Dec 19, 2013

Gold import control - Does it work?

The Govt. thinks that gold imports cause high Current Account Deficit (CAD), and therefore, gold imports should be curbed.  As outright ban on gold imports would create uproar, Govt tried doing it in a roundabout way, with mixed results. 
RBI came out with this circular in August 2013. The circular says that any importer of Gold has to keep 20% of such imported gold reserved for exports. In effect, the gold importer has to supply this gold to an exporter,who would in turn export it out of the country. The 20% is to be kept in bonded warehouses with Customs till an exporter is found. The remaining 80% can be sold in domestic market. However, if the 20% kept with customs is not subsequently exported, the importer cannot import further. The RBI circular presents a worked example on this. Also, if only a part of that 20% is exported, the quota allowed for imports in the next lot shall decrease proportionately. 
The circular was supposed to decrease the import of gold. What it did, was to stop imports completely into the domestic market for some time. The field formation of customs department didn't know how to go about, given the language of the circular, and stopped all import gold consignments till CBEC came up with their own notification to supplement the RBI circular, in september. Here's the link.
However,the language of the circular makes it amply clear that the Govt. doesn't want any imports of gold into domestic market. They have excluded the premier trading houses, nominated agencies, SEZs/EOUs from being counted as exporters.
It has worked. The gold imports have come down drastically. The import of around 3.5 Billion USD since mid of this year of gold (compared to around 18 billion USD last year for the same period), is proof enough. Most of even this imported gold has gone for exports as it was imported against advance licenses for duty free clearances for exports. So, in effect, there is hardly any raw gold in domestic market at the time of this posting.
Does that mean the jewellers are not making jewellery? No. They are getting smuggled gold which is commanding a premium of around 20% (10% duty saved + 10% smuggling costs). The premium is going up every day.
Does the CAD look good. Yes. On paper it does. But is it sustainable? That's moot. Because it's hard to believe that people have stopped importing due to these circulars. I believe that smuggling is back. And the payment is happening through hawala. Ajay shah elaborates on CAD here.
The small amount of gold imports for exports purposes is by premier trading houses such as Rajesh Exports Limited (in Bangalore). Such imports are happening through advance authorizations issued by DGFT. There's an RBI circular that covers it here.

So, in short, gold import for domestic consumption through legal channel is out. Gold imports for exports through legal channel is allowed and is being used by some big names in the field. Gold smuggling is on. And we don't know how the payments are routed through hawala. Is it hitting remittances, or is it being done through exports/imports misinvoicing or through services misinvoicing, only time may tell.

What I fail to understand is the rationale of such moves. Is the govt. serious when it thinks that a pseudo-ban would lead to drop in gold demand/consumption? With an open current account, isn't the govt joking when it thinks about curbing capital account issues arising out of gold smuggling?

Are there any lessons learnt? I bet there would be, in future, if this continues for long. And it would be simple. Such nonsense doesn't work, anymore.

Trivia: A recent flight from Dubai to Kozhikode had around 60 passengers carrying around 1 kg of gold each. As per the rules, a passenger returning from abroad after a continuous stay of more than 6 months can carry upto 1 kg of gold with them. Customs collected 10% duty from all these passengers. Upon interviewing passengers, it was found that someone from Dubai sponsored their tickets for this service. Free tickets for this carrier service. Not a bad deal! However, this import is not logged into the data capturing system of customs. I hear that more than a tonne of gold came this route last month. Customs reported multiple cases of gold smuggling recently, and if we add undetected cases, one has to be naive to believe that gold imports has stopped. 

Further updated blog on this topic here

Dec 9, 2013

Doha round concludes

The WTO's Bali ministerial finally concluded successfully with an agreement which would be called 'Bali Package'. The package is a watered down version of what started very ambitiously with Doha round of talks around twelve years ago.  The talks went through extremely bad patches in 2003 and 2008 when it was almost declared dead. People had started talking about moving beyond WTO, and indeed, countries had started working out regional agreements. So, not much was looked forward to in the Bali ministerial, and I thought it would wash out with India's resistance on food security clause (link), but it survived. Cuba made some noise, along-with India, on different issue altogether, but all came on-board to agree on this mediocre agreement. Mediocre when compared to what started out at initial Doha rounds. 
The main point in this package is something called 'trade facilitation'. It's a relatively harmless topic to agree upon. To cut down on unnecessary costs in terms of procedural delay and documentation requirements is something that's a no-brainer. In the words of WTO site, this measure would work out this way: 

The benefits to the world economy are calculated to be between $ 400 billion and $1 trillion by reducing costs of trade by between 10% and 15%, increasing trade flows and revenue collection, creating a stable business environment and attracting foreign investment

I take the figures above with a pinch of salt. However, it would put pressure on developing countries to improve their processes and systems. 

The objectives are: to speed up customs procedures; make trade easier, faster and cheaper; provide clarity, efficiency and transparency; reduce bureaucracy and corruption, and use technological advances. It also has provisions on goods in transit, an issue particularly of interest to landlocked countries seeking to trade through ports in neighbouring countries.
Part of the deal involves assistance for developing and least developed countries to update their infrastructure, train customs officials, or for any other cost associated with implementing the agreement.

The above is ambitious. India would have to put in money and efforts. Initiatives such as e-BRC will be the way to go for procedural and documentation simplification. Ports, airports, customs stations need upgradation, as well as DGFT, inspection, testing and certifying agencies and so on. 

India managed to have it's way in the end. I had blogged about India's concern here. India held the talks to ransom till the demand of food security clause being extended indefinitely was agreed upon. 

You can read more here and here. It was a personal triumph for Mr Roberto Azevedo, the new Director General of WTO. He has the momentum now. If he can capitalize on it, he might prevent WTO from fading into irrelevance. However, my personal feeling is that the easy agreements are all over. Only thorny issues such as agriculture subsidies, food security, market access etc remain from Doha rounds. They are difficult to handle and reaching agreements on them is challenging. 

