Vietnam and India to US, he will have to reduce American wages by 80% to ensure the same level of competitiveness. Is he willing to do that?

Trump’onomic theory #4: Kill FTAs like NAFTA and those in the making like TPP. Related tweet: “NAFTA is the worst trade deal... and now you want to approve Trans-Pacific Partnership. I will renegotiate NAFTA. If I can’t make a great deal, we’re going to tear it up. The Trans-Pacific Partnership is an attack on America's business.”

Analysis as per logical economics: There is a good reason to believe that Trump’s crusade against TPPs was largely driven by the Clinton factor and bad economics. It was Bill Clinton who signed NAFTA, an FTA that has not altogether been a sour deal for US. If trade deficit is all that Trump want to talk about then which trade treaty will he abuse in the name of blaming rising American deficit with China? As per the US Chamber of Commerce, six million US jobs depend on American trade with Mexico, a flow that has been greatly facilitated by NAFTA, which has helped eliminate costly tariff and non-tariff barriers. As per researches by the Wilson Center, 25% and 40% of the value of goods that are imported from Canada and Mexico into US respectively, are actually “Made in USA”!  In fact, Wharton management professor Mauro Guillen, has been open about the benefits that NAFTA has had on US. He states in a Wharton paper that, “We have gained jobs thanks to NAFTA, jobs that were in Europe and Japan. In the 1990s, after NAFTA came into effect, companies like Toyota, Nissan, Mercedes and BMW established plants in Alabama, South Carolina, Tennessee and other states, for instance. Their suppliers also came.” And talking about TPP, it is true that much of the forecasted failures of this FTA to benefit America is based on the assumption that this deal is “altogether too foolish to make” – little early to say that given this FTA has no China still and actually hasn’t seen the light of the day! And what economics teaches us is that if US leaves TPP, China will benefit the most, as NYU professor Ghemawat concludes in his HBR article, ‘If Trump Abandons the TPP, China Will Be the Biggest Winner’. [But, since Trump says TPP is bad for America, he must be right. Oh! Actually, he is. Because American voters think he is.]

Trump’onomic theory #5: Global warming is non-sense. It’s Chinese propaganda. Environmental friendly products have no future. Stop manufacturing them.

Related tweet: “The concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive.”

Analysis as per logical economics: What does America do when it hears a Presidential candidate campaign against science, logic, experience, vaccination (you read it right), laboratory experiments and all things real? It gives him The White House! Economics and world trade have supported well-proven cases of scientists around the world – so bio-fuels, green technology, solar panels, etc., are increasingly becoming big business in foreign trade. But, if you are a Trump supporter, stop right there. Go back to the Hummers and side with Rex Tillerson!

This cover story deals with Trump and the impact his anti-outsourcing act will have on H-1B visas and India’s outsourcing industry. Does Trump even realise that given the differential between white collar salaries in US and India, even a 100% outsourcing tax will have practically little impact on India’s IT giants' relocation strategy. Given that salary differences between India and US across most white collar jobs areas range roughly between 300% to 500%, the only difference such a tax will make to Indian firms is their bottomlines. And if stricter rules on outsourcing and visas hit Indian companies, they will hold back from investing in US.

Trump’s take on the Turkey-Russia-US faction, at war Syria & ISIS, a hurt Israel, a sanction-free Iran, his new friend Putin, EU’s slim-down season, cursed Big Oil, tax reductions, job-gobbling monster of a China, and other such issues are all significant to decide the future of America's and world's foreign trade.

Trump’onomics makes little sense in most parts. It was probably thought of more as a campaign agenda and less to drive forward America’s foreign relations and trade with the world. Many claim that Trump will destroy relations that American importers and exporters have with their counterparts, especially with those across emerging nations like India, China, etc. His supporters opine that he will 'Make America Great Again'. Trump’onomics isn’t real. Economics is. Promising to bring back jobs and quarelling with neighbours isn’t going to make the impending inflation in America look prettier or Trump look younger.

Translation: US will lose if Trump sticks to Trump’onomics for very long. Remember, Americans are less than 5% of the world’s population. Someone tell Trump that. [Unless of course, his campaign slogan was meant to read, 'Make America primitive again'!]

[steven-p-warner]

Mind Over Heart. Always.

Why is it that despite the massive “anti-Pakistan” emotional outburst that swept through India, we actually bought more Made in Pakistan merchandise in 2016 compared to a year back? Steven Philip Warner | July 2017 Issue | The Dollar Business Sometimes, maturity is harder to achieve than simply, growing up. And for something that exerts overwhelming influence on a nation's internal and external policy and trade decisions like ‘exports’, this is an easy possibility. Clearly, the absence of reality-checks coupled with continued adherence to blind emotions are to be blamed.

The absence of a reality check transpires in many ways, affecting India’s performance in trade and foreign policy matters. Imagine, how we still can’t get over even an old-fashion institutionalised notion like BRICS. Reasons – emotional attachment to pride and lack of reality checks. Really, BRICS is defunct and the influence the bloc had imagined it would have on world trade turned out just a wish. Shouldn’t India break the mould and get over the emotional attachment with the bloc? The manner in which BRICS has shown lowered activity in exports and imports is symbolic of a group gone pale - a shadow of what was imagined – when it comes to economic progress and individual prosperity. The value of exports and imports by the BRICS in CY2016 was lower compared to what was achieved even six long years back! Brittle emotional attachments to old-fashion institutionalised notions need to be dumped if a nation is to excel in foreign trade. What has been happening for the past many months is proof. We’ve been celebrating rising export numbers each month. But little do we realise that in almost a third of product categories (HS code chapter level) our share of world trade has dipped in the past five years! Reality check is important, lest we get swayed away by emotions. India’s exports has challenges and even in traditional export destinations. Let me pinpoint two regions that account for up to a quarter of India’s exports – Middle-East and North Africa. Middle-East has for long played the safety valve to an extent for Indian exports. The Gulf economies are now moving up various industrial value chains, and while this means a fall in remittances with lesser dependence on lower-skilled Indian workers, the region may even start importing less of manufactured goods and more of just raw, low-value materials in years to come. North Africa, which in recent years has absorbed a considerable proportion of India’s exports has its headaches too. The oncoming surge in the count of young Africans (100 million-plus) entering the job market by 2025 is a problem; really, the region has insufficient economic activity or infrastructure to support the influx. Result – by 2025, it could fall sharply in terms of it being a sizeable market for Indian exporters. Emotionally, we could stick to these two regions. Logically, it makes sense to hunt for greener pastures, or even switch to erstwhile popular markets like EU (which has seen quite a quick revival since the second half of 2016). Emotions don’t drive foreign trade. If that was the case, why is it that despite a “boycott Chinese imports” sentimental wave that swept through India in October last, the average monthly imports from China has actually risen? Why is it that despite the massive “anti-Pakistan” emotional outburst that swept through India, we actually bought more Made in Pakistan merchandise in 2016 as compared to a year back? (Why is it that after the Kargil War that gave rise to only bitter emotions, our annual purchases from Pakistan have increased by almost 600%?) Something delicate here – do you recall the anti-beef consumption and anti-cow slaughter movements that have forever been in vogue? Here’s to your knowledge – India is the largest exporter of bovine meat in the world – it commands about 20% of the world supply annually. Surprising? Well, foreign trade knows no emotions! Moral of the story – Get over old-fashioned notions, stop guessing and imagining without reality-checks, and let go of emotions when it comes to cross-border trade. Do these and your export numbers will tick. Out on the rough seas, where rules and policies of governments change each day, sanctions and regulations come alive without much reason, and sourcing strategies are ever so dynamic, it’s forever been mind over heart. And that forever will remain.

[steven-p-warner]

A Time Bomb?

Uncertainly surrounds GST's impact on exports – like discontinuance of duty-free imports, delays in tax refunds that will cause trouble to India's exporters in the MSME sector, restrictions on usability of scrips, etc. Steven Philip Warner | May 2017 Issue | The Dollar Business

Ever seen bikers on Indian roads, imagining their ride to be a battle wagon from Mad Max and threatening to kiss your vehicle bumpers like daring ‘bishops on a chessboard’? Appears, they’re sitting on a moving time bomb. The news their dependents don’t want to hear; it could be any day. Indian exports is riding on a similar time bomb. There is excitement in the air as May begins. News of India’s exports having grown at its fastest pace in five years has made the summer air cooler. Developments across industries in the past quarter are signaling to a year that will see India touch the $500 billion mark. Natural rubber exports from India reaching the highest in the past four years; remarkable jump in engineering goods, steel and petroleum products categories; lifting of the ban on bulk exports of major edible oils; India becoming a net exporter of power for the first time; horticulture and Services exports from India out-pacing global growth last year; and many such developments. But the biggest expectation from the year is from the showdown called GST. A positive change in exports value during a tough year is praiseworthy. Everyone’s pleased. But you don’t need a foreign trade expert with a freakish understanding of how to deal with a spaghetti bowl of factors to tell you that incentives and subsidies were to a great deal responsible for pushing Indian exports to credible highs in the year gone past. There is little logic in ignoring warning signs that have started emanating from the WTO camp. Two issues. First, as per the WTO’s Agreement on Subsidies and Countervailing Measures, when the share of a developing country (India) in global exports touches 3.25% in any product category for two consecutive years, it has to phase out all export subsidies within eight years. Second, India no longer qualifies for differential treatment, as its GNI per capita has breached the $1,000 mark three years in a row starting 2012. As per TDB Intelligence Unit, there are 27 chapters accounting for about 43% of India’s exports value (in CY2016) that no longer qualify for any subsidy. Objections have already started pouring in from Western powers to force the WTO to make India comply. US for instance has objected that India should stop incentivising its garment and textile exports as it has achieved “export competitiveness”. That the WTO reflects and reinforces US economic interests is no hidden fact (remember how US struck back with a reverse complaint at WTO about India’s solar programme being anti free-trade and won?). Means, India has limited time to give the maximum to its exporters before WTO puts a lid on subsidies that are supporting India’s exports. Therefore, why shouldn't it? GST and a modified FTP are two platforms that policymakers can use to express positive intent. Uncertainly surrounds GST's impact on exports – like discontinuance of duty-free imports, delays in refunds, restrictions on usability of scrips, etc. Similarly, while WTO compliance is important, FTP should be recast in a manner that gives maximum relief to exporters, be it for the short term. With rupee appreciation here to stay, can we ignore the tough weeks to follow for Indian exporters? Simply creating an Export Development Fund with a corpus of about Rs.5,000 crore will do little when currently, Indian exporters need an annual support system that’s almost 12 to 15 times that amount. If we are to avoid making Make in India, UnMake in India, when the WTO bomb explodes, we will have to give up the idea of “domestic self-sufficiency” being Option B. So what’ll ‘Option B’ be? That answer will decide whether our exports continue to grow in the years to come, just like it did in recent months.

