May 20, 2012

Exports incentives linkage - Did DEPB matter?

This blog has emphasized many times about the importance of establishing the linkages between exports performance to incentives provided by the Government. The urgency of this hit me when I went to a customs commissionerate on an attachment. The perspective on export incentives, when seen from the revenue angle, is different to, when seen from export promotion angle. The revenue collectors look at such schemes as a loss in revenue. During one such talk and presentation given by a senior customs official, the officer said that removal of DEPB scheme had no impact on exports. Upon prodding, he came up with numbers and showed that the exports had remained same, or increased in some areas, after the DEPB scheme was withdrawn. So, he concluded, DEPB had no impact on exports performance. 

DEPB was an export incentive scheme launched with an intention of offsetting the duties incurred on the inputs that go into export products. Drawback is another such scheme, with similar intent of duty nullification on inputs. However, DEPB incentives were more lucrative, and in some cases, they were difficult to justify from revenue point of view. WTO objections and other issues led to withdrawal of this export incentive scheme last year. Drawback has stayed because the rates of incentives offered are modest and can be justified as genuine duty nullification. 

Coming back, I wondered about the statement. Cusps are interesting points for data analysis. When a scheme is introduced, or when a scheme is withdrawn, the zone of such changes, I call it a policy cusp. At these points or zones (with probably a time lag effect which can be taken into account), we can see interesting things happening. Policy impacts can be studied at these zones. However, cusps can also be misleading if read wrong. Like in the case above. The officer had not taken a lot of things into account.

If a proper policy cusp study is to be done for impact of an incentive scheme, one has to take into account a few things. First, one has to see the trend before and after the cusp. For example, in this case, the exports were probably growing at a rate of X%. After DEPB was withdrawn, the exports didn't decrease, but the rate might have changed. Exports, in terms of value, not decreasing doesn't say anything about change in rate. In fact, contrary to what the officer felt, the rate has indeed changed after DEPB withdrawl. The exports growth rate has drastically come down. Unfortunately, there is a confounding of that variable (DEPB) with global demand slump and due to this mixing, we cannot isolate the effect of DEPB easily. Also, the data change might have a time lag before it shows the effects. It might be more than a year, since DEPB licences are still floating and the benefits are accruing. In addition to that, export orders are mostly taken in advance which also adds to the lag effect. There might also be sectoral effects which do not show up when we take aggregate figures.

Such and other factors make drawing general judgement very risky. At the same time, from the export promotion point of view, it is foolish to say that increasing x% of incentives for exports, is bound to improve export performance. There are many factors, including the ones outlined above, to be taken into account before that statement is made.

Cusps are the zones that must be watched out for. However, we need very good data collection and analysis system to do good research. There is a strong push required to establish a rigorous methodology of data analysis and linking applied policy making with such analysis. Lobbies can always make their demands as long as the in house research of the department supports the claim.

To conclude, did DEPB matter? The honest answer is, I don't know. But that doesn't mean, it didn't matter, either. 

May 14, 2012

Exports data error - The blogger's white paper

There was a problem with the reporting of merchandise exports data a few months ago. It was blamed  on computer crash. Commerce secretary retorted with a 'mistakes do happen' stuff. I personally never bought that line, knowing very well, that no 'crash' can do what had happened. A very well written piece, with scathing attack on the commerce secretary can be seen here. It is a must read for perspective on the issue. The magnitude of error is logically reasoned out below (from the article) and that's the key to lot of answers. It reads:

"... Fourth, the real goof-up is not merely $9.4 billion, but much bigger. For example, the figures given out on Friday spoke of a $15 billion over-reporting of engineering exports, and a $12 billion underestimation in the case of petroleum and gems and jewellery. The net figure may be $9.4 billion, but what has really happened is a $27 billion error – since one error in engineering and another in petroleum and gems cannot really cancel each other out. ...."