Dec 5, 2013

Bali ministerial - some points

It has been in news for few days now. After a very long time, WTO members seemed to have reached a position to clinch a deal. The deal was a toned down version of original mandate from Doha rounds, but even then, it was a big deal because it was a multilateral deal after a very long time. The world has drifted over to regional arrangements in recent years due to failure of Doha rounds. The multilateral differences are too many and too wide to be bridged, or so it was thought. WTO, as a multilateral trade body, started facing questions about its future. Some started to write it off. However, WTO remains relevant, even in the era of proliferating regional agreements, despite what some pundits say, due to its role in trade facilitation, enforcement and dispute settlements. And now, with the new Director General in place, it appeared as if finally a multilateral deal is about to fructify. 
However, it now appears that it won't be. India has thrown the spanner in the wheels by being rigid in its stand about food security. I hoped that India won't be the one to be declared the spoiler, but it seems there is no option. The text of Commerce Minister of India's speech is here. I liked the way the speech was presented. It didn't say that India is a spoiler by being rigid. It took the topic of disagreement in it's stride. Basically the speech follows the below structure:
  1. India has remained sincerely and constructively engaged in negotiations. 
  2. The current text puts developing countries in disadvantageous position. 
  3. Doha round had development mandate, including food security at its core.
  4. We agree that food security is non-negotiable. 
  5. Hence the text that dilutes food security is non-acceptable to us.  
  6. We believe we should agree first on trade facilitation and helping LDCs, which this text falls short on.
  7. India supports multi-lateralism and we should look to build beyond Bali and work on it. 
So the last sentence says that India is not looking to conclude anything in Bali, with the given text. I have been liberal in re-framing sentences from the speech, but I have tried to keep the core intact. What the speech does is simple. While it takes a rigid stand on food security, it says it is ready for constructive engagement, as it always has been. It rises above the issue at hand, and takes a big picture view on multilateral negotiation. 
The problem is, the train of such big picture agreements has gone. India has its own domestic compulsions to stick to its stand. So be it. But to expect others to keep engaged with the chimera of big-picture multilateral agreement is too much to ask. One must appreciate and respect India for standing up for its right (or what it felt right!). However, one must also understand that it pushes the already tottering multilateral framework over the irredeemable cliff. 
Would India gain from this stand or lose? That's a tough question to answer. The domestic politics had tied India's hand at this point. With the recent food security act coming into existence, India cannot afford to have stifling WTO rules that makes it hard to implement. To that extent, walking away from this deal helps it to avoid future penalties on this account. On the other hand, the recent trend and growth of regional trade agreements is taking the momentum away from WTO. Agreements such as Trans-pacific, and Trans-Atlantic deals, in which USA is now actively engaging its energies, would take the trading world away from WTO framework. Any late entrant into such gatherings, as and when they expand, would face penalties. By walking away from this deal, India has thrown away a lifeline given to multilateral framework. The losers, for sure, aren't the developed nations. The gainers, as of now, cannot be ascertained.

Rejoinder on 7 Dec 2013: After multiple rounds of consultation between India, US and WTO, a revised draft acceding to India's demand on agriculture has been put out. The draft might be generally acceptable to all. 

Dec 3, 2013

e-BRC project wins 2013 eASIA award

I had blogged about the revolutionary trade facilitation measure 'electronic-Bank Realization Certificate' (e-BRC) here.  E-BRC was just launched by Directorate General of Foreign Trade (DGFT) at that time. It has been more than a year now and it has revolutionzed the way the bank realizations are filed in India.

Recognizing this, the Asia Pacific Council for Trade Facilitation and Electronic Business (AFACT), which awards eASIA awards, chose eBRC project of India for the award under the category 'trade facilitation'. The award under this category is given for

1) Improve the balance among governmental legislation,
2) Enhance international trade and eBusiness,
3) Increase information visibility, by evaluating the concrete effects on trade regulatory and facilitating agencies control and security, tax-related efficiency, trade promotion, and business efficiency,
4) Adopt a leading model in terms of simplification in trade procedures, single entry point,
5) Implement innovative application of UN/CEFACT standards and recommendations, and have promoted service performance, and
6) Successfully enable bilateral or multi-lateral international cooperation.
The e-BRC project has done well during last year and deserves the award. The official press report on e-BRC award reads thus:

e-BRC project enables banks to upload Foreign Exchange realisation information relating to merchandise goods exports on to the DGFT server under a secured protocol. So far 89 banks operating in India, including foreign banks and cooperative banks have uploaded more than 64 lakh e-BRCs on to the DGFT server. This initiative has reduced the cost of transaction for exporters by eliminating their interface with bank (for issuance of BRC purposes) and enhanced the productivity of banks and DGFT. At the state level, Commercial Tax Departments of Maharashtra, Delhi, Odisha, Andhra Pradesh and Chhattisgarh have signed MoU with DGFT for receiving e-BRC data for VAT refund purposes. Many other states are in the process of signing MOUs. e-BRC project is a success story involving multiple stake holders, each with a different technology platform. This project is a live example of power of Business Process Reengineering (BPR) to improve service delivery. 
Way to go. As I said in the earlier blog, BRCs are just one small step for the trade, but this measure of going electronic, is a big leap in terms of trade-facilitation.

Trade deals and inter-ministerial consultations

The commerce department under Ministry of Commerce is the nodal department for all international trade negotiations. It usually seeks views and opinion from other departments/ministries while taking stands. However, there seems to be some disconnect lately. A part of the news item reads:

Finance Minister P Chidambaram had raised concerns at Thursday's Cabinet meeting over the pact's text, which had been decided without consulting his ministry, after which the proposal was deferred.
The finance ministry, which is the administrative department for India's investment policy, was neither consulted by the commerce department during the talks nor were its views sought when the draft text of the pact was finalised.

The above difference was noticed while the cabinet went through the text of Indo-Asean comprehensive economic partnership agreement concluded recently.
If it was a lapse, it must be rectified and mechanism must be put in place so that such errors do no happen in future. If it was intentional, which I hope was not the case, the delinquent elements must be fixed.
Also, finance ministry should refrain from trying to take over trade negotiations through back door. It should stick to giving its views/opinions. It doesn't have the institutional ability to operate in these areas, as of now.

Dec 1, 2013

Thou shalt pack in jute

Ministry of textiles came up with an order that mandates compulsory usage of Jute as packing material for the year 2013-14, yesterday. The bright idea is to promote jute usage, in this year of jute, to help employment in Jute sector, and keep the struggling jute sector alive. It would also help jute farmers. The legal sanctity for this order comes from Jute packing material act of 1987, under which Govt is within its capacity to come up with such an order. The detailed order can be found here. Basically, it mandates that 90% of foodgrains, and 20% of sugar production must be packaged using jute products, mainly the jute gunny bags. 

The intentions are good. The recent rise of usage of High Density Polymer (HDPE) bags, and Polypropylene (PP) bags has threatened jute sector. The head-on comparison of HDPE/PP Vs Jute bags is given in the figure below: 

Taken from a study by A R Indiramma, CFTRI, Mysore

The economics for the usage of Jute no longer justifies itself. Given market choice, things might move totally towards HDPE/PP bags, as what happened in fertilizer and cement industries (mainly due to moisture issues). Sugar industry protests every-time such measures are forced on them. For example, see here. The last year economics (assuming all other things same, e.g. moisture effect, constant availability and such), for usage of jute bags work this way for sugar industry:

The Jute bags cost around Rs 35 per 50 Kg bag, which translates into cost of packing sugar at Rs 0.7 per kg. On the other hand the cost of HDPE (High Density Poly Ethylene) bag is much less. The 50 Kg HDPE bag cost Rs 15 translating into per Kg cost of packing coming to Rs 0.30. Therefore there will be an additional burden of Rs 0.40 a kg for sugar producers.

The cost benefit analysis cannot be just bare bones economics as above. Jute is an issue that involves much more, in terms of livelihood issues. Around 3.7 lakh people are directly employed in jute industry and 40 lakh farming families depend on jute. The exports of jute, in terms of quantity has mostly stagnated for the last 15 years. Production and consumption of jute has also kept constant for the last 20 years. So, all such ideas that the Govt. implemented for the last 15-20 years, including compulsory measures for usage of jute packaging, seems to have failed. 