[steven-p-warner]

A paradoxical 2017 awaits us!

On one hand, we lament over India’s reduced exports, and on the other, we see no 'social justice' in giving our exporters enough to even cover their input costs in the form of remission and incentive schemes.

Steven Philip Warner | January 2017 Issue | The Dollar Business

When 2016 began, the world trade community had just braved a cold and icy year. TDB's January 2016 issue titled, ‘2016: Are we regressing?’ summed the low-key expectations from 2016 quite well. Based on a comprehensive consideration of various past situations and expected scenarios (simulative analyses), TDB Intelligence Unit had then made a few forecasts about what the year ahead would mean for foreign trade and policy. They were predictions however, and most of which could have been off targets.

Strangely, economics held its ground. So did our forecasts. Forecast 1: “The world will see another 1,000,000 barrels per day being added to its oil supply tank, worsening the glut. In what range will oil prices oscillate? Between the floor support of $40 pb and ceiling of $60 pb. And $100 pb? Leave that for 2018.” What has resulted? As on Dec 21, 2016, Crude oil futures (for January to December 2017 settlement) range between $51.90 and $55.72 per barrel (bbl), while Brent crude futures range between $55.21 and $57.31/bbl. Our take for 2017? We expect oil prices to appreciate, with many OPEC nations recently promising a disciplined approach to production (proving the cartel is still alive!). Crude could easily break through the $60/bbl benchmark in 2017 and could oscillate in the $60 to $80/bbl range. Forecast 2: “Easy to imagine that the USDINR rate crossing over to the higher side of 70 in 2016 will hurt Indian importers. 2016 could mean the USDINR exchange rate swaying in the range of 60 to 70. Anything beyond is difficult to imagine.” What has resulted? The USDINR exchange rate stands at 67.893 (on Dec 21, 2016). Our take for 2017? It’s likely that Fed rate alterations, dynamics of foreign politics, flight of FIIs from India’s bond markets, demonetisation, and other such factors will force the rupee to stay below the Rs.65-68 to a dollar mark in 2017. Forecast 3: “India will end 2015 with merchandise exports in the range of $260-270 billion, marking a change of negative 17-20% y-o-y in total exports. A y-o-y growth in India’s exports in 2016 will prove as heartening as it appears impossible.” What has resulted? India’s exports fell y-o-y by 17.8% in CY2015 to $264 billion. Our take for CY2016 and CY2017? India should close CY2016 with total exports of about $260 billion, marking a fall of 1.35% y-o-y. Analyses by TDB Intelligence Unit shows how 2017 could see India’s export shrink, given various macroeconomic factors, including uncertainties and troubles back home. But a depreciated rupee should help ease the tension amongst exporters to a degree. That will however not be enough to avoid a slip in total annual exports from India by up to 1-1.5% y-o-y in 2017. Forecast 4: “RCEP and India-EU FTA – bet your best horses – you will see little happen on the agreement in the next eleven months.” What has resulted? Nothing conclusive has really happened on these fronts. Our take for CY2017? Round tables will continue. But little is expected to be decided on either RCEP or the India-EU deals. There could be some changes to India’s traditional FTAs, like ASEAN. In fact, there is a greater likelihood of ASEAN being expanded to cover services as well, with Philippines concluding on a narrower set of common services to be included in the trade pact. This could make India’s services exporters smile! Forecast 5: “Putin will become America’s darling in 2016.” What has resulted? Who would have imagined that in our lifetimes, we would hear Putin declaring to the world that "US is probably the world’s sole superpower"? Our take for CY2017? Actually, there will be more than expected activity in the America-Russia neighbourhood in 2017. There are concerns being expressed over the likelihood of Putin having too much influence on the Trump administration. There is so much strong love between the two nations suddenly that this affair could choke America’s foreign policy, raising questions about its supreme leader's support to a nation whose military actions in Ukraine have invited both US and EU sanctions in recent months, and one whose “unpredictable” Head of State is accused of an unprecedented cybercampaign to influence elections in countries. Obviously, policy relations matter in foreign trade, and with various economic and military benefits that the Kremlin will get under Trump’s administration, Putin has probably ensured a breeze of a new year for his nation - global policy-and-trade-wise. If you consider events that have unfolded in recent months, seems, 2017 will be a "paradoxical year". We are headed into this year with occurrences that are simultaneous, yet completely opposed. Most importantly though, they all matter somehow to India’s and global trade fraternity. Allow me to list out some here.

Paradox #1 – A scared, globalised world in 2017? It’s not surprising that in an era of globalisation, recently, dictionary.com named “Xenophobia” (meaning, dislike of or prejudice against people from other countries) the word of the year for 2016. This word was the most searched word in 2016 after Brexit and US Presidential elections. A borderless world and xenophobia are what we're now talking about in the same breath! Paradox #2 – A walled, borderless world in 2017? Talking of creating a borderless world, while on one hand, WTO is excited about the prospects of no boundaries in policy and trade, America chooses a president who wants to first build walls and then fences, ban Mexicans and Chinese and every export from “job stealers”, foul-mouths his neighbours branding them “drug traffickers” and “murderers” while hailing Pakistan “a fantastic country and place of fantastic people” with a prime minister who is “a terrific guy with a very good reputation” who is “doing amazing work”. Perhaps what Trump means when he refers to Sharif being “terrific”, with a “good reputation” and doing “amazing work”, is that he possibly liked the fact that he recently appointed Qamar Javed Bajwa as Pakistan’s Army Chief for one reason – that he’s an Indo-Pak LoC specialist! Paradox #3 – Fallacy of composition comes alive! Apparently, a world without boundaries remains a concept well ahead of its time. On one hand, we’ve had the African Union attempting a closer integration with the launch of a common passport, and on the other, we saw good proof that nations are still fighting hard to retain and regain their individual political, fiscal and economic identities. While the willingness of only 13 nations in Africa to allow advance visa-free movements proves that AU largely remains a concept on paper, the Grexit fever and the real-life experience with Brexit has got us all imagining how fast will national boundaries surface within EU. The way things are going, every EU country may need its own “-exit” term at some point in the near future, perhaps as early as 2017. [Remember, France, Germany and Hungary go into general elections in 2017!] Paradox #4 – Joke of 2017: China, a free trade market! If you were to name the top five apps that you use on a daily basis, Facebook and WhatsApp would be right up there. Now imagine a nation that disallows two loudest symbols of free speech in the modern-yet-common mobility space being granted a 'Market Economy Status (MES)'. If you’re wondering what an MES means, it’s basically the opposite of a centrally planned economy. It is market run by its individual citizens and businesses, and not by government intervention. China has launched “legal challenge against the EU and US” over their reluctance to grant it a MES under WTO rules. Fear is, in 2017 we have an economy still run like a kingdom being granted a false identity of being an open, democratic market. If China is granted MES, it will be a paradox come alive, which will also curtail the freedom of importing nations to impose anti-dumping duties (ADDs) on Chinese products. Imagine world trade thereafter! Paradox #5 – Whose side are we on? It's the problem within. And I am not even talking about something as obvious as pulling our GDP back by 1-2% with demonetisation during a time when world trade is fighting to grow. Imagine, on one hand, we talk about transparency and digitisation (think EDI ports, procedures like single window clearance, etc.) and on the other, we not only fail to conclude on taking action to integrate divisions to make life easier for India’s exim community (like bringing FSSAI, Plant quarantine agency, Animal quarantine agency, wildlife crime and control bureau, etc. under one single window), but also abolish a 12-year-old practice created to infuse some transparency into CBEC's functioning by making public on a daily basis, imports and exports from various EDI ports across India. On one hand, we lament over India’s reduced exports (as on Dec 23, 2016, the government is considering a reduction in exports target for 2020 from the earlier $900 billion to somewhere under $750 billion!) and on the other, we see no social justice in giving our exporters enough to even cover their input costs in the form of remission and incentive schemes. On one hand, we talk about replacing the Nehruvian five-year plan model of country's development to a longer term 15-year-long blueprint, and on the other, we’re witnesses to constant changes in even 5-year-long FTPs created by a department well-versed in the art of doing so! Notwithstanding these paradoxes, there are signs of 2017 shaping into a more prosperous year than 2016. Possibly the worst is over for crude and commodities for atleast three-four years, and stock markets around the world present a prettier picture today (with 76.1% of the 113 major stock indices showing an increase in 2016), representing a positive mood amongst retail and institutional investors in the new year. As for India, hopes of increased FDI inflows (monthly average inflow at $3.32 billion in 2016, has been the highest ever), implementation of a unified tax system, expectations of a lower than usual acts of terror, acceptance of digitisation in foreign trade, an encouraging Manufacturing Services PMIs, etc., make one hope for a better than expected 2017. Despite its paradoxes, we may witness Indian exporters in all their glory in the new year. Mere pyare bhaiyo aur behno, surprises never end, do they?

[steven-p-warner]

Time can travel... in two directions

Currently, VAT refunds take up to two years. Imagine the state of India's exporters, who will have to first pay GST and then claim a refund. This "claims-post-payment" rule will mean "reduced working capital" headaches for India's MSMEs

