Data Grapple

Commerce Secretary Rahul Khullar discussed October trade figures with journalists on Tuesday (November 8, 2011). The numbers were not at all encouraging – exports grew by a mere 12.4% YoY (to $19.9 billion), but imports were higher (at $39.5 billion), leaving a trade deficit of $19.6 billion, the worst in many, many years. Different newspapers have reported Mr Khullar’s briefing differently. While The Economic Times reported that imports had increased by 36.7% (read here), both newspaper Mint and wire agency Bloomberg Businessweek reported that the YoY imports growth rate for October was 21.7% (read here and here). But, soon thereafter, both Mint and Bloomberg disagreed on how bad it was – Mint said it was the worst trade deficit in any month in the past four years, but Bloomberg Businessweek contended that this was the biggest gap since April 1994. Even The Financial Times weighed in (read here)

But, we digress. The press briefing raises two important issues.

1. At the beginning of every month, the Ministry for Commerce and Industry releases official trade figures. For instance, on November 1, it released trade data for September through an official press release. Then, exactly a week later, on November 8, came the provisional October numbers via Mr Khullar’s briefing. But, this data seems to be missing from the ministry website. The question that arises now is: how are we to treat this data? The press release available on the PIB website says: “Dr Khullar informed that these figures are provisional and are likely to change.”

This is a monthly affair. While there is no doubt that timely information is always helpful and provides an early trend indicator, this data should be available on the ministry’s website. There should also be some indications about how the final figures vary from the provisional numbers.

2. The second, and more important, point is this: why have exports dipped in October? The pat answer being dished out is also a seasonal favourite: the crisis in the Euro-zone and the slow growth in USA. But then, this crisis has been continuing in both the continents for a while now and yet exports were growing by 80-120% in the preceding six months.

There have been various reports in the past trying to explain the sudden spurt in exports and some even predicted that exports growth would taper off in October. One of the reasons was the expected demise of the Deemed Export Passbook (DEPB) scheme, which was expiring on September 31. There was some speculation that exporters were front-loading a large part of their exports contracted for later in the year to try and extract maximum benefit from the dying DEPB scheme. The other speculation was that many Indians were bringing back their cash stashed abroad in tax havens, through over-invoicing of exports, before the tax sleuths discovered this hidden cache. The Economic Times carried a story (read here) about how exports to Bahamas had shot up from $22 million three years ago to over $2 billion this year.

However, surprisingly, nobody seems to be asking why was there such an unprecedented spurt in exports when the rest of the global markets were in a funk? One lengthy interview of Mr Khullar by CNBC-TV (read it here) seems to ignore the issue completely. Especially, since principal adviser to Planning Commission and former Chief Statistician Pranab Sen recently fretted about how the buoyant export numbers of April-August did not seem to jive with the torpid industrial production data for those months. It is logical that if there is a pick-up in exports, some of that will definitely reflect in the industrial production data.

When exports were growing at counter-intuitive rates, an explanation was indeed forwarded: that India had successfully diversified both the basket of the goods exported (by including more value-added products) and by diversifying the markets away from the developed economies of USA and Europe in favour of South America and Africa. How come that doesn’t hold good now? How has that changed so soon? Can we have some time series data on the volume and value of goods exported to South American and African countries, please?

A veil of mist continues to shroud, and bedevil, official economic data in India.

Lokpal Versus Lokpal

Parliament is reconvening on November 22 for its winter session. This is no ordinary session. MPs will not only be under public scrutiny but wiill be under tremendous pressure to ensure the passage of Jan Lokpal Bill. Otherwise, the threat of another protest by fast looms large. And, this is no quotidian protest: it promises to galvanise millions of people, Enough reason to give the government a migraine, especially since six states go to assembly polls next year.

A diminutive crusader from the Maharashtra outbacks has sparked off a morality play of an unprecedented scale, unseen and unheard for a long, long time in the history of independent India. The movement has been able to catch the fancy of a wide swathe of India’s population, from the rural peasant to the urban indigent, the village landlord to the city-bred disaffected youth. In simple words, the appeal of this campaign cuts across income, gender and caste divides in India, which again is an exceptional phenomenon. The gale force of this operation has taken the country by storm and has caught the entrenched political class completely by surprise. The champion’s ostensible non-political heritage is his biggest advantage and source of attraction.

But, without getting into the dragnet debate about whether his methods are right or the government’s response to his agitation has been ham-handed (including the naked display of its dirty tricks arsenal ), it is instructive to note that a single word has been capable of rallying around large sections of the Indian population – which, going by recent history, seemed to have forgotten the art of mass protests. In fact, even the student population, which has abjured from politics on and off the campus for an uncomfortably long period, has been inspired by that one word to take to the streets. That one word is “corruption” and its resonance in modern India can be gauged from the groundswell of protests it has generated.

Corruption has become the byword for all transactions in the country. Corruption is also the defining foundation for all business relationships in the economy. It pervades all negotiations and acts as a barrier against all legitimate entitlements. It starts from the very small and goes all the way to the very, very large (such as the Rs 1,39,652-crore loss to the government from the 2G spectrum allotment, as estimated by the Comptroller and Auditor General of India). Corruption touches everybody in the country and the government’s lack of resolve to either uproot it or even check its cancerous spread has helped Anna Hazare touch a common chord across the numerous divides in this country. But, in all the debates and the accompanying sloganeering, there seems to be a marked absence of discussion on how to extirpate corruption from our daily lives – where does it begin and how to get to its roots.

This column tries to approximate some of the broad reasons responsible for giving rise to corruption and also tries to suggest some broad-based solutions.

Campaign Finance: This is the fount of all corruption in the country. This involves all political parties -- yes, sadly, no political party seems to be immune from its lure -- and has become the default pattern for financing elections. Large sums of money is raised by political parties from corporates (irrespective of size -- big, small and tiny), usually in cash, to finance their campaigns. This money is usually used for paying salaries to cadre, meeting the costs of printing posters and other sundry election material, putting gas into numerous vehicles pressed into service during elections, paying for hooch or other inducements (including cash) that need to be supplied to voters, and sometimes even sponsoring arms and ammunition purchases to keep the trigger-happy cadre satisfied. Even in the period between polls, money is often raised to swing politicians or to buy their loyalty. The cash raised from the corporates is like an IOU which gets squared off when the politician assumes some ministerial office and returns the favour by allocating natural resources either out of turn or at cheap rates.

Corporate Culture: The corporates usually hedge their bets by financing all parties. Although corporates are now allowed to legitimately account for donations to political parties, the sums disclosed cumulatively won’t probably finance the elections of even one constituency. The corporates also find the arrangement rather convenient since the generation of cash through operations suits not only the political parties but also the dominant shareholder, who uses the route to generate substantial sums of unaccounted cash for himself.

In fact, the manufacturing sector has been a dominant creator of unaccounted cash in the economy. Many companies sell part of their produce in the market for cash – this produce doesn’t even enter into the formal data collection of the economy. This method not only allows the company (or the dominant shareholder) to generate cash revenues which cannot be taxed, but also helps the shareholder to use different transmission channels in the economy to pay off obligations and add to personal wealth. The only way this can be curbed is through use of smart technology in the levy of excise duty which not only traces every turn of the machine but also monitors the consumption of raw materials and spare parts by the company.

Here's an interesting example: economists have been complaining that the industrial production data (which indicates that the economy is slowing down) does not jive with the export data, which is displying mysterious growth impulses. If export is indeed growing by 30-40% on an average every month, over the same period in the previous year, then some of that buoyancy should have reflected in the industrial production numbers. But it does not. So, what gives? There is speculation that India Inc is bringing back illegal cash stashed overseas by showing sham export orders. This helps not only in laundering the unaccounted cash (sent overseas by hawala, or by understating export prices or overstating the import bill) but also avoid the gimlet eye of the income tax slueths who are increasingly interested in offshore accounts of India Inc.

Control Caper: The government has been reluctant to give up its control over large areas of natural resources, especially the right to allocate at whim. It has also been slow in appointing independent regulators for a large number of sectors (take, for example, petroleum, or even transport). This control over resources is the source of power and the birthplace of all shady deals. This column advocates open auctions for all resources and the immediate appointment of independent regulators in all sectors.

Passion for Power: Getting a ministerial portfolio sometimes requires huge investment – in first winning elections and then contributing substantially to the party coffers. Once, the ministerial portfolio is in hand, this initial investment has to be recovered. This is achieved by distributing the fish and loaves of office – prime postings, lucrative deals, agency commission. One of the visible effects of this distorted structure can be seen in the petty corruption that engages most of the youth on the street – the policeman, the government clerk who will not oblige until his appetite for inducements is satiated, etc. One suggestion is to implement the numerous police reforms suggested by various committees. Ministers should not have the powers to appoint either policemen or judges.

Come November 22, it will be clear whether the political class is serious about the Lokpal Bill, or whether they have some aces up their sleeves that will be used to finesse Team Anna Hazare. Another alternative: both sides choose to walk the middle path. In which case, apart from Anna Hazare, there is another winner: Aruna Roy and the National Advisory Council.