Someone needs to step in and touch the Jute issue in the larger perspective. Compulsory measures might help in short run, but in the long run, there has to be a sustainable solution. Also, a cost-benefit analysis of such orders needs to be studied in detail. 

Nov 13, 2013

Risk management system for export of goods from India

IT based risk management system (RMS) for export of Goods from India was launched today

Speaking on the occasion Finance Minister said that RMS is a trust based IT system that expects the trade to make correct declarations to Customs. It is a trade facilitation measure which, on implementation, would reduce dwell time from few days to few hours. In view of its obvious advantages, RMS is also being endorsed globally at all forums including WTO. 
Finance Minister also emphasized that success of any trade facilitation measure depends on compliance of legal requirements by trade. He urged the trade to comply with the legal provisions so that Customs can ensure speedy clearance of the import and export goods. 
The launch of RMS in exports today covers 11 Customs stations at Bangalore, Chennai, Delhi, Hyderabad, Mumbai, Pune and Tutocorin. It would be extended to all EDI Customs stations by year end. Benefits are expected to accrue to the trade in terms of faster clearances and reduced transaction costs thereby enhancing the global competitiveness of our export goods. 

Similar RMS is already there for import clearance of goods. For exports of goods, RMS was missing. This is a gap that needed to be filled. Kudos. Two points to be noted. 
One, RMS ensures that goods are randomly picked up by the computer software for physical inspection. The picking up is not totally random. It is based on certain criteria which assigns a risk weight leading to selection for inspection. For example, a new exporter might be picked up with higher probability for physical verification of goods; when compared to a regular exporter. Currently, goods are picked up for inspection based on assessing officer's wish, which is not very scientific (difficult to rule out gut feel, hence I can't call it unscientific). 
Two, RMS needs a huge database to operate. For example, for imports, the valuation of goods is picked up by RMS software based on all India level database. A significant deviation leads to re-valuation of goods or physical inspection. 
Overall, RMS makes clearance of export goods faster and more scientific. 

Nov 11, 2013

India's Foreign Trade - October 2013

India's foreign trade data for October 2013 was released today
Trade balance as well as exports performance has been improving for the past couple of months. 

Exports during October 2013 stood at US $ 27.2 billion (Rs.168031.71 crore) which is 13.47 per cent higher in Dollar terms (31.86 per cent higher in Rupee terms) than the level of US $ 24 billion (Rs. 127431.81 crore) during October, 2012. 

Cumulative value of exports for the period April-October 2013-14 was US $ 179.3  billion (Rs 1069226.68 crore) as against US $ 168.7 billion (Rs 918270.21 crore) registering a growth of 6.32 per cent in Dollar terms and growth of 16.44 per cent in Rupee terms over the same period last year.

On the import side, the report reads:

Imports during October, 2013 were valued at US $ 37.8 billion (Rs.233073.43 crore) representing a negative growth of 14.50 per cent in Dollar terms and a negative growth of 0.65 per cent in Rupee terms  over the level of imports valued at US $ 44.2 billion (Rs. 234597.63 crore) in October, 2012. 

Cumulative value of imports for the period April-October, 2013-14 was US $ 270 billion (Rs. 1598772.73 crore) as against US $ 280.7 billion (Rs. 1527088.62 crore) registering a negative growth of 3.80 per cent in Dollar terms and growth of 4.69 per cent in Rupee terms over the same period last year.

So the general trend is that exports are increasing both in dollar and rupee terms and imports are decreasing, leading to better trade balance. Oil imports have not decreased. In fact, they increased by around 3% over last year (cumulative from April-Oct), but other imports (including Gold) have decreased over the period, by around 7 percentage points, leading to such favorable figures. Current account deficit looks comfortable for the time being. 

The summary table is copy-pasted below for quick reference:

India's foreign trade data - October 2013

Oct 4, 2013

Getting Gold out of households/lockers

The following is taken out from an old issue of economic and political weekly magazine dated Nov 6, 1965. An idea that might be of use today.

Jul 12, 2013

India's foreign trade: June 2013

The merchandise trade data for June 2013 was released today. Exports for the month decreased by around 4.6% when compared to June last year, in dollar terms. It decreased by around 1.5% for Apr-June period of this year. So the start has not been good. 
The imports decreased for the month by around 0.37% when compared to June 2012. However, for the Apr-June period, the imports have increased by around 5.99% over last year, in dollar terms. So, the trade deficit has widened this year, till now. It stands at around 50 Billion USD till now, compared to around 42 Billion USD last year. 
The summary table is given below, from the Press information bureau report:

So, to sum up, the year has not been very good. I will discuss about some of the reasons, and potential solutions in coming posts. 

Jul 7, 2013

Foreign Trade Policy of India - Chapter 3 - Part 2

I had covered the Part 1 of chapter 3 of FTP of India, here. The first part covered the promotional measures run by the Department of Commerce. The second part here would cover the promotional measures being run by the Directorate General of Foreign Trade (DGFT). 

A small rejoinder is in order at this point. The promotional measures run by DGFT in this chapter are mostly the incentive schemes that directly benefit exporters. Most of these measures incentivise exports through what is called 'duty credit scrip'. The duty credit scrips can be used to pay customs duty for imports, pay central excise duties or to pay service taxes (from the current year). The duty credit scrip is usually a small percentage of the total value of exports. No direct cash is given as incentives under this chapter. Some of these duty credit scrips are of transferable nature, that is, they can be sold to a third party who can use them for the stated purpose of paying duties/taxes. In this way, the exporter can make money, if he finds that he cannot consume the duty credit scrips earned by exporting. 

The various promotional schemes are discussed below:

Served from India Scheme (SFIS): The stated objective of this scheme is to accelerate growth in exports of services from India, so as to create a powerful 'served from India' brand across the world. The eligible services under this scheme are mentioned at this link. The amount of duty credit script provided is equal to 10% of net foreign exchange earned during the financial years. SFIS scrip is non transferable, except within group companies. This scrip can be used to import capital goods including office equipment, furniture, professional equipment, spares, vehicles that are used as professional equipment etc. Some musings on SFIS by me can be found here

Vishesh Krishi aur Gram Udyog Yojana (VKGUY): This translates to special agricultural and village industry scheme. 
Objective of VKGUY is to compensate high transport costs and offset other disadvantages to promote exports of the following products :
(i) Agricultural Produce and their value added products;
(ii) Minor Forest Produce and their value added variants;
(iii) Gram Udyog Products;
(iv) Forest Based Products; and
(v) Other Products, as notified from time to time.
The products currently eligible under this scheme can be viewed at this link. There are around 800 products listed under this scheme. The exports of these items are incentivised at the rate of 5% of the total export value (FOB=Free on board value). 

