Author: Najib Shah

Yet another crisis for Indian exporters

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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There is a crisis again looming for Indian exporters. And this time is not just the shortage of containers.

The global supply chains are under stress. There is a shortage of most essential products- from intermediates to chemicals to coal to semi-conductors leading to what ‘The Economist‘in its recent lead article called ‘the shortage economy’. The crisis has now shifted to large container carrying vessels. There are large-scale traffic jams at very many of the major ports in the globe with vessels not getting berthing space.

More than 80 percent of world trade volume is transported by ships; 70 percent of such trade is in containers. The global fleet that carries seaborne trade involves dry bulk ships, container ships and oil tankers. These vessels operate either on fixed schedules like in the case of container ships. Or on flexible timing (‘ocean taxis’) like in the case of bulk cargo. Dry bulk ships account for half the seaborne trade and transport ore, coal, grains.

Also Read: COVID-19: Government removes export curbs on all diagnostic kits, reagents

Insightful research has been done in this regard by Brancaccio, G, Kalouptsidi, M. and Papageorgiou, T. (Geography, Transportation, and Endogenous Trade Costs. Econometrica, 88: 657-691). Though in the context of bulk cargo it is applicable equally to other categories of trade. The study shows that world trade is greatly imbalanced – countries are either net importers or net exporters. There is thus an inherent imbalance in the availability of vessels and containers.

The research of Brancaccio et all goes on to show that consequently at any point of time nearly 42 percent of vessels are travelling without cargo-dramatically adding to costs. They point out ‘Shipping lines demand more to travel towards a destination with low exports, to compensate for the difficulty of finding a new cargo originating from that destination. All else equal, the prospect of having a return trip without cargo or lesser cargo leads to higher prices.

The higher transport costs that exporters face in shipping goods to net importing countries tend to reduce the comparative advantages of exporters in those countries. Vice versa, relatively cheaper transport provides the exporters in net importing countries with some cost advantage.

Also Read: Exports rise by 22.63% to $33.79 billion in Sept; trade deficit up $22.59 billion

We need to juxtapose this with the fact that China, the ‘factory of the world’ has been witnessing a slowdown. A slow-down in Chinese imports affects their exports and also has a huge domino effect. This coupled along with the piling up of containers in Chinese ports triggered the container crisis last year.

Its impact continues to be felt now. US ports are experiencing severe congestion. This again is a direct result of the trade imbalance. The increasing emphasis on outsourcing imports leading to imports far exceeding exports.

Incidentally and not surprisingly, while trade has suffered, the shipping lines have been doing very well. As a Reuters report points out, the seven largest publicly traded ocean carriers — including companies such as Maersk, COSCO and Hapag-Lloyd — reported more than $23 billion in profits in the first half of this year, compared with just $1 billion in the same period last year.

All this is severely impacting Indian exports at a time when they have been doing well. The merchandise export in September 2021 was $33.34 billion an increase of over 21 percent over the corresponding figures in September last year. This is the peak festive season market in the USA and Europe. Indian exporters have to factor in a dramatic increase in shipping charges which have upset all calculations.

Also Read: China reports export jump of 28% in Sept, imports up nearly 18%, while surplus with US rose to $42 billion

The Container Availability Index (CAx) is used to monitor inbound and outbound volumes of containers for every port globally. In the context of India, CAx indicates that the inbound containers are at an all-time high since 2019 by about 4X at the Chennai port (and similarly other ports in India). What this means is an all-time high in the imbalance of inbound and outbound containers at Indian ports. Costs have shot up.

The sea freight from Nhava Sheva, India’s largest major port to the US in October 2020 for a TEU (twenty equivalent unit) container was $2,200 and $3,000 for a larger container, the forty-equivalent unit (FEU). Today it is US $10,000 and $13,000 respectively-an increase of 300 + percent. Similarly, the freight for a TEU to Europe was $700 and for an FEU $1200; today it is $7,000 and $10,000, an increase of more than 700 percent. The situation is the same across all major ports and across all shipping lines.

The government has recently announced a Rs 56,027 crore package for the export sector-this is over and above the Rs 12,454 crore announced under the RoDTEP scheme and Rs 6,946 crore announced under the RoSCTL. This is substantial but will not cover the dramatic and sudden increase in costs of transportation. Ideally, the government should step in to announce a freight support scheme. Export of empties should be stopped for the time being. Steps also should be taken to review the position of all detained, seized or abandoned containers and take steps to empty them. It is estimated that there are more than 15,000 containers strewn across the various ports of India. The Federation of Indian Exporters (FIEO) has sought urgent governmental intervention. The need for manufacturing containers in India has again been reinforced.

This crisis is expected to last till mid-2022. If India is to achieve the ambitious export target of $400 billion the Government will need to step in fast to provide a helping hand to the exporters.

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The September GST revenue- Cause for optimism?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The GST revenue numbers for September 2021 at Rs 1.17 lakh crore is impressive. Higher than the revenue of August 2021 which stood at Rs 1.12 lakh crore it shows a positive trend. The average monthly gross for the second quarter has been a healthy Rs. 1.15 lakh crore as against the average monthly collection of Rs.1.10 lakh crore in the first quarter. The press report issued by the finance ministry attributes the increase in GST collection to economic growth and stricter enforcement. It hopes that the positive trend in the revenues will continue and the second half of the year will post higher revenues.

This optimism would appear to be well-founded. We are entering into the festive season-and traditionally revenues have done well in this period.  Further, it may be noted that the gross direct taxes collections for the financial year 2021-22 at Rs.6.45 lakh crore has seen a growth of 47 percent over the previous year. The advance tax collections for the first and second quarter of FY 2021-22 stood at Rs.2.53 lakh crore-a growth of 56 percent over the same period of the proceeding financial year. This is significant and reflective of the increasing close coordination between the GST, CBIC and CBDT portals. It will be safe to say that the budgeted tax revenue for FY 22 of Rs.14.5 lakh crore will be met.

