Jul 17, 2018

Urgently needed - an integrated E commerce policy for India

image of E commerce policy in India
E-commerce policymaking in India is a story of missed chances. As late as couple of months ago, the government was in the process of setting up a think-tank to formulate national E-commerce policy. It would take another six months for the rough contours to be formed, and for the interdepartmental heads to come to some kind of consensus, or not. A reason for not formulating a national policy was that the area of B2C E-commerce is handled by various ministries/departments ranging from India post, RBI, commerce, industries, finance and IT. Coming as late as it would, even if it comes within scheduled time, it would still make a good joke but for the fact that it is true. 

Image of E commerce policy in India

To put things in perspective, we are at a stage where India has been reduced to a marketplace for plunder by multinationals. On one had we have what The Economist calls the FAANGs (Facebook, Amazon, Apple, Netflix and Google/Alphabet) and on the other we have the Chinese BATs (Baidu, Alibaba and Tencent). The FAANGs peddle their own products in India and the BATs enter like trojan horses through investments in our supposedly homegrown PayTMs, Snapdeals, Olas and Flipkarts. Of course, Flipkart is now sold to Walmart, a deal with the loser label hung all over. Within the spectrum, and probably all over it, hangs the Japanese SoftBank with its might of money and investments in all that's tech and glitters. Chinese have now created a tech fund to emulate SoftBank. Among all this, we have very few E-commerce players that can be called truly Indian or India funded. Reliance is making an entry as per their recent announcement but then we have to actually see how it rolls out. 

China has been as clever as ever with its E-commerce policy. They effectively banned FAANGs from China and let their domestic firms build up capacity in the area. Whenever they let someone come through the Chinese wall (e.g. Apple), they ensured that they acquired the required technology to put up a competitor (Xiaomi and others). That's as foresighted as one can get, especially when it comes to policymaking in areas that exist at the cusp of various departments. It's not only their domestic policy that has clicked, but even their exports are an E-commerce success story. That's why when China earmarks ten areas of technology that it wants to dominates through its China 2025 plan, one needs to take notice and prepare. Lest it be misunderstood, it's not that China has got everything right. The BATs are struggling outside China and the overseas markets add less than ten percent to their bottomline unlike FAANGs who get more than half of their revenues from non domestic territories. Most of the Chinese presence abroad in this area is through investments in third parties and not their own brands. This strategy might or might not work in the long run. 

image of E commerce policy in India

And this is where we need to strategise better. The current method of think tanks making reports and joint secretaries from various departments mulling over it till the report twists itself to become what they like won't work. We need an apex body staffed with experts and bureaucrats with sense and direction to sit down and hammer out a policy or strategy. Something like a Technology and E-commerce department within current PMO might not be a bad idea to start with. We have already missed the bus. We are however not yet too late to do some damage control, avoid being a bazaar for the world, and if things go well, get our footing back. If that makes an already rich Ambani richer, it's a small price to pay. 

Jul 12, 2018

Rupee value and exports in short run

(This post was originally published at the Hindu Business line here)

Image for Depreciation of currency and exports

A belief in weak Rupee

A common belief while the Rupee depreciates against USD is that it would help our exports. This ‘weak rupee shall help exports’ is shown as a positive over various negatives arising out of falling Rupee. There is great attractiveness in the argument supported by textbook economics. Undervalued or depreciated currency acts as a direct subsidy for exports while acting as a punitive tax on imports. China used the undervaluation of currency as an effective international trade tool for decades. The undervaluation doesn’t fall foul with the regional or multilateral agreements in the way export subsidies do. However, given India’s situation, it is doubtful if we can have a conscious control on the level of Rupee anymore in light of the central bank’s mandate getting anchored to inflation control. Till some time ago there were calls to depreciate the rupee through direct intervention to help exports. Thankfully the idea is now on the backburner as the rupee has slid on its own, mostly due to the factors originating abroad. In addition, one can never predict a correct level. Rupee at the level of 60 for one USD might be very competitive for services exports, while it may still be dear at 70 for manufacturing sector. However, a mere weakening of Rupee might not be enough to boost exports, at least not in a significant way when it comes to manufacturing sector due to three possible phenomena discussed here.