Focus Market Scheme (FMS): The stated objective of this scheme is to offset high freight cost and other externalities to select international markets, in order improve India's export competitiveness in these markets. This scheme helps to develop new markets where it would be difficult to reach without additional support. Once the markets are developed, the listed country can be taken off the list. This scheme has helped our exporters reach deeper African, Latin American countries, CIS and eastern European countries. Such diversification is important to reduce the dependence on US and EU. This list of countries/markets covered under this scheme can be found at this link. Exporters get a duty credit scrip of 3 to 4% of total value of exports. Certain type of exports such as services export, gems and jewelry exports etc are ineligible for the benefits. 

Focus Product Scheme (FPS): The stated objective of FPS is to promote exports of products which have high export intensity or employment potential. The incentive is provided to offset infrastructural inefficiencies and other related costs in marketing of these products. The list of eligible products and the associated value of credit scrip (from 2 to 7% of value of exports) can be found at this link

A hybrid scheme called Market Linked Focus Product Scheme (MLFPS), which is similar to above schemes of FMS/FPS is also administered by DGFT. The products and associated markets under this scheme can be found under Table 2 of this link.  

Status Holders: Depending upon export performance, exporters are eligible to be classified as Status Holders. Being a status holder confers some additional benefits which will be discussed later in the post. The status category depends on the export performance (FOB value of exports) of the current plus previous three financial years. Double weightage is given for small scale industries and some special categories, so they need to reach only half of the value indicated. The table, taken from FTP,  is shown below:

The privileges to status holders is quoted from FTP below:
(a) Authorization and Customs Clearances for both imports and exports on self-declaration basis;
(b) Fixation of Input-Output norms on priority within 60 days;
(c) Exemption from compulsory negotiation of documents through banks. Remittance / receipts, however, would be received through banking channels;
(d) Exemption from furnishing of Band Gurantee in Schemes under FTP;
(e) SEHs and above shall be permitted to establish Export Warehouses, as per Dept. of Revenue guidelines.
(f) For status holders, a decision on conferring of Accredited Client Program Status shall be communicated by Customs within 30 days from receipt of application with Customs.
(g) As an option, for Premier Trading House (PTH), the average level of exports under EPCG Scheme shall be the arithmetic mean of export performance in last 5 years, instead of 3 years.
(h) Status Holders of specified sectors shall be eligible for Status Holder Incentive Scrip.
(i) Status Holders of Agri. Sector (Chapter 1 to 24 ) shall be eligible for Agri. Infrastructure Incentive Scrip under VKGUY.
Agricultural Infrastructure Incentive Scrip (AIIS) is a scheme for status holders who export products that fall under chapter 1 to 24 of ITC-HS. A 10% scrip is given for import of capital goods involved in storage and transportation of these products. 

Status Holders Incentive Scrip (SHIS): The objective is to promote investment in upgradation of technology. A 1% duty credit scrip, over and above other incentives, is given under this scheme for status holders. The scrip is limited in transferability and can only be transferred to other status holder. This scheme has been discontinued since 2013. 

An exporter can claim only one of the above scrips and the schemes are thus exclusive. 

Jul 2, 2013

Simple and dangerous ideas to reduce Trade Deficit

India's current account deficit(CAD) is hovering at uncomfortable levels, despite an improvement shown in data released last week. The merchandise trade deficit is around the range of 200 Billion USD annually, which contributes major portion to the CAD. The gap is managed by capital flows and trade in services. 

At such times, it is common to hear ideas to control trade deficit, and in turn, CAD.  I totally endorse those ideas that talk about deeper reforms and focus on issues such as infrastructure (power, ports, roads etc) and capacity building of institutions (financial, executive, judicial, regulatory etc). I also agree with ideas on measures that control inflation and talk about fiscal prudence and tax reforms. Lack of deeper reforms, irresponsible fiscal policies and inflation is at the heart of today's CAD. In this post, I am going to talk about ideas other than these. Most of such 'other' ideas aim at import control, directly or indirectly. Such suggestions not only indicate dim understanding of international economics and trade, but also of history, especially of the times between first and second world wars when trade restrictions exacerbated the recovery of economies. 

The simplest of such ideas is to ban imports. If not ban all, then at-least non-essential imports such as luxury goods, Gold, toys etc. When it is pointed out that it is no longer permitted in globalized, WTO regulated world, the common retort is to suggest imposing quotas or tariffs on such goods. The rationale is that such high tariffs or quotas will limit the imports, while not hurting our exports. Sometimes poeple use quotas and tariffs interchangeably while arguing their case. There is difference in tariff and quota, as you can see in this post, but for now, let's assume that tariffs can have the same effect as quota, in decreasing imports, which is generally true.

The problem also lies with the definition of non-essential goods. If one takes out Capital/Engineering goods, Petroleum products, Gems and jewels (as they are used in exports in turn), chemicals, pharma products and so on, we are left with only consumer electronics of certain types (smartphones, tablets, gizmos and such), imported luxury automobiles, toys and such that can be called non-essential. All these hardly add up to 20 Billion USD of imports in a a total of around 480 Billion USD of imports of India. You can see exact figures here. If we add Gold and Silver to it, we will get a respectable figure of around 80 Billion USD for control purposes. I am not sure if all Indians would agree to put Gold under non-essential imports, but let's assume so for the time being. 

The question is, how high a tariff would seriously decrease these imports. The answer is, it depends on the product's demand curve. The above products are generally price inelastic. A small hike might not stop an iPhone buyer from shelling out an extra 1000 rupees, nor would it deter a gold buyer from buying gold for marriage/savings. So the tariff increase has to be large. A large increase would now incentivize smugglers and duty evaders and Burma bazaars would thrive. Also, it would immediately attract retaliation from other WTO members, who might drag us to dispute panel at WTO, and simultaneously erect their own barriers  against our exports.  In addition, any such measure would be read by foreign investors as a sign of panic, and probable balance of payment crisis, leading to withdrawal of funds from India. Future investments would also come under question in a regime with lack of certainty of foreign trade policy. 

Assuming that the above import restriction manages to decrease targeted imports by 40%, we would save 32 Billion USD. However, the retaliation from other nations might bring down our exports by same number. Also the capital outflows might reduce the margin further. Of course, the last one might depreciate rupee further, leading to better exports in the long run, but in the short run, we will end up with worse CAD and potentially stare at default if things go seriously wrong. Economists are well aware of the J curve effect of currency depreciation in short run. The currency depreciation affecting balance of trade is given by Marshall-Lerner condition, which puts the weight on elasticity of import and export products. In a global economy of low demand, a price decrease of export products might not have intended effect, leading to inelastic behavior in exports. Also, we have an inelastic import basket in petroleum, gold etc. So our trade balance would deteriorate. Also, it is not that we export only to US against whom our currency has depreciated. Other currencies have also depreciated against USD recently and to expect our exports to pick up with countries other than US, due to currency depreciation is moot. 

The same would be the effect if we try to erect quotas. Also, quotas have this bad habit of benefiting the quota-grabbers, at the cost of govt revenue that tariff would have generated, unless quotas are rented out for revenue. This arrangement would be complex, retrograde, and might lead to scams in country like ours. 

