Nov 16, 2016

Light at the end of the tunnel - Indian exports hit the nadir

Exports have finally started to look up. While there is certainly base effect in play due to continuously decreasing exports for last two years, I have a hunch that we have hit the nadir and things will languish at this level or they might slowly (and very very slowly) start looking up as time passes. Till then, we shall have this silly increase and decrease of exports which do not carry much significance. 

The merchandise trade situation is as below: 

Exports and Imports - Merchandise/Goods trade from India October 2016

The services sector trade situation is as below: 

Exports and Imports of Services September 2016
The global trade scenario has not improved. While the sentiment for more trade has mellowed down across the globe, there has to be a point which can be called lowest. Probably for India, this was it. Now the question is, how to climb back from this valley we find ourselves in. 

Sep 16, 2016

Institutionalizing Twitter governance - from chaos to order

A random guy feels cheated because Snapdeal, an online retailer, gave him an offer of 32GB iPhone memory expansion drive for Rs 51 (it usually retails for around Rs 4000); and then canceled it within a minute. Probably the deal was on the site by mistake, or maybe it was a technical glitch. Snapdeal sends a prompt message promising a refund of 51 rupees within four working days. The guy in question, who is obviously well enough to own an iPhone, takes offence at this and tweets about it. He tags the commerce minister on his tweet, which is indeed noticed by the commerce minister, who in turn directs a Joint Secretary to look into the matter, and the aggrieved guy is told to connect with the officer. All on twitter. You can google! This is not a lone case. It's bizarre to go through the twitter handles of most of the ministers and departments. People want all and sundry problems to be solved through them, instantly on twitter. Some of them are indeed picked up and solved, or directed to a hapless officer, who takes up the case on priority as it is referred by the minister. Twitter feeds are monitored and each tweet where the minister is tagged becomes a 'Paper Under Consideration' (PUC) for a babu in the department who is sacrificed to monitor the twitter feed.

While using twitter to handle complaints/grievances needs to be lauded, one must also acknowledge the grim reality that this is creating an institutional bypass where the need to create a strong institutional mechanism of addressing service delivery issues is obfuscated with knee jerk tweet replies and artificial back-slapping praises for a random case where the issue gets addressed. This has built a skewed incentive for ministers in the system to launch various so called 'sevas' on twitter to address public grievances and solve problems. It makes good headlines, and at times indeed looks like a laudable effort. However, without building up back end capacity to handle the twitter grievances when they scale up in numbers, it is a disaster in making.

Twitter cannot be a replacement for formal institutional mechanism for grievance redressal. In the current form, it fails the basic test of a good institution of being effective, accountable and inclusive for all. But then, twitter is a social network, it was not designed to serve as a state institution.

For example, the correct institutional mechanism to address the case of snap deal cheating is through a strong consumer court institution which operates without delay or harassment. Twitter is not effective enough. One random case might get attention, but when it scales up, the department cannot afford to bother to take up each case.
The mode is also not accountable. There is no track and trace mechanism that is built into twitter, unlike a properly designed ticketing system for grievances. No one knows if the problem was ultimately addressed or not, or who is to blame for non-resolution of complaints on twitter. .
Twitter is also not inclusive. It is accessible to educated, net-connected and usually english speaking minuscule percentage of population. Any grievance mechanism cannot be exclusivist to this extent.

Strong institutional mechanism and required state capacity to address grievances/complaints needs to be built into the executive. It is a state building activity; slow but lasting. Ad-hoc methods like twitter cannot be a replacement to institutions. At best, twitter can be another input into the well designed process of grievance redressal that is handled through dedicated institutions.
Sadly, in the hope of projecting a social media friendly face, the ministers and departments seem to be missing the point.

Aug 30, 2016

GST and Foreign Trade Policy : Effect on exemptions and incentive scrips - Part 1

GST will be rolled out sometime during April to October 2017. This would be single most radical reform of last decade. While the GST model law has been published, further procedures are being worked out in various committees formed for specific purposes. This post (and a couple more in continuation) would analyse, in a preliminary way, as to how the GST might impact Foreign Trade Policy (FTP) and the schemes therein, and some analysis based on the information available at this time.

{A small video on the topic is also available at the link below:

You may watch and leave your suggestions/comments}

Assuming that the reader is aware of FTP schemes and basics of GST as outlined in the GST model law, I would proceed. 

Currently, the duties levied at the border by customs are as follows:

Total duty = Basic Customs Duty (BCD) + Additional duty of Customs (ADC, colloquially called CVD) + various cesses + Special Additional Duty (SAD, at 4%, to offset state taxes, refundable under certain conditions), + protective duties if applicable (Anti dumping, safeguard duty etc.)

The entire duty collected by customs goes into the kitty of Central Government (Consolidated fund of India). Under GST, the duties at border would be as follows: 

Total duty = BCD + Interstate Goods and Services Tax (IGST) + Protective duties if applicable (Anti dumping, safeguard duty etc.)

The duties at the border would be collected by customs, i.e. central government, and the state share of the IGST collected at border would be transferred to the state where the imported goods are finally consumed. (Article 269 A.(1) - Explanation I). To this extent, states would also be directly getting a part of import duties levied at border, which was not the case till now. 

