Oct 1, 2017

Stampede dynamics - Preventing unnecessary deaths

It is sad to hear news of deaths due to stampedes. These could have been avoided. We had the major Hajj stampede in 2015 and now we have another stampede at Mumbai in a suburban railway station. Hindu temples seem to be designed for stampedes, with a complete wiki list associated to it now. The news of stampede results in common reaction of blaming the authorities for poorly designed entries/exits, narrow lanes/bridges, bad crowd behaviour, law and order problem, and sometimes the victims are blamed for panicking and creating stampede. While it is obvious that we need to evolve standard evacuation procedures in all crowded areas, and ensure that public spaces are redesigned to handle the peak load properly, it is easier said than done, especially when the areas involved are matter of faith, like temples.

Stampede deaths are avoidable
It is in this light that I feel that we should use mathematical methods to arrive at an indicator, which can be used to mandate a redesign of public areas to avoid stampedes. 

For a long time, I have felt that stampede as a phenomenon mimics fluid dynamics. I come from a background where my day job for years included working with fluids and modelling their dynamics in application. I avoided thinking in this direction to avoid being the man in the adage - for a man with a hammer, everything is a nail - till very recently. This article in wired partially reflects how I think about stampedes. 

Fluidically speaking, it is problem that boils down to compression within a rigid boundary, with defined inlets and exits. The fluid in this case are people themselves, with the property of being partially compressible upto a point till the air gap between people reduces, and then the fluid may be treated as incompressible. A gas dissolved incompressible fluid would be a good example. In stampedes, the deaths usually happen during the second stage, when the fluid is incompressible, that is, people are pressed against each other without any gap between them. Most deaths are due to chest compression and haemorrhage, and a few due to suffocation. Stampede therefore is a surge pressure problem in the given conditions. The pressure suddenly shoots up in the area of stampede as people press against each other to the extent that some get compressed, some fall down and are stamped upon, and some die due to lack of air. Basically the circle of death in a stampede region, given the nature of injury, has to be akin to very high pressures in fluids that develops suddenly due to a sudden negative change in volume that leads to shooting up of pressures. This is called a pressure surge or pressure spike, most likely accompanied with an additional transient or perpetuating oscillatory component arising out of the second order differential nature of the behaviour. You may imagine a response to impulse initiated due to the push of some people in the crowd leading to a surge, occurring due to, and leading to, more heaving back and forth, with pressures rising to very high levels at some places in the cramped crowd. 

The best solution to avoid stampede is to design spaces to accommodate the crowd. However, this suggestion is not practical, most stampedes happens at places designed many years ago for a population that was a fraction of today's. There is no point ruminating over lack of foresight or shortsightedness or whatever. For the purpose of this post, I shall concentrate on mitigating factors assuming surges would happen despite whatever. 

If stampede indeed is such a fluid dynamics problem, the practical curative solutions based on my personal experiences, given rigid boundaries and fluid properties that won't change, would be some of the following:

a) Creation of surge relief points - this would practically mean, anticipating and giving emergency exits at multiple locations at crowded areas that open automatically to pressure. They should open up to empty spaces. 
b) Creation of accumulators to avoid sudden surge pressures - this would entail creation of empty voids, spaces or rooms which may usually be empty or semi-filled, without doors, but which can accommodate people in large numbers in case of an emergency. 
c) Streamlining people's movements- through steps such as smoother curves and bends, smoother ramps over steps, avoiding sudden reduction in areas in the direction of flows.  
d) Creation of rupture areas/intentional failure zones - the areas that give in or break if crowd pushes against it. 
e) No sudden opening or closing of entries/exits/not allowing surge loads - when such a situation arises at places, for example the opening of temple doors for darshan, or arrival of simultaneous trains at the station, or ending of multiple movies at the same time in a multiplex, things need to be timed properly keeping in mind the stampede protocol. 

The above is just an indicative list. A competent group of engineering students should be able to design a simple model on stampede, based on their fluid dynamics knowledge, and arrive at various parameters and constants needed to arrive at the equations and solution for a given design of a structure or passage. I assume that arriving at the properties of the imagined fluid, that is properties such as compressibility of people in public spaces would be the tricky part. One may rely at empirical methods in such conditions, or go for simulated experiments. 
Once done, this model could be used to evaluate if a given public space is safe from stampede point of view or not. A rough estimate should not be very difficult to arrive for each structure we already have, very quickly, and plug such gaps. Probably Mumbai local trains and the platforms, followed by some of the crowded temples should be an ideal starting point. 

