Dec 24, 2012

Service sector incentives - Policy challenges

Services has emerged as an important part of our exports. More about facts and figures on service sector here  ;-)

Anyway, this blog is about the challenges when  it comes to grooming (?) services sector through incentives. There is a line of thinking which says that services sector grew as the Govt. was caught napping and didn't know how to deal with it. So all that the Govt has to do now, for services to keep growing, is to just let it be and don't spoil the party by interfering. However, from a trade policy-making point of view, services has emerged as a strong sector with a comparative advantage that is here to stay for some time to come. The policy-makers could not ignore this sector, and in good faith, decided to introduce incentives for this sector too, alongside other sectors. The current foreign trade policy incentivises services exports through schemes such as Served From India Scheme (SFIS). To know more about the scheme refer chapter 3 under this FTP link

SFIS provides incentives to service exports in the form of duty credit scrips, to the tune of 10% of total exports done in the financial year, which can be used to import capital goods. One can use the scrips to pay the customs duty on capital goods imported and used by the service provider. 

Under the scheme, the definition of service sector is very broad. See here. It covers everything from private real estate consulting to hospital and hotel services, except exports from SEZs, STPIs and such special zones. So anyone doing anything that can be put under services exports, is eligible to be incentivized. I won't get into hair-splitting over specifics, as the focus is broader here. 

What's wrong with such schemes. 

Firstly, there is no fool-proof way of establishing the 'value' of services provided. Whatever the exporter declares on the invoice, cannot be disputed easily. The organization which implements the FTP scheme (DGFT) is hardly competent to check if the declared value is correct or not. It goes by whatever foreign remittance was realized through banking channels. The realized money can be anything, including round routing of black money, as long as it says that it came as a payment for 'some' services provided. I must add here, that goods/merchandise trade cannot be easily mis-invoiced, especially if they are being incentivised. There is a specific group in customs which looks after incentivised exports, and checks the value of such exports strictly, using national level standardized database. There is no such known database for valuation guidelines in services.

Secondly, there is no link between services sector performance and incentive that is being provided. It is 'hoped' that it helps, but there is absolutely no data to back up the 'hope'. I am unaware of any study being conducted to check the efficacy of this incentive scheme. 

Thirdly, the Govt might be incentivising something that falls in grey area, viz capital control avoidance through trade mis-invoicing. An eloquent blog on the topic of capital control avoidance through mis-invoicing is here. The  blog accepts that services trade offers substantial opportunity for misinvoicing as valuation guidelines are not easy to come by. So services trade can easily be used to avoid capital controls. And this scheme (SFIS) seems to incentivise such efforts! 

If someone thinks that it is not easy to get benefits under this scheme, one just needs to see the procedures and details. It's cakewalk. And if it still feels difficult, you have consultants advertising on Google, promising to do exactly that for you. One can even float a company, get some money under the services head, take this incentive, and send the money back, all in the name of some service being exported and imported. You keep the capital good for free, without paying any duty. 

This blog is a strong advocate of measured incentivising. Incentives must come with a calculated goal in mind. They should be implemented on field with proper care, and the feedback must be continuous to ensure that the effect is as desired. The logic is simple. Given scarce funds, we need to look at the margins. Services sector, is not yet ready for such incentives. It is still a grey area for the Government, given that we do not have reliable way of capturing the data for this sector. 





Dec 14, 2012

Service sector of India and the Rybczynski effect on manufacturing

The theory I am going to propose below is not based upon any serious study. So the possibility of holes are not excluded. Thus it goes.

If there are two tradeable sectors in an economy, and if one of them is a leading sector and the other one lagging, Rybczynski (pronounced Rib-Chin-Skee) theorem predicts that, over a period of time, there would be more than proportionate expansion in the leading sector, at the cost of the lagging one. This would happen when one reads Rybczynski's theorem in the light of Heckscher-Ohlin model. Alongwith, you might be interested in understanding the mechanics, by reading about what's popularly known as Dutch disease.

Cut to India. We have a leading sector in services, and a lagging (albeit important) sector in manufacturing. When I say leading, I am not referring to the sheer size, I am referring to the productivity and comparative advantage the sector enjoys in international trade. In this respect, services sector is a leading sector today. Now, if I read the theory right, what should happen over a period of time is this: 

The service sector booms, at the cost of manufacturing sector and ultimately, the manufacturing sector loses its comparative advantage in the international markets. Service sector will do very well and will be the mainstay of our trade. 

How would this happen?

Three things would work in tandem. 

First. Exchange rate mechanism would work in favor of services. India will increasingly adopt floating exchange rate in future (it is almost floating as of now). This means that the real exchange rate would ultimately settle at a value which will be determined by the net exports, which in turn will be a function of all tradeable sectors' performance combined (plus capital flows). The value, whatever it is, will be an aggregate of all sectors competitiveness. For any given exchange rate, services sector will be at a discount, as by our definition, it is more competitive in international market. This would lead to strengthening of this sector. Manufacturing sector, being relatively a laggard, will face an adverse exchange rate when compared to its level of competitiveness. This would lead to gradual erosion of comparative advantage. 

Second. Service sector will pay relatively higher wages to the labour due to the above advantage. This would lead to a tendency in the labour market to lean towards services. As the sector expands, it would start absorbing labour from other sectors, mainly manufacturing and agriculture. This would make availability of labour in manufacturing sector scarce, leading to wage increase and further erosion of competitiveness.

Third. Investments would move into sectors where returns are maximized. The relative margins in service sector is better than manufacturing in the present, and will continue to be so for some time to come. This would mean, that given limited investment funds, a more than proportionate portion would invest into services sector.

Is this a cause for concern? My answer is yes. Services sector is not employment intensive, unlike manufacturing. A disproportionate growth in services doesn't bode well for a job-scarce economy. Absorption of new labour, and the labour released from agri sector is an important issue. Absorption could be higher in manufacturing sector, when compared to services, and the growth of manufacturing is important from this point of view. 

The Rybczynski effect is my speculation. It might not happen. There are good reasons for our manufacturing to do well in future. Let me deliberate on that part too.

Increasingly, our manufacturing, especially sub sectors such as auto and ancillary components, engineering etc are integrating into global value chains, or what I prefer to call, International production networks. Once our sector plugs in into the global manufacturing chains, the relative comparison with services will matter less. This alone might offset the Dutch syndrome.  

Secondly, productivity of manufacturing sector will rise with time, and if things go well, our manufacturing might keep up with the comparative advantage over a longer period of time.

Thirdly, the demographic dividend of having a younger labour force in India, and gradual drying up of chinese labour force, might keep us going (China is ageing faster). The supply of labour will keep the wages low. The challenge is to train and get the labour that's industry-ready, by boosting vocational training capability of the country. Vocational training currently is a disaster in India, I will elaborate on it some other day. 