Steven Philip Warner | November 2016 Issue | The Dollar Business

Empty conspiracy theories surrounding the form and factor of the final GST rulebook and efficacy of this tax treatment are fast disappearing like pugmarks on a seashore. Matters and debates on this modern change has made tabloid headlines in India “spicier” than frequent leaks from Trump about his “manhood” and “locker-room” revelations. But it’s taking shape. And one of the most reassuring moments in the GST-in-the-making for India was the on-time, four-tier tax provisional rate structure decided by the GST Council (albeit informally) in the third week of October. Effectively though, with both the manufacturing and services sectors expecting an April harvest with the rollout, there is little in news yet that makes India’s foreign trade community excited. They know time will tell; and also that it’s capable of travelling in two opposite directions. While India’s EXIM community is still unsure about how incentive and remission schemes under FTP will be treated under the new regime, fascinating arguments that are thrown up each day make some EXIM-related grey areas greyer. There is an urgent need to settle on a more sober and responsible version of policy-making and implementation. Let me give you a simple example – in less than three years (since The Dollar Business magazine’s first issue went to print), we’ve seen more number of individuals (actually, four) at the helm of India’s prime policymaking wing for foreign trade. You can’t have a new name being announced each year and expect stable policies for the long-run benefit of millions of exporters and importers in the country. This is also a problem that was recently pointed out by South Korea’s ambassador (to India). He opined that policy unpredictability in India is a challenge that undermines foreign investors’ confidence. He spoke of complaints by Korean businessmen that while at the ministerial level, matters in India look straightforward and hassle-free, when it comes to execution, processes are subjected to various procedure-related issues and delays. “We will appreciate if policy making becomes more predictable” – this one’s straight from the horse’s mouth! Talking of GST and FTP schemes, it’s worth noting that last month, the Commerce Ministry also suggested to the Finance Ministry that exemptions given to exporters should continue under GST. Evidently, the Finance Ministry wants exporters to pay the required taxes first and then claim refunds on a later date. Will this proposed procedure of paying taxes and then requesting a return under GST cause hardships to exporters? That’s anybody’s guess. How about we ask the Finance Ministry this – why does it impose fines on delayed payments of individual and corporate taxes? Because if delays occur, they cause mathematical and implementation headaches to the government and result in a substantial amount of working capital being locked-up. The same issue hurts exporters for whom a “claims-post-payments” rule will mean hardships, especially for MSMEs that account for almost half of India’s exports “knowingly and officially”, and much more “unknowingly and unofficially”. In my recent interactions with heads of a few EPCs and regional export promotion associations, there was one closing question on this subject that we ended up discussing more often than not – “Where therefore lies the logic in calling certain exports ‘zero-rated’, when you are anyway taxing inputs in the first place?” One EPC chief even went so far as to suggest that though GST is good in terms of being a concept, it will create trouble for India’s exporters. Currently, VAT refunds take up to two years – imagine the state of exporters, who will have to first pay GST and then claim refund. Unless, of course, the government can give a written assurance that in all valid claims, refunds will result within a month of the submission of the application. Wishful thinking, you think? I wrote about grey areas. Here’s another problem that India’s exporters and importers are bound to face if the Finance Ministry should muscle its way into grabbing greater control over quite a few export promotion schemes like Advanced Authorisation, EPCG and Deemed Exports. It has been proposed that while the Commerce Ministry will remain the policy-making powerhouse for foreign trade-related schemes, implementation will be a department handled solely by the Finance Ministry. Will this not imply greater difficulties for India's exporters, especially the lesser informed MSMEs which survive on incentives? This is perhaps taking a greater than desired inspiration from the text book of “ideal democracy”. Where India is still struggling with transparency and matters related to Ease of Doing Business, where corruption still thrives at large in the nation, getting more departments involved will mean more leg-work and delays for exporters in getting their dues. So why does the government want to split roles – in crude words, what’s its excuse?

"Why not give our exporters what they deserve to be at par with their counterparts across other markets?"

One unsaid reason is to ensure that Indian firms, be it large listed companies or small proprietary MSMEs, are monitored for ethical behaviour when it comes to export promotion schemes. Let me bring to the fore an interesting observation here. Transparency International, a globally renowned corruption watchdog that ranks nations each year on the basis of how corrupt they are, has ranked India at 76 out of 168 nations in its latest Corruption Perception Index. India’s transparency perception score was just 38 out of 100 – which as per even our primary school rules would mean that the nation fails in the subject of being non-corrupt. So going by this, the Finance Ministry move to intervene makes sense. Right? Wait until you learn of the next fact. The same corruption watchdog, after analysing 15 emerging market countries that includes Brazil, Mexico and Russia, has declared that Indian firms are the most transparent. The report clearly outlined that, “Indian companies have the highest average score of any country – they all score 75% or more – in organisational transparency...” That clearly implies that if India’s small and big commercial entities are doing well in terms of being non-corrupt and ethical, what (rather, who) is actually spoiling the overall rating for India? There is surely some need for quiet introspection and a bit of soul-searching by some key units in our government. There is currently an inter-ministerial and inter-disciplinary interface on foreign trade-related matters. My only fear is – like “democracy”, hopefully, the word “independence” (in power and authority) doesn’t prove more inspiring than it should.

Industry bodies and association chiefs also fear that splitting charge of India’s foreign trade could prove trouble for India’s exporters in another way. More than one department will mean more “cooks”. That could also add greater volatility to policies, which then will make planning in exports a more difficult task than it already is at present, for small and medium-sized merchant and manufacturer exporters. A certain head of one of India’s largest export promotion council feels that getting another department into the picture will only amount to more confusion and increased difficulties and that the Commerce Ministry should be the one-stop authority for all matters related to foreign trade. Get the expert to worry and plan about what his or her expertise lies in. The Commerce Ministry is the right expert for foreign trade. Sometimes, giving decision-making powers to even related departments make little sense. It’s like saying, India’s Health Ministry has everything to do with health of the nation's citizens, but expecting it to decide on the “fittest” contingent for the 2020 Olympics is beyond logic. Perhaps, all these arguments and opinions are born of the notion that incentives are anyway a waste of earnings for the exchequer and an avoidable drag on the economy. In fact, I was shocked to hear a popular CEO stating point-blank at a media event that “Exports don't need incentives to thrive”. Seriously? When we mean incentives, we are not implying profits, but survival. When we mean incentives, we are not implying big firms that have mastered the art of economies of scale, but the millions of MSMEs and SSEs for whom all the excitement about 'Make in India', exports, foreign collaborations, R&D, innovation, etc. etc., are either confusing or make little sense. And why not give our exporters what they deserve to be at par with their counterparts across other emerging and even developed markets? It’s no secret that even today, world over, exports are incentivised in a way or another. There is no denying the fact that for industries and companies that haven’t achieved a critical mass or are facing headwinds in various disciplines, incentives and remissions are tailwinds that will ensure their survival. Hopefully, with the government taking stock of what the Indian exporters are faced with in these challenging times, we will witness a basket of logic and kindness, which should get our country’s merchant boats rowing into the direction of growth. India’s merchandise exports have fallen y-o-y in 20 of the last 22 months, growth in Services exports has significantly slowed in the past year, and domestic sector-specific bottlenecks are just not helping the cause of India’s exporters at present (as per a report by HSBC Global Research’s study, titled ‘India: Churning the Ocean’, almost 50% of our decline in exports is explained by domestic bottlenecks, while global growth slump is responsible for 30% and exchange rate for just 20%). This is a signal enough that we need to begin by putting our own house in order. Time can travel in two directions. An environment of volatility and stranglehold on the exports community will only make both the hourglass and the compass look ugly.

[steven-p-warner]

Let’s Not Forget Murphy’s Law!

Incentives and remission schemes in FTP are likely to be reviewed under GST. The Centre has to ensure that in these harsh times, the alterations don't lower the appeal of key schemes that are currently helping Indian exporters survive.

Steven Philip Warner | The Dollar Business

There’s always an upside to a downside. Think of the two most popular three-letter words that were symbolic of a prelude to victory for India on the global stage last month – Rio and GST. While we missed the gold at Rio by many miles, at many-an-event, it has given us golden hope for a better than yesterday face-off in Tokyo four years later. [I’m more excited about how an Abenomics-driven nation can handle the expensive weight of an Olympics.] And despite prevailing uncertainties over GST (Goods and Services Tax) – rates, deadlines, laws, etc. – progress made in the passage of this tax reform makes us believe that we’re ultimately living in a nation where the opposition party doesn’t necessarily oppose everything that’s good for the nation. Away from sports and politics, passage of the GST (Constitution Amendment) Bill in the Upper House early last month, literally marks the revival of a dormant controversy, one that’s apparently good news for India’s manufacturing and export communities. But remember, everything “most exciting” can also be everything “most unpredictable”. With GST, it may be no different. Murphy’s Law, let me remind you. GST is talked about as being a potential game changer. There is little doubt that GST will mark the move towards creation of a common Indian market for manufacturers and sellers alike, and nullify the cascading effect of tax on the cost of goods and services. From tax structure to tax credit utilisation and impact on buyers – GST in the form as it is being imagined is set to overhaul the existing indirect tax system in India. From the viewpoint of the services and manufacturing exports community, the impact of GST is to be understood in two aspects. One, its effect on the factors of production. Two, its effect on exports. With Central taxes (like Excise duty, CST, Service tax, ACD, Additional excise duty, etc.) and State-level taxes like (VAT, Entertainment tax, Entry tax, Octroi, Luxury tax, etc.) being subsumed under GST, you’ll find companies settling on altered strategies for sourcing and distribution. And along with the changed tax rates, the new arrangements will impact both their pricing, profitability and cash flows. Suddenly, inter-State procurement will look viable, tax savings due to GST rates will call for repricing of products, removal of excise duty on manufacturing would mean revised distribution strategies and perhaps even superior cash flows and lower inventory costs (due to GST being paid at the final point of sale), etc. It all sounds good when looked at from the taxation point of view. It all appears forward-moving for both production and exports. But unpredictable it can get. As this issue was being sent to print (on August 22, 2016), only three states (Assam, Bihar and Jharkhand) had ratified the Bill. 13 more State assemblies were yet to give their nod. After that happens, the President has to approve the bill, post which the GST Council will be constituted and assist the Finance Ministry in drafting the Central GST (CGST), State GST (SGST) and Integrated GST (IGST) Bills. These three bills will then be tabled in the winter session of the Parliament. There are matters still undecided about the three bills. Two questions. One, when will GST go live? [Even if the government gets a minimum of 16 States to agree to the GST Constitution amendment bill by September 10, drafts the CGST, IGST and SGST bills in time for the Winter session, gets all State assemblies to say “AYES” to the SGST bill, is April 2017 enough time for the nation to have the GST in all three forms rolled out? Recall the Malaysian example, where its government received strong resentment even after providing 18 months to firms in the country for a single-mode GST preparedness? Given the complexity of the dual-model suggested for India and the state of technology preparedness prevailing, anything under 2 years appears too hurried.] Three, the big Q – what threshold rate will be acceptable to the Centre and States alike?

[Remember, it’s the GST Council that will take a call on that.] Given the current air of uncertainties, especially with respect to the final applicable rates – how much of a rate differential will exist between IGST and CGST (or SGST) is a question. It will be easier to determine the impact of GST laws on India’s manufacturers and exporters when the final ‘acceptable’ tax rates are announced. To understand simply how Indian manufacturers will benefit, here is an illustrative example: Say, the Cost of Production (CoP) of good A for an Indian manufacturer is Rs.10,000 and he sells it at a profit of Rs.4,000 to a wholesaler. Scenario 1: Under the current system of taxation, considering a Central Excise Duty (hereafter referred to as 'Excise') of 12.5% and VAT of 14.5%, the final invoice value for the product would amount to Rs.18,033.75. That essentially means that the final buyer, which in this case is the wholesaler ends up paying Rs.4,033.75 in various central and state taxes. [If we consider the wholesaler to retailer and retailer to consumer chain, the tax base broadens due to the cascading effect, which means that each subsequent buyer gets a bigger share of the tax burden in relative terms.] Scenario 2: Under the new GST system, considering the same CoP and profit for the manufacturer, there is no Excise imposed, therefore, the final tax (or taxes), two in this case – CGST and SGST – are applied on Rs.14,000. Let us for sake of comparison say that the total tax burden of 27% (which in Scenario 1 was Excise+VAT), is equally divided as CGST and SGST, each being 13.5%. The final invoice value for the product would amount to Rs.17,780. Under GST therefore, the final buyer (which is the wholesaler in this case) ends up paying less tax (just Rs.3,780), and therefore a lower price for the same good. What this therefore ensures is that Indian companies can sell the same ‘manufactured’ product to firms that are higher up in the value chain (Indian or subsidiaries of foreign multinationals), and these firms can therefore indulge in more competitive exports as a result of lowered costs, and better cash flow and working capital (due to taxes being paid at the point of supply or sales). It appears as though under GST, India’s exports will become more competitive and Make in India will get a decisive boost. But reality can be somewhat different.