Sep 30, 2017

Musings about Niryat Bandhu - Export promotion through training

Govt of India started a program under Niryat Bandhu (Exporter's friend) scheme during 2013. It was an ambitious scheme and continues today. Hundreds of thousands have been trained across India under the scheme. 38 filed offices of DGFT, headed mostly by various Indian Trade Service officers are spearheading the efforts to help exporters through this scheme. However, the efficacy of the same, and the outcome has not been scientifically evaluated. 

I was posted at Bangalore at the time of launch of the scheme. My jurisdiction at that time covered the entire state of Karnataka. My then boss, an expert in trade himself, gave me a lot of freedom to implement the program in our jurisdiction. We launched out the program systematically. The program covered three training components. 

1. Training new entrants to international trade
2. Outreach programs with various industry clusters
3. Outreach programs with universities and colleges

Apart from the above three, at Bangalore, we took initiative to develop few video tutorials for training newcomers. The videos are hosted on youtube and the link is available on the main website of DGFT. A talented junior who had joined recently with me in Bangalore helped me develop these videos. The videos which were developed for less than Rs 350000 are crossing 350000 views as I write this. 

The first part, training new entrants was an eye opener. A newcomer faces unique challenges. While we trained hundreds of such first time exporters and importers, we learnt nuances of trade that no foreign trade institute could teach (Almost all trainers are graduates of Indian Institute of Foreign Trade). As we interacted with exporters from almost all sectors, it gave the trainers an overarching understanding of international trade. It also gave immense satisfaction when we were able to launch a few into real trade. As their first consignments sailed, we felt elated as if our own consignment has sailed. The journey from taking an Import Export Code to actually getting them to export was a real learning one. At the same time, it was felt that the module we were trying to cover for the newcomers was too elementary, unless we got into the handholding mode, which we were able to do only for few. Expanding the training modules, while certainly beneficial to exporters, would severely affect our day to day work at office of running various export promotion schemes. Handholding more than a few at a time was too taxing on us. Therefore, a balance needed to be struck. We decided to standardise the modules, and collaborate with various export promotion agencies, banks, customs department, Export insurance body (ECGC), Export inspection agency and so on. This helped us a lot in running the modules better as these agencies took up their respective parts of training very efficiently, and our module automatically expanded to cover all these aspects of trade more comprehensively. In terms of handholding, the trainers from other departments were handy and available. The module has more or less stabilised now and is doing good job. 

The second part, outreach with industry clusters was another unique experience. We started by targeting industry clusters where we could organise specific programs beneficial to these industries. For example, Channapatna in Karnataka has a thriving toys sector where wooden toys with GI mark are produced and exported. The artisans are usually small scale and most of them don't know much about exports. Karnataka government has given good encouragement to this sector by giving space and helping to build a toy park nearby. Export promotion council for Handicrafts (EPCH) has been helping some of these artisans effectively. We liaised with EPCH to conduct Niryat Bandhu program with the artisans. The big learning was that beyond general knowledge about exports that hardly helps them when they hear it like a story, they would benefit better through specific handholding at the time of difficulty to help them overcome the regulatory requirements and export. This is exactly what we did. We developed our relations with EPCH and became available to the artisans in times of need. We had few successful exports using export promotion schemes during my time. Similarly we conducted programs with Agri exports cluster, textile sector, engineering sector and so on. In most of the sectors, the key learning was that the intervention is needed in terms of handholding at the time of need, once the basic knowledge is imparted. Also when it comes to basic knowledge aobut trade, larger industries have dedicated teams that have requisite knowledge in international trade, but the medium and small industries sector need training. Therefore, during the later part we focused more on small and medium enterprises for training purposes. The idea was simple. Give them enough knowledge on a bigger scale, and when need arises, they would know where to dig deeper. This philosophy in training has keep us in good stead till now. 