Some might also propose that non-essential imports should be allowed only against a quota. The quota mechanism of the proposal was interesting. We might give some kind of import-license to exporters, commensurate to their export performance, as an incentive. This will be the allocated quota. The non-essential goods can be imported only against this quota. Exporters, in turn, would sell their quota in open market (or use it themselves) to importers who wish to import non-essential goods. When they sell it, they might do so for a premium. This would have two effects. First, it would act as an incentive for exporters, and second, it would act as an additional cost for importers of non-essential goods. So our exports will be boosted at the cost of imports. Though the idea looks attractive on the face due to the complexity of the mechanism involved, a closer reading would show that it suffers from the same pitfalls of an increased tariff. Retaliation, WTO disputes, market sentiment, and capital outflows apart, one can mathematically show that such ideas would hardly generate much change in the trade deficit given the nature of elasticity involved. In fact, there are very few studies linking export performance with incentives. In case of Gold, it is the seasonal fluctuations that play a major role and increasing tariffs hardly affect the imports. Also, a high tariff in gold will restart smuggling activities of 1980s. So, we go back to our argument in the previous paragraphs that this idea too is no good.

It is not that one finds such ideas only here. Whenever a country faces difficulty, such ideas fly. US had its own protection related act during great depression where it increased tariffs on imports on over 20000 items. You can read more about it, here. However, it's difficult to enact such things today due to WTO. You can see how concerned WTO/UNCTAD sounds about the trade protectionist measures that has risen recently, here.

I hope this post helps put few things in perspective for import control ideas.

Jul 1, 2013

Foreign Trade Policy of India - Chapter 3 - Part 1

I had given the introduction to Foreign Trade Policy (FTP) of India, here. This post will concentrate on third chapter of FTP. The third chapter concentrates on the promotional measures in order to increase India's international trade. It focuses mainly on export promotion. 

Promotional measures are divided into two parts. First part pertains to those measures that are directly implemented by the Department of Commerce. The second part pertains to the incentive schemes implemented by Directorate General of Foreign Trade (DGFT). 

Promotional measures under Department of Commerce

One of the important promotional measures include assistance to states for infrastructure development related to exports, known by the name ASIDE. The objective of this measure reads thus:
The objective of ASIDE scheme is to establish a mechanism for involving the State Governments to participate in funding of infrastructure critical for growth of exports by providing export performance linked financial assistance to them. The Scheme is administered by Department of Commerce (DoC).
I had written an evaluation of this scheme sometime ago at this link

The second scheme focus on increases market access through various trade promotion activities on focus country and focus product basis. Financial assistance is provided to Export Promotion Coucils(EPCs), Industry and Trade Associations, Agencies of State Govt and Indian Commercial missions abroad. This scheme is called Market Access Initiative (MAI). Under MAI, following activities can be conducted:
(i) Market studies/surveys,
(ii) Setting up of showroom / warehouse,
(iii) Participation in international trade fairs,
(iv) Displays in International departmental stores,
(v) Publicity campaigns,
(vi) Brand promotion,
(vii) Reimbursement of registration charges for pharmaceuticals and expenses for carrying out clinical trials etc., in fulfillment of statutory requirements in the buyer country,
(viii) Testing charges for engineering products abroad,
(ix) Assistance for contesting Anti Dumping litigations etc.
The second similar promotional measure goes by the name Market Development Assistance (MDA). 

Under MDA Scheme, financial assistance is provided for a range of export promotion activities implemented by EPCs and Trade Promotion Organizations on the basis of approved annual action plans. The scheme is administered by DoC. Assistance includes, amongst others, participation in trade fairs, exhibitions, travel expenses for participating in such fairs, stall charges and so on. 

Department of commerce also identifies and encourages, through various promotional measures, certain towns which have shown exemplary export performance. Such towns are called Towns of Exports Excellence (TEE). There are around 27 such towns currently.

In order to build the 'Made in India' brand, Department of Commerce also runs Indian Brand Equity Foundation, which started initially as a fund and is now working towards developing brand awareness for Indian exports in markets abroad.

Apart from all above, Department of Commerce also allocates funds to national level institutions and Export promotion councils for trade promotion. One can get more details of all these schemes at the website of commerce department

Jun 30, 2013

Foreign Trade Policy of India - Chapter 2

I had given an introduction on Foreign Trade Policy (FTP) of India here. This post will concentrate on the second chapter of the foreign trade policy. The second chapter of FTP covers the general provisions regarding exports and imports. 

FTP says that all exports and imports are 'free' unless otherwise specified. Free to import doesn't imply no import duties. It just means that one can import by paying required duties and after completing the formalities. The exports and imports of merchandise is organized as per the International trade classification (harmonized system). DGFT on its website, maintains a link to the policy, based on the ITC HS code under the heading 'downloads'. One can easily look up to check if the good in question can be freely imported/exported here.

The other categories listed are 'restricted' and 'prohibited'. Restricted implies that one needs a license from concerned authorities to trade, and prohibited implies that the good can not be traded at all. This chapter also mentions the restrictions based on UN security council resolutions on countries such as Iran, North Korea etc. 

The final say on interpretation of the policy lies with the Director General of Foreign Trade. Chapter 2 also rationalizes the grounds for restriction on trade with the following statement: 
DGFT may, through a notification, adopt and enforce any measure necessary for: -
(a) Protection of public morals;
(b) Protection of human, animal or plant life or health;
(c) Protection of patents, trademarks and copyrights, and the prevention of deceptive practices;
(d) Prevention of use of prison labour;
(e) Protection of national treasures of artistic, historic or archaeological value;
(f) Conservation of exhaustible natural resources;
(g) Protection of trade of fissionable material or material from which they are derived;
(h) Prevention of traffic in arms, ammunition and implements of war.
The restricted goods need a license/authorization which is given by DGFT/concerned authorities. However, the license cannot be claimed as a right. It may be denied based on procedures enforced from time to time. 

To trade from India, one needs an Importer-Exporter Code (IEC). It is a ten digit numeric code and is mandatory before undertaking international trade. IEC is issued by DGFT offices across various cities in India. 

Import of second hand goods are restricted. Capital goods, even second hand, are freely importable. However, second hand air conditioners, computers, photocopies, Diesel generators etc(even if they are capital goods for business) are restricted. The purpose of this restriction is to prevent import of e-waste/polluters.

Imports as samples, gifts and passenger baggage is 'free' as long as the product is freely importable as per FTP. Chapter 2 also outlines that sale on high seas is permitted. It also allows imports on export basis and other minor details on import/export restrictions. 

Bonded warehouses, where goods can be stored before paying duty, are mandated under this chapter. Department of Revenue/CBEC has issued detailed guidelines on bonded warehouses under Customs Act, 1962 (Section 57 to 73).