One, at present both VAT and Excise are refundable on exports of goods manufactured in India. [We’re ignoring the delays in refunds.] The cost of goods procured by a merchant exporter (wholesaler) for exports will therefore remain same even under the new system (because GST on exports are still zero-rated). Of course, improvement in logistics leading to delays in transport could be a big plus to exporters. Two, there is serious doubt about the single tax nature of GST, given the State and the Centre components of GST. Three, at present, many MSME units are eligible for exemption from Excise (as are SSI units with turnovers of up to Rs.1.5 crore). Also, traders and merchants are not liable to pay excise duty, which is the main indirect tax component of the Central government. Plus, all categories of goods are not covered under Central Excise regime. With GST coming into force, the payment of Excise Duty (that gets included in CGST) is a part of taxes right up to the point of sale or supply. Four, given that the Centre has now promised to compensate states (especially those that are manufacturing hubs and fear loss of revenues from the new tax-at-point-of-sale regime) for any revenue loss in the first five years of rollout of the proposed indirect tax regime, there is little doubt that the standard GST rate (which will be set as close to the Revenue Neutral Rate as possible) will be higher than what was being imagined originally. A CGST and SGST combine of anything under 18% is out of question. Between 20-25% looks most likely (higher than the global average of 16.4%). Five, there are currently hubs in the states of Himachal Pradesh and Uttaranchal that enjoy an excise tax holiday on manufactured products. It is unclear whether area based exemptions will continue in the GST regime. Perhaps they will be asked to pay GST on the manufactured goods, and given a tax credit or a refund. More word is required on it. Six, greater clarity is needed on how taxation on ‘imports for exports’ goods is to be treated. It is understood that BCD will continue to be levied under GST. In fact both CGST and SGST will be imposed on cost of imported goods plus BCD (CIF+BCD). But with CVD (Excise) and ACD (SAD) being absorbed into GST, more information would be needed on what transformation Drawback Rates will undergo. Let’s consider three products that India is importing from two countries for sake of comparison. One, black matpe seeds (urad dal) whose imports (from Myanmar) are subject to BCD, CVD and ACD of 0% each. Two, steel utensils, on which a 10% BCD, 12.5% CVD and 4% ACD are levied (from China). Three, diammonium phosphate (from China), on which 5% BCD, 0% CVD and 1% ACD are imposed. Three very different products that are subject to very unique import duties. Imagine that an Indian importer procures these three products, and after adding minimum value required for the goods to qualify as exports, subsequently exports them from India. Two questions therefore. One, the current Drawback Rates schedule was designed to incorporate ‘total’ duty paid on inputs used in exports (remission up to levels permitted under SION). That includes BCD as well. But since under GST, BCD would be chargeable, an already complicated percentage system of refund will become more complicated. How changes in the AIR of Drawback will reflect the refund limit to the amount of BCD embedded in the export product is yet to be understood by India’s exporters. Hopefully, there will be Science applied to alter the Drawback Rates. Now let’s get this straight with god and pray that with GST, will come more clarity on DBK Rates and that SION will come closer to being a logical standard. Seven, beyond Drawback, the current customs import tariff is loaded with exemptions that are likely to be reviewed. What could result are changes in many export-linked duty exemption and remission schemes where exemptions will only be allowed from BCD, but not IGST. These changes will for sure lower the appeal of key schemes under FTP like MEIS, SEIS, EPCG, Advance Authorisation, etc. Eight, the Customs valuation principles that have been adopted for GST purposes is a new phenomenon that Indian companies will have to follow. For instance, valuation through ‘computed value mechanism’ which is prevalent in the Customs valuation norms does not exist in the current form of excise duty or service tax or even VAT laws. Plus, Indian service providers may not be comfortable with valuation of their services by using the ‘computed value mechanism’ as that may reveal their margins on services provided. In terms of industries, the impact, especially if you look at each of them from a domestic consumption viewpoint will be varied. For some it’s good. For others, the impact will be largely positive. For example, with duties on electronic goods – from mobile phones to laptops – set to rise from the existing level of about 5-16% to in excess of 20%, the cost of electronics will automatically rise. On the other hand, estimates for fall in on-road prices of automobiles range anywhere between 8-18%, depending on the final rate of GST. GST is therefore good news for the auto industry. In one line, it’s largely favourable for Consumer durables, FMCG, Cement and Infrastructure, but not so for Wind energy, (electricity) discoms, pharmaceuticals, etc. For services, there is more bad news than good with telecom companies, insurance, hotels and airlines taking a hit on the increased tax incidences. Interestingly, in the impact report submitted by the committee led by Chief Economic Advisor Arvind Subramanian in December last year, recommendation for final GST rate was 15-15.5%. It was suggested that lower rates be kept at 12%, with standard rates varying in the 17-18% range. Why such numbers? Allow me to give you an example: In India, hotels and restaurants are subject to service tax, VAT, and luxury tax. Though the impact of GST would depend on the tax previously levied by various states, the CEA-led Committee had concluded that, “If the GST rate gets capped at 18%, the impact is likely to be neutral as presently service tax payable by hotels is around 8.7% and luxury tax at around 8-12% (depending on the state and type of service). Restaurants have to pay service tax at around 5.6% and VAT at around 12%-14.5%.” Obviously, the hotels probably won’t drown under the additional taxes, but over a prolonger period, they’ll definitely feel hurt. And ‘hurt’ businesses weren't what GST was meant to create! Yes, GST will make logistics smoother, reduce transaction costs and wastages, eradicate the multiple layers of overlapping taxes, bring in uniformity of tax rates across states, and reduce levels of corruption. GST has its goods, but how far it will go in making India a manufacturing and exports hotspot is to be seen when the GST Council uses its pen. Short term inflation spiking is a likely repercussion of GST implementation (as seen in Singapore in 1994). It is also important to understand if GST really will impact exports. Currently, 160 countries have introduced GST in one or the other form. While most of them have a unified GST system, the most notable example of a dual GST system adopted in a nation similar to India (being amongst the BRICS) is Brazil. It may not be completely appropriate to compare the impact of GST on exports of the two nations because Brazil's portfolio of exports is very different from that of India’s. But let us still take a quick dig at it in a line. Monthly exports from Brazil averaged $4.48 billion in the 63 years leading to July 2016, with the lowest being recorded within a year of GST implementation in Jan 1965 (of $75.06 million only!). What a coincidence! While NCAER has predicted that exports would increase by 3.2-6.3% in the long run, it is known that benefits will only result from an interplay of tax and non-tax factors. The impact of GST on exports will largely depend on how inflation turns out and how smooth is the implementation process. In recent weeks some fantastic steps have been witnessed that promise changes for their sectors. For instance, the Special Advance Authorisation Scheme was added as an amendment to India’s FTP on August 11, 2016, to boost exports of articles of Apparel and Clothing Accessories. This was a much needed move, especially given that textile export from India fell in FY2016 and the Trans Pacific Partnership threatens to further shrink India's textile exports over the next few years. Another industry, another bright spot. Food processing. After allowing 100% FDI in food processing sector through automatic route and in retail marketing of food products produced and manufactured in India through approval route, the ministry has now reduced the excise duty on food processing and packaging capital goods from 10% to 6%, and declared a five year-long tax free earning period for newly set-up food processing units and 25% exemption on profits thereafter for another five years. Now that sounds more like the real Make in India move, the real Make for the World move; feels like we’ve got one sector that’s likely to give China a run for its money! Like I said earlier, there’s always an upside to a downside. During a time when our exports are not living a dream, and manufacturing needs more than just vision and promises, we hope that GST will bring in a downpour of good news and prove Murphy's law wrong. And that our policymakers will take decisions that aid our exim community. No point betting on a pack of face-down cards. GST alone will not have foreign investors flock to India. Parallel strategies need to be implemented to do magic with India’s fortunes in foreign trade. If GST is about a real roadmap, then planned progress has to accompany the reform. The Centre and States should come together to ensure that our exporters don’t just survive on hope. Let the next decade be a decade of perfection and intolerance to average will. Let’s make our 70th Independence Day count!

[steven-p-warner]

Forex Remittances. Growing... Growing... Gone?

Go back in time and you will realise that year after year, inward remittances to India have been far higher than the oft-talked about FDI. Apparently, this precious non-FDI well of funds has started to dry up.

Steven Philip Warner | May 2016 Issue | The Dollar Business

By now you would’ve heard of the leaked Panama Papers and the illicit capital movement and tax evasion scam that it has unearthed. Claims are that Panamian law firm Mossack Fonseca was hand-in-glove with leading individuals and entities around the world. The accused list includes names from Russia’s Putin, Pakistan’s Nawaz Sharif and Britan’s Cameron to the stars we love like Jackie Chan, Lionel Messi, etc. A big count of the world’s top 1% (individuals or corporations, capitalists or politicians) with muscles to exploit financial loopholes through setting-up of billion-dollar offshore agreements to questionable investments, has been named in 2.6 TB of data files. From much known entities like UBS, HSBC, FIFA, Société Générale, to the lesser-known kinfolk of Chinese President Xi Jinping, Vice-Premier Zhang Gaoli, former Premier Li Peng (and we were wondering why all information on the leak was blocked on the Internet in China in a matter of hours!), Icelandic PM Sigmundur Gunnlaugsson, former Egyptian former President Hosni Mubarak, and Syrian President Bashar al-Assad, besides many others, the leak has made itself explosively heard! This story of inappropriate dealings across offshore havens and improper piggy bank practices linked to people and nations, is one aspect that proves how in the current season, globalisation is flu-struck.

While on one hand, movement of goods in the global perspective is facing bad weather, the revelation of something like ‘Panama Papers’ proves that capital movement is not enjoying a completely clean ride either. Talking about capital transfers, away from all talk about tax havens and the elite 1%, the case of ‘foreign remittances’ is an area of interest for India (unlike the Panama leak, which hasn’t given India much trouble). The reason is simple. India being the nation that is the origin of the largest count of emigrants in the world (13.9 million during 2015 as per UNDP; followed by Mexico, China, Russia, Bangladesh, Pakistan and Philippines), is also the highest recipient of foreign remittances (that includes personal transfers and workers’ remittances). The forecasted figure for 2015 stands at $72.2 billion – a whopping Rs.4.8 lakh crores! – as per The World Bank, putting India ahead of others like China, Philippines, Mexico, France and Nigeria.