The Govt. decided to bring out a 'white paper' in January2012. I am not sure what happened to that and what stage is the white paper in, if at all someone is actually working on it. 

I thought of doing some Sherlock Holmes work, sitting with modern internet and some knowledge of things going around. So here's the story, as per me. Let me know if you have a better one!

The exports data is collected from the Shipping Bills (a document) that is filed with customs. For imports, Bills of Entry is  filed with customs. These documents carry the ITC-HS code of the product to identify/classify the exports, the FOB/CIF value of exports/imports in relevant currencies, and some other details. The documents are filed electronically. The entire database of shipping bills and bills of entry is kept in the centralized servers of Customs department (under CBEC/Ministry of Finance). They have two database servers at Delhi, one main server, one backup server that mirrors the main, and an additional disaster server that's kept in some other location. These servers are the ones that  hold all the information that are filed in various customs ports, on current basis. A few transactions at some non computerized ports are added up manually later on, but the percentage of that is negligible (and will be reduced to zero in coming years). 'DG Systems and Data Management' (DG-Systems), a body under Central Board of Excise and Customs (CBEC),  is responsible to maintain the database and servers. More details can be found here. DG-Systems/CBEC belongs to Ministry of Finance. 
Directorate General of Commercial Intelligence and Statistics (DGCIS) Kolkata, under Ministry of commerce, is the nodal agency that is mandated for collection, analysis and dissemination of trade data. In the earlier days, they used to collect the manual shipping bill copies from various customs ports and generate trade statistics. In the modern days, they get the data from the DG-Systems directly. In fact, DG-Systems gives them the access to the database. 

The bare database access is used by DGCIS to analyze and generate trade statistics. And this is where complications arise. The database is a huge pile of stored values in tables. To get it in some sane order and to manipulate the data, one has to use queries (e.g. SQL) and data manipulation language (DML) to generate data in required manner. 
The best people to work on databases are the ones who actually created the database and the structure inside. Second best are people who are there on the live systems and maintain the database. The last kinds are the ones who have the access and are not live and less familiar. DGCIS happens to be of the last kind. In order  to generate the data in the way they want, they have to create the queries in correct manner. Otherwise, the database will throw up results that might not add up or make sense. This step is most vulnerable to errors. The queries need to be tested thoroughly before being put to use. 

Analyzing the errors in data reported, it looks like it was an error of a wrong query. The tables of data generated were numbers, which looked reasonable but were off from the actual values. Sometimes the query has thrown up the same number twice (leading to double figures) for some HS codes (e.g. Engg items) and sometimes, some data rows are missed (e.g. petroleum/gems/jewellery). Only a wrong query can generate these kinds of errors. So the guy running the queries at DGCIS must have goofed up, for the story to be what it appears.

So in short, 'mistakes do happen'. A query error is a mistake. The question is, how do you make the process robust to avoid such errors in future. And is DGCIS the right body to analyze the database in today's world when you don't need the data collection and compilation due to computerization of the inputs. My personal take is, let the DG systems do the data compilation/dissemination too. They just need to add a small team to their existing workforce for this task. The database is theirs, let them get the direction from Min of Commerce as to what is required, and then run the query and transfer the results. The mandate of DG-systems needs revision in order to do that. 

The second best solution is, develop an 'analytics team' in DGFT/Min of commerce/DGCIS that can do such activities on databases. The second best solution is better in the long run, as data trends and analysis is something that is core of trade negotiations/policy making (ahem!), and is the forte of Min of Commerce. 

PS: It simply beats me as to why DGCIS charges money for the data that they never collected and hardly added any value! They should offer the summary historical data for free on their website.  Is it because they are headquartered in Kolkata? Look at RBI and learn. 


PPS: A crash would mean that you just have to run the query when the computer/database is ready again. No crash can generate such errors as double entry and missed rows with other data points intact. 

May 11, 2012

Thinking export subsidies. A suddenly something argument...