The IGST exemption issue

As centre and states both lay claim to IGST collected by customs at the border (as with inter state transactions), any exemption or modification in rules would have to be agreed to by the centre and the states. Border exemption of duties lie at the heart of some of the popular schemes of the current FTP. The exemption would be challenging if IGST is viewed strictly in the light of Article 269 A.1 - Explanation I. That would make any exemption at border, in the current form as outlined in the FTP unimplementable under GST regime. The problem can only be overcome with the agreement of, and a push by, the GST Council. States have an important say on the matter and to that extent the job is tough. There is no clarity as of now if it would agreeable to states. Or if such exemptions at the border are being considered at all. To that extent, the current FTP's exemption schemes' fate hangs in balance. 

The thinking in policy circles is to minimise exemptions as far as possible, and go with the refund route wherever necessary. Exports would be zero rated, which means taxes are not intended to be exported, and therefore all taxes paid on exported products would be refunded/credited (and not exempted) to the exporter. 
There is no doubt that exemptions would be preferred over refunds by the trade, due to obvious reasons of cash flow issues and time value of money. However, refunds are better from tax administration point of view. One needs to ensure that flow of refunds do not entail delays and harassment in GST regime.
In order to circumvent the cash flow issue, there can also be an alternative approach where applicable exemptions are shown as credit entry against the importer, to be offset once the export obligation is completed. This way, the revenue collection agencies may show it as deferred collection at the same time not holding to cash flow of exporters who use imported inputs.  

Duty Credit Scrip Acceptability and design of suitable mechanism

Currently, under FTP chapter 3, various duty credit scripts are issued (MEIS/SEIS) which can be used to pay/offset duty liabilities at customs, central excise or service tax. Being transferable in nature, they are near money in market. CBEC has issued suitable notifications in this regard.
There is no clarity if such scrips would be acceptable under GST. Assuming that incentive scrips would be made acceptable to offset atleast CGST and IGST part of liabilities, suitable mechanism in the GST network need  to be made. The scrip should be designed in such a way that they enter into the credit account of the firm under CGST/IGST credit head. That way, the deduction would be automatic. The current cumbersome process of paper scrip being issued by DGFT, followed by online transmission to DG systems at customs is buggy and harassing. It is better for DGFT to migrate to GST Network and leave behind the legacy NIC software that it currently uses. As GSTN is a private non-profit company with shareholding from Centre and all states, there is no reason why DGFT should not dismantle its NIC gradually and move on to GSTN completely. Given the way it is formed, GSTN might prove to be more accountable in comparison.

We may now look into the specific schemes under current foreign trade policy which might need readjustments under GST, assuming that indeed the GST council comes around to the enlightened view of exemptions at the borders for exporters. We need to also look at what other countries in similar situation are doing, but that would be in a later post.

1. Duty Exemption Schemes under GST

The current duty exemption schemes are Advance Authorisation (AA) scheme and Duty Free Import Authorisation (DFIA) scheme.

a. Advance Authorisation scheme under GST - direct import case with physical exports

Under Advance Authorisation scheme currently, the total duty is exempted for raw material, inputs and intermediaries as long as they are exported as final products, with a value addition of around 15%. The duty exemption is given at the point and time of import, usually before the exports are effected. The multistep process of exemption is outlined in brief below: 

Step 1: Get the advance authorisation issued from the DGFT and get it registered with the customs and execute a Bond/BG/LUT as applicable. 
Step 2: Import duty free inputs[This is point of exemption], incorporate into export products, and export. 
Step 3: Produce export documents to DGFT and get the export obligation discharge certificate (EODC) and produce it to customs to get the bond cancelled. 

The current interface between DGFT and DG Systems (ICEGate) is rudimentary. The advance authorisation details are transmitted to customs, but the exporter needs to produce the license physically at the port. The Bills of entry and Shipping Bills are not electronically linked to the EODC process at DGFT, leading to lot of avoidable paperwork. Two departments are involved in the process of implementation of this exemption scheme, and there is duplication in verification checks. 

Under GST regime, this scheme's survival depends on exemption agreement on various duties levied. 
If indeed total duty exemption is agreed upon, including exemption for IGST, this scheme may continue as is, with a new notification on similar lines as existing being issued in this regard. 
However, if IGST exemption is not agreed upon, or worse still, if exemption (BCD+IGST) at the border itself is not agreed to, and the council goes with only refund route, this scheme will get stunted or redundant, respectively.

Scenario A: Border Exemptions are fully agreed to:

Assuming that in the interest of exports and trade, the total duty exemptions are agreed to, and states come on board, the following changes would be warranted: 
  • A new notification from GST council to replace the existing ones from CBEC with regard to this scheme. 
  • Integration of DGFT system with GST network. The exemption details under AA (credit note, direct exemption as in existing scheme or any other approach) and the debiting at the customs have to move online for smooth integration. The EODC process needs to be integrated with GSTN feeding in the export data to DGFT system. This activity has to start at the earliest and should be a co-development with the same team that is working on GST network. 
Scenario B: Border exemptions are not agreed to, but refunds by Customs are agreed upon:

Assuming that all states come aboard in the interest of exports, and agree to forego their share of IGST which would then be refunded to exporters by customs (similar to drawback mechanism currenlty), a mechanism would then need to be designed to allow faster and harassment free refunds under GST Network.