The increase in revenue is indeed a reflection of the economy doing well. The performance of the 8 core sectors has been strong in August ‘21. The core sector grew by 11.6 percent during the month as compared with 9.6 percent in the previous month and degrowth of 6.9 percent in the corresponding month of the previous year. Thus coal, natural gas, refinery products, steel, cement, electricity, grew when compared with the previous year’s 5-month period.

The ambitious PLI schemes which should come into play this fiscal will also contribute in giving a further impetus to the economy. The Scheme with its focus on furthering the pace of investment in key industries accompanied with incentives linked to performance should have a positive impact.

Exports, another key indicator of growth, have continued to do well. India’s merchandise imports in September 2021 were $ 56.38 billion, an increase of 84.75 percent over September 2020. The trade deficit in September 2021 at $ 22.94 billion has also increased. India’s current account balance showed a surplus of Rs 6.5 billion (0.9% of the GDP). Foreign exchange reserves increased by $ 31.9 billion in the first quarter of 2021-22 as compared to $ 19.8 billion in the first quarter of the previous year.

September also witnessed the submission of the Parliamentary Committee Report to augment infrastructure facilities to boost exports. The Committee has made some key recommendations-the important policy measure being the need for a National Logistics Policy. If implemented this will help exporters significantly. Today exporters end up paying more for transporting the goods from the place of manufacture to the port than what they do for shipping the goods to the foreign market.

Thus, there are a lot of positives. Having said that there is a need to temper the optimism with some factors which can impede growth.

Despite the revenue doing well there is a constant danger of the fiscal deficit increasing beyond the 6.8 percent target. The government had announced a number of fiscal measures as relief for the pandemic hit sectors -all of which have increased expenditure. The overall revenue deficit thus can increase to an estimated 7.65 percent to 7.72 percent as per the study conducted by CARE Ratings.

The recently announced telecom package will also impact non-tax revenue. This is based on the safe assumption that all telecom companies will opt for the moratorium on AGR dues.

The ambitious disinvestment target of Rs.1.75 lakh crore will be touch and go. While there has been news of a successful Air India bid, a lot will depend on the LIC IPO. The National Monetisation Policy is another big-ticket item whose outcome will be critical for government finances. An estimated Rs. 88,000 crore is to be achieved in this fiscal for infrastructure investment.

Then of course there are the known unknowns.

The global impact of a possible shut down or worse a default by USA, if the Congress does not pass the appropriation bills and raises the debt ceiling, will be enormous.

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View: Helping businesses do better

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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‘What gets measured gets done’, so begins the foreword of the World Bank’s Doing Business 2019 Report. What this also implies is that the measuring has to be done correctly. But as the sordid story coming out tells us, the Bank’s Doing Business Reports have been deeply compromised.

The audit report of William Cutler Pickering Hale and Dorr LLP, the law firm engaged by the International Bank for Reconstruction and Development, makes damning reading. The firm was engaged to review the ‘internal circumstances at the bank that contributed to the data irregularities identified in the Doing Business 2018 and Doing Business 2020 reports’. This is polite bureaucratese for interference in the rating process so as to influence outcomes.

The law firm’s report suggests that the rankings in respect of China (Doing Business 2018) and Saudi Arabia, the United Arab Emirates and Azerbaijan (Doing Business 2020) were affected. It suggests the involvement of the Chief Executive and the President and that the rankings given were not backed by data but were the result of extraneous considerations.

Yet another expert panel headed by the former Columbian Finance Minister Mauricio Cardenas has in its report highlighted the lack of ‘methodological integrity’ of the Doing Business report. Cardenas’ caustic comment that the World Bank ‘has been advocating country reforms for better governance, transparency and practices. Now it has to use the prescription for its own reform’ sums up the unfortunate situation. The World Bank has reacted to the furore by discontinuing the very Report.

The Doing Business Report methodology was dodgy. It focused on 11 specific parameters. Starting a business, labour market regulation, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, trading across borders, paying taxes, enforcing contracts and resolving insolvency. A one size fits all countries approach was adopted.

In respect of India what this meant was sending a questionnaire to a small, select target audience in Mumbai and Delhi. It was always a moot point whether the target numbers were indeed representative-or for that matter if Mumbai and Delhi were representative of India. The entire findings were based on the very subjective responses received. The Report was getting undue importance and becoming ‘weaponized’.

Having said that it forced countries to look at business processes, laws and regulations. In India we do have examples of reforms carried out which can be attributed to the Ease of Doing Business (EoDB ) requirements. For example, the single window interface for facilitating trade (SWIFT) in Customs which links all regulatory agencies on a common platform is an initiative as a result of the World Bank trading across borders parameter. Similarly, the landmark Insolvency & Bankruptcy Code with its emphasis on time bound corporate insolvency resolution also owes something to the insolvency resolving parameter. It is not that these reforms would not have been done-it is just that there was a greater urgency.

There being no external pressure on carrying out reforms to ease doing business should not mean that we should stop carrying out reforms. The NITI Aayog for instance ranks all states with reference to progress in implementation and meeting the 17 Sustainable Development Goals (SDG). The last report published in March 2021 is an excellent indicator of where a State stands in the implementation of key development sectors- education, health, sanitation, employment, infrastructure, energy and environment.

The RBI publishes a Handbook of Statistics of Indian States which ranks States on various parameters. The latest Handbook published on October 2020 at Table 127 ranks States on the basis of EoDB. Andhra Pradesh ranks 1, Uttar Pradesh 2, Telangana 4 and Madhya Pradesh 4. The usual suspects, Gujarat, Maharashtra, Karnataka, Tamil Nadu figure at double digit ranks. The very brief foreword does not spell out the parameters or methodology adopted while arriving at the rankings of States. Without casting any aspersion on the integrity of these rankings, suffice it to say it has not got much traction.