But this well of funds has apparently started to dry up. For the first time in over a decade, total remittances to India fell in CY2015 (by 3.1%). As was revealed recently, workers’ remittances to India fell for the first time in over 12 quarters. Never in the past five years has this inflow stream been smaller than in the previous year. Last year however, the unexpected happened.

Like we said before, the narrowing of this channel of remittances is neither a happy development, not a sign of great things to come for India. You ought to ask, why this very question of remittances? I mean, we don’t really hear this term every second day in the news like we do terms like FDI, Portfolio Investments, Trade deficit, Forex reserves, GDP, etc. Why would this term mean so much for Indians residing in India? If you missed reading the previous paragraph, I did mention that India’s emigrating population (temporary and permanent) per year is the largest in the world. A 2015 World Bank study claims that every year, over 1.4 crore Indian families are potentially affected by what happens to remittances (the estimate is based on the fact that in 2013 alone, as per UNDP, India was the source of 14 million emigrants). That’s reason #1. Reason #2 is simple. Remittances have undoubtedly remained a reliable source of foreign exchange to India and a great support to narrowing its Current Account Deficit (CAD). [In CY2015 alone, remittances nullified more than half (53%) of India’s merchandise trade deficit of $126.64 billion; DGCIS data.] Beat this for a fact – every year in the past five years (and I’ve only mentioned five years so that we don’t go back to digging out ancestral numbers), remittances to India have outclassed FDI in value. In CY2015, while foreign remittances to India touched $67.40 billion (as per RBI’s Balance of Payment reports; the figure stands at a higher $72.2 as per The World Bank), FDI inflow stood at a lower $36.70 billion. That means remittances to India was almost twice as large in value as compared to the oft-hyped FDI (and FDI is what the Make in India theatrical is all about, isn’t it?). Go back in time and you will realise that year after year, inward remittances to India have been far higher than FDI. [See chart, ‘Remittances versus FDI: What's more precious?’] That does force you to ask the question of “importance”, but we leave that to your intelligence.

What is peculiar about the fall in inward remittances during 2015 was that it occurred while the rupee continued to slip against the dollar. In the past decade, for reasons obvious, a depreciation in the Indian rupee has always had a positive impact on inward remittances. In fact, in the year that followed the last Global Financial Crises, while inward FDI and portfolio investments into India took a beating, remittances held its ground. RBI had then claimed that one major reason for inward remittances in India not being impacted significantly by the global economic crisis was the depreciation of the rupee [by about 10% in a matter of twelve months between early 2009 and 2010] resulting in the rise in inflows through rupee-denominated NRI accounts to make the most of the weakened currency back home. And this is one big fact that explains how between early 2011 and end-2014, while the rupee continued its downward ride, depreciating almost 39.0% in a matter of 48 months, inward workers’ remittances grew 39.8%! [That’s quite a direct effect, you’d reckon.] But what explains the 4.4% and 3.1% fall in workers' remittances and total inward transfers during CY2015 – a time when the rupee declined 5% between the first and last day of the year? Surely, this defiance of everyday economics is a cause for concern.

It’s perhaps too early to place the cursor on a number, but remittances may actually have seen the last of good news for some quarters, perhaps years. Close to 47% of remittances to India come from four nations in the Gulf (UAE, Saudi Arabia, Kuwait and Qatar) and that is one big trouble area. [As per World Bank estimates, besides US, migrants from India are concentrated in Gulf nations like the United Arab Emirates, Saudi Arabia, Kuwait and Qatar.] Between the start of 2011 and mid-2014, greater fall in the value of rupee meant higher inflow because oil prices remained stable between the $100 to $120 per barrel mark. [See chart titled, ‘Impact of oil prices on remittances’.] Fluctuations occurred. But almost every time, the abovementioned floor and ceiling held firm. Until in mid-2014, the rigs were shaken and oil prices gave many-a-nation hosting Indian migrants (responsible for the multi-billion dollar transfers that India receives each month) nightmares of the undertaker.

Obviously, they’ve passed on the fear to India (and other nations from where the migratory folks have originated).

Not to forget, these economies are based on steadily rising incomes fuelled by oil. Oil accounts for 85% of Saudi Arabia’s total exports, 65% of UAE’s, 94% of Kuwait’s and 83% of Qatar’s. So if the price of a barrel of oil falls by 60-65% in a matter of 15-18 months, these economies are sure to be affected.

Let’s do a quick build-up here… Take Saudi Arabia's case. Oil revenues account for about 80-90% of State revenues, and the US oil boom causing the undesirable market glut has created havoc for the nation. The country’s 2015 budget was based on expectations that oil would remain in the range of $90-$100 per barrel. It’s at less than half of that at present, which has resulted in a budget deficit that has exceeded the 20% mark and $100 billion in value terms. All this trouble has started showing on the unemployment rate too – as per CIA data, 30% of employable Saudi youth (below the age of 35) is jobless today. Now juxtapose this fact with this one – 90% of those employed in the private sector and 70% in the government are foreigners. So when a landslide of trouble hits the economy, which group becomes the first one to lose jobs or incomes? With oil prices forecasted to remain at under $60 per barrel mark for the next few years, the remittance stream to India from this country is expected to narrow down further. [For the record, Indian migrants account for about 8% of the total Saudi population!]

And here comes the final nail in the coffin – an announcement like the one that the Saudi government made on March 8, 2016. It launched a new nationalisation or Saudization program called “Guided Localization”, under the direct supervision of the country's Ministry of Labour. The aim of the programme is to implement “total” replacement of foreign workers with Saudis in phases across both skilled and semi-skilled job areas in the private sector over the next six months. We reckon this complete overhauling will call for more time than that, but it is for all means a practice to legally force firms to have 100% Saudi employees in time. Disaster will strike India’s remittance inflows if the other countries of the Gulf Cooperation Council were to implement such a programme. Like we said earlier, close to 47% of remittances to India come from four nations in the Gulf (UAE, Saudi Arabia, Kuwait and Qatar) and that is one big trouble area. One of India’s top geopolitical agendas in the coming weeks should therefore be to convince GCC members to avoid this carpet bombing!

Many in the industry also opine that even if GCCs were to cause India some trouble in remittances, the itch won’t last too long as our expat labour market will move to the West like US and EU (which account for 46% of India’s total remittances). Now, that’s naïve. Official data proves that of the total 25 million NRI work force that India has, 60% are unskilled, while the rest 40% belong equally to the semi-skilled and skilled categories. It is well understood that the larger proportion of remittances that come from Gulf nations originate from the unskilled and semi-skilled categories (that’s a huge 80%!), while those from US and EU are from Indian NRIs in the IT and financial sectors who are classified “skilled” (that’s just 20%). How does one expect to see unskilled and semi-skilled workers, four times in count and used to the oil rigs and regular shop-and-home chores, accommodate themselves in First World geographies that are only in love with India’s doctors, engineers, bankers and those in the knowledge arena?

Whenever it comes to capital movement, Indian media is busy writing about black money and something as newsy as the Panama leaks. But no one cares about remittances, bigger in value than even FDI, a stable source of forex revenues and which is primarily used (60% of the transfers on average) for household expenditure in India. Whenever it comes to capital movement, Indian media is busy writing about discovery of cost-effective remittance services in India and quoting our PM’s commitments made across G20 summits on reducing remittance costs, but little do they realise that the average cost of remittance to India from markets like UAE, US, EU, etc., is amongst the lowest in the world. Understood that transfers of small amounts can become costly with transfer costs rising by even a fraction of a percentage, but that will only improve when technology itself becomes a greater enabler, and security and risk lesser deterrents (and our policymakers can’t do much about that, can they?)! [As per Remittance Prices Worldwide (World Bank), average remittance cost on a transfer of $200 from UAE to India is 2.8%, and from US to India is 3.1%; data for Q4, CY2015. Compare this to the global average cost of 7.7% recorded during the same period!] What they can however do is to ensure that this particular mode of forex ‘river of support’ that was greater than all of India’s much-celebrated IT & ITeS, Telecom and Financial Services exports combined together last year, doesn’t suddenly flow off the cliff.

Indeed, the situation at hand is a complex one. And we need the best of diplomacy to solve the riddle of existence for this trustworthy source of ‘precious forex’ for India. Else this becomes another case of growing, growing, gone!

[steven-p-warner]

An Apple Lesson Made Newton Wise. Is India next?

Volume is a short term USP. It's easy for another emerging nation to emulate low-quality assembly lines. Quality is permanent. India's MSMEs should be taught that quality matters. In Olympics. In manufacturing. In services. And in exports!

Steven Philip Warner | The Dollar Business

If you want a happy ending, where you stop the ink matters. It’s the case with fiction and reality, individuals, nations and companies alike. But I won’t as much begin with a conclusion, as I will with a question. Can one brand – a company – tell a convincing tale about another – a nation – in an era that seems to be indefinitely moving into the past at warp speed? The company – Apple, a widely sung symbol amongst the modern digitalised and globalised human race, the only company to be ever valued at over $700 billion, and the most valuable brand in the world today as per Interbrand and Brand Finance. The nation – India, which given its young demographics, manufacturing potential of the future, services delivery in the present, and a strong-willed government, should be the world’s most valuable nation (when measured by equivalent fractions of cerebral and emotional capacities). It isn’t though; but I’d prefer viewing its trade potential as more like a gracious ‘Made-for-the-world’ furniture set with an incredible ability to grow itself or a highway that self-repairs (or…anything that’s nothing short of magical). Going back to the question – what can Apple tell about India? To keep my logic simple, allow me to flip the calendar by a month. On September 7, Tim Cook and his other officials in intense moods, launched amongst other new products, the much awaited iPhone 7. I will not give you a tech-review of the product, except that it does carry a couple of remarkable features – true innovations as you’d call them. But beyond the product, what is most relevant to those who are still pondering on the question I asked, is the company’s decision to launch the product in three phases, with India’s launch scheduled in the third! Technically, that put India at number 52 in the queue, and on Apple’s list of markets, after nations like Andorra, Bosnia and Herzegovina, Cyprus, Estonia, Greece, Greenland, Guernsey, Isle of Man, Jersey, Kosovo, Latvia, Liechtenstein, Lithuania, Maldives, Malta, Monaco and Slovenia. For those willing to give the company the benefit of doubt, a month is not so long a wait. But the fact remains, India has never featured in the first batch of launch markets for Apple. Imagine this – you consider a market important and hungry for quality and manufacturing technology that’s about to be rolled out of your plant(s), and you omit that market in your very first phase list of launch markets, each year, for nine years on the trot? A thought and an action at odds, isn’t it? Makes me wonder. Why does a brand like Apple consider a Guernsey or an Isle of Man more important to be served first? (Imagine the world map. Now picture where these two nations lie on it. Confused?). It’s not that Indian consumers lack the capacity to consume high quality products. India buys more iPhones each year than all except two markets that iPhone sells in (behind US and China; y-o-y sales of Apple’s flagship product rose the highest in Q1, 2016, in India – by 76% as compared to 45% in Korea, Middle-East and Africa, and 18% in China; this, despite the so considered “exorbitant” pricing for the iPhone 6s). The problem is “perception”. A story that appeared last month (around the time I was penning down this note), in The New Yorker (one of the most popular publications in US) titled, 'Apple's big problem: Will India buy iPhones', sums that up quite well. And that, as much as it is a reflection of how India is perceived as an import market, also goes to show how foreign buyers too do not consider India an entirely high-quality export-manufacturing hub. That isn’t entirely shocking though.

