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.

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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:

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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

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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. 


Sep 3, 2018

National logistics portal of India - A step in right direction


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National logistics portal for logistics service providers

India is planning to setup a National Logistics Portal on an e-marketplace model. The initial idea was mooted sometime during February 2018. The idea is to have an amazon for logistics service providers that would help bring down the logistics cost in the country. In principle, this is a great idea. The rest boils down to execution. In that respect, I find the National Trade Portal of Singapore to be a good single window example to emulate. While I am not a fan of Government being in business of making e-marketplaces of anything, I believe that public sector needs to step in to create infra-superstructures if/when the private sector fails. This effort falls in the category of private sector not living up to the expectations. 

The logistics portal aims to bring onboard some 80 odd regulatory functions under one umbrella. I assume most of this boils down to providing links to the respective websites, which while dumb might still work as long as the respective websites work well. For example, the clearance at customs is done through ICEGate portal and I can visualise a link being provided to file bills of entries to ICEGate using the new logistics portal. If ICEGate works fine, all would be fine. However, there are many websites that just don't work the way they should. For example, obtaining RCMCs (one of the myriad necessary certificates that could be done away with) from various export promotion councils is a nightmare. Links to these websites might not help unless the entire request system for RCMCs is redesigned. This brings me to the topic of process redesign in e-governance. 

I believe that most initiatives to computerise government functions/services fail because they fail at process re-engineering. Computerisation is usually super-imposed on the existing manual system of doing things in government service delivery process. That doesn't work. One needs to re-design the work flow before it could be computerised. Let me cite an example related to international trade area. DGFT issues something called a duty credit scrip under various schemes. This is a manual scrip that is printed on a security paper, signed by an officer after affixing something called a security seal. Customs would accept only when the seal, signature and the security paper is intact and whole. When we computerise this process, we need to re-imagine the security paper and seals. Unless we evolve a system of NSDL kind of de-materialzation, or come up with our own blockchain based technology, the computerisation cannot be complete. The paper and the signatures would still make the process slow and inefficient. This would be a challenge for National Logistics Portal too when they think of integrating these 80-ish regulatory functions. Unless they can get many of the departments onboard for process re-engineering, they delivery efficiency would be moot. The problem is that not all these regulatory functions fall under the purview of the commerce department which is making the portal. Therein lies the risk that the integration would end up as links to the respective useless websites.

Second is the aim to bring various logistics services providers on-board. This is where the efficiency and user-friendliness of the portal comes into play. Being a user of various forced Government marketplaces such as GeM, I can vouch for their user-Unfriendliness. But for their mandatory nature, I would stay away from Government e-Marketplace. It fails on all counts of ease of navigation, placing of orders, payment, delivery and support. You just don't know where to look for when things fail. I hear that a special purpose vehicle (SPV) might be launched for logistics portal. The SPV usually is a way of saying that private sector would get involved. The unfortunate thing with the government is that the least cost bidder is picked up for execution. While the rules may be tweaked at the stage of entry to weed out smaller unproven players, yet there is no guarantee that the best developer is picked up. Even if we assume that we get a semi-decent developer, the rest boils down to proper definition of proposal and requirements. And here, I have seen that wish lists are doled out to developers without proper definition of the scope. The end product is loose if the scope is not tightly defined. 

The third challenge would be get the service providers on board. This would happen relatively easily if the portal is good and gains traction. I would hope for the best and wait for the launch of the portal. If done properly, this would indeed be a good step in right direction. The pilot launch is expected during March 2019. 




Jul 17, 2018

Urgently needed - an integrated E commerce policy for India

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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.