Another provision of FTP under this chapter that I find interesting is the para 2.40 which mandates that the denomination of trade can be in Freely convertible currency (FCC) or in INR but the payment realization 'shall' be in FCC only. So the currency to be realized as trade proceeds cannot be INR unless otherwise specified. This provision will slowly be diluted in coming years. Currently there are some arrangements where ACU units (Asian Clearning Union) can be used. However, the current use of such provision is very limited in scope and magnitude. The exception to above is given in this para:
However, export proceeds against specific exports may also be realized in rupees, provided it is through a freely convertible Vostro account of a non resident bank situated in any country other than a member country of ACU or Nepal or Bhutan. Additionally, rupee payment through Vostro account must be against payment in free foreign currency by buyer in his non-resident bank account. Free foreign exchange remitted by buyer to his non-resident bank (after deducting the bank service charges) on account of this transaction would be taken as export realization under export promotion schemes of FTP.
This chapter also talks about Export promotion councils, DGCI&S for data collection and E-initiatives and Grievance redressal committee. Chapter 2, is thus the cornerstone of the FTP of India. 

Jun 29, 2013

Foreign Trade Policy of India

Foreign Trade Policy of India

An Introduction

Foreign Trade Policy (FTP) document is the key document that announces the policy intent regarding international trade. It is the apex document that prescribes the broad outlines for imports and exports of goods and services, to and from India. Foreign Trade Policy is generally a five yearly document, and an annual supplement is released every year. Foreign Trade Policy of India is accompanied with  handbook of procedures in two volumes, that supplement and elaborate the details. 

In India, Foreign Trade Policy preparation is managed chiefly by Directorate General of Foreign Trade (DGFT), under Ministry of Commerce. I shall 'briefly' review the content of FTP in this blog. FTP is divided into several chapters as outlined below:

Chapter 1: This chapter has three sub-sections and covers the legal framework under which Foreign Trade Policy of India is created. It also mentions some of the special schemes which had been added recently to promote exports. The last part of the chapter talks about Board of Trade, its constitution and terms of reference. 

Chapter 2: It covers the general provisions regarding exports and imports from India. The opening sentence declares:
"Exports and Imports shall be ‘Free’, except when regulated. Such regulation would be as per FTP and/or ITC (HS). ITC (HS) contains the item wise export and import policy regimes. The ITC (HS) is aligned with international Harmonized System goods nomenclature maintained by World Customs Organization ( Schedule 1 of ITC (HS) gives the Import Policy Regime and Schedule 2 of ITC (HS) gives the Export Policy Regime."
The details of product restrictions, if any, are available at the website of DGFT. Apart from products being 'free' and 'restricted' there is a third category of 'prohibited' products. Such products cannot be traded across borders in India (e.g. endangered wildlife). You can read the details of Chapter 2 here.

Chapter 3: This chapter covers the promotional measures, commonly known as incentive schemes, to promote exports from India. The details are covered in two posts, here and here.

Chapter 4: Duty exemption and remission schemes are covered in this chapter. The schemes are meant to import raw materials duty free for the export products. This is to avoid taxing those inputs that go out with the export products.

Chapter 5: Export promotion capital goods (EPCG) scheme is covered in this chapter. This scheme is meant to promote exports through helping the firms to import capital goods duty free to produce export goods.

Chapter 6: This chapter covers provisions for settings up of units that export their entire produce of goods or services under various schemes such as Export Oriented Units (EOUs), Software Technology Parks (STPs), Bio-technology parks (BTPs) etc.

Chapter 7: This chapter pertains to Special Economic Zones which are now governed by a special act called SEZ Act 2005, and rules.

Chapter 8: Deemed exports are covered in this chapter. 'Deemed' exports cover those exports that do not actually constitute direct exports, but go to someone who exports it as part of their products. The technical definition reads thus:
"Deemed Exports” refer to those transactions in which goods supplied do not leave country, and payment for such supplies is received either in Indian rupees or in free foreign exchange. Supply of goods as mentioned in paragraphs below shall be regarded as “Deemed Exports” provided goods are manufactured in India. (The paragraph below is not part of this post)

I shall outline important chapters from the above list in separate posts in this blog in coming days. 

Jun 27, 2013

Optimum foreign currency reserves and India

Rupee crossed 60/USD yeterday. It splashed across newspapers. RBI, the central bank of India, gave up any efforts to intervene during the slide, giving up meekly. India has a forex reserves of around 290 Billion USD currently, which is around 15% of the GDP. RBI could have deployed the war chest but it chose not to, logically so. The size of the INR forex market is around 50 to 70 Billion USD per day and to influence it significantly, the player must enter with a quiver of around 4 to 5 Billion USD and if RBI decides to deploy its forex reserves to this effect, it might run out of reserves in around 2 months. And the speculators will have an exponential run sooner than later, as the reserves dwindle, hastening the process of currency crisis. A breach of psychological benchmark of Rs 60/USD is better than a currency crisis. 

A floating exchange regime need not have any forex reserves, theoretically. But a forex reserve is required nevertheless. The reserves can be used to influence exchange rate, can be used to contain volatility, or to insure against loss of liquidity/capital market access.  Indian currency, INR, is not yet fully convertible, and India maintains a forex reserve. India maintains the 10th biggest reserve in the world. RBI's stated motive to maintain such reserve is to contain volatility. It has no stated intentions of maintaining forex rates at any particular level. That explains the non interventionist approach of RBI. It's not that RBI is not bothered as you can see in this news item. It's just that RBI finds it impractical to intervene at this point of time. 

A question arises as to how much reserves is adequate. If RBI doesn't use the reserve in times of crisis like this, is it judicious to keep a reserve? If yes, what should be the size of such a reserve? The answer is not simple. The cost of keeping a huge reserve is enormous, in terms of giving up on the earning potential of the reserves thus maintained. A huge reserve gives a psychological advantage if the central bank decides to intervene in the markets, but at the cost of wasted opportunity to earn. Indian reserves are decent, but not enormous. The power of RBI to intervene in the forex market is very limited. 

The blogger has a strong opinion that the reserve size is a function of the sensitivity of the forex market to intervention. It must be a function of the size of the market, and the size of the intervention required to bring about a required change in forex rate. The latter, that is the size of the intervention required to bring about an intended change in forex rate, is a function of order flows (the micro-structure approach) at any given moment, and the existing liquidity at that instant, and nothing else. For example, if the size of liquidity of the market at the given instant is around 50 Billion USD, and the order flows in one particular direction changes from one billion USD to say, five billion USD, it might influence the market enormously, whereas a directional imbalance of a hundred million dollars is not enormous. However, if the liquidity of the market dries up and becomes small due to lack of trade, then even a directional change of a hundred million dollars can bring about a bigger change in exchange rate. This is when the reserves come in handy. In a situation when the liquidity is low and the smaller volumes play a significant role. How frequent is such a situation? This is the moot point. 

I wish there was a good mathematical model to predict an ideal forex reserves size. I am yet to find one. If you know of any such model, please point it out. 