The Department of Promotion of Industry and Internal Trade (DPIIT) has similarly carried out an exercise to rank states on the basis of EoDB. The DPIIT has devised a Business Reform Action Plan (BRAC), an 80-point list of reforms. The reforms are grouped into areas like land administration, labour regulation, obtaining electricity & water permits. The rankings again are done on the basis of responses from respondents. This analysis also places Andhra Pradesh at 1, Uttar Pradesh at 2- the more industrialized States here too figure at double digit rankings. But as a CARE Ratings analysis points out these have not translated into new investments for the top-ranked States. So, we do have a credibility issue with the methodology adopted.

Which brings us to the need for an acceptable methodology which evokes greater acceptance in a potential investor. NITI Aayog is perhaps best suited to act as a neutral umpire. The methodology has to be rigorous. The respondents should be selected carefully and from an extensive list. All responses should be subject to verification at the ground level. The process should be transparent. The mistakes of the World Bank approach should be avoided-the spread of the survey obviously should be more than just two cities. The linking of release of Central grant in aid to reforms should be strictly adhered to. The focus of the survey should also be to identify impediments and suggest remedial measures.

The ranking exercise is a means to the end of improving the business ecosystem. And the ultimate aim after all is to use these outcomes to make India a better place to invest and do business in.

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The 45th GST Council meeting: A disappointing denouement

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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So, the long-awaited 45th GST Council physical meeting is over. And it has been a bit of a disappointment. Yes, there has been an impressive list of recommendations.

Some of the recommendations being:

• COVID- 19 relief measures have been extended till December 31, 2021. There is a reduction of GST rate to 5 percent on some more Covid-19 treatment drugs till December 31. There have been changes in rates on a range of goods. Retro fitment kits for vehicles used by the disabled have been reduced to 5 percent, ores and concentrates of a range of metals have been increased from 5 percent to 18 percent, cartons, boxes, packings container of papers from 12 percent to 18 percent, all kinds of pens to 18 percent. IGST on import of specified medicines for personal use for muscular atrophy have been reduced to 0 percent.

• Brick kilns have been brought under a special composition scheme with a threshold limit of Rs 20 lakh. Correction of inverted duty structure in footwear and textile discussed and recommended in an earlier GST council meeting, but deferred, will now be implemented from 1.1.22. This will mean a rate of 12 percent on a range of items falling under footwear and textiles.

• Similarly, on services there have been several recommendations. The more significant among them being the move to bring within the ambit of GST, E commerce operators providing restaurant services with effect from 1.1.22. The restaurant industry is very fragmented-from a 5-star hotel, to high end restaurants, to ordinary eateries, all of which use the e-commerce platform for home deliveries. There needs to be clarity as to how E commerce will impact this range of food service providers.

• Clarifications have been issued in relation to the GST rate on goods and on services. This being primarily to address the often-contradictory decisions being taken by the various state advance ruling authorities. Thus, for instance scented sweet supari and flavored and coated ilaichi would attract GST at 18 percent; ice cream parlors selling already manufactured ice cream would attract GST at the rate of 18 percent.

• There have been recommendations on law and procedure too. For instance, Aadhaar authentication has been made mandatory for being eligible for filing refund claim. GoM’s are to be set up to address issues of inverted duty, review exemptions, increase the use of technology and create an institutional mechanism for sharing intelligence.

One wonders if this exhalated constitutional body, one of the most powerful in the country with the mandate of carrying forward the most ambitious tax reform in the country, should even be concerning itself with such an array of mundane matters. Of whether they should trust the fitment committee consisting of officers from the States and the Centre to go into the details like whether tamarind seeds should attract 5 percent or not. And whether this august body of all Finance Minsters should be concerning itself with larger policy issues.

The elephant in the room, bringing in of petroleum products, finds mention in the press release post the council meeting. To the very limited extent of saying that in terms of the directions of the Hon’ble High Court of Kerala, the issue of whether petroleum products should be brought within the ambit of GST was placed for consideration. That ‘after deliberations, the Council was of the view that it is not appropriate to do so at this stage.’ This was expected, but still disappointing. The Council certainly did adhere to the letter of the directions of the Court but most certainly not the spirit.

The bringing in of petroleum products is so very important for the very integrity of GST. Its absence breaks the chain; it adds to costs. The sheer ubiquitousness of the usage of petroleum products means its impact is across the entire range of goods and services. Which is why it generates so much central excise revenue for the Centre and the VAT revenue for the States.

Revenue considerations should and can never be a reason for keeping products out of the GST chain.

Bringing at least one of the petroleum products would have been a powerful signal. Bringing in an item like ATF which would have impacted just a few States where fueling/refueling takes place, would have been ideal. The revenue implications are minimal. This unfortunately was not to be.
And the other 800-pound gorilla in the room, the issue of whether compensation will continue beyond 2022 does not even find mention in the press release. The press note does mention of the Council having been informed that compensation cess will have to be imposed till April 2026 to pay for the back-to-back to borrowings and debt servicing made to meet the compensation gap in 2020-21 and 2021-22.

The Centre’s constitutional commitment to meet shortfall at the absurdly high assumed rate of growth of 14 percent is no doubt only till June 2022. However, given the anxiety levels of the States, and the fact that it would appear that the very future of GST hinges on this issue, it needs to be addressed and resolved urgently.

The GST Council should address large policy issues-of why dispute resolution mechanism is still an issue. Of why the Tribunals have still not started functioning despite the Supreme Court repeatedly expressing concern. Of why there is still no Apex Advance Ruling body leading to the spectacle of State’s dishing out Rulings which contradict each other. Of when the very important issue of convergence of rates will be initiated. Of how to improve compliance. Of the road map for GST going forward. Hopefully, this will start happening soon.

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GST Council 45th meeting: Here are key issues that may be addressed

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The 45th GST Council meeting is scheduled to be held on September 17. Without reading too much into the rationale for selecting Lucknow as the venue, suffice it to say this will be a significant meeting. This is the first physical meeting after a long time. And the long shadow of compensation to States hangs heavily.