Finally, the Govt is waking up to the uncomfortable fact that manufacturing sector cannot be ignored anymore. The initiatives on National manufacturing zones is a step in that direction  If right incentives are provided, the future of this sector might become bright.

A combination of above will play out in coming years. The results will determine not only India's trade, but also decide the developmental pace and stability of the society.




Nov 26, 2012

Humanoids, Robots, IPSoft and IT Jobs

Okay, this is going to be long. So brace for it. 

There were two news items recently, and I am going to draw heavily from them for this blog. 

1. Today's mint front page article on IT exporters adding revenue with fewer new employees. 
2. A robotic threat to outsourcing model, here

The first one talks about how our IT exporters added more revenue without adding too many employees this year, basically moving towards more earning from higher end projects. The ratio of people with less than three years experience in the IT giants like Wipro, Infosys etc is decreasing, the article no. 1 points out. 

The second one is from the last week, and talks about how....wait a sec...let me quote 

"Robots and humanoids that automate and deliver information technology (IT) projects at a cost that is less than one-fourth the billing rates of engineers from Tata Consultancy Services Ltd (TCS) and Infosys Ltd are the latest threat to India’s $100 billion (Rs.5.5 trillion) IT services business."

Okay, that says it. So there are companies like US based IPSoft (very interesting company website, check it out! Don't miss the Turing centennial post by Chetan Dube, the CEO), who are working on software robots and humanoids that can automate many mundane software development jobs. These IT robots are going to revolutionize the process of software development as we know today. If you are thinking it's fantasy, let me quote this:

"Software robots or algorithms automate the entire workflow, offer solutions in a fraction of the time and at a cost that cannot be rivalled by engineers, based in cheaper, offshore locations such as India and the Philippines. For instance, if a US bank faces issues in running a particular software application, an algorithm or software robot can solve it by sifting through the entire IT infrastructure of the bank within seconds, identifying the cause and fixing the problem. A human engineer would take at least few minutes to identify the problem and another few minutes to offer solutions."

“The economics are eye-popping: while an onshore FTE (full time equivalent) costing $80K ($80,000) can be replaced by an offshore FTE for $30K, a robot developed with the Blue Prism/IPSoft tool kit can perform the same function for $15K or less—without the drawbacks of managing and training offshore labour,”James R. Slaby, research director at HfS Research, said in his October report titled Robotic Automation Emerges as a Threat to Traditional Low-Cost Outsourcing.

So that sums it up. And what are our IT giants doing? Let me quote again:

Already, senior executives at Wipro Ltd, Infosys and Cognizant Technology Solutions Corp. are scrambling to partner with IPsoft instead of losing some existing and even potential projects to the new model. Officials at these companies confirmed they are in talks with IPsoft for a potential alliance, but asked not to be identified citing non-disclosure norms.

So that's one part of the story. The second part relates to the first article. IT companies earning from high end projects. Now let's relate both and do some crystal gazing. What I see is not pleasant. I see a loss of job creation in IT sector. People would like to have more experienced IT professionals, doing high end work, and leaving the mundane software development, which forms the bulk of software development jobs today (ask me, I worked with Wipro and Infy), to the IT robots. And that would effectively mean, higher entry barrier to the new IT engineers/professionals, especially the ones that pass out from not elite institutions. 
What about data/voice and other low end outsourcing jobs? They should be the prime target once algorithms starts passing Turing tests, and trust me, it seems closer than ever, going by what I am reading/hearing. 

Is it all doom now, with bots killing humans? Not exactly. But one has to brace for what might come. The strategists at our IT giants need to look into the future, and think about how to adapt. The current model of being a global provider of services using low wage human workers, has served them well, but they need to move into product development to stay relevant in future. They have tried, but the results are yet to show significantly. It's time our IT sector grows up, into products and solutions that go beyond what can be done by IT robots or low skilled employees. I am sure, the IT strategists (in the IT sector, not the Govt.) know it.  It would be nice to watch this sector in next couple of decades. We sure live in interesting times!

PS: Blame the informal language on beer! Will correct it some other day and remove this PS

Nov 24, 2012

e-BRC, one small step for trade, one giant leap for the tradekind

Electronic Bank Realization Certificate (e-BRC) is an initiative towards trade facilitation. It was introduced in the current foreign trade policy (FTP) this year. You can read the detailed circular on e-BRC here
As the blog is for general public, let me clarify a few things. One of the objectives of FTP is to provide incentives for increasing foreign trade of India in desired direction. Trade facilitation is another objective. Most of the incentive schemes need proof of conducting foreign trade (say exports), and that the foreign trade proceeds were 'actually' realized. (Ok, in simple English, to take incentives under FTP, one needs to prove that he exported, and got the money back for it.) The physical part of movement is captured by what we call as shipping bill, and the money movement part is captured by, to keep it simple, a bank realization certificate, which the banker issues after the proceeds are realized. More about these things here.

Incentives are given after physical verification of these two documents and after matching the details therein. DGFT is the organization that does this work. And it's a mundane, manual work. Lakhs of shipping bills are verified against lakhs of physical BRCs. It was a case fit for automation. Customs had already moved on to e-shipping bills. The banks were a challenge. There are multiple banks, and to get all of them on board, to comply with the laid down formats, was a big effort. I realized the magnitude of effort only when I spoke to the in-charge of the team that developed the system. It has been done now, with the highest level of coordination between DGFT, MoF, Banks and RBI. Of course, the system is developed by NIC! For once, I must appreciate them for this one. The 'FAQs' and the 'Help' actually helps by using some common English. That itself is a change. See here in the link, under ECOM (read me first)

The advantages of doing this are many. One, it removes the huge workload on the DGFT organization, of physically verifying details on two sets of documents. Two, the transaction cost involved for traders, to go to the bank to get the physical BRCs, is eliminated. The cost of getting each BRC was (unofficially) between Rs 400 to Rs 1500 per BRC. Three, Banks were employing personnel to cater to this specific function of generating BRCs for the clients. This overhead is now reduced and the resource can be deployed elsewhere. Fourth, it drastically reduces the processing time, as what could take days, would now be done instantly. Lastly, it removes transaction costs of trading community of making visits to DGFT offices and trying to push the files faster. 

Paperwork has hidden transaction costs in terms of monetary and time penalties. Easing paperwork through automation, especially the ones that involve straightforward filing or checking of numbers, should be taken up on a mission mode. In years to come, I envision many such moves that would totally eliminate the need of paperwork (using trees) in international trade. The trickle has started. ICEgate of Customs and DGFT's E-initiatives are on the forefront for trading community. Banks have now hopped on-board. The blog welcomes the change. 


