Feb 24, 2012

About captive mines for fertilizers

Here is an article from policy section of economic times. It talks about the global race to control the strategic mines that produce Potash and Phosphate reserves in the world. These two macro nutrients (of the famous NPK trio) form an important part of the plant nutrients supplement in India. Of all the talks about using organic manure, the ground reality is that these supplements are the ones that are actually being used in a big way. For this, see here for the general reasons. The subsidy component varies from 60 to 75% of total cost in India, which adds to the economic reason for high demand of fertilizers over organic manure. For fertilizer consumption in India, see here
The imports of DAP and MOP (from which phosphate and potash are obtained, respectively) by India is one of the highest in the world. Close to 70% of the phosphate based fertilizers and 100% of potash-rich fertilizers sold in India are imported. So that makes these two imports vital for our food security. 
The article talks about the race to own the mines that produce these minerals. It says:

"Almost the entire reserve of world's phosphate rock is located in 15 countries. Nearly 77% of this reserve is in Morocco and Western Sahara and over 98% in nine countries. 
Supply is even more concentrated in potassium. Potash helps plants to survive in dry conditions, strengthens their roots and fight disease. Global potassium reserve is located in just 13 countries, with over 80% in just Canada and Russia.
The upshot is that Africa has become the site of intense competition. EU and countries such as India, that have no phosphate rock deposits, are rushing to Morocco and Western Sahara to buy mines. Simultaneously, US, China, Australia and Canada are also heading there to shore up depleting reserves." 

The cartels are making profit in the process. There are two such cartels in this field. 

"Every year, India negotiates with foreign suppliers. With the world's wealthiest economies and China chasing the same sellers with fistfuls of dollars, India's only advantage lies in bulk purchases. But in times of shortage, like in 2008-09, even the promise of large volumes isn't enough to strike a deal."

There are already some Indian companies operating in South Africa, Tunisia and Morocco in this area, and some are further exploring chances in other African countries. They are looking for some type of government support, though funding, to own such mines. When the price fluctuates, it becomes difficult for importers in our country, as frequent negotiations are difficult to conclude. High import prices leads to increase in subsidy costs in the end.  We have had some very bad experiences in this area in recent years. The economic surveys point this out clearly. 
There are big players such as BHP-Billton, Vale, Rio Tinto etc who are already in the game and are lapping up the mines in Africa aggressively. Aggressive support from the government is required in this area to help our industries buy such mines. One can come up with better strategies of owning these mines, but time is an important factor. Strategy works only if it is implemented in time. In this area, it is already getting late. An assured supply line in the form of captive mines would not only ensure supply assurance in the long run, but would also leverage the bargaining power of Indian importers with the existing cartels. 

Feb 22, 2012

Measuring trade policy effects

I was going through the Results Framework Document (What's RFD) for Ministry of Commerce here. In short, the RFD seeks to address three basic questions:
(a) What are ministry’s/department’s main objectives for the year? (b) What actions are proposed by the department to achieve these objectives? (c) How would someone know at the end of the year the degree of progress made in implementing these actions? That is, what are the relevant success indicators and their targets which can be monitored?

The primary objective as per the RFD for Commerce ministry is to "To provide policy support for increasing India’s annual export growth." 
The item under action points for this goal reads, "Action-1: An export level of US$ 300 billion is targeted to be reached at the end of 2011-12". And
"Action-2: Disposal of Appeals overdue under the Foreign Trade (Development & Regulation) Act, 1992."
I will focus only on Action 1 as Action 2 is more of a service obligation that must be met.

Action 1 has these details: 
Success indicator: "Degree of achievement of the target set for the year in US $ Billion" and the target/criteria says "300 Billion $ for excellent, 270 for Very Good, 240 for good" and so on. 

The issue that bothers me here is this:

Can we really attribute the trade performance to trade policy like this? Do we really think that the fiscal incentives and other measures directly lead to increase in exports in such a direct manner? Do we have methods though which we can say that if I provide 'X' amount of incentive to a particular sector, this would generate an export increase of 'Y%'. One might say, it is understood that that's how it works,  and it cannot be easily measured. In that case, my further question would be, how do you decide as to how to split the Big X, i.e. the total incentive spending into various small Xs for different sectors? 
One of the ways of doing it could be, to have a marginal export improvement measure (wrt. incentives), for all sectors and then distribute the X based on this measure. Or the distribution could be also based on other policy goals, such as saving a sensitive (employment/livelihood etc) industry or sector. However, the cause and effect should be linked and THAT should be measurable/observable. 

To summarize all the points above, the questions are: Do we have models that can build a case to provide policy interventions? Can we simulate the effects of policy changes and study the results on the export performance, and the economy as a whole? 

A good place to start would be to have comprehensive and timely data on trade performance, to study the effects of a new policy that has been implemented. When the data itself comes with a lag of more than 6 months, how reasonable it would be to say in the annual RFD, that policy implemented has led to export performance of 300 billion dollars? 

Feb 20, 2012

The import duties in India

The original post below was posted before CBEC released the import duty calculator on their website. To that extent, the post below is now redundant. You may go here:

In this blog I shall talk of various types of import duties/cess levied on products imported into India. I shall take an example and demonstrate the calculation method. 

I assume one knows how to read HS codes. One can find the HS code for products from DGFT website (under download section). Let's take the HS code 8474 80 10, which belongs to Brick making machine.

The best way to find the correct duty is to catch hold of any Customs House Agent (CHA). Else, there are manual and books from which one can look up the values. On websites, the data for various components of import duties, are scattered and is difficult to collect for getting the whole picture. Anyway, for the duty calculations, the following steps are followed:

 The duties levied are as follows (with brief descriptions)

     - Basic Customs duty (as would be given here) which is 7.5 % for the product we took for example.

     - Additional Duty/CVD (mistakenly referred as CVD) which is equal to central excise duty paid on like product. . It should be around 10 to 16 percent. It is 16% in this case. See here to find out how I found it out.

     - Countervailing duty/Additional Duty of Customs : This is levied to give level playing field for our local manufacturers as they pay excise duty for input material if they make similar machine.

     - Various education cess (calculated on Additional duty/CVD). This is standard 3% as shown in example below

     - Anti dumping duty if applicable (it's not applicable for your product right now. You can check it in the same webpage for basic customs duty, that is,  here)

     - Safeguard duty 

    -  Preferential duty 

     - Special CVD- to countervail the local state taxes faced by local manufacturers. It is generally around 4 %

Let's now calculate it for our product, which has the HS Code 8474 80 10

Duty is calculated on CIF (cost, insurance and freight) value and not on invoice value. The CIF value is practically the value when it lands in the port of import. This includes, the cost plus insurance plus transport cost from exporting coutnry to Indian port. 

So if the CIF value is say Rs 10000 (add 1% as landing cost to this, I have ignored for simplicity)
then assuming Basic dity of 7.5%, the cost is 10000 + 750 = 10750
on this add additional duty of 16%, i.e. 10750 + (0.16*10750) =  10750 + 1720 = 12470
education cess of excise = 3% of 1720 = 51.6
duty value for education cess of customs = 2470+51.6 = 2521.6
education cess of customs = 3% of 2521 = 75.63
Total value = 12521.6+75.63 = 12597.23
On this add 4% of special CVD = 12597 + 4% of 12597 = around 13100

So your ballpark figure for the item is around 31% of import duty. 

So, in WTO negotiations, one usually talks about Basic Customs duty of 7.5% (applied tariff, bound is even higher), whereas the actual duty in the end is around 31%. 

PS: There's an update for this blogpost, post the 2102-13 budget presentation in the Parliament. The education cess on the additional duty of customs is lifted. So, in the above calculation, the 3% that's added to 16% duty is no longer there. (The 51.6 rupees becomes zero)