The third part, outreach to students in universities and colleges went almost nowhere. Most of such programs, except for the ones where we were talking to students in entrepreneurial courses or MBAs, were flops. I still remember having an audience at a college where a student was sleeping in the auditorium. Even MBA students were more interested in regulatory aspects than wider picture. There was a fault in the way the training was administered to these students. I have corrected my presentation when I address students now. A bigger picture view that covers the evolution of international trade in India, with lots of interesting examples, and a better policy angle, gives a twist that encourages the students to engage. However, as Niryat Bandhu modules are not standardised, it depends on each officer in the jurisdiction whether she corrects or updates her course to suit the needs. 

I am an ardent supporter of Niryat Bandhu program. The program needs to be upgraded and standardised. Right now, as implemented in most parts of the country, it has become a non standardised mess. Officers impart whatever training they think is good. While most officers are good in themselves, and understand ground realities, it would be better if there is some standardisation when a program is launched at this scale. 
The program also needs to go online. While the videos developed by our team in Bangalore is a starter, it would be better if all modules are made online and uploaded. This way, the dependence on physical training could be minimised. I need not go into advantages of online mode for blog readers. 
Also, international experience has favoured such programs over generic fiscal incentives. I had elaborated about it in an earlier post (partly reproduced below)

It is in this light that a recent study conducted by the World Bank in Tunisia, titled "Are the benefits of export support durable" gathers importance. The study can be accessed here. The study is interesting because it tries to isolate the effect of export assistance given, under a program named FAMEX in Tunisia, to different sized firms over a period of time. FAMEX grants were used mostly to co-finance the cost of technical assistance and marketing services provided by local and foreign experts. Five types of activities were financed: (i) market prospection, (ii) promotion, (iii) product development, (iv) firm development, and (v) foreign subsidiary creation.

The study finds that relative to the control group (which was not given the FAMEX treatement), the experiment group showed statistically significant improvement in export performance. However, this advantage was lost over a period of four years and firms in the control group caught up. There was also an effect of the size of the firms in question. The medium sized firms retained better performance over period of time, over smaller and larger firms. The spillover effect (from treated firms to the control group firms) was shown to be non-existent. In the words of the paper:
...the paper considers also the longer-term impact.....beneficiaries initially see faster export growth and greater diversification across destination markets and products. However, three years after the intervention, the growth rates and the export levels of beneficiaries are not significantly different from those of non-beneficiary firms. Exports of beneficiaries do remain more diversified, but the diversification does not translate into lower volatility of exports. The authors also did not find evidence that the program produced spillover benefits for non-beneficiary firms. However, the results on the longer-term impact of export promotion must be interpreted cautiously because the later years of the sample period saw a collapse in world trade, which may not have affected all firms equally....

Jul 25, 2017

Is GST killing Make in India?

Is GST killing Make-in-India? 

Is GST making imports cheaper? Is it harming make-in-India initiative? 

While it is easy to dismiss such questions in the face of yay-we-rolled-out-GST euphoria, it still makes sense to analyse some challenges that GST has thrown up in terms of cheaper imports and greater competition to domestic industries. 

Cheaper imports for finished goods

Before GST, the major components of import duties were Basic Customs Duty (BCD) and Additional Duty of Customs (ADC) along with Special Additional Duty (SAD). The ADC and SAD together were bigger components that usually totalled around 20% of the value of goods for most of the items and not refundable to most extent. 
The ADC part was equal to central excise duty (usually 12 to 16% for most items) and SAD was equal to 4% of value of goods. For a merchant who imported finished goods and sold them locally, SAD was refundable upon production of sale documents while ADC was not refundable at all. The ADC part, and many a times SAD part (especially for those who sold cash/without invoice), was passed on to the consumer, thus making imports costlier. 
After GST, SAD and ADC have been subsumed under IGST. We have BCD and IGST imposed on goods at the border. IGST paid at the border is available for an importing merchant as input tax credit which he may use to pay downstream taxes. Therefore, to that extent IGST doesn't add to the cost of imports thus making them cheaper. 

In effect, GST has brought down the import duties across board by around 15 to 20% for most sectors. This is a huge and sudden decrease, the effect of which may show itself in coming months. This is why Jeep prices have fallen. 