There was a news item on Exports sops  in economic times recently. It's about boosting exports by providing  discounted interest rates and product and market linked incentives. Chapter 3 of Foreign Trade Policy covers product and market linked incentives. 
ET goes about criticizing the idea in the following words:

"The government’s plan to bring back subsidies such as cheap loans to prop up exports makes no sense. Instead, the government should open up trade in farm products, which are severely restricted now. A record 75 million tonnes of grain will pile up by next month and much will be lost in the monsoons that will follow. Instead of allowing grain to rot, the government should allow exports. Beefing up storage, marketing and transport infrastructure will also increase the competitiveness of manufactured exports. A weak rupee, which inflates import costs, actually improves export competitiveness. Competitiveness is the answer, not sops."

The criticism caught my eye. It was on first page. So some research should have gone into it, I supposed. But then, I realized that it is not so. It was random babble. From the number one business daily. Do they really think this one off farm export measure will do the trick? Or have they forgotten as to why some farm export restrictions are there in the first place? Of course, the concern for rotting grain is genuine, but the solution is misplaced. (e.g. why not distribute it to local population?)
The last thing about weak rupee 'actually' improving export competitiveness shows the lack of depth of understanding of international economics. How much of currency depreciation would actually improve BOP situation, is generally given by Marshall-Lerner condition. In fact, the J curve effect might worsen the situation in the short run. Even otherwise, a currency depreciation doesn't do anything to sagging global demand, the prime reason as to why exports are not increasing in recent months. Add to it the domestic inflation that eats away on the advantage of currency depreciation. Overall, the situation doesn't improve much for exporters even with some sops and depreciation.  

Yours truly feels, the point to ponder shouldn't be what ET says. The bigger issue is about understanding the process of export promotion through subsidies. Do these measures actually work? The question is, is there a causal link (supported by data/research) between subsidies given and export performance at sectoral levels. If yes, do we know the marginal effects and where to stop the sops. Rather, how much should be given before the export performance starts saturating. And how do these things interact when the demand is sagging. 

That, dear friends, I think, is the right question to ask. 

May 4, 2012

Merchandise trade statistics for India, March 2012

Finally, we have the complete figures for merchandise trade for India for the year. You can see the complete press release here.

Exports:

Exports during March, 2012 were valued at US$ 28681.95 million (Rs.144331.29 crore) which was 5.71 per cent lower in Dollar terms (5.46 per cent higher in Rupee terms) than the level of US$ 30418.50 million (Rs. 136857.10) during March, 2011. Cumulative value of exports for the period April-March 2011 -12 was US$ 303718.70 million (Rs. 1454065.61crore) as against US$ 251136.19 million (Rs.1142921.92 crore) registering a growth of 20.94 per cent in Dollar terms and 27.22 per cent in Rupee terms over the same period last year.

Imports:

Imports during March, 2012 were valued at US$ 42587.99 million (Rs.214308.30 crore) representing a growth of 24.28 per cent in Dollar terms (39.01 per cent in Rupee terms) over the level of imports valued at US$ 34266.97 million ( Rs. 154171.89 crore) in March, 2011. Cumulative value of imports for the period April-March, 2011-12 was US$ 488640.39 million (Rs.2342216.79 crore) as against US$ 369769.12 million (Rs. 1683466.96 crore) registering a growth of 32.15 per cent in Dollar terms and 39.13 per cent in Rupee terms over the same period last year.

Trade Deficit:

The trade deficit for April-March, 2011-12 was estimated at US$ 184921.69 million which was higher than the deficit of US$ 118632.93 million during April-March, 2010-11.


So the trade deficit is around 184 billion USD. That's above my expectations of around 180 billion USD. So, we have a real bad trade balance now. So, when someone cheers that commerce ministry has met the goal of reaching a goal of 300 billion USD exports targets, I can only smile.

I will be soon posting another blog about the analysis of these figures. For once, let's go beyond blaming Gold and Crude and see what ails our export sector. Will keep you posted.