  • A new notification on refund process and rate of refund determination. Rate of refund may be similar to drawback or may be linked to actual duty suffered, as the data would be readily available in the network. 
  • Verification method, checks to prevent diversion and documentary requirements for refund. eBRC, Shipping Bills etc. 
Scenario C: Border exemptions are not agreed to, but refund is mandated under revised FTP:

Same as Scenario B in terms of agreement, but the implementing agency would then be DGFT. 
  • FTP chapter 4 needs to be revisited to devise a mechanism to refund the duties suffered at the border. 
  • Refund may be upon production of Bills of entries, in the form of credit/scrip/cash, and the export obligation may be monitored by DGFT as usual post the refund. 
  • EODC may be issued after export obligation fulfilment, and in case of failure, refunded amount with interest would be recovered. 
Scenario C entails minimum tweaks in the FTP, where the border exemption is replaced with refund by DGFT and all other details (EO monitoring etc) remain the same. Rather than getting duty exemption at border, the trade would pay the duties there, and come with bills of entries to DGFT to get the refund.
However, refunding through DGFT involves a different challenge altogether. Refund from DGFT would entail fund allocation for the purpose from Finance ministry, which involves budget approvals for withdrawal from consolidated fund of India. This would be tricky each year. Refund from tax collecting department is relatively easier to implement from this point of view, as the department that does revenue collection is the one that refunds, and thus it can do book accounting for refunds that flow out for a financial year. 

Scenario D: IGST exemptions are not agreed to, BCD exemption is agreed upon:

Advance authorisation scheme loses the charm as for most of the items currently the BCD is less than 10%; and if the imports are from one of the countries with which India has signed a free trade agreement, even this BCD might be near zero. This would effectively make the advance authorisation scheme redundant. 

One of the above four scenarios, or a mix of one or two above would play out in actual. The best case for the trade would be Scenario A if border exemptions are allowed, and Scenario C if refunds are chosen over exemption. 

The second part of the series can be found here.

Aug 22, 2016

Video tutorials for export promotion

DGFT has come up with a series of video tutorials on their youtube channel to help newcomers in the area of international trade. The video series aims at providing the basic knowledge about fundamentals of international trade, such as introduction to incoterms, export import policy of India, starting an export business etc. As yours truly was deeply involved in the development of the project from the beginning, I thought of sharing some of the links here. The videos were developed in Bangalore DGFT office, and some more are in the pipeline for the beginner series. The videos will be accompanied on the official DGFT website with FAQs on various introductory topics in coming days.

Given that e-learning has been popular for last few years, this initiative was designed to produce standardised, short and easy learning modules in the area of international trade from Indian perspective, keeping in mind the unique situation of an Indian exporter/importer. 

Feedback welcome on official youtube channel. Enjoy.

Jul 7, 2016

Wish a million exporters from India

A couple of months ago, I installed an app named 'wish' on my phone. While all other e-commerce firms strive to deliver at the earliest, Wish didn't seem to be in a hurry. Most of the products listed seemed ridiculously cheap, originated from China, and showed delivery timeline of around 30 to 45 days. And there was no cash-on-delivery option, just upfront payment. I would have dismissed the site as hoax and deleted the app, but for the buzz it has already created. Items on the site are unbranded and usually cost less than 1000 rupees; and I could sense that their backend AI is pretty good given that it zeroed-in correctly on my interests within a few sessions. I seldom see useless recommendations, and given its Pinterest type clean layout,  the app is a joy to browse. No wonder millions are hooked. 
I ordered some stuff, and all of them landed up between 30 to 45 days, except one which came in two weeks. No complaints there. The quality was better than what I expected. China is known to make both high quality stuff as well as cheap knock-offs; somehow Wish had suppliers who were honest to the price. You got better than what you paid for. 
There were rumours that Amazon and Alibaba eyed this app last year for an all cash deal of $10 Billion. And apparently the makers of the app walked off! 
Wish is based out of San Francisco, USA. It is a marketplace model which brings buyers and sellers together, and keeps a commission for that work. The buyers are spread across the world, mostly in North America and Europe. The sellers are mostly from China, ASEAN and to a small extent, US. Most sellers appear to be manufacturers, and small scale. 

Some salient points to note:

- The payment is taken care by the app. While the app may take its commission, it ensures that the payment is assured and there is no default once the item is supplied
- The shipping price comes to around 30% of the cost of item for most items from China to India. Given that the import duties would be around 10 to 25% for these, the shipping prices are extremely competitive. Mode of transport can be either sea or air. 
- The shipment tracking is available online. 
- The sellers seem to use logistic hubs efficiently, based on the tracking details of the items I purchased. 
- The border paperwork is taken care by the third party logistic partner. 
- There is a strong mechanism to weed out fakes and cheats and quality maintenance on the site. There is good refund mechanism to take care of customer's interests. 