The Constitution (101st) Amendment Act 2016 provides for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. The deadline of June 2022 is fast approaching. The States will be anxious to get clarity if their demand for extending the compensation timeline is being considered. Given the unprecedented economic impact of the pandemic and the extensive loss of revenues, both to Centre and States, this will be a difficult call. However, the importance of taking a decision on this issue cannot be overemphasized – it would appear for many States that compensation is the glue which is holding GST together.

Closely linked with this issue is the rate at which compensation should be calculated. A compound growth rate of 14 percent from the base figure of 2015-16, has only led to fiscal lethargy on the part of the States. As the incisive analysis by Manish Gupta and Indira Rajaraman (Economic & Political Weekly, November 28 2020, Vol LV no.47) shows there was no economic justification when this rate was agreed to-there is lesser justification now.

The next issue of course is the gap and delay in giving the compensation. As per the written reply to a Lok Sabha question on July 19 2021, the MoS Finance had informed that GST compensation due for the period April 2020-March 2021 was 81,179 crore and Rs 55,345 crore, for the period April-May 2021. Compensation is due to all the States except Arunachal Pradesh, Manipur, Mizoram and Nagaland.

The amounts are particularly substantial for some states-Maharashtra is due Rs. 23,133 crore, Tamil Nadu Rs. 9729 crore, Karnataka Rs. 12,702 crore, Uttar Pradesh Rs.11157 crore, for the 2 years. The Centre would hopefully release some amounts before the Council meeting. This would help calm ruffled feathers and facilitate meaningful discussions.

The issue of bringing in some petroleum products into the GST chain needs to be brought to the table. There can never be a good time to have this discussion given the huge revenue it generates for both Centre and the States. But a beginning with at least ATF can be made-the revenue impact will be minimal and the process would have started.

A review of the reduction in rates given on various products in the light of COVID on the recommendations of the 43rd and 44th GST Council meetings needs to be taken. They should be withdrawn if the situation has improved-a similar ongoing exercise needs to be done in respect of all previous exemptions. Any break in the flow of credit which an exemption causes should be discouraged.

The Council needs to finalize when it would like the National Bench and the Regional Benches of the GST Tribunal to start functioning. The statute has created this important institution-but the posts have yet to be filled. The Supreme Court has frowned on the failure to fill up the vacancies in the Tribunal. This is unfortunate-Tribunals have been created for a purpose, to provide a faster and cheaper process of resolving litigation and relieving the already burdened High Court.

The Council also needs to deliberate on the need to create an apex GST advance ruling authority. The spectacle of each State giving a different ruling on the same issue flies in the face of one nation, one law. This is an issue which needs early resolution.

Several State Finance Ministers have raised the issue of a bureaucratic implementation committee working independent of the Council. The fact that while there is such a committee, it does not function independent of the Council and merely ensures implementation of the decisions taken by the Council, should be emphatically clarified. What should be ensured is adequate representation from the States in the committee.

The Council should also look closely at the GST revenue performance. The IIP data for July 2021 has seen a dip in industrial production to 11.5 percent as against 13.6 percent in the previous month. The growth in very many of the sectors when compared to June 2020, has been primarily because of the low base effect. So, while the August 2021 GST revenue at Rs.1.12 crore was good and the coming festive season should see a revival in demand especially for consumer goods, there is little room for complacency. The emphasis on enforcement should continue and technology used for a more in-depth analysis of trends and gaps. If compliance can be improved, the need for compensation would reduce.

The endeavor of both the Centre and the States should be to ensure that meeting of the Council takes place in an amicable and constructive atmosphere- in short in a spirit of cooperative federalism.

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IMF and the crisis in Afghanistan

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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William Dalrymple in his book, ‘The Return of the King’ mentions the prescient comment of Rev. G. R. Gleig in his memoir, written shortly after his return from the First Anglo-Afghan war. The army chaplain wrote ‘a war begun for no wise purpose, carried on with a strange mixture of rashness and timidity, brought to a close after suffering and disaster, without much glory attached either to the government which directed or the great body of troops which waged it. Not one benefit, political or military has been acquired with this war.  Our eventual evacuation of the country resembled the retreat of an army defeated.’ This was written in 1843. Nothing has changed. The US army retreat from Afghanistan in 2021 leaving the country in the hands of the battle-scarred Taliban, eerily resembles the earlier retreat of the British-and the Soviets who left after 20 years of trying to subjugate the locals.

Afghanistan today is a country ravaged -by war and disturbances, by corruption and inefficacy, by apathy and poverty. With a population just under 34 million, 54 percent of whom live under the national poverty line, ranked among the countries with the lowest gross domestic product by capita at $580.82, they desperately need economic aid.

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The world today is, on the contrary, choking even what is due to Afghanistan. Typically, the International Monetary Fund (IMF) established in 1944 helps countries tide over economic crises by offering loans and technical assistance. The IMF is funded by a quota system where each country contributes depending on its size of the economy. The IMF had in 1969 also created special drawing rights (SDR) a type of international reserve asset to supplement official reserves. The US with a 17.4 percent share and being the largest contributor has the largest percentage of voting rights in the IMF. What this means is that they have a huge influence on the functioning of the IMF.

This has manifested now with the IMF under pressure from the Biden administration, announcing that they would block Afghanistan from accessing emergency reserves. The justification for this being that the Taliban government in Afghanistan has not been recognized. The country was to receive about $455 million in SDR’s as part of the recently approved proposal of IMF to release $650 billion into the pandemic hit global economy. They will not get it as of now. Further the US Treasury Department has frozen $9.4 billion of reserves held by DAB, the Afghan central bank in in the New York Federal reserve and US based financial institutions. The consequences of this being a huge financial and humanitarian crisis in Afghanistan.