Nov 3, 2012

TPP, Regulatory Coherence, and India

 "On November 12, 2011, the Leaders of the nine Trans-Pacific Partnership countries – Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States – announced the achievement of the broad outlines of an ambitious, 21st-century Trans-Pacific Partnership (TPP) agreement that will enhance trade and investment among the TPP partner countries, promote innovation, economic growth and development, and support the creation and retention of jobs."... from USTR website

Now, what's so special about an agreement that US is going to have with few other nations across pacific? 
A reading of the same USTR page would tell you this too:

"The United States, along with Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam are working to craft a high-standard agreement that addresses new and emerging trade issues and 21st-century challenges. The agreement will include:

• Core issues traditionally included in trade agreements, including industrial goods, agriculture, and textiles as well as rules on intellectual property, technical barriers to trade, labor, and environment.

• Cross-cutting issues not previously in trade agreements, such as making the "regulatory systems" (emphasis added) of TPP countries more compatible so U.S. companies can operate more seamlessly in TPP markets, and helping innovative, job-creating small- and medium-sized enterprises participate more actively in international trade.

• New emerging trade issues such as addressing trade and investment in innovative products and services, including digital technologies, and ensuring state-owned enterprises compete fairly with private companies and do not distort competition in ways that put U.S. companies and workers at a disadvantage." 

Those three bullet points above, are the major points of TPP. The key lies in the world "Regulatory Systems" in the second bullet point. 

When I was working with Infosys in Bangalore, way back in 2007/2008, I used to work on projects outsourced by Boeing. My job was to prepare structural repair manuals for Boeing 787. I used to read a lot of technical manuals written by Boeing, and invariably, those documents contained the IP clauses on the bottom of each page, that said that the information is covered under Boeing/US Defence Intellectual Property (IP) laws, and cannot be divulged without permissions/approvals. Infosys, had signed the agreement to protect the 'Intellectual Property' of Boeing in all possible ways. In fact, the access to the 'Boeing area' in Infosys was restricted to only those employees whose IDs were given access, after necessary approvals, and 'only' such employees could unlock the doors to the Boeing work area. It was the same with Johnson controls, Airbus, or other such sensitive projects, that were bagged by Infosys, with an assurance that all IPs will be protected fully. Infosys did a commendable job, to the best of my knowledge, to adhere to what it had signed on paper. US firms such as Boeing, had to go that extra length to sign such IP/regulatory related agreements with 'each' of the firms that they worked with. Random audits, to ensure that such firms confirmed to the regulatory requirements, were a common feature when I worked. I believe that it is still the same, when it comes to Indian firms that undertake such projects. 

US, or for that matter any other country, that generates such sensitive IP, is wary of outsourcing work to any random vendor, who might copy or leak the data outside. That applies not only to firms but to the countries too. US is extremely wary of China, rightly or wrongly, as US suspects China of stealing data or IP protected stuff. 

US firms lead the global supply chains that crisscross multiple countries, each having it's own version of IP law implementation. The regulatory framework might be dictated by TRIPS and such agreements, but in the end, the level of implementation, is a function of how much the individual country gets serious about implementing such IP related laws on the ground. 

US has tried to push for stricter IP protection laws at the WTO for some years now, and US has been successfully stonewalled by developing countries, mainly due to differences arising from Pharma industry experience. 

US firms would ideally like to have an environment where they can operate without the fear of IP theft, while taking the advantage of outsourcing/local comparative advantage in various aspects of product development.  It is not easy to have such a secure environment across countries. At TPP, this effort, to have a coherent regulatory environment,  is being undertaken, and that's why they hail it as a 21st century agreement. 

If the agreement comes through as desired by US, the US firms would have flexibility of operating in TPP countries without bothering about special US legal/regulatory permissions or agreements for each and every project that they execute in collaboration with TPP countries, as these countries would have 'regulatory coherence'. Regulatory coherence would mean that the countries would converge on IP and related regulatory structures. 

So, where does that leave us, that is, Indian firms? 

It's a challenge in the sense that India won't get into any such agreement, with US, or at WTO level anytime soon. So, the set of countries that fall in the 'regulatory coherence' ambit of TPP (or such similar agreements that might crop up in future) would have an advantage. However, Indian firms, such as Infosys and others, have been quite open to adhere to US regulatory requirements. So, I don't see any reason as to why they should get affected. When it comes to manufacturing, we are not getting too much of 'sensitive' projects, except for the ones that come through defence offset clauses of Indian defence procurement policy. So, that area too is safe, for the time being. 

The TPP type of 'regulatory coherence' would start hurting when this type of  regional agreement clauses would start becoming the norm. US couldn't push it through WTO, so it's pushing it into TPP. Once this comes through, the ambit might widen, with more countries showing interest to join TPP. And the TPP document might become benchmark for future regional agreements with US and other countries, and ultimately coming into multilateral agreements of WTO. This might happen sooner than later. Are we gearing up for that? 

I think it's time we start analyzing TPP seriously in our policy circles, without minding that it is happening far away from us. It's indeed a 21st century challenge, for a 21st century agreement.

PS: I have kept the focus narrow in this post, and have omitted larger issue of technical barriers to trade (TBTs). My intention is only to draw the attention. The bigger debate is for another day




Oct 31, 2012

Why India is wrong in opposing WTO IT Agreement-2

WTO members are actively involved in negotiating the second phase of Information Technology Agreement (ITA - 2) at WTO. The initiative is led by US, and supported by Canada, Japan, Chinese Taipei, Korea, Singapore etc. EU and China too have shown positive signs towards the agreement under consideration. The aim is to bring down the tariff of all technology related goods to zero. The agreement includes computers and peripherals, electronic hardware including semiconductors, computer software, telecommunication equipment, and hardware/Capital Goods to produce the above. You can see here, here and here to know more about this agreement under discussion (or Google!)

Now, I had blogged about the issue of our infant electronics hardware/semiconductor industry here. The issue in brief with our electronics industry is: We are lagging in the race of indigenous development of electronic/semiconductor products, and do not enjoy the economies of scale. The reasons and factors were discussed in previous blog that I mentioned. The situation is grim in the sense that electronic hardware is poised to become 'the' biggest import item by 2020 (beating crude imports) if the current trend continues. Govt has come up, in the past and in recent times, with incentive policies. The latest policy on National Electronic Mission was released last week. You can read more about it here and here. The idea is to encourage domestic electronic hardware/semiconductor manufacturing. The good news is that the projected growth of electronic hardware industry is around 22% based on current trend, unless we do something stupid! 