The above points sum up all aspects of an efficient globalised trade; A good market  to bring buyers and sellers together, payment assurance between strangers without resorting to costly letters of credit, efficient logistics for shipping and delivery with tracking, and mechanism to ensure quality and avoidance of fraud. The aggregators and middlemen get weeded out. The only aggregation is probably in terms of logistics where the hubs collect the items directed to same destination and bunch them together. Wish probably represents what one wishes in an ideal globalised trading system with given constraints of today's technology. 

India has millions of small suppliers and manufacturers who are cut-off from global markets. Some who export are dependent on middlemen (the so called merchant-exporters) and aggregators. This is a loss not only to the manufacturer, but also to the country as we lose competitiveness. An exposure on apps like Wish would go a long way to get the buyers directly to the manufacturer. The payment assurance, a usual stumbling block for starters, is taken care through the app. 

However, shipping from India is relatively costly and the number of door pick up services of international standards is few. The cost of shipping for smaller packages is way higher when compared to China. This has more to do with lack of scale efficiency, and poor export related infrastructure. Shipping cost is a direct function of these. 

While export infrastructure will take time to come up, some amount of handholding and guidance is needed to develop small scale Indian manufacturers and suppliers to start thinking global. This activity can be done at relatively lesser cost and may have high impact in increasing exports. An interesting idea about how Government should go about creating a national level trade network towards this objective is outlined here in an article by Ajay Srivastava, an experienced Indian Trade Service officer. There has lately been good initiatives by the Commerce ministry in this direction through various initiatives such as handholding startups, iSeva twitter handle, Niryat Bandhu scheme run by DGFT to handhold newcomers in international trade, and so on. More such measures are welcome. And existing efficient tools such as Wish should be exploited by spreading the news about them. This post is an effort in that direction. 

Jul 1, 2016

Technology solution to the authenticity problem - Blockchain applications

I had blogged three years ago about the Bitcoin and the associated blockchain technology and how it might be used to create an international currency in place of the existing SDRs of IMF. 
A lot of icecaps have melted since that post and I thought of revisiting the topic of Bitcoin, chiefly relating to the interesting tail of the Bitcoin; the blockchain, and the potential applications that the world has since discovered. 
For starters, Bitcoin is a digital cryptocurrency, stored and exchanged electronically to buy/sell whatever can be dealt online. More about Bitcoin here
The Bitcoin runs on a public ledger called a blockchain. The blockchain is the interesting part that has applications beyond running a digital currency. The blockchain per se is a dry piece of code that grows with every transaction of the underlying asset (e.g. a Bitcoin). The beauty of the blockchain lies in its ability to generate trust of authenticity of the underlying asset, without resorting to any government/semi-government/autonomous agency to do the verification. The verification is based on the peer-to-peer sharing of this blockchain which resides on multiple servers and readily tells if the Bitcoin is genuine or not. You may find a simpler explanation about how all this works here.
The block-chain has number of interesting applications. Let me give one example here.

In a country like ours, verification of documents to title (land, apartments, sites etc) is an important aspect in sale transaction. The verification process is cumbersome. The land title for example needs to be verified from the land revenue records of state government in addition to registrar's office to verify the last sale. Also, one needs to check for legal issues, if any, due to inheritance related matter. Similarly, the residential sites needs to be verified from town plan sanction authority, registrar's office and so on. In case of apartments, one needs to check property tax matters in addition.
Despite these verification, one is never sure that the title being transferred is clean and will come without encumbrances. The blockchain may be used to tag each unique property document issued and any change of hands would reflect in blockchain, leading to easier online verification. The blockchain may include all information related to the underlying asset including details such as payment of property taxes, sale registration and so on. One look at the blockchain would give a complete picture on the title. Also, in case of litigation, the blockchain may add a link that stops sale transactions immediately. No sale allowed till the litigation link is broken by the court. You get the drift.

Similarly, borrowers may be tagged with a blockchain in a credit system. The individual links of the chain are created with each repayment of loan by the individual/corporate(Aadhar/PAN). A chain is built up through such links which contain complete repayment history (in time/delay, full repayment/partial, default details etc) and the banking network might maintain it on peer-to-peer basis. That would eliminate the credit information agencies.

A newborn may be tagged with a blockchain with an aadhar that builds up immunisation/vaccination record. It might also contain all illnesses and health check details as one grows up, leading to an impressive record for later stage diagnosis or for building a database of individuals for big data analysis .

You again get the drift.

The applications are immense. While the Darknet may be the major Bitcoin land today, it is just a matter of time before people find application of crypto-currency, and associated block-chain technology, in other areas. It has already started happening. Somewhere, as long as there is a peer-to-peer faith maintained, or an institutional arrangement is built up for privacy purposes, the idea is very workable. After all, money is what you call as money. It can be sea-shells, peacock's feather, bits of silver, paper currency, leaves of a tree, or a Bitcoin.

BitSDR idea was one such idea I had explored 3 years ago, for international currency application. The time has probably come for the policymakers to take up Bitcoin a little more seriously and look at it from the application point of view to solve day to day verification problems. That would just be a start.

