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.