Twin mechanism of inputs and value chains

First, India is no longer an isolated market exporting local goods alone. Our exports are tightly linked to imports through twin mechanisms of input import dependence and global value chains. The inputs for two of our leading exports, Petroleum & derived products and gems &jewellery, originate abroad. Crude, rough diamonds, and gold are imported to make these export products. A significant part of our non-petroleum, non-jewelry based manufacturing exports are tightly linked to the global value chains. We import various steel products, automobile parts, engineering and electronic components that are processed and assembled before getting exported.  Except raw material, primary forms and agricultural exports, we have few items where the origin is fully Indian. Given this scenario, any depreciation of our currency works both ways. The gain would be only to the extent of value addition that happens in India. 

image for currency of invoicing and exports

The invoice currency curse

Second, there appears to exist a counter-intuitive effect of weak local currency not helping exports that arises due to the choice of invoicing currency (Gopinath, 2015).  Almost all our exports are invoiced in international currencies such as USD, Euro or Pounds. Assume a case where the price of a certain export good is agreed at 100 USD for the coming quarter. The goods are invoiced at this price in USD for all shipments for the quarter. If the Rupee weakens meanwhile, this invoicing method would lead to windfall profits for un-hedged exporter during the period (and commensurate pain if it strengthens), but it does nothing to change the underlying competitiveness. An item, which was invoiced at 100 USD earlier, continues to do so in international markets even after weakening of rupee, unless the terms are renegotiated between the exporter and buyer for the quarter. It is seen from the study that the weak exchange rate effect may take upto two years (http://www.nber.org/papers/w21646.pdf) to trickle down into the local non-invoicing currency. This time zone while prices are renegotiated is the profit zone for Indian exporters. The process of renegotiation and adjustments is a medium to long-term process and therefore we don’t see an immediate advantage in terms of trade despite a fall in value of rupee. There is no change in the level of attractiveness of sourcing from India for an international buyer. Therefore, it doesn’t boost exports in terms of quantity or exports in terms of USD.Only value of exports in terms of Rupee shoots up to the extent of depreciation while the effect lasts. The invoicing of international trade in foreign currency is therefore a disadvantage for us, as it doesn’t let our competitiveness improve automatically and immediately upon depreciation of Rupee. Unless the exporter consciously uses the windfall to mark down the prices, or uses it to boost productivity, there’s not much hope.
However, arising out of the same study, there are further two negativespossible. First, the import costs shoot up almost immediately as the invoicing is done in foreign currency which now needs more Rupees to buy. This leads to inflationary pressurearising out of inelastic imports such as crude for a country like India. Second, it adds to the cost of inputs that go into export products in the value chain, thus eroding margins. There appears to be nothing much we can do about the way the trade invoicing is done in foreign currency.

A weak correlation

Third, there are also doubts about correlation between a weak rupee and manufacturing exports. It was found that a fall in the value of rupee didn’t lead to an expected commensurate gain in manufacturing exports during the period 2004-2012 (http://www.nipfp.org.in/media/medialibrary/2013/04/WP_2013_115.pdf). This weakness in the correlation between a weakening rupee and increase in manufacturing exports may be an outcome of combination of factors, including the integration into global value chains which makes the exports dependent on imports. As the sensitivity to exchange movement is faster on imports, and slower on exports, the weak correlation is not a surprise. At least the Indian experience attests to it. 

In short, one cannot rely on a weak rupee alone to boost exports. We need to look beyond at structural factors and take a sectoral approach to boost competitiveness if the aim is to improve export performance. The central government has taken various steps in this direction, significant among them being the collaboration with the state governments in order to take a micro sectoral approach at the level of clusters and districts. While the steps produce results, we may discount the expectation of a weak Rupee boosting exports. 

Jul 11, 2018

Leveraging export control group memberships

India has recently become member to Wassenaar Arrangement (WA), Australia Group (AG) and Missile Technology Control Regime (MTCR), the three leading export control regimes in the world. The memberships to these bodies reflect acceptance of India as a responsible growing power, and an acknowledgement of impeccable non-proliferation record that India has maintained over decades.  However, a mere membership doesn’t confer the desired benefits unless India walks the extra mile to harness the technological benefits these agreements confer. Lest it be misunderstood, one must state here that India has shown tremendous self resolve to develop technologically despite non-cooperation from leading technology powers over decades, especially in the area of missiles, space and computers. However, with the membership to the technology control groups, we may now look forward to develop as a partner and a leader in future if we strategize and work towards it in mission mode. 

The export control multilateral agreements seek to control the proliferation of dual-use, advanced military, space and sensitive technology from falling into the hands of rogue nations, terrorist groups and non-member states. They have their genesis during cold war era, but have continued in altered forms to the present. India has suffered for want of such technology for decades while being a non-member. The non-availability of advanced technology hampered India’s fast technological advancement in the past as she was forced to develop most of the required technology indigenously. While in few areas we did well, we suffered in various defense related technology development. It is difficult to measure the exact impact of technology denial on development; one may reasonable surmise that we must have lost decades of manpower reinventing the wheel. 

India has now set up a reliable and effective export control system for controlling the export of sensitive technology from India in line with the best practices of the member countries. The outreach with the industries has ensured that partner industries, especially in the private sector, understand the sensitivity of technology transfer to non-member states. Various arms of the government work in tandem to ensure that India adheres to the commitments in letter and spirit. The number of applications for exports under these arrangements has soared up in recent times, indicating the fact that there is a good awareness of export control requirements, and that India is integrating into the technology regime. Many of those who are exporting the technology products are private sector players, which is a positive development. 

Yet this is not enough. India needs to strategize to gain more from the memberships to these groups. The membership opens up a world of opportunities for technology up-gradation that was not available earlier to us. For effective utilization, India should move on two fronts. 

First, we should do a SWOT analysis to identify the fields in which we are lagging when compared to the member states. A team of experts should be constituted in each such area in terms of technology verticals. A collaborative R&D setup including universities, research institutions and industry should be established to get the technology at the working levels in each vertical into the country. At times, some of the technology might not have any takers in the industry. Even then, the technology should be mastered at the research institution levels. For example, in the area of some of the high temperature alloys used in turbines and missiles, we should establish research foundries that can produce these alloys and develop the knowledge base for industry transfer whenever need arises. Similar arguments can be made in the area of advanced manufacturing, 3D printing, armaments and defense equipment, software, drone technology and so on. The list is endless. 

Second, we should develop deeper linkages with friendly member nations for technology collaboration and transfer. India has developed as an important export market for the member states. The membership is an attestation to our growing potential as a market for technology products, in addition to our credentials as a non-proliferator. We need to leverage our position to collaborate and grow. While India would certainly benefit from technology transfer, our technical manpower and expertise would help the member states too. It would be a two way street in the long run. We should use the membership for developing and integrating into the technology value chains in defense and advanced technology areas. 

It is important that India strategizes and moves actively to harness the benefits arising out of these memberships as early as possible. Otherwise the membership would simply end up as a decorative feather in the cap with marginal utility for a handful of public and private sector players who fulfill defense offset requirements and elementary technology exports that fall under export controls. 

May 18, 2018

The wage factor in NAFTA negotiations - a potential deal breaker

This is new and preposterous. It could be the dealbreaker. It might be better to face a non NAFTA trade barrier of 2.5% over complying with this provision. The median wages in USA for auto workers is almost 8 times that in Mexico on an average. In addition, there would be the burden of accounting and bookkeeping to comply with the provision. 

These types of requirements are usually designed for dealing with developing countries who prove too hot to handle for the domestic sector in developed countries. Recall the child labour free certifications, carbon footprint requirements, wood certification for legality and so on. These requirements are cloaked in the guise of humanitarian concerns, eco footprint, food safety etc to give it a semblance of respect while implementing. But the wage requirement is bare knuckle tactic that punches on the face of the idea of free trade. 

A wage requirement like the one proposed would take away the very key advantage that makes trade possible between developing and developed nations. Developing countries typically have wage advantage in terms of competitive labour costs. Take that away and the developing country is handicapped in cross border trade. There is still a possibility that Mexico might negotiate. But then, Mexico might as well walk away and face the tariff if the costs outweighs benefits. At the moment, it looks like it would be the dealbreaker.

It's interesting times to watch as NAFTA renegotiations are falling behind schedule. America is slowly and steadily undermining the very system it helped build in the last fifty and more years. Its amazing how one person's paranoia about free trade can grip an entire country and shake the very foundations on which lasting ideas are built. It's sad to see the very competent US trade officials twisting themselves into knots to propagate ideas that suit the president. 

Sooner or later, these ideas would trickle down to other forums including WTO. India needs to be on guard. 

Apr 25, 2018

The forgotten caveats

The headline in the business standard reads : "India must grow at 18% to ensure jobs to growing workforce: World Bank".  The article is based on the recent world bank report titled "Jobless Growth" under the south Asia economic focus series. 

One would agree that 18% growth for a country of our size is not attainable. That being so, the headline implies that World Bank is saying that India cannot secure jobs to its growing workforce. Gloomy picture indeed. There is an element of certainty about the nice round number 18 which misleads a lay reader. 

It is not so if one reads the actual report. The actual report has pushed in enough caveats to survive any close scrutiny about the number 18. The problem is, the report presents things in a way that make newspapers pick up such headlines. That's a danger that any report writer should be wary about, and should factor in while presenting data to a lay reader. To expand the debate, the assumptions behind the models and the assumed simplifications should be made amply clear to the uninitiated audience lest they take the models on face value and start drawing conclusions for real world. The simplified models work, under set of circumstances and assumptions, to enlighten about some particular causal phenomenon under study. And it stops at that. A brief look at the calculation of the number 18 would throw some light. 

The first assumption the model makes is the roughly U shaped relation between employment rates and economic growth. It runs thus. 

image of U curve GDP per capita versus employment in percentage
GDP per capital Vs Employment rate - The U curve

Data indicates that employment and per capita income appear to exist in a U shaped relationship as shown above. When per capita income is low, the country has high employment as people start working young and remain employed due to sheer pressure of survival. If they drop out, they go hungry. As per capita income grows, children enroll in schools and stay there longer, old  people may get pensions, women may not go to work, and the abject need to work for survival decreases. This leads to decrease in employment till a certain stage is reached where the per capita income increases enough to reverse the trend. This happens as people in countries with high per capita income have higher education, they are less likely to drop out of employment, including women who now have access to better daycare and health facilities and can afford to be in the labour force. Also, better healthcare and life indicators ensure that one remains in labour force longer with less drop outs. The first set of assumptions while deriving the 18% growth is that such a curve exists, and India exists at a point on the curve where it is downward sloping, that is, more prosperity would lead to less employment with people dropping out. 

The second set of assumptions is that the employment data the model relies upon is good enough. That might not be so, even in the own words of the report: 
Economists in South Asia agree that the quality of the available employment data makes it difficult to credibly assess the labor market situation in their countries...PP34
One may recall the recent debate in the newspapers about the EPFO based employment data being used to prove the growth in employment numbers. Everyone took sides, but agreed on the point that we are far from getting reliable data on employment. So the report cleans up some sets of employment data that it has and goes ahead with whatever best it could manage. 

The report outlines the below equation to represent the approximation of the U curve mentioned above

Where Et is the employment rate, Yt is the total output, Nt is the population, Beta is the approximate slope of the U shaped curve around Yt, and negative for countries like India as mentioned above. 
Delta captures the responsiveness of employment to economic growth and is expected to be positive for India. Alpha and Gamma are short and long term constants arising while linearising the equations respectively. 

Then quarterly changes in employment are correlated with quarterly GDP growth, the report mentions that Okun's law (which roughly states that employment increases in direct relation to GDP growth) doesn't hold for India. For each percentage point increase in GDP growth, India's growth seems to drop by 0.11%. Counterintuitive? Yes, but the models say so. And within south asia, the law holds in Pakistan and Sri Lanka and fails for India. Nevertheless, we plough ahead with acceptable p values. 
See images below. 

image of Jobless growth in India

image of jobless growth in India

Then the attention of report turns towards the question in hand. The one I have a problem with. How much growth is needed to create enough jobs? It takes three scenarios: 
a) Unambitious - let the Growth be whatever it is and lets see where employment would head
b) Constant - Growth needed to keep the level of employment constant
c) Catch-up or Ambitious - Growth needed to catch up in terms of employment levels and get pushed to the positive slope area of the U curve in a certain number of years. 

image of Okun's law in india

Based on T number of years to catch up, it models three equations by substituting above into the earlier two equations. Then the linear models look thus: 

image of Modeling employment unemployment GDP growth

Based on this, the model predicts the growth rates, and puts them on a neat bar chart. 

image of Unemployment and job creation problem in India
Now one may see that India needs a growth rate of around 18% to catch up with a time horizon T of 20 years. This chart doesn't contain any disclaimer. If one simply scrolls down the report and stops at it, it misleads. While the methodology is probably the best one could get in given circumstances of shaky data and inapplicable models, yet the chart doesn't mention any of those. It assumes a linear and deep reading of the text. 

If you observe, by the time you reach here in this post, you must have forgotten the first U curve assumptions I started with, unless you are econ types. Most policymakers in India are not Econ types. They are generalists who are more managers than policymakers. And that's why I have problems with data presented in this form. It has a ring of conclusiveness to it while the report embed the doubts about the U curve and Okun's law inside the text. To be fair, the report has been candid about employment data inaccuracies. 

If asked, I would present the following way. I would add up the uncertainties at each level in the modeling process as error terms. And when the final value is presented, and if forced to make a bar graph, I would include this cascaded final error term in the projection. It would be a range to reflect the uncertainties built into the model. 

Probably the headline then would read like this: 
India might need around between 7 to 25% growth rate for twenty years to ensure jobs for a growing workforce, depending on where we lie at the downward sloping U curve, and depending on the assumption that it's an U curve after all, with an inverse relation Okun's law holding tightly enough; which though counterintuitive, we shall somehow ignore, and depending on how much we believe on the employment data being generated, and given that other things remain constant in the time horizon considered. This after ignoring the inherent assumptions in data collection methods, which ignores pakora makers, and uncertainties in calculation of GDP growth. We are in bad shape. 

Probably that'll not be a click-bait headline. But then, who cares about the misleading headline too?