Jun 11, 2016

9 Easy steps to get IEC code online from DGFT

IEC code online

IEC code online

(While this blog is mostly about foreign trade and international economics, this post is for the benefit of those who are just starting out in the area of international trade from India - one needs an IEC number to get into foreign trade from India, and this is a post to help them)

IEC stands for Import Export Code. IEC is mandatory for anyone planning to carry out import export business from India. IEC is issued by Directorate General of Foreign Trade (DGFT, online. Earlier the IECs were issued through manual as well as online mode at the choice of applicant. However, since 1st April 2016, IECs are mandatorily to be applied and issued online. Post GST, since July 1st 2017, IEC numbers issued are same as the PAN numbers.

Vide Trade notice number 23 dated 08 August 2018, DGFT has made it very easy to obtain an IEC for anyone having a PAN and bank account. The trade notice can be found by clicking here.

With this, it is very easy to get an IEC. Once the application is submitted at this link by filling up required details, e IEC gets generated online immediately which then can be downloaded, printed and used. A random sample based inspection is carried out after issue by the department, and in case of any discrepancy, the applicant is contacted to provide further details or to rectify the documents.

There is no need to go to the DGFT office anymore to get an IEC. You may apply for IEC by clicking at this link.

---Earlier procedure----Now redundant------

While one may point to the links at website, I thought of elaborating the application process here as the current DGFT website might be too cumbersome (and misleading at times!) for a new applicant. To sum it up, the following is the process to obtain the IEC code online. 

Step 1:
Obtain a digital signature (class 2 or class 3) for your self/organisation from one of the authorised agents of DGFT. Currently there are three: n-code, emudhra, and safe-script; who are authorised to issue the digital certificates. Keep the digital key active and ready when you wish to apply. You may refer the link here for more details on obtaining digital key. 

Step 2: 
You need to keep two documents ready. A PAN card, and a cancelled cheque bearing pre-printed name on it. In case a pre-printed name cancelled cheque is not available, a banker's certificate would do. The format for banker's certificate is given in the last page of this document. Scan these two documents and keep them ready for upload. 

Step 3:
Scan a photo or keep a digital photo of the applicant ready. 

Step 4:
Keep an email id and mobile number ready. The details once keyed in will get locked with PAN number, so one needs to be careful and use correct email and mobile numbers. The digital tokens are sent to the email and mobile and needs to be used while logging in. 

Step 5:
Keep a debit/credit card with minimum balance of Rs 500 for fee purposes ready. Fee is to be mandatorily paid online. 

Step 6:
Keep your computer ready with the following (don't ask why, it's weird, but that's how it works):
  • Internet Explorer (preferably version 11) browser. Chrome/firefox/safari etc won't work. 
  • Java version 7.51 with security settings low. 
  • Compatibility view settings to be changed as follows: Go to IE --> Tools --> Compatibility view settings --> under add this website add '' --> Add and Close the menu. 
  • Add to trusted sites in security settings. 
  • Activex controls should be enabled (do only if required/if there is an error)
Step 7: 
Go to and navigate to IEC code online application as shown in the image below and click. 

Online IEC code application

Step 8:
Follow on screen instructions to log in and key in all the details. You may see the details of what needs to be filled in step by step here. You also need to pay the fee online during the application. 

Step 9: 
Digitally sign and submit the application. 

iec code online

Thereafter, an e-IEC would be sent to you on your registered email id and a confirmation sms would be sent to you on the mobile phone. The time taken is around 2 days to issue a new IEC code online. 

Also, once the IEC code online is issued you may check IEC code status 'View your IEC' at the DGFT website. Refer image below. Also, one may see the status of your IEC under 'online applications' --> 'IEC' as shown in the image below. 

IEC Code Status
 In case of any queries or difficulties during filing of online application, you may refer the matter to IEC helpdesk at the link shown below on DGFT website
DGFT Helpdesk
For any further questions on this topic, you may leave a comment below. 

Apr 21, 2016

Are we really ready for RCEP?

I had blogged a year ago about our approach to RCEP. My views at that time is reflected in this article of Business standard. At that time, the debate in the media was not vibrant about the RCEP topic. Now it has heated up. To sum up, from various articles here, here and here:
  • India has taken the normal approach of hard-negotiating behind high tariff walls. 
  • India doesn't have much choice as we are, among the RCEP nations, stuck with high tariff barriers due to legacy revenue generation issues. India has calculated that it stands to lose 1.6% of GDP in revenue if she gives up on some of these high tariff barriers. 
  • It pinches India to give up these high tariff barriers when other countries don't have much to return due to their already low tariff barriers. 
  • Therefore, in return to reduction in tariff barriers in goods, India is expecting others to reciprocate in services. 
I have been, through this blog, an ardent supporter of open borders and low tariffs. The argument I usually make can be summed up as:
  • The world has moved away from segregated model of manufacturing to global value chains in last 20 years, especially in electronics and complex engineering items. This means that manufacturing has been discretised and spread across countries. (This value chain model would be revisited by firms in future and the model would evolve towards consolidation into bigger markets as trade wars threaten cross border movements. Expect ASEAN to drop out gradually and firms moving into India and China as their main manufacturing bases by 2025s.) 
  • It is difficult to integrate into current value chains if we stay behind tariff barriers, or non-tariff barriers arising due to poor infrastructure (especially ports), red-tape, lack of skilled labour etc. 
  • Integrating into value chains pulls you up in terms of technology, scientific know-how, processes and creates a demand for trained labour. 
  • The revenue lost due to reduced tariffs can be made up through corporate tax that arises due to higher manufacturing activities and profits. 
  • At times low tariff on imports, especially in electronics and IT hardware, feeds as input into IT services and therefore it helps another sector to compete better internationally. 
  • Other usual 'yay-free-trade' arguments based on trade theories. 
After careful consideration (rather re-consideration), and based on evolving trends in International trade area, I now think that it might not be in India's interest to get into RCEP. 
Or into any free trade agreement bilaterally or regionally. 
Basically, I am carefully retracting from 'yay-free-trade' to 'wait and watch' mode. 
My argument flows below: 