Policy wonks in Delhi believe signing ITA-2 is one such stupid act. To guage what Delhi thinks, you can read this interesting article from mint on this link. Let me summarize the points in the article. The wonks believe, it is bad to sign ITA-2 because:
  1. It will lead to disadvantage to our domestic electronics manufacturing industry as tariff will become zero and our industry won't be able to compete with imported products on cost. 
  2. It is a plot by electronic giants (Intel, Cisco, Huawei etc) and countries (US, Japan, Korea, China) to retain monopoly. 
  3. It's NAMA by another name and why should India give up the tariff barrier without getting anything in return? 
  4. It includes consumer durables like ACs, Regrigerators and Washing machines under the guise of electronics, which is foul play, as they don't belong to strictly electronic hardware classification. 
Point no. 1 and 2 are actually linked. They are linked by what is known as "International Production Networks" (IPN). You can read an interesting paper on IPN and electronics industry here. Electronic hardware manufacturing is no longer a one country isolated phenomenon. If one sees the manufacturing process of an I-Phone or Nexus tablet, end to end, you will see the involvement of multiple nations and organizations. Semi-manufactured and intermediate goods move back and forth between nations, and firmware and software is designed across national boundaries to bring out the end product. China might be the final assembler, but ASEAN puts in a lot of small components, while EU, US and other countries put in their designs, firmware and software (yes, include India here!). And remember, most of the firms assembling in China, are the global giants in electronics, and not homegrown industries. 

Point 3 is negotiators delight. If you want to see a conspiracy, you can see it everywhere. The game is to get something to give up something. The question I am going to ask later is, by insisting on Point 3, who is losing? 

Point 4 is a no-brainer. One should be able to negotiate out of that by taking a firm stand on correct definition of electronics/digital products. 

The current state of negotiation of ITA-2 is in a stage where it covers 70 countries preparing to sign, covering 97% of IT trade worldwide. India is opposing and is not ready to sign. We want to sit out. 

So what's the idea? 

Let's assume for a moment that India doesn't sign and decides to go alone with its policy missions on electronics and tariff walls and incentives. This would literally shut us out of any calculations of any reasonable participation in any type of electronics IPN. And if IPNs are the future of electronics, we will end up totally isolated behind our tariff walls. That shuts out MNC investment in the sector, as moving intermediate goods to/from the country would incur additional tariff costs, nullifying any other advantage we might incidentally have. 

Of course, India being a big market, final products will keep coming in, with an additional duty burden, thus inflating the costs of such products in India. That would imply, that those sectors which use such goods as infrastructure, would incur additional costs. 

India is suffering in electronic hardware manufacturing sector due to lack of proper planning and investment during 90s. We blame it, rightly or wrongly, on ITA-1 that was signed during initial WTO agreements. That explains some reservation. But it also indicates a lack of understanding of evolving dynamics of electronic hardware manufacturing. Anyone wanting to make it big in this sector, cannot think of doing it in isolation. And what exactly are we trying to achieve with an infant industry, isolated from world production networks, behind tariff walls? Are we serious, when we say on one hand, that we will create some special electronic zones or provide some incentives to this sector, while on the other hand, literally shutting it out of the world? 

I believe, the way to go is to be a part of the team, and not someone who sits outside the field. You don't get to play if you are out. You just watch. And carry water for the players. 

I think the sensible course of action is to bargain hard, and be a part of the team that plays the game. Our special manufacturing zones might then bustle with global MNCs manufacturing and assembling electronic components here, and providing jobs to millions. And who knows, the next Huawei might be our TATA. 




Oct 26, 2012

Merchandise trade data in India: Collection, presentation and issues

I thought of summarizing the merchandise trade data collection process in India at one place, in easily  comprehensible manner (ahem! Aim for parsimony), and the effort resulted into this post. I hope it helps to give a brief overview to anyone interested, about the merchandise trade data collection and presentation process in India. 

The merchandise trade data in India, related to 'physical movement' of goods, is collected and disseminated by DGCI&S. The other part, concerning 'money movement', related to merchandise trade, is handled by RBI. The two sets of data do not 'generally' match. The error varies due to various factors, which I will discuss later on. 

Let's start with the DGCI&S part. 

Physical movement of Goods data:

The physical trade part is monitored by Customs department (except SEZs which have their own monitoring systems, assisted by Customs). Transactions are recorded when the goods are 'cleared' by customs. The shipping bills filed during exports, and the bill of entries filed during imports are the reference documents. The values of goods as declared by exporters/importers are checked against the valuation guidelines, and are accepted/modified. The valuation step has undergone multiple improvements over years which qualifies for a post of its own (for some other time). Once the data on shipping bills/bills of entry is accepted,  the data is fed into the system and Customs generates a Daily Trade Report (DTR) for the day for most of the ports covered under EDI (Electronic Data Interchange). Most of our trading ports are already covered by EDI barring few land stations and remote posts. The process of covering all ports under EDI is under progress. SEZs do not come under this EDI system. Those land stations and ports 'not' covered by EDI, send their data in hard copy/ CDs through post, at intervals. The SEZs send their data in CD format to DGCI&S. 

DGCI&S thus has data in three formats. DTR data(daily), CDs(at different intervals, with lag), and hard copies(at different intervals, with lag). Compilation of data and presentation is done by DGCI&S. The data is released in phased manner, based on level of details. 
  • First release: Also called press release. Generally released by Ministry of Commerce with a lag of one month. This talks of just the aggregate data on provisional basis. 
  • Second release: Called Press Note. This is released shortly after press release, officially by DGCI&S. The data details are again at aggregate level. 
  • Third Release: Called Foreign Trade Statistics of India (FTSI): This has a time lag of around 2 to 3 months. In this release, data is divided into principal commodities and countries. So you have some data for analysis. Data is revised at this level due to addition of Non-EDI data. 
  • Fourth Release: Called Monthly Statistics of Foreign Trade of India (MSFTI): Lag of 4 to 5 month. This covers further revision of data. Data keeps coming in even after MSFTI, which is termed as 'late receipt data' and is kept on adding to the database. 
DGCI&S keeps on revising the data with minor modifications based on any further information till the end of financial year, to match the monthly figures with the cumulative figures. 

Banking Channel data:

The money part of the trade is captured by RBI through various ADs (Authorized Dealers of Foreign exchange, mainly banks and few dealers authorized by RBI to deal in forex). The mechanism of data collection is through FETERS (Foreign Exchange Transactions Electronic Reporting System). Any transaction, linked to the trade, is logged under a certain code, given for the purpose, as mandated by FETERS system. The compiled data is transmitted to RBI, which summarizes the total data coming from all ADs. 
While it is easy to record the transaction of physical goods movement,  as the physical goods are 'cleared' by customs, it is not so easy for banks/RBI to tap money movement. The payments are realized at multiple stages, depending on whether advance payment are made or not, or when was the document given for negotiation  how many shipping bills were clubbed for payment realization, was there any equity participation in imports and so on. However, FETERS captures most of the data quite accurately and the compiled data is released by RBI at monthly intervals. 