FTA effect on GST imports

The second effect is with respect to countries with whom India has signed Free Trade Agreements making BCD zero or almost zero. Under GST, any import from such countries (Bangladesh, Sri Lanka) is as good as buying from any state in India. One just needs to pay IGST at the border and take credit against it. For proximate countries, the GST turns them into another Indian state for taxation purpose. This is a threat to sectors such as textiles, who are already facing heat from countries like Bangladesh. Add to it the fact that Bangladesh uses cheap Chinese fabric to make garments, we can expect a significant rise in cheap imports of finished garments. Different sectors may face similar threats from other countries. 

GST effect on domestic export industry

From the above, it may be surmised that those who make finished goods may find greater competition from cheaper imports. This would warrant a greater hand-holding for domestic sector, including those who export. However, GST has, in the name of tax compliance, blocked the working capital by doing away with various exemptions that were available earlier. IGST exemption for export sector has been removed. Merchants cannot avail the facility of procuring against Bond without IGST payment from manufacturers for export. Such moves tie up productive capital, further deteriorating competitiveness. FIEO estimates that such blocking of capital has an effect of 2% price increase (and commensurate decrease in compeitiveness) on export products across all sectors on an average. This comes at a wrong time and might hurt our exports. 

Is everything that bad with GST

No. The procedural simplifications envisaged under GST would do good in the long run, and before all of us are dead. Those who wished to be part of Global value chains in intermediate goods trade would now find that the zero rating of exports works the way it is supposed to be. With India signing Trade Facilitation Agreement at WTO, border procedures are bound to get simpler with time, and with the correct taxation system under GST, the competitiveness should rise. 

I see a J curve effect here with things improving as time passes. 

Jun 5, 2017

ITC HS harmonisation method for trade data analysis - a proposal

(I have used LaTeX in this post for math symbols. If you are using a mobile browser, you may consider requesting a desktop version of the page in order to view the table and formulae properly)

The International Trade Classification - Harmonised system (ITC HS) codes are used for classification purposes in international trade. All products traded internationally are represented though these codes. The codes extend upto 8 digits in India, first 6 of which are harmonised with the international system. Most of the countries are harmonised at 6 digits which implies that the product classification upto 6 digits is common. However, the next two digits are country specific and this sub classification or further bifurcation is a function of statistical and industry needs. Some countries have further two digits, taking the number of digits to 10 to help further statistical purposes. In India, it stops at 8 digits. First two digits in the classification are known as chapter number (01 to 99), the third and fourth digits make up the 'heading', the fifth and sixth digits are called 'sub headings'. The last two digits are called 'tariff headings'. A tariff heading is usually given a number ending with 00 in order to classify all 'other' products falling under the sub-heading after important ones are allotted various numbers starting with 11 and running upto theoretically 99. At times, this 'other' which ends with '00' grows big enough to warrant it's own tariff heading. I have seen tariff headings where the data under 'other' warrants a split to get granularity in data, but it has not been done. At other times, I have seen tariff headings that take up a huge bandwidth (a disproportionate share of the trade under the heading) and yet they have not been split to show further granularity. At times, it feels that the process could be automated. However, till now as I understand, the Govt. depends on various representations from industry and requests from statistical bodies for a split in the sub-headings. The requests are not always very scientific and arise out of ad-hoc needs. 

This I feel may be avoided by automating the function of splitting sub-headings of ITC HS. The proposal below suggests a method to decide if a particular tariff heading needs further bifurcation into lower levels, e.g. from 6 digits to 8 digits, or from 8 digit heading ending with 90 or 00, to further divisions and so on. 

The proposal would use the same technique used in calculating Herfindahl­ Hirschman index for market concentration in antitrust/competition law cases. The proposal doesn’t apply to cases where the new heading is needed due to environment/public interest and so on. Such headings can be considered on ad­hoc basis. The proposal utilizes the relative weight and not absolute value method. The absolute values in terms of trade in ‘X’ crore rupees might become cumbersome as the relative importance is missed out. e.g. a 20 crore exports under a particular heading under handicrafts is significant enough to have a separate heading whereas even 200 crore is negligible in the case of diamond exports. Hence a technique of harmonization that looks at relative importance with respect to parent heading might prove superior to a method of looking at absolute value. The core idea behind this proposal is to develop a system that can be programmed, thus obliviating the need of human intervention in drilling down the headings. The working is illustrated with an example below, in which a case of 6 digits HS codes at sub-heading level are being considered for further harmonization up to 8 digits.