The international trade dynamics are fast evolving. Some of the salient points are:
  • World-over, the appetite to cooperate on matters of free trade is on wane. It has mainly to do with the continued subdued growth over last few years. The slow growth has hit the domestic appetite in developed parts, especially in Europe and US. 
  • The world trade has not grown as expected over last few years. The international trade growth has stagnated. The dry baltic index is languishing at the bottom for some time now. This might be an indication that trade has stagnated at last. Discretisation and china model has probably peaked and will either stagnate or deteriorate in future. While one may point at low commodity prices to be a factor, it cannot explain all the slowdown. And low commodity prices itself is a result of global slowdown, again pointing to a subdued sentiment. 
  • The evolving politics is not free trade friendly. The recently concluded Trans Pacific Partnership was opposed both by Republican (Trump) and Democrat (Hillary) front runners. While the speeches might not reflect what the candidates might do once in office, but it can be fairly surmised that they would not exactly be willing to use their fast-track powers, if renewed by congress. 
  • Non-tariff measures are on an increase in the last decade (India being one of the leading imposers of NTMs) as tariff measures have been negotiated away through WTO and Regional agreements. There seems no point in concluding more agreements when the intent is blunted through NTMs. 
  • There are countries that continue to operate under tacit subsidies, mainly China and US. The amount of support, both direct and indirect, to their industry that comes through cheap loans, better infrastructure, better government support through subsidies cannot be matched easily. The economies of scale Chinese enjoy due to this support in last couple of decades makes entry barriers steep for others. This leaves the competitors crippled. US (and farm sector of EU) is loathe to reduce their subsidies, while urging others to curb theirs. 
  • Lastly, the trade issues in goods have moved beyond the tariff reduction and comparative advantage. It is now more about regulatory and IP matter. While tariffs do contribute to much of the noise, the actual scenario in latest rounds of FTAs (TPP, TTIP) was more about arriving at regulatory coherence to ensure common quality and technical standards, common intellectual property regimes and common technology in order to arrive at better value chains. The idea, mooted by MNCs who want seamless experience while moving across countries, has gained traction. While there are fears that regulatory coherence of this type undermines multilateral (WTO) agreement, it needs to be seen rightly as next step of evolution in trading across borders. India still sticks to old school and is not comfortable with evolving IP regimes at regional levels, and is yet to get over the WTO IP agreement shock. 
On domestic front, India has some specific challenges which warrants a re-think on our readiness to get into complex Free Trade Agreements. 

Some of them are:
  • India doesn't appear to be in a position to take advantage of any Free Trade Agreement that it negotiates right now. The existing FTAs can be written off as useless due to their abysmal usage in bilateral trade. What is the assurance that a new FTA, negotiated on similar lines, will be useful now. The very reasons that make the current FTAs unusable will continue to operate with RCEP and others. 
  • India lacks the infrastructure required to cater to increasing trade. Most of the ports are handled inefficiently and few of them are extremely congested. The roads are not yet world class. The industrial clusters languish in apathy. The red-tape and bureaucratic hurdles make things difficult. The contract laws and enforcement is poor. In short, doing business is difficult in India. This, is not the ideal conditions with which we can engage in international trade. We need to build the basics first. Till then, the WTO deal is good enough. 
  • There is a feeling in trade community that we have opened up our market with every FTA we have signed, and have got little in return. Therefore, FTAs don't make sense unless we get an incremental and meaningful market (over MFN status from WTO) for our goods in return. That's the general feeling and the point is moot, but clearly we are not moving in a direction that caters to the need of our industries through these FTAs. Hence the feeling.  There is a need to develop a framework where the negotiating team involves industry and consumers, beyond seminars and touch-and-go interactions with commerce officials. The current touch and go interactions bring forth only the vested interests, with negative consequence of narrow protectionism. 
  • Our industry loves to stay infant. A 100 years old Tata rallies with a 50 year old Jindal and asks for anti-dumping on Chinese steel. We oblige. The industry loves tariff walls. We keep them. 
  • We have multiple market failures (monopolies/cartels, lack of pubic goods etc) and institutional weaknesses in our system. Our farm sector suffers from inefficient Govt. subsidy and procurement issues. Our policymakers still think of subsidies as the best way to address market failure. 
  • We lack good data on services. RBI, a central bank, is our data provider in this area. We are, in RCEP negotiations, leaning on something called 'mode 4' of services. Mode 4, for lay readers in simple terms, is sending our techies abroad to do coding kind of stuff. We have too many of them here. Our Wipros and TCSes have already reached wherever they could, even in China. We are asking for further ease of mode 4 movement. And we want easy visa with less fee.  We are trying to get more mode 4 access in return for reducing tariff. It would have made a good joke but for a serious nation like India. If this is the line of argument, I infer that we have no idea how to negotiate with people whose tariffs are already almost zero, while ours is sky high in comparison. We change the goal-posts, and we want everyone to be in our game. 
  • Finally, our import tariffs generate a revenue of around 15% of total Government revenue. Now, I don't think there is any rationale to reduce it at any FTA, given our industry's lack of capacity to capture further markets abroad. While we better our infra, better our technology, better our labour, better our abilities, it is best to sit tight and not let others eat away our domestic market. Let our incompetents survive till they become worthy. Killing them by subjecting them to China or Korea is criminal. US thinks the same way about their industries now. UK too is forced to think similar. We need to think on the same lines too. 
Given the above, there is a need to re-look at the way we negotiate. The politico-bureaucratic setup currently is not designed to maintain continuity. While the political masters involved in negotiations change with elections, the bureaucrats change with central deputation postings. There is no permanent body at commerce that acts as institutional memory. The is a lack of knowledge management. It is upto individual bright sparks, who choose to come on central deputation, either to escape a bad cadre or due to genuine interest, to carry the baton. This approach, while manageable in last century, is no longer workable. There needs to be a permanent set of people whose career is trade matters and trade negotiations. The commerce department under-utilises its captive cadre of Indian Trade Service. A relook is in order. 