Sources of differences between physical and banking channels:

It is observed that there is a difference between data reported by DGCI&S and RBI for merchandise trade. These differences mainly arise from:
  • Differences arising from exchange rate used. Customs uses a common exchange rate given by FEDAI for the month, which is an average value. ADs use the current exchange rate while actually transacting the money. 
  • Timing differences of recording the transaction. Customs records the data while 'clearing' goods and ADs records the data during monetary transaction which might (and is generally) different date from the goods clearance. The difference can be up to one year, between physical movement and payment exchange as per current FEMA guidelines. 
  • Freights and insurance and agent commissions which go under 'services' head, and are captured by FETERS as separate head, though Customs takes it under CIF (cost, insurance and freight value at imports) for imports. 
  • Some minor differences arising from gold/silver imports by passengers, imports paid through accounts maintained abroad, credit transactions etc. 
(All such differences are clubbed under 'leads and lags in exports/imports' and are presented under 'other capital' head in the Balance of Payment account.)


RBI and DGCI&S, along with DG systems of Customs are working to iron out such differences. However, due to the lags in data collection from Non-EDI ports and SEZs (which account for almost one third of merchandise trade), the work involved is challenging. Going forward, in coming years, we might see good quality data, coming with lesser lag, if the move towards digitization goes as planned. 

On a side note, I must confess, the data presented on the DGCI&S website, needs a lot of improvement in terms of presentation. It is one of the least user friendly websites around. On the other hand, there is RBI's website, where one can find mountain of data, in a very user friendly, query-enabled format. Someone should point this out to DGCI&S. I have tried for couple of months now, to shake up someone to look into it, but nothing has changed. 



Oct 11, 2012

Trade gloom and slight rays of hope

Past four months, I came across this statement frequently being quoted by various experts/officials: 

"The exports declined this month, but imports declined more, therefore trade deficit has not been adversely affected."

For once, September data changes it. Exports contracted by 10.8% (over last year, to 23.7 USD Billion) and imports surged by 5.09%. The trade deficit for Sept 2012 is around 18.1 Billion USD, the widest in 11 months. More on September trade data here, here or here. As I write this blog, I see that the data is surprisingly not uploaded on commerce ministry or DGCI&S website. It's the news sites from where I am getting the information! 

I was never comfortable with that italicized statement. Traditionally, we had imports growing at a faster rate than exports, including last year when the imports grew by around 32% compared to exports growth of around 21%. This year, the summary is: 

"For the April-Sept period, exports dipped 6.79% to $ 143.6 billion from $154.1 billion in the same period last year while imports decreased by 4.36% to $ 232.9 billion" - Mint

So, the trade deficit not getting adversely affected was like searching for 'some' or 'any' positive point in the gloomy trade statistics. Now that even this was taken away, I wondered what would optimists say. I found Commerce Secretary's statement interesting (from mint again):

While unveiling trade data for August, commerce secretary S.R. Rao had said that the numbers provided a “slight ray of hope” after a dramatic 14.8% shrinkage in exports in July. “I hope this will give us some confidence that we can make up,” Rao had said, adding that some sectors such as pharmaceuticals, engineering and textiles were showing some sign of improvement.

Well said sir, but the reason for such 'slight rays of hope', in near future, beats me, for the following reasons (as Sept data has proved now):

1. The QE3 by US/Europe will release more money into the global system in coming months, leading to rising commodities prices, inflating our import bill (mainly due to oil imports)

2. Gold imports, tightly pegged to inflationary expectations in India (and fascination to yellow metal), might not come down as expected. Gold alone can push us back by 40 - 80 Billion USD.

3. Exports from India doesn't seem to pick up, as global demand is currently low. You can't push products without demand.

4. Our appetite for oil imports remains unchanged, as we are insulated from global crude price effects to large extent due to subsidies. (even after discounting the recent 'reforms')

The ho-hum solutions being suggested by various export promotion councils, such as to provide exports linked incentives, to provide easy credit for exports/reduction in interest rate, sectoral revival plans, etc, do not address the simple lack of demand. I would, in their place, keep mum.

My slight ray of hope is this:

US/Europe will have slight revival of demand during Christmas shopping season. Hopefully, QE3 might start showing effect after Christmas, leading to some kind of (miraculous) revival of global growth rate, which in turn would lead to demand for Indian exports. And I hope, nothing goes wrong in Eurozone/middle east/China in the meanwhile.

I won't talk about our imports, as that is a separate topic, which needs another blog. The import figure doesn't seem to come down, and it won't, as far as I can see. It's not bad to have higher imports as such, just that, some parts of it (read oil/gold) look bad.

Sep 27, 2012

Trade invoicing in INR: Some thoughts

Most of our trade is invoiced in Freely Convertible Currencies (FCC) such as Euro (around 8% of total), Pound (3%), Yen(0.5%) or USD ( 87%). In fact, to become eligible for benefits under our Foreign Trade Policy, one has to realize the export proceeds in FCC 'only', as per para 2.4 a of FTP (ignoring minor arrangements through Vostro/Nostro/ACU and Nepal/Bhutan trade)

The questions are: why do we have this practise? Is it good? What if we tweak it and allow people to inovice  and realize the money in INR and let them avail the benefits of FTP. And what determines the invoicing currency in international trade to start with? Will traders rush to invoice in INR if they are allowed to? And so on. 

We have this practice of invoicing/realizing in INR because our currency is not an international currency. Till we become fully convertible, it is not easy to be an international currency. Importers cannot (generally) ask the quote in INR as the exporters from abroad cannot hedge INR easily. Exporters from India don't invoice in INR as the realization has to be in FCC (ok, there are many other determinants, right from differential inflation rate of trading currencies, proportion of country's share in global trade, currency strength and depth of forex market, microeconomic choices of firm such as existence of substitutes in market, macroeconomic compulsions, Grassman's law, etc, which I won't get into, to keep the blog simple)

There is enough literature on what determines the currency of invoicing. You can read about it here, or if you you want to understand it through the example of Euro, you can see here in greater detail. One might add that a stable (low exchange rate fluctuations), low inflation, internationalized currency, is always a preferred choice for trade invoicing. 

However, I find that most of the studies on invoice currencies relate to FCCs. Our currency is not yet FCC, due to the last bit of capital controls that we still have on INR. So this issue presents unique challenges, as there are hardly any studies that are done for the transition effect of internationalization of a currency. Perhaps, Chinese RMB comes closer to our example, though they are ahead of us in internationalizing their currency. 

