Dec 23, 2018

Ease of Doing Business and States export performance

Do business reforms lead to better export performance? Are there any other measure(s) that correlate with export performance by Indian states? We can measure merchandise export performance of states against Ease of Doing Business and also against the Logistics Ease Across Different States (LEADS) index for some preliminary understanding of the matter in Indian context.

India has a Business Reforms score that measures the individual states in terms of ease of doing business, on similar lines as that of World Bank's (WB) Ease of Doing Business (EoDB). This is to help identify the reforms required to make doing business easier. The score card - let's call it EoDB for the sake of the simplicity - is maintained for all states and union territories of India.

LEADS index is relatively new. It has been created on the lines of World Bank's logistics performance index and covers various states and union territories of India. The 2018 report prepared by Deloitte for ministry of commerce can be found here.

The below table (mostly self explanatory) of various states with their merchandise export intensity with respect to their GDPs is compared with LEADS and EoDB scores shows that there exists a stronger correlation with respect to LEADS and merchandise exports (correlation coeff. of around 0.65) and lesser with regard to EoDB (correlation coeff. of around 0.4).


Even visually, it can be seen that LEADS scores seem to better correlate with export performance over EoDB score. This may be primarily due to the inherent methodology differences. LEADS covers an important determinant of export performance - the ease of logistics.

One more figure to ponder from the LEADS report:

image of logistics leads eodb states india export performance
A better LEADS performance indicates better exports and better GDP - not necessarily causation but good correlation






Dec 15, 2018

November numbers for foreign trade - some points

The November 2018 numbers for India's foreign trade are here. The summary for April-Nov 2018 is as shown in the figure below:

image for India foreign trade statistics
Trade stats of India - Summary
At this rate, we would end up with an annual deficit of around 192 Billion USD, a significant jump from a deficit of around 162 Billion USD during last financial year.

The below are the numbers for last financial years imports listed in descending order of value of imports (excel online may take time to load).


The first item in the list, the mineral fuels and oils, is a necessary need as India doesn't produce any oil. Out of the imported crude coming under this chapter, we refine and export around 38 Billion USD refined petroleum products. Thus the net deficit is around 94 Billion USD. This is the fuel oil bill for India every year.

The second item in the list, the pearls precious stones and metal, mainly constitute of imports of diamonds and gold. India is the largest diamond polisher, and one of the biggest gold importer for domestic consumption. Under this chapter, India exports out around 42 Billion USD, bringing the net imports to around 32 Billion USD.

The third item in the list is worrisome. The import bill is around 48 Billion USD, and growing each year, and we don't have any significant exports in this chapter. The main imports under this chapter pertains to mobile phones and other consumer electronic equipments which contributes to roughly 25 Billion USD. The entire import is almost a deficit, making this chapter the second biggest net import item for India.
image of Mobile phone imports into India 21 Billion US Dollars
Split of major imports under Chapter 85 - Mobile phones contribute around 21 Billion USD

The fourth item in the list belongs to the capital goods, engineering equipment, and machinery where we have significant imports at around 38 Billion USD and exports at around 18 Billion USD. So the deficit is around 20 Billion USD.

Of the above, the urgent and important area for attention is the third item - the electronics. Despite efforts and incentive, this area is taking time to catch up. The efforts till now consisted of four noticeable steps:

- Incentives to invest in electronics through schemes such as M-SIPS
- Tariff barrier for completely assembled electronics imports
- Efforts to simplify policies for electronics sector
- General efforts towards ease of doing business

One wonder what more should be done, after missing out on the scaling up at the right time. A solution could be to think about the new technologies that would emerge in next 20 years and start investing early. The policy measures to support infant electric cars industry is bang on.

Dec 11, 2018

Dhaka Vs Ranchi - a post GST scenario analysis of apparel imports

Under the existing system of trade and indirect taxation prevailing in textile and garment sector, does it makes more sense for a Bangalore stockist of apparels to import from Dhaka in Bangladesh over buying from Ranchi? Here's the self explanatory calculation.

Assumptions: Bangladesh usually sources fabric from China while an Indian supplier sources fabric from an Indian supplier based in Gujarat/other states. I shall assume that the price at the factory gate of fabric manufacturer for both Chinese and Indian fabric is same - usually Chinese fabric is cheaper. The transportation cost from China to Bangladesh is same as that from Gujarat/other states to Ranchi - usually Chinese transport cost would be smaller. I shall also assume, for sake of simplicity that labor cost in Bangladesh is same as that in Ranchi, while a ballpark analysis tells that Bangla labor is cheaper by 40% over Indian labor.

(Excel online may take some time to load the table below - I shall be thankful and glad to correct any errors if pointed out)



From the above, it appears that Dhaka has a clear advantage over Ranchi despite adverse assumptions towards Dhaka.

Before GST, the IGST component paid at border was not refunded to the importer. That barrier was significant.

Did all this add up in the end? Did the imports really rise for apparels after introduction of GST? The below graph for pre and post GST quarters of import under ITC-HS 61 and 62 (apparels) from Bangladesh into India is self explanatory. The red tick is the point where GST was introduced.

image of apparel imports from Bangladesh into india
Apparel imports (ITC-HS chapters 61 + 62) from Bangladesh into India - Before and After GST


image of post GST rise in  imports after GST

Looks like Dhaka is indeed making sense over Ranchi and all other apparel cities of India.

Edit 1: Thanks Moin for pointing out the error in calculation. Rectified now.