Till we put our house in order, and get a clarity on trade matters, I believe going into RCEP is not a wise idea. There is hardly any incremental advantage that we would get. We may as well put it on hold or walk away. The cost might only be diplomatic. The trade cost seems almost nil in present circumstances. While the Govt. has put a number to revenue loss in case we agree to reduce tariffs (1.6% of GDP), it has failed to tell the public as to what would be the gain from this agreement in terms of numbers. We know how much we will lose, but we don't know what we would gain. That, according to me, is a poor start.

Apr 13, 2016

Rethinking barriers on steel imports into India

India has taken various measures to curb cheap steel imports into India during the last one and half years. They chiefly include:

  • Anti-dumping duties on some steel items
  • Safeguard duties on few, and,
  • Making Minimum Import Price (MIP) mandatory on some steel items

The intention behind the above is to protect domestic steel industry. To that extent, the measures are succeeding. The local steel industry led by leading capitalists of the country is surviving if not thriving. The above measures were the result of effective lobbying by the steel industry. The same has repeated across many countries, like USA, in the recent past. UK too is now feeling the heat with Tata Steel pulling out of steel sector there due to cheap Chinese imports.

Why is steel so important? The argument in general policy circles goes this way. One, steel sector is a strategic sector. Defence and infrastructure depend on it. Two, it generates big employment. Three, the sector has unionised labor. Government needs to appear to do something to help the ones that are running by not letting them close down. It is not unique to India, even UK is facing the same puzzle.

The above policy circle argument needs re-examination. A globally traded commodity like steel cannot be strategic in 21st century. That was so during world wars. Indian steel is especially not so, given the poor quality of most of the mills (we import most of high grade stuff). The employment argument needs rephrasing. Supporting one job in steel mill might be costing two in the downstream engineering sector that uses steel. Downstream engineering sector is losing competitiveness/export potential due to costly steel, and it has already started hurting.

China's steel dumplings - from Economic times
The policymaker is put in a tricky situation due to global scenario. China has excess capacity in manufacturing steel which will continue for some time, till production in China falls, or their local demand picks up. There is a glut in global market due to this. The trade defence measures such as anti-dumping, safeguards, minimum import price etc are the measures at hand. One may impose one or several of them. The cost is the downstream sector and consumers. No one eats steel. It goes into infra, engineering, and goods. The question is about balancing the interests. While the policymaking-bureaucrat might play with data and study the export/competitiveness loss in downstream sector and so on, the actual decision is made at political levels which may not be influenced by such inputs, and is rather influenced by the heft of the lobbies. That is so everywhere.

I feel that these times should be used to re-invent the steel sector. Rather than continuing the way it always did by hiding behind artificial barriers, the steel sector should look at reinventing business model. As TATA is selling out in UK, the steel sector there is thinking on those lines; splitting into smaller units specialising in specific high quality steels, using scrap as inputs and so on. The mammoth integrated steel plants in India produce soviet era steel at un-competitive price point.

Policymakers should see how steel sector can be supported through better infrastructure, cheaper and reliable electricity (thus obviating investment in captive power plants), cheaper inputs, incentives for high quality and specialized steel and such measures. And they should let the rotten parts of the steel sector to totter.

Jan 31, 2016

A case for trade invoicing in INR

Should it matter whether the international trade invoices are quoted in INR or USD?
A simple thinking says it shouldn't. When buying/selling a good or service we mentally convert the currencies in the head or a calculator and it doesn't matter much. Like an inch or millimetre, they seem to be just units with a floating (or fixed or pegged or whatever) conversion ratio. It appears that it is not so. It does matter, and with profound consequences.