Step 1

List down the 6 digit codes under consideration, with the total trade value of previous year and the corresponding share in their parent heading at 4 digit. Let’s take the heading 8413, under which the eight 6 digits subheadings are:

ITC HS CodeTrade ValueFractional Share in Parent 4 digits (8413)
841311A1$S1 = \frac{A1}{\sum A}$
841319A2$S2 = \frac{A2}{\sum A}$
841330A3$S3 = \frac{A3}{\sum A}$
841350A4$S4 = \frac{A4}{\sum A}$
841360A5$S5 = \frac{A5}{\sum A}$
841370A6$S6 = \frac{A6}{\sum A}$
841381A7$S7 = \frac{A7}{\sum A}$
841391A8$S8 = \frac{A8}{\sum A}$

Step 2 

$Index number =  S1^2 + S2^2 + S3^2 + … + S8^2 = \sum S^2 $

Step 3

If Index number is greater than 0.25, there is a case for further bifurcation of that subheading at 6 digit which has the highest share in trade into 8 digits. 

Step 4 

The process is repeated till all high value 6 digits are bifurcated into 8 digits. The highest possible value for the $Index Number$ is 1 (only one heading with 100% share). $Index Number$ below 0.01 indicates a highly distributed trade. $Index Number$ below 0.15 indicates an unconcentrated trade. $Index Number$ between 0.15 to 0.25 indicates moderate concentration. $Index Number$ above 0.25 indicates high concentration of trade requiring further granularity. The concentration begins somewhere at the point where the $Index Number$ reaches 0.15 and crosses the threshold once the number reaches 0.25, at which point it should be further drilled down into lower headings. 

A worked example with some numbers is given below: 

Let’s take a case where there are 16 sub­headings at 6 digit level. Now, we will consider two cases in which the six largest 6 digit headings (out of those 16) cover 90% of the trade value: 

Case 1: Six sub-headings share 15% of trade each, 5 sub-heading share 2% each, and rest 10 sub-headings share 1% each. 
Case 2: One sub-heading covers 80% while five other sub-heading cover 2% each, and the rest 10 subheadings share a minor 1% each like Case 1. 

By inspection (and common sense) we can say that the first case would be fine at 6 digits without further harmonisation, whereas the second case is apt for further bifurcation/harmonisation. 

The Index Number for these two situations makes it strikingly clear: 

Case 1: 
$Index Number = (0.15^2+0.15^2+0.15^2+0.15^2+0.15^2+0.15^2) + (10 \times 0.01^2) = 0.136 $

Case 2: 
$Index Number = 0.80^2 + (5 \times 0.02^2) + (10 \times 0.01^2) = 0.643 $

The squaring of the shares this way in the index number calculation penalises bigger shares more than the smaller ones, giving additional weight to headings with larger size. The threshold value 0.25 is based on popular usage of this threshold in antitrust/competition law cases of market monopoly. In a way, any higher share of one among many is a kind of monopoly, hence calling of use of such an index number. The above steps can be easily programmed in simple tools like excel. Any request that comes for addition of a sub­heading at 8 digit can be evaluated using this method and if deemed fit, may be taken up for harmonisation. 

Mar 29, 2017

GST effect on Foreign Trade Policy: Effect on various exemption and incentive schemes - Part 2

I had elaborated my thoughts on the topic in the Part 1 of the series. This is a continuation and part 2 of the series. As was outlined in part 1, it appears that the duty exemption schemes, specifically the popular advance authorisation scheme may get a short shrift under GST and may be made ineffective. As proposed, GST would allow only refunds on the duties suffered, unless a course correction is done before the launch and now.

I have discussed some details in the video post here:

I have also summarised my thoughts on other schemes, namely the Export promotion capital goods scheme and the export incentive schemes in the same video. I guess I got too lazy to type at some point and decided to video log it over a coffee.

To sum it up, it appears that GST has not kept the best interests of exporting community in mind at the time of rollout. However, one must also agree that GST is being rolled out with a sense of urgency and there will be kinks and knots and pockets of dissatisfaction which would get ironed out over a period of time. Probably there would be revision or rethink about the exemption schemes too. The last word is not yet out. I would most likely come up with a final part of the series then. Till then fingers crossed.