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But then the IMF has not always covered itself in glory. As the incisive paper by OXFAM ‘Adding Fuel to Fire-How IMF Demands for Austerity Will Drive up Inequality Worldwide’ shows, historically the IMF linking grant of funds to conditionalities have not always been in the best interests of the countries. The IMF demands wage cuts, cut in government spending, austerity -the consequent burden and impact being felt more by the vulnerable and paradoxically increasing inequality. Since Afghanistan is not receiving any money from the IMF, these have not kicked in as of now.

But what the financial crisis will mean is that the Taliban will necessarily turn to drugs to fund their activities. It should not be forgotten that Afghanistan produces nearly 90 percent of the world’s illicit opium from where heroin is distilled. As per UNODC, nearly 224,000 ha of land is under opium cultivation. In 2020 the UN has estimated that nearly 6300 tonnes of opium were cultivated- with a farm gate value of $350 million which when it reaches the Western markets becomes worth many folds more. It is estimated that opium trade is worth between 6-11 percent of Afghanistan’s GDP. Most or all of these were for feeding the drug habits of the Western markets, from US to Russia to Italy to UK. While the Taliban did curb opium cultivation in their previous stint in power in the 1990’s since ‘addiction is not permitted in Islam ‘, it is unlikely to do so now. The Taliban spokesman recently did make a very brave statement that ‘Afghanistan will not be a country for cultivation of opium anymore’ -however the financial stress and chaos the country is facing will force Taliban to resort to even more unchecked cultivation of opium. And the country itself will become fertile ground for the disgruntled, drug addicted youth, to fall easy prey to the influence of the Taliban.

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Western countries all of whom have not been able to curb the demand in their countries for drugs, will get large supplies of illicitly cultivated opium and heroin. Drug trafficking apart from hurting societies, triggers a whole host of other criminal activities and worse, finances terrorism. Afghanistan has also discovered that ephedra plant which is a major source for methamphetamine grows there, providing yet another conduit for illicit fund generation.

The US President in his address to the nation after the withdrawal of US presence in Afghanistan did mention that the US must learn from its mistakes by setting clear goals when it goes to war and not become involved in nation building. This is true. The abrupt withdrawal and the subsequent choking of funds will definitely hurt Afghanistan and the Taliban -but will hurt the ordinary citizens of that beautiful country even more. They deserve better. A solution needs to be found to ensure that politics does not override humanitarian considerations.

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Free Trade Agreements yet again

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Free Trade Agreements (FTA) are back in the news. After the RCEP episode, they had gone into cold storage. First, came the announcement that the India-EU talks which had stalled in 2013 would be resumed. Then came the announcements in the last few weeks that FTA’s with other countries are in various stages of discussion and a possible early harvest too is in the offing. August has seen a lot of focus on trade and exports -and a confidence that the ambitious $400 billion export target for 2021 -22 is doable. It would appear this exuberance is riding on the country’s July foreign trade performance when merchandise and service sector exports exhibited a positive growth of 36.19 percent over the same period last year and a positive growth of 23.24 percent over July 2019. India had also registered its highest-ever annual FDI Inflow of $$81.72 billion (provisional figure) during the last financial year 2020-21.

The Prime Minister in his address in early August to the Heads of Missions abroad and stakeholders of the trade and commerce spoke at length about the role of exports. He highlighted the fact that exports constitute only about 20 percent of GDP which given the country’s size and potential was far too less. This was followed by three back-to-back interactions of the Union Commerce & Industry Minister with trade associations- with the CII, the Export Promotions Councils and Industry associations. The primary focus in all the meetings was highlighting the policy measures in place to meet the export targets, with FTA’s being mentioned as an important medium of achieving them. The minister spoke of revamping FTA’s highlighted progress being made in FTA’s with UK, EU, Australia, Canada, UAE, Israel and GCC countries and that early harvest agreements with UK and Australia can be expected.

These are welcome developments; however, for FTA’s to indeed succeed to the extent that we want them to, we need to get our act together. It is essential that we study our 16 existing FTA’s- how have they panned out? How have we benefited? Has any cost-benefit analysis been done? What is the balance of trade with these countries? We have the study of NITI Aayog in the public domain- (A Note on Free Trade Agreements and their Costs) which points out that India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world. Only about 22 percent of exports are to the FTA partner countries. On the contrary, imports through the FTA route have increased; nearly 30-35 percent of all imports are from FTA partners with a corresponding cost in terms of revenue impact being in the region of about Rs 65,000 crore for 2019-20. An RBI paper on FTA’s has also pointed out “the increase in exports could not keep pace with the spurt in imports.” What then are our learnings from these FTA’s?

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A major failing in all our FTAs was that there was little recognition that we need to take our trade and industry into confidence and made them partners in the journey. Trade associations also have failed the FTA process by not speaking for the entire industry or speaking only what the government wanted to hear-not articulating the challenges exporters faced. Fortunately, all this is changing.

We need to be clear why we wish to have an FTA with a particular country. The list of countries we have preferential agreements with currently are baffling. China with whom we have a trade deficit in excess of $55 billion has access at a preferential rate for more than 2,000 product lines as part of the Asia Pacific Trade Agreement (APTA).

We need to be aware of the present pattern of exports to the target country, the impediments which exporters are facing and then analyze if an FTA will help. We need to clearly identify sectors and understand from the exporters their concerns. Rates of duty in the countries presently under consideration will not be an issue- the Non-Tariff Barriers (NTB) will, however, be very challenging. We need to educate our exporters and prepare them to meet the NTB challenges.

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FTA’s are a two-way street. Given our high rates of duty and protection which our domestic industry enjoys, we will be giving much more in terms of duty reduction. We need to be clear if our domestic sector is in a position to meet duty-free/reduced duty competition. Have we prepared our domestic sector accordingly? Which are the sectors we would like to ring-fence? The service sectors we wish to focus on? Similarly, the country we are engaging with -what are the service sectors in India they are focusing on? Is our domestic industry suitable prepared?