Today, over 97% of India's exports are invoiced in freely convertible currencies (FCCs) mainly in USD. INR is not yet an FCC due to restrictions on movement and convertibility in capital account. The realisation of export proceeds in India need to be in FCCs as mandated by FEMA and the master circular on exports and imports. While para 2.52 of India's foreign trade policy allows export invoicing in INR, in addition to FCCs, the trade prefers quoting invoices and contracts in USD, Euro and other FCCs. It appears that it is a bad policy. A better policy might be to make it mandatory to quote all the invoices in INR.

There is an interesting working paper by Gita Gopinath hosted at NBER website. Some of the results discussed therein have profound consequence on the way we think about exchange rate effects on macroeconomics. And about how invoicing currency has a significant link with exchange rate pass-through, trade balance and imported inflation. Let me summarise some of the key takeaways, in applied sense. 

I had blogged earlier about how exchange rate has a lag effect of around a year and a half in India. A depreciation of INR today helps our exports with a lag of more than a year. It turns out that one of the reasons for this delayed pass-through is 'not' invoicing in INR. If we quote our trade in INR, the pass-through delay will reduce drastically. Empirical data, as quoted in the paper, supports this view. Therefore, if we want to take advantage of currency depreciation in boosting exports, a better way is to quote all our invoices in INR. A corrigendum of the pass-through effect is also that trade balance adjustments happen through exports in countries that quote in domestic currencies, and through imports in countries that quote in foreign currencies. Therefore, India would try to adjust it's trade imbalance through control of imports, whereas US would work through exports. That's an important point to ponder about.

Secondly, prices are sticky in their currencies of invoicing. This leads to a situation where INR depreciation leads to markup profits for exporters/windfall gains, and pain to importers (and vice-versa for appreciation). India being a net importer, it hurts as it imports inflation. Invoicing in INR won't do this. US is insulated from currency swing effects on domestic inflation as most of its trade is quoted in USD. Imported inflation stabilisation would become much easier if we decide to quote mandatorily in INR.

Now, if that's true, we have some further points to ponder about.

First, would it be sensible to force our trade to quote exclusively in INR, irrespective of currency of realisation? An amendment to FTP/FEMA might achieve this but a better way of going about it would be to internationalise our currency by making it fully convertible, and thus more acceptable as an invoicing currency. While the path to full convertibility is long, we might think of amending FTP/FEMA to make invoicing in INR mandatory for all goods and services. This, after careful consideration.

Secondly, we need to realise that while we quote in USD, a currency depreciation is not helping much, and the export boost has a significant lag of more than a year. Therefore, a competitive devaluation of our currency is not in good interest, given that it might import inflation. So, to that extent I stand corrected from an earlier post that recommended rupee devaluation.

PS: I have assumed hedging both ways or none, therefore, the points hold even with hedged currency exposure. 

Jan 9, 2016

Time for an RMS at DGFT?

DGFT is the body that deals with international trade policy making in India. Apart from making broad contour of policy, and issuing import export code; a mandatory document to start imports/exports in India, it also implements various tax nullification schemes (AA/DFIA), capital goods upgradation scheme (EPCG) and few schemes to offset infrastructural inefficiencies(MEIS/SEIS). It also runs a complaint resolution mechanism (chapter 8) in the area of international trade. DGFT implements various schemes through its field offices across the country. 

DGFT field offices are severely understaffed in the recent times. The retiring staff have not been replaced, under the plea that computerisation leads to better productivity. While the argument of computerisation leading to higher productivity is true in general; it is not automatically applicable if the underlying workflow is not changed. DGFT processes the file manually even today, with each file moving along with the notes like a normal, non-computerised, file. The workload has also increased in recent years with number of applications peaking with the recently expired quinquennial policy. 

Therefore, the following might be a proposal worth consideration/debate:


A risk management system (RMS) on the lines of popular RMSs seen in other departments such as customs/central excise might be envisaged. The idea is to use parameters such as track record of exporters, status of exporter, value of scrip, nature of product and so on, in order to arrive at a risk factor, which then would decide if the file can be processed without any physical verification at RA, and the scrip/authorisation/EODC issued without any scrutiny on self-declaration basis. It goes without saying that there must be a random post-facto verification. Those who fail RMS risk factor have to follow normal work flow which involves scrutiny or processing as done currently. 
RMS can be a software, which runs each time an application is received and arrives at a risk factor. If the number falls in green zone, an automatic approval ensues without any interference, else the file goes through normal route. 

This is elaborated with some imaginary RMS criteria for few work-processes below:

A status holder, who has closed more than 20 EPCG applications in past, may be allowed to close his EPCG cases on self-declaration basis. On submission of documents online/offline, an EODC is generated automatically without any delay. Similar criteria might be adopted in redemption of Advance Authorisation. The criteria might be fine-tuned, but the intent is to reward exporters who are regular, and who know the procedure well enough to have closed enough past cases. 
Fresh AAs/EPCGs: 
Similar criteria may be evolved, and the licenses issued same day online. 

Incentive Scrips: 

Similar to Drawback issue by customs. May issue online scrips based on self declaration for people who meet RMS criteria, and the rest may follow normal workflow till they start ticking RMS criteria.