Apparently, a focus on “quality-in-practice” is a must have (rather than a good to have) chapter in the ‘Make in India’ campaign that turned two in September this year. Easier said than done though. India has its unique set of problems. I take you back to a third noteworthy incidence that occurred last month. PM Modi’s visit to Laos. While addressing the ASEAN-India Summit in Vientiane on September 8, he stated categorically that the ASEAN bloc was “central to India’s Act East Policy”. The policy adopted by the new government since taking charge in 2014, was meant to be a more effective form of the Look East Policy that had been in vogue for two decades, especially to enhance India’s trade and trade relations with the world. I won’t comment on relations as foreign policy, as you’d know, is subject to the winds of constantly changing diplomatic moods. But how the Act East Policy was meant to change fortunes of India’s exports, and how it hasn’t, is a case to be considered. Since the Act East Policy was launched, our average annual trade deficit with the so called trade bloc that’s apparently central to the policy has increased by 170% (in CY2014 & CY2015, as compared to the five year-long period leading to CY2013). The average quarterly deficit in the nine months leading to Q2, CY2016, showed a 56% rise as compared to the same duration in the immediate period before Act East was adopted. There is actually nothing political about this backslide. Look East or Act East, India’s problems in merchandise trade remains central to the fact that our manufacturing hasn’t reached a point where quality can become the next talk of town. Even today, we are worried about how our industrial production (IIP) may tiptoe past the 0% mark, into the negative zone, any month. [Some coincidence, but it did that again in July this year! IIP fell 2.4% y-o-y in July 2016 – the biggest decline in almost a year.] Every time you hear the phrase ‘Make in India’, the word “manufacturing” comes to mind. Not “high-quality manufacturing”. That will snowball into a bigger problem in the years to come. A mention of China here is unavoidable. It’s easy to speak of China’s problems in a time when world trade is facing the heat. (What else would you expect? China doesn’t yet export to Mars!) But China didn’t become the World’s Factory by just manufacturing air conditioners, laptops, mobile phones, and shoes and…mostly everything. Besides being a famed hotspot of mass manufacturing, it has also kept aside a big chunk of its capacity – one that’s dedicated to ‘quality’ air-conditioners (80% of the world’s ACs are Made in China), ‘quality’ laptops (91% of the world’s cellphones are Made in China), ‘quality’ mobile phones (71% are Made in China), ‘quality’ footwear (63% are Made in China), and ‘quality’ mostly everything! (Data source: Bank of America Merrill Lynch) What is remarkable is the very fact that even the concept of “high-tech” manufacturing is misunderstood in India. Through its media and Internet arms, The Dollar Business gets a chance to strike a detailed dialogue with over 500 MSMEs each day in India (and I mean a dialogue!). Most of these MSMEs seem to care little about the need for giving quality a preference over simply…mass manufacturing. For them, their competence lies in being able to supply low cost components (and goods) to bigger Indian and foreign firms only for whom, branding and quality become important in the context of exports. For a nation where MSMEs (and SSIs) contribute to nearly 50% of exports (FY2016), that is bad news. Each year, The Dollar Business explores MSME clusters across India – from Gujarat in the west to Mizoram in the east, from Kashmir in the north to Kerala in the south – to understand what’s on at cities and towns that are quietly adding those precious greenbacks to our kitty. [This issue marks the third annual issue of Export Temples in as many years.] Alleppey, Agra, Bellary, Butibori, Coimbatore, Chimakurty, Dewas, Elluru, Firozabad, Gangtok, Guntur, Hooghly, Jodhpur, Kanpur, Kishangarh, Kashmir, Karimnagar, Kolkata, Kolhapur, Ludhiana, Moradabad, Mizoram, Mysore, Namakkal, Panipat…you can literally count them from A to Z…and since The Dollar Business has toured and analysed all those mentioned above and many more, we’ve come to identify that one common characteristic shared by these clusters besides being worthy of being called an export temple – while they are all far isolated from Make in India, for them, 'Make high-quality in India' is a thought for perhaps the next-to-next generation. Let me give you a quick update on live findings from just eight of the over two dozen export temples from North, South, East, West and Central India, that The Dollar Business editorial team members visited in the past month. The challenges described should give you a clear idea of how MSMEs are way behind even when it comes to just manufacturing, forget paying attention to serious quality. In the North, Ludhiana still suffers from poor infrastructure and connectivity issues. Imagine, in one of India’s leading export-manufacturing clusters, there is still no airport, roads are in such poor condition and there are insufficient freight trains to-and-from the region. Especially in hosiery exports, high raw material prices and competition from Bangladesh (not only does the Bangladeshi government offer double-digit export incentives, the nation's preferential trade status in US and Europe is also spoiling the case of Ludhiana’s hosiery manufacturing cluster), makes happy manufacturing a distant dream for Ludhiana’s MSMEs. Agra’s leather manufacturing cluster and Kishangarh’s (Rajasthan) marble industry have quite a similar story to share. Lack of logistics, absence of ancillary support systems (forward and backward linkages absent as seen in China), a pro-big industry State policy and corruption practices prevalent in the Customs (many MSMEs claim that corruption is so rampant at Customs, the trade officers arbitrarily decide the nature - quality, quantity, and volume - of goods and their worth and tax them at will!), unsustainable supply of raw material (especially in Agra which suffers due to lack of systematic breeding programs, despite being present in a state with the largest livestock supply in India), gap in awareness about export markets, product-wise opportunities, export incentives and financial support schemes, are some issues that you’ll come to hear from these aspiring manufacturing clans for whom Make in India is just a power statement, fit for the global stage. It isn’t difficult to make out, but they’re unhappy doing what they are because even at an age where other developing nations have started giving them a run for their money in both volume and quality play in businesses of their expertise, they continue doing what they were in the last millennium. I’ll be quick with the other regions. In the East, clusters in Hooghly, Kolkata and Sikkim complain of a lack of promotion of their products in international markets, depleting count of artists and craftsmen, close to zero training and development, logistical headaches, lack of R&D thereby leading to damaged organic crops, poor development plan of the cluster, etc. In West and Central India, MSMEs across Dewas (MP) and Butibori (Maharashtra) are concerned that despite the government showing excitement about improving manufacturing in the country, they are still exposed to vagaries of nature, and subject to producing low-priced goods due to lack of adequate incentive and remission schemes that could enable them to produce higher quality goods at higher costs, and alongside spare them some change for marketing and branding their products in the international markets. Logistics, which seems a universal problem remains a roadblock in these two regions too. For instance, there is massive wastage of oranges fit for exports in Nagpur because roadway and rail resources remain booked for close to two months. Even textile companies in the region have had to make alternate arrangements to ship their goods to prevent damages to the extent that they can. In the South, Coimbatore in Tamil Nadu – a cluster popular for its engineering machines & tool-making industry – suffers from a lack of adequate connectivity to major cities such as Chennai and Bangalore. Connectivity among various industrial clusters such as Pollachi, Mettupalayam or Tiruppur is also not satisfactory. Absence of incubation centres, patent information cell, R&D centres, and presence of cross-subsidy charges (that kill manufacturing competitiveness) and cabotage rules (that present hindrances to cost-effective inward raw material movement to the city), etc., are headaches to the MSME community in this cluster. Power outages, lack of logistics, failure to adopt economies of scale, zero training and development, lack of attention from local authorities and state government, corruption, etc. – if India has to gallop ahead of the other developing nations in making high-quality goods for the world, these clusters that altogether combine to form MSMEs, have to be treated like a natural heart and not a replaceable, artificial pacemaker.

Hopefully, the detailed account of the distressing state of affairs at many of India's export temples in this issue’s cover story will serve a wake-up call to various state governments and the Centre. Perhaps it’s time for the states to take the responsibility of exports into their hands. Three years back, there was much excitement about making state-level five-year export policies a reality. There is silence on that front now. Perhaps it’s time from the Centre to make the states realise that a band of heroes sitting in New Delhi along cannot make Act East work for India, or ‘Make high-quality in India’ dream a reality. The states will necessarily have to pitch in. And soon. Volume is a short term USP. It doesn’t take much for another emerging nation to emulate low-quality assembly lines. Quality is permanent. And I don’t mean that Indian MSMEs should immediately start cultivating overnight aspirations to become the Apple of the global marketing world’s eyes (as Apple is today). Let that take time. But they should also forever remember that quality matters. In Olympics. In brands. In manufacturing. In services. And most importantly, in exports! Simple mathematics – sell a pair of shoes for Rs.10,000 or 100 for Rs.100, the one selling lower volumes in this case doesn’t just make equal revenues but earns greater ROI and saves on time, logistical headaches (found aplenty in India!), marketing & sales expenditure, manpower investments, and perhaps in the process ends up building a more respectable brand that’s famed for quality. It’s time a new flavour is added to Make in India. And this can really be the next big leap. How about “Make high-quality in India”? Usually if you want a happy ending, where you stop the ink matters. In India’s romantic manufacturing novel titled, ‘Make in India’ however, whether we are able to add new chapters will matter. How about one on ‘quality’? And then, the world will admit, “touché!” Even Tim Cook.

[steven-p-warner]

Not Everything Has Changed In 233 Years!

It’s surprising how some of the problems that haunted India's foreign trade community over two centuries back continue to still. Some day these problems will matter. Today is that day.