FTA’s are much more than merchandise and services -what are the investment opportunities in the country we are engaging with? Is anybody from the domestic sector in a position/interested in investment in that country? Which are the sectors we are prepared to open up for foreign investment?

Every FTA has provisions for causing verification regarding the certification of origin, to confirm if value addition, an essential ingredient for extending benefit, has indeed happened. We would need to look at our experience of such verifications and fix the loopholes. An early harvest has been spoken of as the way forward. Early harvest is a precursor to an FTA, whereby tariff barriers are reduced in a small number of goods between partners. Our early harvest experience has not been good.

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And most important how well are our negotiators trained to handle these complex negotiations? Experience is vital -are we prepared to keep the same negotiators till the completion of the process? Can we prepare a team of experts? Are we prepared to empower our negotiators to take decisions if required? Most countries have the same set of negotiators for the entire period of discussions.

Our newfound enthusiasm with FTA’s has to be juxtaposed with the constant concern we have of consequent unbridled imports. We had made changes in the Customs Law in the last budget to check them; the FM had declared that “undue claims of FTA benefits have posed threat to the domestic industry. Such imports require stringent checks.” We would need to balance these contradictions.

Trade takes place because of comparative advantage- it should be the endeavour of the government to create such a comparative advantage by adopting a dynamic trade policy. The last word in the matter is the Prime Ministers. He had emphasized four factors crucial for increasing exports- increasing qualitatively competitive manufacturing within the country, improving logistics, the need for government to “walk shoulder to shoulder with the exporters” and finding an international market for Indian products. These are the areas where a lot of work needs to be done before we can indeed achieve our targets- $400 billion by 2021-22- and $2 trillion by 2030.

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Restitution of our antiques

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The recent announcement by The National Gallery of Australia that it is returning 14 works of art to the Indian government is welcome news. These include works connected to art dealer Subhash Kapoor, presently interned in Chennai awaiting trial on charges of running a smuggling racket; the US authorities have also sought his extradition to face similar charges there. This is the fourth time the NGA has returned to India illegally exported works purchased from Kapoor.

A good number of antiquities have been retrieved in recent times – in reply to a recent parliament question, it has been mentioned that the Archaeological Survey of India (ASI) has received as many as 36 antiquities from foreign countries over the last five years. All the antiques recovered having been given voluntarily by the museums and related authorities of three countries.

Which brings us to the larger question-have all the artefacts stolen from India been returned? The answer is an unequivocal no. The large-scale looting of antiquities in India has been fair game for a long time. Britain with its long colonial history is by far the worst offender. The celebrated British Museum makes ‘a visitor from a post-colonised country, very aware how his or her past has brutally been ripped away and appended to British history ‘. The Museum has a gallery on exhibits from India. This is apart from the other London museums which display relics of India including the reputed ‘Kohinoor’ and ‘Tipu’s tiger’, taken by East India Company officials after the siege of Seringapatam in 1799.

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All colonial rulers-Netherlands, France, Italy have initiated the process of returning artifacts taken from their colonies. In January 2020, the Netherlands returned 1500 artefacts to Indonesia. The blue and gold Canon of Kandy, seized in 1765 by soldiers of the Dutch East Company and displayed in the Prince of Orange’s cabinet of rareties is in the process of being returned to Sri Lanka. The French senate voted unanimously to returning 27 colonial-era artifacts to Benin and Senegal. Germany has agreed to return to Nigeria priceless artefacts that were stolen during the colonisation of Africa. In 2005, Italy returned the 1700-year-old Obelisk of Axum to Ethiopia from where it had been removed in 1937 by Benito Mussolini’s troops. In 2018, Norway agreed to hand back items taken from Chile by explorer Thor Heyerdahl.

Britain remains unfazed. A British Museum spokeswoman confirmed that it even allows a “stolen goods tour”, run by an external guide. Founded in 1753, the British Museum in its mission statement, proudly states that “the Museum’s aim is to hold a collection representative of world cultures and to ensure that the collection is housed in safety, conserved, curated, researched and exhibited.” During his visit to India in 2013, when asked about restitution of the Koh-i-Noor diamond, then British Prime Minister David Cameron, had stated he did not support “returnism” since this would empty British museums.

What then is the international law of restitution, the process of returning cultural property to its country or people of origin? The 1954 Hague Convention on the Protection of Cultural Property, defined cultural property as property “of great importance to the cultural heritage of every people” and sought to raise awareness on the issue. There are subsequently two prominent conventions regarding repatriation and ownership: the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property and the 1995 UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects.

The UNESCO Convention applies only to cultural goods illicitly acquired three months after a State has become a party to the treaty- the Convention provides a framework for goods illicitly traded after 1970. It provides no legal recourse for countries seeking the return of long-lost, long-disputed cultural goods. Consequently, while United Kingdom is a signatory to the UNESCO Convention, the British Museum is under no binding obligation to repatriate its artifacts-all taken before 1970.

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The UNIDROIT Convention was enacted to supplement the UNESCO Convention, to provide legal consequences on those who violated its pact. The UNIDROIT Convention states that “the possessor of a cultural object which has been stolen shall return it.” Britain is not a signatory to this convention-in fact India also is not. Only 22 countries have signed to this Convention thus far.

So, while we could not preserve our artifacts when under British rule how are we faring now? Not too well unfortunately. India has The Antiquities and Art Treasures Act, 1972 (“Act”) read with The Antiquities and Art Treasures Rules, 1973 (“Rules”) which falls within the purview of ASI. The Act was brought into force in order to regulate the export trade in antiquities and art treasures, and to provide for the prevention of smuggling of, and fraudulent dealings in, antiquities, to provide for the compulsory acquisition of antiquities and art treasures for preservation in public places .’Antiquity’ has been defined under the Act as to include inter alia a wide range of objects from any coin, sculpture, painting, any article, object of historical interest which has been in existence for not less than one hundred years; and any manuscript, record or other document which is of scientific, historical, literary or aesthetic value and which has been in existence for not less than seventy years. The Act has not been particularly effective in stopping violations.