Meanwhile, the rupee bears the brunt of weak fundamentals. It just reflects the inherent flaws in the macro indicators, mainly the gap in current account and high inflation that has persisted over the last few years. This high inflation is chiefly due to mindless spending by the Govt on welfare programs such as NREGA, and the blogger has no qualms calling the kettle black, when it is indeed black. The situation about current account is elaborated here by the blogger. 

And the optimum size of forex reserves, for a country like India, remains a question unsolved. 

Jun 17, 2013

India's foreign trade May 2013 - The gloom continues

The foreign trade data (merchandise) was released today. It paints a gloomy picture of trade. The exports declined:

Exports during May, 2013 were valued at US $ 24505.66 million (Rs. 134807.62 crore) which was 1.11 per cent lower in Dollar terms (0.13 per cent lower in Rupee terms) than the level of US $ 24779.72 million (Rs. 134983.82 crore) during May, 2012. Cumulative value of exports for the period April-May 2013 -14 was US $ 48670.03  million (Rs. 266203.05 crore) as against US $ 48568.66 million (Rs. 258239.33 crore) registering a growth of 0.21 per cent in Dollar terms and growth of 3.08 per cent in Rupee terms over the same period last year.

The imports increased:

Imports during May, 2013 were valued at US $ 44649.26 million (Rs.245619.14 crore) representing a growth of 6.99 per cent in Dollar terms and 8.04 per cent in Rupee terms  over the level of imports valued at US $ 41733.45 million ( Rs. 227336.72 crore) in May, 2012. Cumulative value of imports for the period April-May, 2013-14 was US $ 86600.99 million (Rs. 473734.59 crore) as against US $ 79540.94 million (Rs. 423225.26 crore) registering a growth of 8.88 per cent in Dollar terms and growth of 11.93 per cent in Rupee terms over the same period last year.

The rupee has depreciated over last year. That explains the difference in terms of trade in dollar and rupee terms. The rupee slide is due to the high current account deficit and bad numbers churned out by major macro indicators. The trade deficit increased by more than 7 billion USD over last year period of April-May.  7 additional Billion dollars of deficit in two months is significant.

Indian policy makers are absolutely clueless about how to turn this around. The foreign trade policy can hardly do anything about it. As pointed out by your blogger in this earlier post, the situation is turning bleaker, with the foreign capital inflows being stymied now. I wonder how India will afford such a huge current account deficit in times to come. Rupee is poised for a major slide. The blogger cannot rule out a level of Rs 62/dollar by year end if things continue this way. There is hardly much that RBI can do in terms of intervening in the rupee market. The forex market has grown to a magnitude of more than 70 Billion USD per day, seriously limiting the influence that our central bank can have on rupee valuation. There are merits of having a devalued rupee, but the inelastic imports (oil and gold) might lead to an imported inflation in India. The debate is out in the papers. The blogger will leave it at that.

It's time to reboot reforms. Period.

Jun 7, 2013

Rupee slide, CAD , current happenings and some unwanted advise

Rupee has depreciated above Rs 57/USD. The current account deficit (CAD) has gone above 5% of GDP during previous quarters. It had reached 6.7% for the Oct-Dec quarter last year. In simple terms, we are importing more and exporting less. The difference is being financed currently by  capital inflows into markets, direct investments into India and borrowings. The investments flows in recent quarters were helpful due to the quantitative easing (QE) at US and Japan. The excess global liquidity found its way into India too, helping our cause of financing the deficit. 

In coming months, the QE from the US will taper off, most likely by Dec this year. There has been indications from US Fed regarding this in the news. The expectation of this event itself has caused the USD to strengthen across the world. The effect has started playing on Rupee too. 

However, that's not the only factor. Global investors have noticed the gap in our financing. Our major imports, petroleum products, are inelastic to price, subsidies being a cause of it. Also, the penchant for Gold continues unabated, irrespective of minor tweaking of taxes on Gold. Gold has proved to be an effective hedge against inflation in recent years. Also, Gold and real estates are safe parking places for black money. So you can't blame the culture if it continues to be Gold standard.  Weddings continue to gorge gold and weddings won't stop because of CAD. And many analysts have ignored the consumer electronics which also add to our import bill. On the exports side, the global demand is still sluggish. US markets seemed to show improvement, but the story is still being debated. The emerging and new markets are being looked at, but they need time to develop. So overall, it doesn't seem that our exports will be able to finance our imports for some time to come. And with the capital flows tapering off, we won't be in a comfortable position.

Theoretically, what should happen is this. As CAD increases, Rupee should depreciate, making our exports competitive. Also, as rupee depreciates, imports would get costlier, thus killing demand for imported products. Over a period of time, the gap narrows and we come back to normal with no deficit (or move to surplus). That's theory. In reality, a sudden depreciation doesn't make our exports competitive. There's a lag built into it. I had blogged about that here. Also, exports are a function of global demand, which doesn't seem to improve. On the other hand, imports might be shielded by subsidies, or might be inelastic by nature/culture, and might not react to rupee depreciation. People in the field would talk about J curve and pass through effects too. Govt, in it's dim-wisdom and electoral compulsions, will keep spending more, given that it's an election year, further disturbing the economy and RBI's efforts to control inflation. And so on. To cut it short, natural economics might not work to restore balance and the situation might deteriorate from bad to worse very fast. Or is that the natural economics? 

Meanwhile, I saw the jokers from Export Promotion Councils predicting an export growth of 10% or more this year. Last year, they had predicted 20% growth, while the exports actually contracted by 4.4%. Audacity of hope, I must say.  Economists and your blogger are not that hopeful. Bleak times ahead.

What would I do with my money and my above predictions? I will walk the talk. When Biwi comes from US, I would advise her to keep her money in Dollars and not convert it fast. I would check if I can park my money in some mutual funds that invest judiciously in US markets. Also, buy Gold (ETFs/Physical/Funds), against national interest, for my daughter's marriage  in future (she's 4 right now). I will stay away from Indian equities, as they might fall as a reaction to FII outflows. I will also stay away from any fixed deposit schemes that give me a return of less than 12% (I assume an inflation of 9% and hope to grow my money by 'around' 3%). I will also wait for the real estate to cool down before I buy any site/flat. And I will keenly follow one Mr. Murthy of Infosys fame (and first name not Phaneesh), to see when he exits, so that I go long when market over-reacts and make a killing when it corrects! I missed going short this time when market over-reacted and jumped high at his entry. It's already back to normal now. 

Jun 4, 2013

Bitcoins, SDRs and BitSDR

The idea of Bitcoins is more than 4 years old. The idea of special drawing rights (SDRs) by IMF is more than 44 years old. Both are attempts at creating alternative currencies for different purposes. 

SDR was created to help international trade tide away the exchange difficulties. SDR is not actually a currency, but a claim on currency, or a basked of currencies. Being internationally acceptable and with the ability to act as a medium of exchange, it has the potential to work as international reserve currency for trade. SDRs draw the legitimacy from the backing of IMF. How much backing the IMF has, especially when it comes to bringing SDRs to the center-stage of international trade, is moot.  Probably the idea needs some development, and, the backing of USD supporters. 