Steven Philip Warner | June 2016 Issue | The Dollar Business

History is taught for a reason. You continue to believe it but drawing lessons from the graves to dictate your cerebral existence on an hourly basis hardly sounds an exceptional idea. I mean, how would it have mattered to your choice of something as casual as “What to prepare for dinner?” or as far-reaching as “Where to export?” at this present moment, if your school teacher had floated the idea of John Hanson and not George Washington being the first President of the United States of America? [Hanson was the first President of the US Continental Congress after the Articles of Confederation was ratified in 1781 – eight years before Washington became famous as the Father of the American nation.] The textbook description of innovation and globalisation debunks all theories centered around the past being a near-perfect reflection of the present. America during the Alan Greenspan era, China during the two decades leading to 2014, modes of communication and dissemination of information, coffers of oil-rich countries, seemingly ever-spiralling commodity prices, tax-deferred and debt-funded growth of businesses across Europe, expectations from BRICs, gun-slinging Wild West – this list of ‘how far removed the past is from the present’ is endless. Alright. Telephone inventor Alexander Graham Bell is dead. Nokia went from feature phones to feature phones and smartphones, then only to feature phones, and after Microsoft decided to dump even Nokia's feature phones business, Nokia is planing to come back into smartphones! And IBM that was once popular for exporting computer hardware is now earning forex by exporting communication and IT-related services! It's all change out there. That's the only constant.

But not everything respects the rule of time.

The clock does make the present in some instances, an unadulterated reflection of the past. Coincidentally, I felt this pinch for once last month on the day when hopefuls in India’s export-manufacturing community felt “insecure” for the 17th time in as many months. [Insecure? That may sound a clamorous expression for an occurrence that has now become as common as NASA’s complaints about the mercury hitting newer highs. Actually not. Juxtapose India’s performance in the past seventeen months against the same duration leading to March 2005 (when monthly exports from the country crossed the $10 billion mark for the first time), you'll notice that the linear representations of the two event windows make a perfect X. Now that visual comparison can breed insecurity.]  An old friend – popular in his social circles as a voracious reader – came across a wonderful book. He shared the wonderful manuscript with me saying, “History is taught for a reason. But I couldn't read this one.” The book, published in 1783, was titled, ‘Five letters from a free merchant in Bengal to Warren Hastings’. As soon as I started reading the very first line of the opening chapter, I understood why the book was given to me in the first place. Reading it felt akin to stealing honeycomb. Painful. Not because it carries labyrinthine research that makes a commoner feel lost in the alleys of an uninhabited hinterland, but for the fact that it is written in ‘Eignlsh', not English. But for the interesting dramatised account of problems related to India's exports and imports during the British Raj, I would have returned the book instantly. I didn't and read it from head to toe. In the book, the writer, a Bengali merchant argues about the causes of decline in India’s exports in the 1770s. He talks about imports and manufacturing at length too. What’s wonderful is that almost every problem that he discusses seems to have a replica in today’s scenario of India’s foreign trade. He complains of India’s exports declining, Chinese imports hurting Indian producers, inferior quality of goods produced in India, over-invoicing by exporters, increasing trade deficit, levying of excess import duties on raw materials used to produce export items, etc. To quote his letter in unedited form, “The remedy is certain, and within our reach. There is one, and but one remedy for our present. It is the restoring, as soon as possible, of manufactured goods for [foreign] trade to their primitive goodness and price. Our export trade is already extremely decayed... Loading your own articles for exports with heavy duties is contrary to the policy observed by all the States in Europe.” The book is like an Instagram upload of a photo that captures the sufferings of India’s manufacturers and merchants due to unnecessary taxation and lack of incentives for export-manufacturing. So much for the book.

Charity begins at home. And who better than Chinese leaders with the forever etched on their faces Mona Lisa smiles can teach this? I am inclined here to quote a paper titled, 'China’s trading success: the role of pure exporter subsidies’, by Profs. Defever and Riaño of the University of Nottingham – “Behind the meteoric rise of Chinese exports in recent years lies an under-appreciated factor: there is a wide range of government incentives aimed at encouraging firms to produce almost exclusively for the foreign market. These incentives – which we call ‘pure exporter subsidies’ – usually take the form of tax rebates that are conditional on a firm exporting all or most of its production.” In China, companies with a majority of foreign stakeholding that export in excess of 70% of their produce are taxed at levels almost half of the standard corporate tax rates. No tax is charged on profits earned in forex, i.e. all exports! Add to this the SEZ tax benefit, VAT rebates, lower tariff on capital goods imported for export-manufacturing, additional tax benefits on profits reinvested, lower duties on raw materials, direct cash subsidies, discounted utility and land rentals, and easier access to loans; no surprise that over a third of manufacturers in China currently sell over 90% of their products overseas. And here’s the interesting part, ‘accounted-for’ Chinese support to exports currently amounts to close to $200 billion annually – almost 75% of India’s total merchandise exports. The biggest lesson? While Chinese leaders have haggled with lobbies across UN, WTO, etc., who objected to their style of ‘planned governance’, they have always intelligently encouraged exports while keeping their domestic market largely shielded.

Should India ape China's export strategy? Yes. In part. And now.

First and most compelling is the fact that in the second week of May 2016, China’s Ministry of Commerce in its 'Report on Chinese Foreign Trade (Spring 2016)' issued guidelines for greater government support to foreign trade in the weeks to follow, claiming that “the supports from the government to foreign trade development are strengthening.” China’s cabinet has outlined that “a combination of financial, fiscal and land policies will be used”. So at a time when our neighbour has decided to focus increasingly on credit, land and other business promotion policies like encouraging international marketing channels for its exporters and cross-border e-commerce, why should India not execute a similar plan of “conquer the world”? Some do say that this is China’s second shot at stepping on the gas after a rather modest 2015, and government support may not help. Morgan Stanley Huaxin Securities’ chief economist Zhang Jun thinks otherwise. “The governments support for export enterprises in finance and fiscal taxation can help the transformation and upgrading of export industries over a mid to long period of time.” Agreed, developing countries in both Central and Eastern Europe, and those of the former Soviet Union have moved far closer to the free market model – they have evolved by largely trashing the planning model, which has remained an integral part of China’s development strategy over the years. In India’s case however, the same can’t be said. That’s how identical India is to China. There are more striking similarities: population, reliance on import substitution policies, existence of highly capital intensive means of production, etc. Besides incentives, duty exemptions help Chinese exporters. I’d best sum it up in two lines written by Prof. Arvind Panagariya from the University of Maryland, in his academic paper, “China has instituted an elaborate system of duty exemptions on imported inputs used in exports. Total exports associated with concessional import arrangements account for 64% of China's manufactured exports. The country for which the Chinese experience is most relevant is India.”

Premature it may seem, but Indian policymakers have to make amendments at the earliest to get the big outbound ships honking their horns. Remember, foreign trade is a zero-sum game. And instead of waiting each time to call China’s bluff, Russia’s bluff, Iran’s bluff, whoever's bluff, India should move ahead with a determined head on the negotiations table.

Think about India's FTAs. It’s no secret that under the trade pacts that India has signed with developed countries such as South Korea, Japan and ASEAN, it has ended up giving away more market access. Without stringent and internationally accepted rules governing IPR protection, there was little to gain from these FTAs given the already low import duties prevalent on most product lines in these countries. [Read more on India’s experience and future with FTAs in the cover story of this issue.] Not to say that FTAs can be ignored, for their geopolitical reasons are compelling enough – but it would be wiser to focus on FDI and manufacture quality products, help build international channel networks and brands for Indian exporters (exactly what the Chinese State Council decided to do on April 20, in its third meeting of 2016), and focus greater on facilitating e-commerce exports (in this regard, DGFT’s notification no. 2/2015-2020 issued on April 11, 2016, defining e-commerce very "healthily”, thereby categorising sale by Indian e-commerce sellers to consumers overseas as exports and making export benefits their right, is commendable).

It’s surprising how some of the problems that haunted India's foreign trade community over two centuries back continue to still. Some day these problems will matter. Today is that day. 

How do First World companies manufacturing orphan drugs command high prices for their patented formulae? These companies – who could easily write off FTAs as just spiritual truths – ensure exports of patented high-quality products that make industry and political groups in the very importing nation (India being one) debate and quarrel over why duties on such products should be 'nil'! Do they therefore even require their countries to sign FTAs?

What India is currently doing is more to follow rules set by WTO’s moral police. There's nothing wrong with that. But to make life easier for India’s exporters during a time when external demands are still weak in general, should be priority. Even if that means rowing  against the tide of textbook obedience.

Are we doing enough? We can analyse this question in the context of three recent developments.  On May 4, 2016, DGFT issued a public notice (No. 06/2015-2020) that introduced changes in Appendix 3B under MEIS. Through this notice, it excused 2787 product lines (eight-digit HS Code) from the need to submit proof of landing, therefore getting rid of the need for Landing Certificate for all 5012 product lines for all markets. Alongside, the fact that the government increased MEIS rates for countries falling under Group C of MEIS from 0 to typically 2-3% was another welcome change. Welcome, but not enough. The markets to which MEIS rates were increased have accounted for 8.8% of India’s total exports in FY2016 so far. Were the rates increased to encourage exports to markets like Tokelau, Antarctica, St. Pierre, Niue Islands, Guam, Nauru, Cocos Islands, Heard Macdonald, Aruba, Eritrea, Faroe Islands, Pitcairn Islands, Saharwi, Palau and Wallis & Futuna Islands? [We will consider ourselves lucky if you knew half of these countries even exist!] Even if we believe that the logic behind increasing MEIS rates to Group C markets was to try and up the shipments to non-traditional and lesser explored markets, then what could possibly be the objective behind ensuring that in over 5,000 product lines eligible under MEIS, the support to the Indian exporter is the same for a market like US, EU, Nepal, Pakistan, Channel Islands, Kiribati and New Caledonia? And why therefore would an exporter choose to export to an island market with just 1 lakh inhabitants like Kiribati (which will be underwater by 2045 as per UN's Intergovernmental Panel on Climate Change) over a market of 32.5 crore consumers like USA? And if the move to equalise rates has logic, then does it not defy the very reason why rates were increased for the Group C markets or why the three Groups even exist? Baffling! As far as the question of enough is concerned, should India not encourage exports in an environment where the world is overburdened with concerns of falling trade (in CY2015, total world merchandise trade was the lowest in five years) by offering greater relief and cushion to exporters instead of just juggling around with country groups?

Second is the recent talk of a combination of DGFT and CBEC to perform functions as one department under the MoC. This process will only lead to centralisation of authority, greater opacity, and is bound to impact negatively India’s scores in matters like Ease of Doing Business. On one hand, where the country is trying to simply matters for foreign trade and investors, where is the logic in combining two independently functioning department of the government that are currently accountable separately? You must be familiar with the game of cricket. Aren't tasks to bowlers and batsmen unique (in that sense the job of a bowler is to bowl the other team out, so 'negative' purpose that works for his camp; that of a batsman is to pile runs, so 'positive')? But they work together to win as a team. No use imagining you can become a world champion with all all-rounders in the team. That has never happened and possibly never will. DGFT and CBEC are both important arms of the Ministry of Commerce and Industry. They are unique by purpose and design. And their performance can only be judged and improvements introduced if they are allowed to function with separate objectives but for the overall health of the nation’s foreign trade. There is much change yet to be introduced in the manner in which goods are handled and CBEC still has its hands full of trying to achieve something that it already should have by now, like single-window and 24x7 clearance facilities that are aimed at reducing delays in clearance of goods at the ports, quicker examination of export goods by Central Excise officers among others, that increase dwell time and inflate costs for importers and exporters alike. As per estimates by the Commerce Ministry, poor trade facilitation results in cost escalation of Rs.42,000 crore-a-year for the exim community. It’s time we focus on reducing those roadblocks than plan a merger that hardly works even in capitalism.

Third, Make in India. I don’t want to mention job creation or quality here. Just the fact that investment proposals have continued to head south in recent quarters is a concern. In CY2014, proposals in India fell by over 23% y-o-y to Rs.4 lakh crore, which slid by another 23% to Rs.3.1 lakh crore in CY2015. And in the first quarter of 2016, the value stood at just Rs.60,130 crore – if the trend continues, it will be a fall of another 23% in 2016! Clearly, the government has to incentivise foreign and Indian investors, give them greater incentives to set up export-manufacturing bases in India, just like China does! At a time where deflationary pressures have prevailed in the Indian domestic circuit, you can’t assume that India will forever retain the edge of being a consumer of its own produce! If domestic consumption grows weaker, retail (CPI-based) inflation starts finding it tough to break past the 5% barrier repeatedly as it has happened many-a-time in the past two years, IIP continues to move like a sloth (in April 2016, change in manufacturing IIP was -1.20% y-o-y), oil prices rise because of the ongoing disruptions in Canada and Nigeria causing India’s manufacturing costs and imports to rise (the recent supply shortage around the globe amounts to 3.75 million barrels per day, which is 150% more than the existing supply glut as per IEA estimates), Trump becomes the US President (you know to what extent he could go to distance India and China to reduce US’ trade deficit), the Chinese firewall stays (starving Indian e-commerce companies of the only other consumer market with over a billion souls), and markets like EU, Canada, Argentina and Brazil don’t make exciting macroeconomic progress, India’s export-manufacturing community could be in for bigger shocks.

It’s time we paid heed to a letter that was written 233 years ago by an Indian free merchant to the head of his then-government. Many problems mentioned therein apparently remain the same today. Some day, they will matter.

Today is that day.

[steven-p-warner]

Bright Spots of Work-In-Progress

India’s export community has over the years been giving more export destinations, more respect. Interestingly, India’s exports is more geographically diversified than US’ or China’s. And that is a very reassuring development.

Steven Philip Warner | The Dollar Business

Falling, worrying, dipping, etc. – there is suddenly so much noise about India’s exports contracting and how that could mean a dangerous ditch for the country. But to single out India and declare its run in recent months a shameful one would put you on the wrong side of common sense. It’s like saying, “Obama did a poorer job at saving America that was handed over to him seven years back. Why? Because unemployment rate reduction from 7-8% to 5% by adding 14 million jobs wasn’t heroic enough. And more importantly because, perhaps, George Washington would have done better.”

None of the other 25 nations that get counted as the largest exporting powers (India is one in the group) managed an extra dollar in exports growth in the past one year (y-o-y comparison for Q3, 2015). That is enough to understand how world over, exporters (and importers) are feeling the absence of windfall gains. And to expect India to continue growing its exports with global commodity prices falling, the dollar continuing to rise, and global demand shrinking with political and financial crises being written about in many parts of the world is just as we said before – calling Obama an ineffective White House occupant.

Behind the drama of falling export numbers, the Indian foreign trade landscape has been subject to encouraging developments. What’s so interesting is that these occurrences seem so obvious to ordinary minds, they appear worth overlooking. I agree. India’s jaunting through the foreign trade land isn’t ‘the’ experience – but that’s how entirely honest anyone can get in a world trade order that calls for a Scrooge-like risk appetite. But not to be essentially defensive, India is on a smarter course of action in the world of exports-imports, benefits of which will be seen in years to come. Thankfully these are developments that in all respects can be termed “organic”.

All that noise we’ve heard about oil prices has taught us one thing: Don’t be a one-trick pony. Saudi Arabia’s recently announced plans to sell shares in state-owned entities and companies (including everything from ports to hospitals) and Qatar’s decision to stop funding some of its overseas investments (including the likes of Al Jazeera America) and axe some of its very elaborate public schemes, are lessons clear enough. When oil hovered at $100 a barrel, the single export product bet appeared well thought-of. Under $30 per barrel, logic is less visible than vapour (Brent Crude futures closed at $28.94 per barrel on January 18, 2016). India has done well to diversify its export basket in recent years. Between 2010 and 2015, share of the top dozen export products (at the two-digit chapter level) in overall exports has fallen by about 5% (comparison for the first ten months during each year). The number of products that have contributed to more than 3% to our exports by value has fallen over the past decade. The number stood at 10 in 2008, which fell to 8 in 2010 and 7 in 2015. Less concentration of export weightages of a few products means greater spread of export revenues and therefore a broader, safer export offering. This is also one prime reason why India, unlike Brazil, Russia, Australia, Canada, and other OPEC nations, has a more secure 2020 in-the-making as far as exports are concerned. And the fact that at present, manufactured goods account for just 64% and high technology products for just 8% of our merchandise exports is proof of the adequate legroom for segment-wise growth of the already broad basket that India has to offer.

Like in products, in case of geographies too, India’s actions have only been for a reasonable future. Not to say that the number of partners to trade with will grow in time, but India has increasingly been engaging itself with foreign trade partners in recent months. And I don’t just mean our PM’s rapid and frequent handshakes with other world leaders on foreign soil. We are actually getting more branched out as a world exporter. In 2001, the top 12 markets that we exported to accounted for 61% of our total exports by value. By 2014, the number was just 53%. The share of the top 20 markets fell from 75% to 63% during the same time period. TDB Intelligence Unit used the Herfindahl-Hirschman Index (HHI; lower the Index, lower is the dominance of a few import markets and greater is the competition) to measure the level of concentration of India’s partner countries (using export data revealed by 228 countries). In an extensive study that ranged 15 years, the preliminary findings arrived at were interesting. One of them was the fact that over the past decade and a half, the indicator of market concentration (HHI) has been steadily falling – from 582 points in 2001, to 506 in 2006, and further to 401 in 2015. This means that India’s export community has over the years been giving more export destinations (nations), more respect. Interestingly, India’s exports is more geographically diversified than US’ (HHI of 752) or China’s (HHI of 669). That’s very reassuring.

One area that has remained India’s strength in the past two decades is Services. Call it a case of willful liberalisation or a mystifying lapse in manufacturing since the 1990s, India (with exports of $156 billion in 2014) as the seventh-largest exporter of Services is matched comparatively well with nations like Japan and Netherlands in this respect. The steady growth in value of Services exports and sustained diversified offerings has been good news for India. It often beats me why India is referred to as “primarily” an IT and ITeS exporter. This segment’s contribution to service exports in the past two decades has never exceeded 34% in any given year except once – in 2014 when it reached 34.01%! And even in 2014, contributions of Travel and transport-related services and Consulting services (Professional and Trade-related) to India’s Services exports base were significant (26% and 28% respectively). Unlike what many perceive to be true, India is not just a back-end technology and VoIP support base. In recent months, India has also started showing more seriousness to Services exports at the policy level. That in July 2015, Services was included in the India-ASEAN FTA is one sign. [Every Indian now understands that a visit to India’s leading hospitals isn’t complete without catching glimpses of how the world trusts its “life” in India’s hands.] Another is that while in four of our bilateral trade pacts (with Malaysia, Singapore, South Korea and Japan), services is already included, even in the most talked about FTAs in-the-making, like India-EU FTA, India-Canada FTA, India-Australia CECA, etc., both Goods and Services are being negotiated. In fact, in some cases – like in India-EU FTA – the biggest gain for India is expected in the realm of services. Thirdly, efforts by the DGFT to streamline Services exports (which as you can understand is quite scattered and hard to monitor as compared to merchandise exports from the country which have to happen from one of the ports) is an indication that in the years to come, Services may become as important a component as goods in the exports domain. On January 15, 2016, DGFT issued a trade notice to all RAs, CBEC, concerned EPCs and related service industry associations (No.13/2015-20) for the purpose of effectively capturing trade statistics related to export/import of services. “All data on import/export of merchandise are IEC based. Similarly, the Department of Commerce would like to capture Services trade data on the same line. In the absence of IEC for most Service exporters, the Services trade data as of now is not comprehensive. Any policy intervention by the Government of the day requires authentic data and its analysis,” stated the document. Though many claim that this is a move to estimate outflows that will result from the Services Exports from India Scheme (SEIS) announced in April last year, to give DGFT its due, making Service exporters voluntarily apply for an IEC (and making this step a mandatory requirement at a later stage) will lead to enhanced accountability and transparency in the realm of Service exports. It will also enable the government to give greater incentives to service exporters with a clearer focus with fewer doubtful objectives. If all goes well, next time we may have a policy document that is more fairly tilted towards Service exports than one that mentions the word “goods” 323 times and “services” just 123 times (as was in the FTP 2015-2020 document).

Corruption – that has always plagued efficient and effective allocation of resources and timely implementation of policies across various government wings – is another area where DGFT has been constantly at work. On January 13, 2016, it issued a trade notice (No.12/2015) to all RAs, EPCs and the export-import community that it will hereafter show zero tolerance to corruption. “…RAs must ensure the highest standards of integrity and transparency in their offices and zero tolerance should be shown for any blemish that comes to light in this regard…,” states the notice. Spotting and monitoring officers and staff with dubious reputation, work rotation to avoid long tenures in sensitive positions, etc – never in the recent past has DGFT been so loud about ethics. So are we to expect that India’s foreign trade will be purged of wrongdoers with immediate effect? That will take time, but such an act is a clear voicing of intent that Indian authorities in the DGFT will hereafter not take corruption matters lying down. This (alongwith incidences of miscreants being produced before competent authorities – as the recent case in Ludhiana in January 2016) will not only assure the foreign trade community of ethical treatment at the hands of India’s foreign trade guardians, but will encourage new investors – Indian and foreign – to test fortunes with exports-imports. So, a positive development without doubt.

Beyond hauling diplomats over the coals for their foreign visits, denouncing the very purpose of a scheme like ‘Make in India’ and constantly howling over falling export figures, there are matters that are so obviously entwined in the normal proceedings of India’s foreign trade that we give them a convenient miss.

As far as worries over India’s exports performance are concerned, recall how the world welcomed 2016 with Wall Street’s worst five-day start ever? Now just because you’ve had one such sour pill to kill your New Year’s hangover doesn’t mean you write off all its stocks. Similarly, just because India has been a tad wobbly at the ports doesn’t mean you start writing its exports off as falling, worrying, dipping or…whatever! And if you’ve lost so much hope already, look for those bright spots of ‘work-in-progress’.