There was recently a circular doing rounds for feedback, which asked the view on allowing INR as the currency for international trade from India. That would mean, amendment of FEMA, and amendment of our FTP to accommodate this. There is no point in not amending FTP as it will skew the incentive away from INR in that case.

I feel it is a good step in right direction, if implemented  We have been cautious with captial account convertibility all these years, with good reason. I think, the Govt is now warming up to the idea of opening up. We are following Chinese in this. The initial steps might see us getting into various swap agreements with multiple trading partners with whom we can have INR/XXX arrangements. This will slowly make way for other steps and gradual transition into FCC, over a comfortable period of time.  For sure, we are living in interesting times. 




Sep 12, 2012

The Phantom Menace

Can there be one 'simple' test for policymakers, that if applied to a trade policy measure, could come up with an answer that tells if the step is good or not? I tried to devise one and failed. However, I believe that one can spot a bad policy decision, after the policy gets implemented. I guess, that can be one of the tests.

It's a personal view, but I believe the measure to give duty exemption on imported luxury cars in the name of Export Promotion is one such bad measure. The Foreign Trade Policy (FTP), under chapter 5, has a policy that's called Export Promotion Capital Goods (EPCG) scheme. EPCG is an excellent scheme by itself, as it is aimed at capacity building of the industry. You can read more about it here and here. In short, one can import capital goods/machinery, without paying any duty on it, and export the manufactured items (ideally from that machine), over a given period of time in lieu of it. That helps the industry to climb up the technology ladder, by helping them invest in capital goods, and also helps exports. Fair enough. 

Under this chapter, 5.2 (h) says that motor vehicles can also be imported as capital goods by certain category of exporters. The category includes the hotels, travel agents, tour operators, transport agents, golf course owners etc. The idea is that vehicles are capital goods for this category, and by using these vehicles, we can serve foreign tourists better, in turn earning foreign exchange. And this is not fiction! This is exactly what FTP believes. And that's why this measure comes under the EPCG chapter. 

And there comes this foreign exchange earner, who owns a chain of hotels, and orders a Rolls-Royce Phantom under EPCG scheme, saving customs duties that run in crores. And there come his followers who are ordering such cars all over India. Of course, they are earning foreign exchange through their hotels or tourism business, but then, the question is, how much of  it is due to this capital good that came duty free. Do they really use it to ferry the foreign tourists, as our FTP assumes? In Phantoms? Really?

 DGFT made it mandatory to register such vehicles as taxis, if they come under EPCG scheme but then, as it goes wink wink nod nod, who checks on the ground? A little shade of yellow on white never hurts, and a traffic constable would never dare stop a Phantom or Ferrari and check for the shade of yellow. And you can see the link above to see how difficult it was to implement the taxi rule. 

That's when I thought again about the simple test to determine if the policy is producing intended effect. The complex one would have all the questions below (and more):

1. Is the export performance directly linked to the incentive? 
2. What will be the marginal change in export performance, if, this incentive 'alone' is withdrawn?
3. What will be the marginal change in export performance, if, this incentive 'alone' is introduced?
4. How does this incentive interact with other variables that effect export performance. 
5. What would the be demand for the incentive itself, if other variables (such as duty structure) is tweaked. In this case, what would happen if the duty on assembled cars is reduced from 180% to say 10% of CIF value. Would the people still queue up for the EPCG? (for sure, they will import more cars, but by paying duty)
6. What is effect of incentive on domestic industry. Does it increase local production or increase imports? 
and so on...

And to make things simple, for this case, I thought of this test:

What is the incremental, direct, foreign exchange earning due to Rolls-Royce Phantom? 

But then, the simple test failed the generalization principle. And I ponder further.


Disclaimer: I would love to own a Phantom myself. And I don't envy who do! 







Aug 25, 2012

A Case for Agri Exports - Part I

In this blog, my effort is to make a case for Agricultural exports from India. I will put across my views on why we need to focus more on this area, when compared to 'any' other area of exports. And why we must move beyond making noise about Cotton/Sugar and get serious with other agri commodities. As I will take my time to build up the case, the blog is split into two parts. 

To start, the top 6 exports from India last year (April2011-March2012, you can see more details here), with approximate values are:

            EXPORT ITEMS                           VALUE              GROWTH                   GROWTH 
                                                                                         (last year)                 avg. over last 5 years
  1. Engineering Goods --------------    58    USD Billion    -02.8%                          23.9%
  2. Petroleum Products --------------   56    USD Billion     34.3%                          39.6%                         
  3. Gems and Jewelry --------------     47    USD Billion     27.3%                          38.8%                    
  4. Chemical and related -------------- 40    USD Billion     27.4%                          22.9%                                        
  5. Agriculture and allied products----  27.4 USD Billion     52.4%                          43.0%                     
  6. Textiles                                ----- 27.2 USD Billion     21.2%                          13.1%                     

Agricultural exports, by value, is placed fifth. However, going by growth rate of last year, or for the last five years, it should be placed first. 
The constituents of the Agri exports show an amazing uniformity of distribution. It is not one or two products that are pulling the agri exports up. Cereals exports lead at around 6.2 Billion dollars, followed by guargum, meat and preparations, nuts and seeds, oil meals, spices, processed foods, sugar and molasses, all of which have an export value between 2 and 3.5 Billion USD. The distribution, to that extent, is spread over multiple products. 
Contrast this with Engineering exports, where transport equipment and auto components constitute more than half of the exports. 

It is important to understand the imports that go into export products. I want to talk about value addition here. I am aware of intra-industry trade in auto and some other sectors, which hinders my arguments. However, I shall account for that later. So for the last year, the figures are as shown below

            ITEMS                                            IMPORT VALUE
  1. Engineering Goods                    65 USD Billion (deduced - approx)
  2. Petroleum crude and Products  155 USD Billion
  3. Gems and Jewellery                  92 USD Billion (30.6 for precious stones, 61.55 for Gold/Silver)                      
  4. Chemical and related                19 USD Billion (excluding Petro chemicals above)
  5. Agri                                         12 USD Billion (Edible oil 9.5 Billion, Pulses 2 Billion)
  6. Textiles                                     5 USD Billion (data approximate, from textile ministry)

It can be seen that, except textile and agri sector, all other sectors have imports that outweighs exports. In case of chemicals, it is not obvious as petroleum imports also go into chemical exports. Once accounted, chemical sector will come into deficit. In case of Gems and Jewelry, gold imports is mainly for domestic consumption. However, a small part, goes back in jewelry form. I couldn't get the exact figure, but I am sure that if we combine precious stones and gold, it will be slightly lower than export figures, with low figures for value addition. Precious stones is mainly traded with India for polishing, cutting, grinding, grading and jewelry making. Except for the last one, the scope for higher value additions in other activities is low.
Petroleum again, is mostly for domestic consumption, but a third of it is refined and re-exported. Due to cost advantage of refining, we are exporting petroleum products. 
Textile imports is mainly due to import of yarn and fabrics, followed by semi raw and raw materials to make fabrics. Ready-made garment imports is insignificant. You can see more about textile imports here.  The value addition in textiles is quite high and most of the exports have indigenous origins of raw material. 