Bitcoin is virtual currency based on open source cryptographic protocol. It was introduced during Jan 2009. It is a peer to peer electronic cash system, and depends only on mathematical crypto-algorithms for its creation. There is a cap on maximum number of Bitcoins that will ever be generated at 21 million (by year 2040). This limiting cap might be a bad move, as Krugman helpfully points out. You can read more about how Bitcoin system works, here and here. Krugman has critiqued the idea here and here. Nevertheless, Bitcoins have done reasonably well for themselves and have achieved fair amount of acceptance in online transactions and black markets. Bitcoins have also undergone value fluctuations, crashes/recoveries, inflation etc, like any central bank backed paper currency. It is currently trading at around 120 dollars/Bitcoin. However, Bitcoins are not backed by any central bank or international authority. It is 'mined' virtually. Also, wider acceptance of Bitcoins in the real world is in question. Money is what people 'accept' as money. It might be gold, feathers, paper or Bitcoins. Bitcoins need time for acceptance.

Recent years have seen a lot of debate about Dollar being the prime global reserve currency. Also, competitive devaluation of currencies is being discussed after Abenomics of Japan, and the QE by the US's Fed. There are also nations who are not comfortable with US Dollar's pre-eminent position as reserve currency for international trade, e.g. Iran or Russia. Then there are currencies such as Euro, Yen, Renminbi, Pound and others. We do have multiple international currencies today but compared to USD, the share of others is low. About two thirds of world reserves are in USD, followed by around 20% in Euros and the rest is shared by all others. That means, the domestic problems of US is transmitted to the world through the reserve currency mechanism and there is hardly much that can be done as long as USD enjoys this position.

Here is what I propose. We can think of combining SDRs and Bitcoins. SDR as a concept is good. It has legal backing of IMF. And Bitcoin, as a technology, is great. A combination of Bitcoin and SDRs can create a good online currency that is tradable, liquid, and can be a good medium of exchange. The BitSDRs can be traded on regular exchanges and the base of BitSDRs can be determined by the IMF, based on the requirements of the international trade. A mechanism like SWIFT can be used for transactions between banks. That would de-link international reserve currency from getting affected by the domestic  compulsions of one nation. Of course, the size of big economies like US will continue playing an important role on the BitSDRs too, but that would be determined purely by the terms of trade and not domestic problems. And so on. You got the drift. I missing something? If it's this easy, there must be something wrong with the idea. Point it to me please.

Rejoinder,  Dec 2013: Bitcoins have gained in value meanwhile. Countries are looking at it seriously, but none of them have banned them outright. Bangalore is the leading city in India in terms of Bitcoin transactions. There is a global bitcoins conference being organized in Bangalore on Dec 14 and Dec15, 2013. 

Jun 2, 2013

EU Timber Regulation - Trade barrier that we didn't fight?

Illegal timber logging is a problem. It is identified as a problem in all civilized countries. Most of them have domestic laws to deal with the issue of timber logging. E.g. India has extensive forest laws to stop illegal timber logging. It is argued that corruption and fraud is rampant in timber trade and the extent of illegal logging might vary from 25% to 50% of all timber logged (anecdotal evidence from Wikipedia). The same illegal timber enters international trade too, and efforts are on to stop such activities. Good intentions. 

European Union has come up with a regulation sometime ago called the EU Timber Regulation(EUTR) applicable from 3rd March 2013. The stated obligations run thus:
The regulation counters the trade in illegally harvested timber and timber products through three key obligations: 

1) It prohibits the placing on the EU market of illegally harvested timber and products derived from such timber;

2) It requires EU traders who place timber products on the EU market for the first time to exercise ‘due diligence’. 

Once on the market, the timber and timber products may be sold on and/or transformed before they reach the final consumer. To allow for the traceability of timber products economic operators in this part of the supply chain (referred to as traders in the regulation) have an obligation to

3) keep records of their suppliers and customers.
I have seen the requirement of traceability of drug suppliers being applied rigorously in the case of pharma products. It is understandable due to human lives involved directly. Each bottle/strip of drug can not only be traced back to the manufacturer, but also to the lot/batch that the drug belonged to, and to the date of production.

Applying such requirements to timber products is moot. There will be advocates of global warming and such, who would go great lengths in defense. This blog doesn't differ on the principle of bad effect of de-forestation. The larger question raised here is, why is EU getting into extra-terrestrial legislation? Does it believe that their piece of legislation will prevail over domestic laws and stop illegal logging? What is the reason to believe so? 

What appears here is simple. The countries exporting timber and timber derived products, will now have an additional cost. The cost of compliance in terms of certification, process verification and documentation. This will add to the cost of business. The 'due diligence' can always be twisted beyond the information, risk assessment and risk mitigation goals as stated in the legislation originally. And this will further increase the cost of doing business. This, in simple terms, is a non-tariff trade barrier. In plain language, it says that if your timber products do not follow EU's certification and standards, EU will ban your products. And to meet EU's requirements and processes, you will incur additional cost, which will decrease your competitive advantage/margins. 

There was a similar piece of legislation from Australia last year, which was being contested by Indonesia and Canada. You can read more about it from Srikar's blog here. He raises a lot of pertinent questions from WTO point of view. The same questions apply here too. Also, Why should we let EU take higher moral responsibility of protecting the environment? Doesn't it mean that we don't trust our foresters and Customs/Excise officials?  And is is this legislation purely non-commercial in nature?

Now, there was a news report at SME times yesterday that said that India has come up with a certification process to comply with EUTR. It is called VRIKSH. The news report says:
"VRIKSH will suffice the due diligence requirements of international regulations set by foreign countries and authenticate the procurement source as legal based on evidential proofs. It plans to accelerate advocacy, raise awareness and build capacity and propagate the scheme amongst the overseas buyers," the Export Promotion Council for Handicrafts (EPCH) said in a press release.
The Export Promotion Council means good. It is doing the job of helping small exporters in its sector. It cannot be faulted for this line of approach. It also gets the legitimacy from this notification of DGFT. However, what disturbed me was this news report, in which the Govt representative talks about 'reinventing foreign trade mechanism', whatever it means, to meet the requirements. The press might have misquoted or whatever, but I gathered that India doesn't seem to have any ideas of contesting this piece of legislation.

That brings me back to Srikar's blog. The comments section goes on and on about the details and the provisions in WTO to counter such legislation, reiterating my belief that WTO is lawyers's paradise. Not coming from legal side, I realize that this piece of legislation will surely increase transaction costs and will bring down traditional advantage we enjoyed. Isn't that reason enough to pick up a fight, even if the details do not support us? Has someone done any research as to how much would be the benchmark increase in cost due to this legislation? Will it affect employment? Is there any study on the capability or readiness of our domestic timber based industry to face this new threat? Why are we so keen on implementing this piece of requirement that is thrown at us randomly, without contesting?  What are we planning to reinvent in foreign trade mechanism to counter this? 

I get only questions in my mind, with very few or no answers at all.