UNESCO has estimated that India had lost some 50,000 artefacts until 1989, although experts suggest the number to be much higher. More than 1,200 ancient idols from temples in Tamil Nadu were said to have been stolen between 1992 and 2017, according to an audit by the Hindu Religious and Charitable Endowments Department in 2018. Vijay Kumar, author of The Idol Thief, estimates that at least 1,000 pieces of antiquities are stolen from Indian temples every year. Several cases of attempted smuggling of antiques by misdeclaration have been detected by Indian agencies. With museums the world over becoming increasingly concerned over provenance of the antique before buying it, smuggled antiques invariably go to private collections which makes detection that much more difficult.

The last Performance Audit of Preservation and Conservation of Monuments and Antiquities (report no. 18 of 2013) carried out by the CAG has made a scathing indictment. The Report highlights the fact that the ASI had not conducted a comprehensive survey or review to identify monuments which were of national importance nor had they a reliable database of the exact number of protected monuments under its jurisdiction. During joint physical inspections many were not traceable. The Report states that the ASI did not have a comprehensive policy guideline for the management of Antiquities owned by it; and significantly, as the custodian of antiquities, did not even maintain a centralised database of the total number of antiquities in its possession.

What then is the way forward? We should continue to engage with countries which have our treasures. We need to strengthen the management of our heritage for which we need to know our treasures. We need to build a robust database of existing and stolen antiques and artefacts. We need to invest a lot more in our museums. It is important to increase public engagement and awareness for the protection of India’s cultural heritage. It should not be forgotten that the Directive Principles of the Constitution at Article 49 casts an obligation on the state to protect monuments, places, and objects of artistic and historic significance. Heritage it is which gives us a clue to the past, pride in our present and hope for the future.

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India-EU trade and investment agreements – The way forward

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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There is a sense of déjà vu in the air. Of times not too far back, in 2019, when there were passionate debates about the pros and cons of free trade agreements in the context of the ongoing Regional Comprehensive Economic Partnership (RCEP) talks. Of whether India should or should not. Till finally and dramatically, India on the occasion of the signing ceremony of the mega-free trade agreement stepped back.

The trigger now is the recently concluded India-EU Leaders meeting when amongst other things the leaders “welcomed the decision to resume negotiations for balanced and comprehensive free trade and investment agreements.”

There is a commitment to achieve the early conclusion of both the agreements together. And a belief that this “will enable the two sides to realize the full potential of the economic partnership.” The focus of this article is on the proposed free trade agreement.

EU is an important trading partner of India. More than 11 percent of India’s trade is with the EU — 14 percent of India’s exports go to the EU.

A whole range of products is exported from India. Textile articles, engineering goods, pharmaceuticals, ceramics, granite slabs and marble, footwear, machinery parts, rice, tea and coffee being the more important exported goods. The belief is that a free trade agreement will increase trade furthermore specifically exports.

Free Trade agreements involve both reductions in tariffs and easing non-tariff barriers (NTB). All countries resort to NTBs, as a means of ensuring the goods meet the regulatory requirements of that country. And also as a means of controlling trade.

Free trade agreements when entered between developed economies and developing economies generally work to the advantage of the former. India’s FTA’s with Sri Lanka and SAARC are a case in point. And the converse is true, as in India’s FTA with ASEAN where the trade deficit is in excess of $22 billion.

The only detailed study in the public domain about the efficacy of India’s free trade agreements (A Note on Free Trade Agreements and their Costs) by NITI Aayog has pointed out that India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world.

Only about 22 percent of exports are to the FTA partner countries. So, while undoubtedly exports are essential and necessary, FTAs have not entirely served that purpose.

On the contrary, imports through the FTA route have increased. Nearly 30-35 percent of all imports are from FTA partners with a corresponding cost in terms of the estimated revenue impact being Rs.65,000 crore for 2019-20.

This, apart from the damage that imports at preferential rates of duty had caused to the domestic industry. The Government had also appointed experts to study separately the impact of Free Trade Agreements on goods and services, these reports are not in the public domain.

We need to keep this background in mind while we proceed to engage in negotiations for our 17^th Free Trade Agreement. The negotiations for the India -EU trade and investment agreement had commenced in 2007. The last round of discussions was held in 2013. Obviously the ‘gaps in the level of ambition of India and EU’ stalled progress.

Tariff barriers are not a barrier in exporting to the EU; we would have to reduce our tariffs a lot more. The margin of preference (the difference between the most-favoured-nation rate of duty (the import duty rate which is applied to all countries) and the preferential rate of duty), which EU imports into India would enjoy would be much more.

This brings us to the key issue: How does India capitalise on a free trade agreement? Or to put it differently, how do we make our exports competitive?

The high cost of production makes exports uncompetitive. It is essential that we focus on improving our domestic manufacturing. With easier credit, improved logistics, better infrastructure, emphasis on quality and creating a competitive environment, domestic manufacturing will improve.

Exports will follow. But it is essential that exporters are supported. The Remission scheme (RoDTEP) announced in 2020 to obviate unreimbursed costs to exporters is yet to see the light of the day.

India’s exporters will need to adapt to the demands of the sophisticated EU market. EU has in the form of specifying standards in effect created multiple NTB’s.

As the report ‘2020 National Trade Estimate on Foreign Trade Barriers’ of the United States Trade Representative brings out starkly there is no shortage of trade barriers erected by the EU:

• An average MFN rate of 5.2 percent ( agricultural products at an average of 12 percent and 4.2 percent for non-agricultural products ),
• the non-tariff barriers range from special measures for pharmaceutical products,
• transfer pricing issues,
• a special Meursing table tariff code, (EU charges a tariff based on the content of milk, sugar, protein for confectionary/baked products)
• sanitary and phytosanitary barriers,
• restrictions on import of chemicals and renewable fuels,
• quality schemes for agricultural products,
• government procurement policies that permit member states to reject bids with less than 50 percent EU content,
• various barriers restricting services, including, digital trade and electronic commerce,
• investment barriers.