Agri exports, have a very high value addition. In case of exports of direct produce, like apples/mangoes, it is almost 100%. In case of processed foods, it is slightly lower. Even then, overall value addition of this sector is undisputed highest. After accounting for fertilizer imports, some capital machinery for food processing and  accounting for fuel that went into transport etc, I can say that if I am getting one dollar through exports of Agri products, I can be reasonably sure that I have gained at-least 90 cents of foreign exchange, on a net to net basis. I cannot say that about 'any' other export product. 

The second part shall follow soon...

(PS: I thought I will talk about intra-industry trade of engineering sector here, but I am reserving it for a separate blog on a later date as it mars the flow. My apologies)

Jul 31, 2012

The official customs Import duty calculator for India

And the customs pulls off a coup with this link. It is the import duty calculator. 


I must say, for once, CBEC is a rare body that I have come to respect. 
With this, now you have all that you need to calculate your import duties upto 8 digit of HS code for any product that is being imported. 
One has to enter the product code under CTH (Customs tariff head), and one can get all details of import duties that are levied on the product. 
If you are unsure of your HS code upto 8 digits, you can key in just 2 digits (chapter heading) and it throws up a list from which you can select.
I love the way they have incorporated the effect of notifications on the duty. 
Neat stuff. Good work CBEC! It was sorely missed by trading community. In comparison to this, the new automated ITC HS based policy of DGFT website looks like a joke!

Tiru

Jul 3, 2012

Rethinking comparative advantage in electronics industry

There was an article in firstpost today, which caught my attention. It talks about how Google chose to manufacture it's new streaming gadget, Nexus Q, in silicon valley of US and not in China or other East Asian countries. It was opposite to the thinking of other organizations, such as Apple, who primarily source from Asian countries. 

The belief for many years, regarding the manufacturing of electronic goods, has been that East Asian countries have a comparative advantage in terms of labor cost. Initially, the trickle that started with Japan, Korea and Taiwan making some electronic devices, developed itself into an Electronics International Production Network deluge that enveloped China, Thailand and other East Asian countries. The Asian electronic network virtually rules the production chain of electronic components, save a very niche category, which for some security and technology reasons, is still with western nations. The network of production chains lead to specialization and scale economics, that tilted the balance even more towards Asia. It became difficult for others to compete. (Take India for example, which missed the hardware industry revolution and is struggling to catch up, despite cheap labor cost. See here for more.)

--optional paragraph--
A paragraph on theories of trade is needed to put things in perspective. The traditional, and inadequate, Heckschler-Ohlin theory of trade would predict East Asian domination based on the comparative advantage. However, HO model also had interesting corollaries in factor equalization and Stolper-Samuelson theorems which would predict that the advantage might decrease over time. The intra-industry trade theories which studied demand effect and specialization effects in greater detail, over traditional theories, cannot explain East Asian dominance, as the electronic products today are catering to global demand, and the taste doesn't change based on geography here (take iPhone for example). The theory of Krugman on increasing returns due to specialization (and not just starting factor endowments), which determines trade, is something that comes closest to explain East Asian dominance. The scale and specialization worked for Asians, to help them reach where they are today in electronics trade. 
--optional paragraph--

This move by Google doesn't fit the pattern. Why would someone start procurement (or production) at a place where the costs are almost double. The reasons given by Google is that they will have shorter lead times in development, shorter shipping time of products, less freight cost, better cooperation as the design team can work with the suppliers easily, fewer defects due to better automation and so on. 

Coming to what Google says, I don't agree with 'lesser freight cost' or 'lesser defects' theory. Freight cost of products will average out when you take the whole global demand for products, given that the demand from other continents is significant, irrespective of where the production is located. Lesser defects is again a function of design and production process, and it can always be checked, irrespective of location. So the only advantage lies in faster product launches and faster iterations of products. And this advantage might be a game changer.

Google is looking at the total cost, rather than just manufacturing/production cost. A very valid reason is that the total cost is not just production cost. It's the total design and development cost, plus the recurring regular 'cost of time delay' of shipping if you think that developed markets drive major demand. I would add to it the fact that it is easier to work with suppliers closer home. When I used to develop products, (in my previous life in hydraulics industry), I always found that, as a designer, it was important to work with suppliers to get the product right. Whenever the supplier was in other city/abroad, the feedback cycle for improvement got stretched, affecting the product development cycle adversely. This is a very valid reason to have your suppliers near home for product development. And Google knows that its products are highly prone to obsolescence, and the product development cycles would be frequent. 

That's true of the entire electronic hardware industry today. For the products that are coming out for the past few years. e.g. the phones, pads or laptops, have typical life-cycles of a year or two. The industry, 20 or 15 years ago (think 2-in-1s, CRT TVs, old desktop machines etc), had longer life cycle periods, of 4 to 5 years. So the game is changing in this industry when we account for the need to invent frequently. 

It looks to me, that it is dawning upon organizations that for the new genre of electronics products, it makes sense to have their suppliers closer home. The best battle to watch out would be between Google products (if they continue with the same strategy for other products they are coming up with) and Apple, over a period of time. Apple is still going with the older model, Google seems to be challenging it. I think, we would need a new theory then. To put our minds at rest by explaining away the world!

Update on 07 Dec 2012:
Apple is planning to now return some Mac production to US from China. Looks like there is some rethinking going on in Apple too about their China strategy. 

Jun 14, 2012

Banning second hand capital goods, the policy perspective

There was an article in the Economic Times today, regarding India mulling about banning imports of second hand plant and machinery, basically capital goods. You can read the full article here. It says:

A panel headed by cabinet secretary AK Seth has decided to ban import of machinery more than five years old. "The big worry is that such imports would impact overall productivity and erode competitiveness of the manufacturing sector," said a government official privy to the development.

The domestic capital goods industry says imports are partly responsible for the drop in output; a contention supported by government data that showed production of capital goods contracted 4.1% in 2011-12.

and about the current situation of usage of such goods, it says:


The usage of second-hand machinery is high in certain sectors. For instance, industry estimates show that use of second-hand shuttleless looms constitute about 80% of equipment purchases in the textiles sector.

While the share is 40%-45% in the case of machine tools equipment, it is a high of about 80% for construction equipments such as cranes.



The current foreign trade policy of India allows import of second hand capital goods under para 2.33 as reproduced below:


(a) Import of second hand capital goods including refurbished / reconditioned spares, except those of personal computers / laptops, shall be allowed freely...



This issue is interesting because you can have good arguments from two opposing sides. 


The people who want the ban  give the following arguments (you can also see the CII report here for more points). 
  • Infant industry argument, that our domestic capital industry needs time to mature. 
  • Second hand goods are of lower technology (as they are older and not from the latest generation) 
  • They are less energy efficient
  • We lag in technology up-gradation of our production industries due to usage of these old machines. 
  • Such imports kill our local capital goods industry. (This is basically due to low cost Chinese capital goods that are increasingly flooding India markets. How Chinese keep it low-cost is a different story that will be discussed some other time)
The points seem repetitive, but they all work in tandem to build up the argument of ban supporters. 

The opposing parties give the counter arguments:
  • It is against free-trade principles
  • Our domestic capital goods manufacturers are not able to meet the demand
  • The domestic CG manufacturers don't have the technology to make such machines, even equal to the ones that are supposedly old and second hand. 
  • If a ban or heavy import duty on second hand CG is levied, then our production ability would suffer esp in sectors like textile that rely on such captial goods. They cannot afford costly new capital goods, especially when they are to be imported. 
  • Second hand goods need not mean worn out goods. They can be decent machines of three or four years old that are of fairly good technology. 
Our domestic ability to produce quality capital goods (as per industry requirements) is poor. You can read an interesting report prepared by PwC titled Global competitiveness of Indian Capital Goods industry. As per the report, the Revealed Comparative advantage of our industry is poor, when compared to the countries from where  these goods are being imported. 
However, RCA cannot tell the complete story, and the report goes on to list the factors that has lead to lack of competitiveness, and what steps needs to be taken. DIPP has hosted this report on their server, and I hope that means that they are working on it. 

I was looking at the New trade theory (by Krugman and others) which actually supports a view of protecting domestic infant industries. This part by Korean economist Ha-Joon Chang was interesting:

Japanese companies were encouraged to import foreign production technology but were required to produce 90% of parts domestically within five years. It is said that the short-term hardship of Japanese consumers (who were unable to buy the superior vehicles produced by the world market) was more than compensated for by the long-term benefits to producers, who gained time to out-compete their international rivals.

Your blogger has presented the points. The readers can draw their conclusions. 

Jun 8, 2012

Foreign Trade Policy Reloaded - The blogger's review

The FTP annual supplement is out. It's 3 days since and your blogger was going through the details. It took time as the entire policy document and procedure handbook was revised and updated, and the annual supplement was incorporated into it. The two manuals ran into more than 300 pages. It was a good move, as there were hundreds of notifications and couple of annual supplements that had come since the last time the policy and procedure manuals were released. So, the manuals were to be read along-with these notifications and supplements. The new manuals are now up to date, and include the current annual supplement. 

Now, the review about the latest annual supplement and views. You can read the official highlights here.

The good points:
  • You can read some good points from news sites here, here and here
  • Overall, the policy supplement was better than expected and is being welcomed by exporters and consultants.
  • Additional incentives were announced in focus market and focus products. Some markets and products are added. 
  • Added thrust to green technology in form of incentives.
  • North eastern industries to be incentivized under chapter 3 for export promotion.
  • Interest subvention scheme of 2% continued for another year. Some additional sectors added
  • The duty scrips earned through exports can be used for paying excise duty. This is to give a boost to local manufacturing. Till now, these scrips could only be used for paying customs duties while importing. 
  • 0% EPCG scheme reintroduced to help upgrade the technology. Post exports EPCG introduced.
  • Handlooms, handicrafts and Gems and Jewellery, leather and marine sectors to get additional focus.
  • Electronic and IT hardware will be incentivized under Focus Product scheme.
  • Procedural simplification at places like chapter 5 for EPCG. 
  • Chapter 4 procedural simplification for advance authorization. 
  • Couriers and e-commerce brought under exports benefits.
  • Introduction of e-Bank realization certificate, which will be made mandatory next month onwards. This is one additional step towards paperless office. 
  • Introduction of ITC HS based import policy search on DGFT website. Key in the HS code and you get the import policy for that item. 
The bad points:

There is nothing bad as such in the policy document or intent. However, it fails to get the big picture of trade and its promotion. As has been pointed out, it's not an incentive here and a procedure there that is holding up exports. Most of the exporters have a margin that is way above the additional percentage point of incentive that is provided. The review discusses it in detail below. 

The review:

Export performance cannot be seen as a standalone entity that responds to bare incentives. Other factors such as a vibrant industrial base, infrastructure base like ports and roads, the procedural simplifications, and policies that create a trade friendly environment etc, influence export performance in a big way. These enabling factors, in tandem with the human resource, create a competitive advantage in international markets. The human resources, in turn have their feeder enablers such as education, health and family welfare. An economy with slow growing industrial base, suffering from poor infrastructure problems, cannot be expected to deliver great export performance in tough global conditions. 
The trade policy making appears to have zeroed in on the incentives as the most important way of boosting the exports. This view needs some rethinking. Is export performance really a direct function of increasing incentives, in the way the trade policy makes us think? If yes, is there a way to find out as to where the marginal returns of such incentives start diminishing? And are we doing the required number crunching to arrive at the optimal allocation of incentive funds, to those sectors that have the maximum impact on exports, if that is the goal of incentives. The distribution of incentives for the cause, be it employment generation, capturing new markets, export product diversification, or capacity building should be supported by background research. In order to determine the effects of such incentives on exports, one needs to have good data at sectoral levels, on export performance, and link it to incentives. A good amount of research needs to be done to link incentives to export performance in order to justify them. There is a serious lack of such studies in India. In the absence of good data and studies, incentives just boil down to doles handed out to lobbies that bargain hard.
It is not the job of trade policy to address all the enabling factors such as infrastructure and industrial base. However, the trade policy should go hand in hand with other policies that are closely linked to its success. A few measures in the trade policy, in a standalone manner, to help manufacturing sector or infrastructure, are not going to change things. The incentives on export performance can only be the last measure that boosts the exports by giving them an additional edge in international markets. Even then, they need to be targeted towards the sectors that can maximize the results, based on back end research. Incentives cannot be the starting point for boosting export performance. This is not to say that the current policy is out of place. It is just that, the need of the hour is to look at the policy making in an integrated manner, given the challenges we face.