Dec 15, 2018

November numbers for foreign trade - some points

The November 2018 numbers for India's foreign trade are here. The summary for April-Nov 2018 is as shown in the figure below:

image for India foreign trade statistics
Trade stats of India - Summary
At this rate, we would end up with an annual deficit of around 192 Billion USD, a significant jump from a deficit of around 162 Billion USD during last financial year.

The below are the numbers for last financial years imports listed in descending order of value of imports (excel online may take time to load).


The first item in the list, the mineral fuels and oils, is a necessary need as India doesn't produce any oil. Out of the imported crude coming under this chapter, we refine and export around 38 Billion USD refined petroleum products. Thus the net deficit is around 94 Billion USD. This is the fuel oil bill for India every year.

The second item in the list, the pearls precious stones and metal, mainly constitute of imports of diamonds and gold. India is the largest diamond polisher, and one of the biggest gold importer for domestic consumption. Under this chapter, India exports out around 42 Billion USD, bringing the net imports to around 32 Billion USD.

The third item in the list is worrisome. The import bill is around 48 Billion USD, and growing each year, and we don't have any significant exports in this chapter. The main imports under this chapter pertains to mobile phones and other consumer electronic equipments which contributes to roughly 25 Billion USD. The entire import is almost a deficit, making this chapter the second biggest net import item for India.
image of Mobile phone imports into India 21 Billion US Dollars
Split of major imports under Chapter 85 - Mobile phones contribute around 21 Billion USD

The fourth item in the list belongs to the capital goods, engineering equipment, and machinery where we have significant imports at around 38 Billion USD and exports at around 18 Billion USD. So the deficit is around 20 Billion USD.

Of the above, the urgent and important area for attention is the third item - the electronics. Despite efforts and incentive, this area is taking time to catch up. The efforts till now consisted of four noticeable steps:

- Incentives to invest in electronics through schemes such as M-SIPS
- Tariff barrier for completely assembled electronics imports
- Efforts to simplify policies for electronics sector
- General efforts towards ease of doing business

One wonder what more should be done, after missing out on the scaling up at the right time. A solution could be to think about the new technologies that would emerge in next 20 years and start investing early. The policy measures to support infant electric cars industry is bang on.

Dec 11, 2018

Dhaka Vs Ranchi - a post GST scenario analysis of apparel imports

Under the existing system of trade and indirect taxation prevailing in textile and garment sector, does it makes more sense for a Bangalore stockist of apparels to import from Dhaka in Bangladesh over buying from Ranchi? Here's the self explanatory calculation.

Assumptions: Bangladesh usually sources fabric from China while an Indian supplier sources fabric from an Indian supplier based in Gujarat/other states. I shall assume that the price at the factory gate of fabric manufacturer for both Chinese and Indian fabric is same - usually Chinese fabric is cheaper. The transportation cost from China to Bangladesh is same as that from Gujarat/other states to Ranchi - usually Chinese transport cost would be smaller. I shall also assume, for sake of simplicity that labor cost in Bangladesh is same as that in Ranchi, while a ballpark analysis tells that Bangla labor is cheaper by 40% over Indian labor.

(Excel online may take some time to load the table below - I shall be thankful and glad to correct any errors if pointed out)



From the above, it appears that Dhaka has a clear advantage over Ranchi despite adverse assumptions towards Dhaka.

Before GST, the IGST component paid at border was not refunded to the importer. That barrier was significant.

Did all this add up in the end? Did the imports really rise for apparels after introduction of GST? The below graph for pre and post GST quarters of import under ITC-HS 61 and 62 (apparels) from Bangladesh into India is self explanatory. The red tick is the point where GST was introduced.

image of apparel imports from Bangladesh into india
Apparel imports (ITC-HS chapters 61 + 62) from Bangladesh into India - Before and After GST


image of post GST rise in  imports after GST

Looks like Dhaka is indeed making sense over Ranchi and all other apparel cities of India.

Edit 1: Thanks Moin for pointing out the error in calculation. Rectified now. 




Nov 9, 2018

MSME support and outreach - The 100 districts 100 days initiative

On 2nd November 2018, the Prime Minister of India launched schemes for Micro, Small and Medium Enterprises (MSMEs) which he termed as the Diwali gift for the hard working honest entrepreneurs of India. It was termed 'Support and Outreach' initiative for MSMEs. The initiative was launched for 100 districts to be continued for 100 days. 

MSMEs are important for the growth story of India. There is no certain way to measure the number of MSMEs. The numbers given out by various agencies varies from 60 million units (CII) of operational MSMEs to 120 million units (NSSO). They are supposed to contribute around 7% to the GDP through manufacturing activities (share of manufacturing in GDP is around 26% in India), and 25% to GDP through services (share of services in GDP is around 58%).  MSMEs contribute around 40 to 45% in total exports from India based on various reports. This number too has unsure origins. Nevertheless, even with the data inaccuracies, there is no doubt that MSMEs contribute in a big way as these cover all the mom and pop businesses in the economy. The unfortunate part is that they are not adequately covered under the Goods and Services Tax (GST) and therefore we cannot expect the GST returns to cover them for raw data purposes.

The prime minister launched the so called twelve initiatives to support MSMEs in India, and termed them as his Diwali gift to the MSMEs. It is a known fact that demonetisation and GST has adversely affected this sector and given the approaching elections it was important to address this issue at the earliest. In addition, the credit squeeze the banks are facing in the light of Non Performing Assets (NPAs) hitting the balance sheets is hurting MSMEs the most. However, what came as a surprise is that none of these initiatives, barring an interest subvention and some ease of procedures, adds anything significant to the lives of MSMEs. Interest subvention is a kind of subsidy and any subsidy is a sure shot political winner at any point of time, albeit at a great cost to the taxpaying public. However, what's moot is how much these initiatives would actually help MSMEs in surviving the downturn and actually grow.

image of MSME support and outreach
MSMEs support and outreach - 12 Diwali gifts


The most celebrated of the initiatives was the 'loan under 59 minutes' scheme where MSMEs would get 'in-principle' approval for loans under 59 minutes when they apply through a dedicated web portal (www.psbloansin59minutes.com) developed for the purpose. This portal works by linking the MSMEs with the GST portal and bases its credit worthiness on GST returns, income tax returns on owners, bank statements of last six months and other KYC details. MSMEs who file regular GST returns and have good income tax return profiles of the owners constitute a small minority among the MSMEs. This minority never faced credit crunch in the first place. So one wonders which MSMEs pain is this initiative trying to ease. And the in-principle approval by the public sector bank is only 'in-principle'. One still has to visit the bank physically and submit all relevant details in paper form again to the bank for final approval which would take more than a week. The pain lies in the approval process. Given the credit squeeze the banks are facing, and the fear of enquiry the bank managers face if a loan goes bad, the banks shun lending to anything even slightly risky.

While not entirely new, some initiatives are laudable. Various clearances such as separate water and air pollution clearances have been merged into one, and this can be now based on self-certification for a majority of MSMEs that don't fall in hazardous material zone.  Also, the bill discounting through TReDS platform, which is in place for more than a year, is also a good move.

Overall, while there was nothing new in the announcements apart from the interest subvention, the PM did a good job in enumerating the steps taken towards ameliorating the pains of MSMEs.

I was one of the officers in my area who was given the task of inviting the MSMEs to come and listen to the announcements being made for them through video conference. A union minister was also deputed along with a senior officer from Delhi to overlook the preparations. The convention hall was filled up with bank employees (banks were the main coordinators for the program) and random public who were hauled up in the last minute to ensure that the hall doesn't look empty. As the video conference began, the snacks arrived, and with it most of the public vanished. By the end of the announcements, there were only few rows of bank employees, government officials, and a few uninterested press reporters who were left. Of course, there were some MSME owners among us who wondered what's all the fuss about.




Oct 18, 2018

The mid year review of Foreign Trade Performance of India

India's financial year is counted from April to March. That makes it out of step from regular calendar year followed at most places. The September numbers for foreign trade is here. So that makes it a half year data being available for this financial year. The brief summary from the official report is as follows:

image for India's foreign trade statistics
India's foreign trade summary - April to Sept 2018

Imports over the period has grown faster than exports of merchandise and services. To that extent, the trade deficit worsens. What is noticeable is that even in services, the trend is following merchandise in terms of imports growing faster. India maintains an overall services surplus of around 70 Billion USD per annum that helps bridge the merchandise trade deficit of around 200 Billion USD (other gap-filling coming through various forms of capital flows).

Since 2013, when the exports last grew significantly, we are stuck in doldrums in the range of around 300 Billion USD exports. The government has exhausted all traditionally available means of cajoling exports to grow. The exports has simply not grown. Also, the constituents of exports have also not changed significantly. As I predicted, the weakening of rupee has not made exports grow; it takes more than a year before weak currency effects starts to show on actual trade.

I have a feeling that we squandered away the recent good three years of global export growth wave when many countries saw their export boats getting a lift. Demonetization and lack of sensitivity towards exports while launching GST were two contributing factors, apart from credit squeeze in Indian market.

Meanwhile, we are approaching headwinds in exports, or rather, international trade and growth in general due to:


  • Trade appetite wane in general, trade wars, losing significance of WTO and its appellate mechanism
  • Out of sync monetary policies in US (tight) and other countries (loose) leading to dollar appreciation and its spillover effects which will wash ashore everywhere in next 6 months to a year
  • Possible financial recession, it's been a good ten years now since the financial crisis. The trigger could be anything from Italy's budget, Saudi Arabia/Iran/Middle East, US/China tensions, Latin America, or even a botched up Brexit. 


Here are the items that grew in terms of exports and imports during September.

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Commodity groups showing positive growth in exports during September

image for Commodity import growth India
Commodity groups showing high growth in imports during September




Sep 12, 2018

NAFTA Rebooted - some points

How do you stop the President from tearing up a trade deal. As per Bob Woodward in his new book Fear:Trump in White House, by simply pulling out the signing paper from the desk. The President simply forgot that he had to unsign the NAFTA deal, or rather sign a NAFTA withdrawal (someone please do that for RCEP in India). While the deal break never happened (or engineered to not happen), the revised onerous negotiations on NAFTA wound their way to give the world a glimpse of what makes the US President happy when it comes to trade deals. Mexico has hammered out a deal that's acceptable to the US President. And going by the look of it, Trump loves trophies. He got his wall sponsored. Well almost. Canadians are still thinking, and bargaining. 

One can understand the Canadian negotiators' dilemma. There's noting on the table for Canadians if they sign. But if they don't, they have things to lose in trade and economic growth. US is their biggest trade partner with more than 3/4th of Canadian exports headed to USA, thanks to NAFTA and friendly border compliance procedures. They also import more than half of all their import needs from US. Of particular interest is automobile trade that makes almost one fifth of the total trade between them. This would change if NAFTA changes. 

Automobiles are interesting in NAFTA. NAFTA changed the way auto majors operated in north American market. Auto components shuttle across NAFTA borders around 7 times on an average before coming out inside a car. Many carmakers shifted assembly bases to across border Mexico where wages were cheap, almost tenth of that in US. I had blogged earlier about the preposterousness of Trump's demand to have the cars assembled by workers who earn atleast 16 USD per hour (Mexican assembly workers earn around 2 USD per hour). I thought that's a deal breaker. I was wrong! Trump has pulled it off in the first round as Mexicans have agreed to the condition of more than 40% of final assembly to be done by workers earning 16 USD per hour, and for the condition that the share of USA in car components to increase from almost 60% currently to 75% after the reboot of NAFTA. If that jacks up the car price by a thousand dollars, so be it. It's an 'America first' world after all. 

It's not that Canada is not warming up. Their dairy sector is thinking of opening up for US imports after years of resistance from Quebec farmers; Canadian dairy sector has protectionist tariffs that would put India's dairy product tariffs to shame. The investments in Canada are already taking a hit due to uncertainty around NAFTA and due to the revised corporate tax rates in US.  At this time, Canadians seem to focusing too much on dispute resolution mechanism, the chapter 19 of the deal, that shouldn't bother so much during normals times; but given Trump's record at WTO dispute body Canadians are right to try and play safe here. Given the overall loss Canadians stand to suffer if the deal falls apart, it won't be a surprise if Canada decides to play ball after all.

There's time till September end to strike out a deal and make the rebooted NAFTA a union of original three. Otherwise, going Trump's way it would be a bilateral US-Mexico deal, on Trump's terms. Well almost.