While the report is in the context of exports from the USA, they would be similar if not more for the Indian exports. These are the challenges India negotiators will need to be very conscious about.

It is paramount that the lessons learnt in the previous FTA negotiations are not lost. Institutional memory has never been our strong point.

But the RCEP negotiations got over not too far back and could be a useful starting point. It is essential that Industry, Chambers of Commerce, Export Promotion Councils are taken into confidence and their concerns addressed.

We should never overlook the fact that India offers a significant market to the EU. At 446 million EU’s population is a fraction of our population of 1.40 billion.

Surjit Bhalla in 2019 headed a high-level Advisory Group constituted by the Ministry of Commerce and Industry for boosting India’s share and importance in global merchandise and services trade. Its aim was to increase exports from $500 billion in 2018 to $1000 billion by 2025. The group had made several important recommendations.

The report, had among other things, emphasised the need for strengthening the EXIM bank, using data analytics to build an export strategy, optimising FTA negotiations and usage. It also highlighted the need for sectoral analysis to assess the price competitiveness of Indian products and to involve industry in the process of negotiations.

We would be well advised to act on them if we are to make a success of the India-EU agreement.

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Global minimum tax – a welcome development

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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When Justice Oliver Wendell Homes in a dissenting 1927 US Supreme Court judgement stated that taxes are what we pay for a civilised society, he was stating truism-the money collected from taxes pays for the development of a country, for providing essential services to its citizens. Any government expects its citizens, as also the corporates, to pay taxes due. While governments had reasonably effective enforcement machinery to ensure their citizens did pay their taxes, the challenge was in ensuring that corporates, particularly, multinational enterprises, did pay what was due.

The G20 countries, an informal grouping of 19 countries and the European Union, which accounts for two-thirds of the global population, and the Organization for Economic Cooperation and Development (OECD) had in this backdrop, suggested an inclusive Framework on Base Erosion and Profit Shifting (BEPS) project, which targeted tax-planning strategies that sought to shift profits to low tax jurisdictions. These tax planning strategies relied ‘on mismatches and gaps that exist between the tax rules of different jurisdictions, to minimise the corporation tax that is payable overall, by either making tax profits “disappear” or shift profits to low tax operations where their little or no genuine activity. The BEPS reports released in 2015 were aimed at improving the ‘coherence, substance and transparency of the international tax system’.

Base erosion as has been pointed out constitutes a serious risk to sovereignty, tax fairness, and tax revenues for both developed and developing countries alike. For instance, Tax Justice Network, a UK-based organisation has estimated that India lost each year to tax havens a whopping $10 billion.

India ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – and deposited the Instrument of Ratification to OECD, Paris under the Convention. These have entered into force for India on October 1, 2019, and its provisions on India’s DTAAs from FY 2020-21 onwards.

However, the BEPS project did have very many shortcomings. OECD, released blueprints of proposed solutions to address these challenges – it introduced a two-pillar approach to international tax reform in 2019 to address the digital economy (Pillar One) and unresolved BEPS issues (Pillar Two).

Pillar 1 was aimed to “adhere to the concept of net taxation of income, avoid double taxation, and be as simple and administrable as possible.” In simple terms, the OECD did agree to the concerns of governments that companies were not paying enough tax in jurisdictions where they had ‘market-facing’ activities.

Pillar 2 sought to give governments the “right to ‘tax back’ where other jurisdictions had not exercised their primary taxing rights, or the payment was otherwise subject to low levels of effective taxation.” Essentially, Pillar 2 sought to establish a minimum level of taxation on multinational companies doing business around the world; and if companies fell below those thresholds, they would owe additional tax. Pillar 2 required companies to “top up” the tax paid to bring the amount to a minimum effective tax rate.

OECD Pillar 2 was to apply after Pillar 1, rather than concurrently. Companies would first allocate the tax due to jurisdictions where they generate revenue under Pillar 1; then, if they were still below the minimum effective tax rate, Pillar 2 guidelines would be applied.

The OECD proposals got a push when US President Joe Biden came to power leading to what UK Chancellor Sunak termed as ‘seismic tax reforms. The historic G7 Finance Ministers communique of June 5th committed to the principal design elements of the OECD’s two-pillar approach for international tax reform. This includes a commitment to introduce a global minimum tax of at least 15 percent on a country-by-country basis. The agreement will now be discussed in further detail at the G20 meeting in July.

The brilliant French Economist Gabriel Zucman, (a protégé of Thomas Picketty) known for his research on tax planning and tax havens and at the forefront of the fight to bring multinationals within tax jurisdictions, has estimated that the redistribution of profits from high tax countries to tax havens or lesser tax countries has resulted in around 40 percent of profits having shifted. The resultant loss was said to be in the range of $620 billion in 2015. This he has pointed out, has resulted in headline economic indicators -like GDP, trade balance, getting distorted.

Thus, the G7 decision is a huge step forward and will reduce tax rate arbitrage. Concerns have been raised that the proposal impinges on a nation’s right to decide on tax policy; that taxation is a sovereign policy determined by local factors and whether it would in any way tackle tax evasion. This is a myopic view-no country in this globalised interconnected world would like to facilitate corporate tax planning bordering on the illegal.

India has in 2019 reduced its corporate tax rate to 22 percent for domestic companies and 15 percent for new manufacturing companies. However, its large domestic market size should continue to attract global players. There has been no official government reaction thus far. India which is a member of the G20 will be watching these developments closely.

The global minimum tax should in the words of US Treasury Secretary Janet Yellen “end the race to the bottom in corporate taxation”. Nothing can be better.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow