Friday, February 3, 2012

Johnny Johnny! Yes Papa!, Telling Lies? No Papa!

The Economist magazine has published a report in its latest issue about India’s surging exports. According to this report, India’s exports as a percentage of its GDP are converging to Chinese Exports ratio. This ratio is not to be confused with China’s exports in dollar terms , which are at least five times higher. Economist article, gives two reasons for this upwards shift. Firstly, India no longer only sells simple things such as jewels. A decade ago engineering and petrochemicals were 14% of goods exports; now they are as much as 42%. Secondly, the share of goods exported to western hemisphere (read America and Europe ) has dropped from a half of total exports only to a third. India is now exporting more complex products to a wider and more buoyant group of trade partners and Small firms are participating in the export drive in a major way.
In spite of this bright and rosy picture presented by Economist, nagging doubts are resurfacing, that this is just an official hogwash or bogus official bumbling. Kotak Institutional Equities, a leading brokerage and equity research firm, has recently published an report with a detailed analysis of export figures from India and Foreign institutional investor dollar inflows into the country. This report claims that there are wide gaps between the official data and the figures reported by companies and foreign funds.
The report rightly raises concerns over the possibility of illicit funds entering the country through these routes. This is not something new to any person familiar with the ways of the wealthy in India. Over invoicing of exports to slip black money back into the country is a very common practice. The data available if often fudged and seldom reliable. The quality of goods manufactured in India is often shoddy and unsuitable for competitive export markets. It is easier to believe that the report by Kotak Institutional Equities would be nearer to the truth.
The report says that the official export growth data for the financial year 2010-11 is much higher than the figures reported by the country’s top-500 listed companies for the same period in their annual reports. The study reports that the official figures of engineering goods exports show a rise of 79 per cent during FY 2010-11, yet the group of top engineering companies included in the Bombay Stock Exchange-500 group have reported in their balance sheets, an increase of only 11 per cent in their exports for the same year.
About the foreign institutional investments in the country, this report points out the huge gaps between figures provided by the Government and the figures reported by stock exchange listed Foreign investment institutions and exchange traded funds. The report also refers to the estimates of a global fund flow database, EPFR Global. The Government official data shows inflows of US$ 22 Billion whereas data collected by Kotak report shows inflows of only US$ 4.5 Billion. This is really a huge gap or a difference and it is obvious that someone would have to do lot of explaining. Kotak report admits that its data is not all inclusive and does not take into account dollar inflows from sovereign and private equity funds. Even we account for that and all other limitations on data collection, the gap between these two figures is so huge that something appears to be seriously misreported somewhere.
Economist report surprisingly supports the Government data. It refers to research done by JPMorgan Chase and says that they have tallied the official figures against India’s trade partners’ numbers and data on port traffic and appear to be largely true.
As suggested by the Kotak report, a better clarity is a must for the Government data as to minimize risks to the economy from illicit foreign funds. There are possibilities that exports are now largely driven by small er entities, which would make data from listed entities suspect . Economist report suggests this theory strongly and says that the conspiracy theories are flimsy.
Perhaps the most worrying aspect of this huge gap between two reports is the possibility of huge amount of black money, previously stashed abroad, making a comeback due to fears of future stringent action by the Government, pressurized by the anti corruption movement of the people of the country going stronger and stronger each day. Kotak report highlights this possibility and calls this money as “ round tripped money of Indian companies and foreign accounts of Indians”
Even before the controversy about the accuracy of data is settled, Government has gone ahead and has offered a Rs 170 million incentive package to exporters to ensure continuation of export growth in the unpredictable global scenario. It may well turn out to be just an incentive for the round tripped money, brought back into India. Just imagine the inflationary pressures this kind of money would create on common people if the exports on paper are flimsy or not backed by real transfer of goods.
Right now our little Johnny keeps saying that he has eaten no sugar and is not telling any lies. I hope that is true and sincerely wish that Papa finds the truth as soon as possible.
15 October 2011

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