Jan 6, 2017

Undervalued currency of China and learnings for India

China maintains an undervalued currency which is one of the key reasons for trade surplus of China with most trading partners. It has also led to huge forex build up over the years. While China's undervalued currency has faced criticism from trading partners, the public policy choice of this tool for development of China is not well appreciated. The use of currency undervaluation as a tool to gain export advantage has decreased over time for China due to multiple factors and I doubt it the current level of Chinese currency is as undervalued as it used to be. Yet, as a policy lesson it is illuminating to analyse the effects.
China has used the currency as a policy tool to empower itself; it is just incidental that this policy has done damage to trading partners. The undervalued currency of China acts as a direct subsidy for exports. A 20% undervaluation of currency is equivalent to 20% direct subsidy support in terms of export price. Given that China has usually maintained an undervaluation of a quarter to a third of its price, Chinese exports have enjoyed this subsidy. In addition, an undervalued currency acts as a tax on imports into the country, leading to further favourable change in terms of trade. 

China has used currency as an evolutionary policy response against stifling conditions imposed upon it from WTO and other bilateral/multilateral arrangements. If one looks at China's growth decades, it can be seen that the late 70s and early 80s growth right up until mid 90s rode on the active state support to the manufacturing industries. Heavy structural change towards industrialisation was led by the state, leading to rapid increase in productivity in the manufacturing sector. During this period, China maintained heavy import restrictions, provided subsidies to industries, and incentivised investments into the manufacturing sector in the country. The strategy worked and led to creation of world beating manufacturing sector in China. The scale of industrialisation met and surpassed advanced industrialised nations within two decades. None of the above steps that China took to support its domestic industry were compatible with WTO, and therefore China didn't come onboard at the time of WTOs inception in 1995. 

While China prepared for joining WTO during late 90s, (it ultimately joined WTO in 2001) it realised that the earlier strategy of direct subsidy and import restrictions would not work. Therefore it resorted to an undervalued currency strategy which was not countervailable under existing WTO rules. The decade from late 90s onwards till very recently, China maintained an undervalued currency, thus helping its manufacturing sector weather the gradual withdrawal of direct subsidies and state support that fell foul with WTO provisions. This strategy ensured that Chinese industries continued with the state cushion while appearing to follow all WTO rules. Even today, currency policy cannot be countervailed under WTO. It was the protest by trading partners, and problem of burgeoning forex reserves that made China do a partial rethink. 

In contrast, Indian manufacturing industries were not well prepared to withstand global onslaught once the gates were opened under WTO, especially from competitors like China. Wherever Indian government provided even semi decent support, Indian manufacturing industries showed good results. For example, in auto and auto ancillaries industries Indian government had made provision for incentivising localisation, mandated joint venture requirements for direct investments in the sector, and had levied heavy import duties on fully assembled imports during the 90s. While these provisions fell foul with WTO rules later on and had to be removed, these policy steps during formative years helped our auto and engineering sector thrive. Similarly, in pharma sector, Indian patent laws allowed the industries to operate and copy generics and derivatives despite TRIPS, and today India's pharma sector has done exceedingly well. On the other hand, electronic hardware manufacturing sector in India was opened up to the world from initial days under Information Technology Agreement of WTO, and no meaningful support was provided during the early days and today we are struggling in electronics manufacturing. 

Lest I be misunderstood, the argument is not about infant industry protection or supporting protectionist policies of the yore or even to recommend currency devaluation as a potent tool for India. It is about the need for policy makers to carefully analyse the options available as policy tools whenever an industry is being subject to inorganic changes such as globalisation, treaties, change in import policies, state support introduction or withdrawal etc. To cite an example from recent times, the imposing of anti dumping duties on imported steel in order to protect the steel industry in India has bled the engineering and auto sector by raising input costs on them. It appears that policymakers did not do a good cost-benefit analysis, and therefore helping one sector is harming another. If steel sector needed to be protected, one needs to build in adequate protection for engineering sector which needs imported steel. 

Chinese policymakers were indeed smart to introduce currency devaluation while they withdrew from direct subsidies. It was a policy option they had in hand and they exercised it very well to their advantage. That's a lesson for policymakers worldwide.