India

Busted: The ‘biggest’ myth about Indian exports

3D chrome Dollar symbolOne of the economic theories (I don’t know what else to call it) that often gets bandied around by almost anyone who has anything to say on the Indian economy, is that India’s economy is not as dependent on exports as the Chinese economy is. Honestly, given that China and the word “exports” are almost used interchangeably these days, it sounds true as well. Nevertheless, that is clearly not the case. While this may have been true in the 1990s, the most recent data does not bear this out.

Let’s look at exports of goods and services as a proportion of the gross domestic product (GDP, a measure of the size of the economy) of both these countries. In 1995, the Chinese exports to GDP ratio had stood at 20.4% of the GDP. The Indian exports to GDP ratio was around half of that of China at 10.7% of the GDP.

In 2014, the Chinese exports to GDP ratio had stood at 22.6% of the GDP. On the other hand, the Indian exports to GDP ratio was at 23.6% of the GDP. Hence, as a proportion of the size of the economy, Indian as well as Chinese exports are at a similar level. And that is indeed very surprising. It is not something that one expects.

As Rahul Anand, Kalpana Kochhar, and Saurabh Mishra write in an IMF Working Paper titled Make in India: Which Exports Can Drive the Next Wave of Growth?: “India’s exports have been increasing since the early-1990s – both as a share of GDP and as a share of world exports. Total exports as a share of GDP have risen to almost 25 percent in 2013 from around 10 percent in 1995. Likewise, Indian goods exports as a share of world goods exports have risen, with the share almost tripling to 1.7 percent during 1995-2013. A similar trend is visible in India’s services export – the share tripling to over 3 percent of world service exports during 2000-2013.” Computer services form around 70% of India’s services exports, which forms around one third of India’s total exports.

What these data points clearly show us is that the theory that India is not dependent on strong exports for a robust economic growth, is basically wrong, as exports now amount to nearly one-fourth the size of the Indian economy.

The Indian exports have been falling for the last nine months. In August 2015, the exports were down by 20.7% to $21.3 billion. Twenty three out of 30 sectors  monitored by the ministry of commerce saw a drop in exports in August 2015, in comparison to August 2014. Exports for the period of April and August 2015 stood at $111 billion and were down by 16.2% in comparison to the same period last year. Hence, there has been a huge slowdown in exports during the course of this financial year as well.

A major reason for the same has been a fall in commodity exports. As Chetan Ahya and Upasana Chachra of Morgan Stanley write in a recent research note titled What is Driving the Sharp Fall in India’s Exports?: “Persistent downward pressure from commodity prices has undoubtedly put pressure on commodity export growth (in value terms). Indeed, commodity exports (including oil), which account for 33% of India’s total exports, have been declining since Jul-14.”

Commodity prices have been falling because of a slowdown in the Chinese economic growth. China consumes a bulk of the world’s commodities.
Not many people would know that refined petroleum oil, much of which is exported out of the state of Gujarat, forms around one fifth of India’s exports.

Hence, while India benefits immensely due to a fall in the price of oil, given that we import 80% of what we consume, there is a flip-side to it as well.
Further, in India’s case, export of services, in particular computer services, has played a major role in driving up the exports over the years. The same cannot be said about India’s manufacturing exports. As Anand, Kochar and Mishra point out: “[India’s] services exports, as a share of total exports and in terms of sophistication, are comparable to high income countries, the share of manufacturing exports and their level of overall value content are still low compared to its peers, especially in Asia.”

The reasons for this are well discussed. They include an unpredictable tax regime (which the government keeps promising to correct), complicated labour laws and land acquisition policies, inspector-raj and a shaky physical infrastructure.

And this best explains why unlike China, India’s manufacturing exports are not a major part of its goods exports. As Anand, Kochar and Mishra point out: “For example, in 2013, manufacturing exports accounted for 90 percent of total exports in China, almost double the share during 1980-85. Indian exports have also undergone transformation during the decade of high growth, though to a lesser extent compared to peer emerging markets. The share of manufacturing in total merchandise exports has increased to 57 percent in 2013 from 41 percent in 1980.”

Also, given the problems an entrepreneur faces in India, in getting a manufacturing unit going, India’s share in global goods exports may have plateaued as far back as 2012. Data from Morgan Stanley suggests that India’s good exports as a proportion world goods exports has plateaued at around 1.7%.

As Ahya and Chachra of Morgan Stanley point out: “India’s market share in exports of goods for which we have monthly data has declined marginally over the last 12 months but has remained largely flat since 2012…The structural bottlenecks in the form of inadequate infrastructure, outmoded labour laws, a cumbersome taxation structure and systems, and poor ranking in terms of overall ease of doing business are probably making it harder to make gains in market share at a time when external demand has been weak and excess capacities in competitor economies have rise.”

And this is something that cannot be set right overnight.

The column originally appeared on The Daily Reckoning on Sep 28, 2015

Are acche din for the Indian consumer about to start?

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Vivek Kaul

Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). This proportion comes down as income levels go up. Nevertheless, if food prices go up, the pinch is fell by almost everybody except the upper middle class and the rich.
This has an impact on consumption given that incomes don’t always rise at the same pace as food prices and overall inflation. People then cut down on their expenditure on other things leading to a slowdown in consumption growth.
In 2012-2013 and 2013-2014, private consumption growth was at 4.9% per year. In comparison this had been at 8.4% in the preceding five years. This was primarily because both food inflation and inflation as measured by the consumer price index(CPI) were at greater than 10% levels. As people spent more money on things they consumed on a daily basis, the growth in expenditure on non-essentials slowed down.
As Crisil Research points in a research note titled A Rs 1.4 trillion consumption kicker looms: “Sales growth in air-conditioners, washing machines and refrigerators nosedived from 18-20% in fiscal 2010 to 3-4% in fiscal 2014. Passenger vehicle sales plummeted to an average 6.2% in fiscals 2013 and 2014 compared with 29% in fiscal 2011.” This clearly tells us that many people postponed the purchasing things that were not essential for everyday living.
Things have changed in the recent past. The consumer price inflation for the month of February 2015 stood at 5.4%, well below the double digit levels. Food prices remained flat during the course of the month in comparison to February 2014.
Over and above this, oil prices have also fallen big time in comparison to where they were last year. On March 18, 2014, the price of the Indian basket of crude oil was at $104.47 per barrel. On March 16, 2015, around a year later, the price of the Indian basket of crude oil was at $52.11 per barrel or 50% lower. The entire fall in price of oil has not been passed on to the end consumers. The government has increased the excise duty on petrol and diesel. Nonetheless, there has been some relief for the end consumer. The retail price has fallen by Rs 12.3 per litre for petrol and Rs 6.8 per litre for diesel, since April 2014.
Crisil Research expects lower food inflation and lower oil prices to do the trick in pushing up private consumer expenditure growth: “The fall in food inflation and lower fuel prices will together yield additional ‘savings’ (or increase in spending power) of Rs 1.4 trillion in fiscal 2016 compared with nearly Rs 509 billion in fiscal 2015. Savings on fuel expenses alone will be Rs 300 billion, while on food it will be more than thrice that at Rs 1.1 trillion.”
Another factor that should help is a fall in inflation expectations(or the expectations that consumers have of what future inflation is likely to be). In the inflation expectations survey released by the Reserve Bank of India(RBI) for September 2014, the inflation expectations over the next three months and one year were at 14.6 percent and 16 percent.
In the latest inflation expectations survey for December 2014, these numbers crashed to 8.3% and 8.9%. A belief among consumers that prices will not continue to go up at the same rate as they have in the past, is very important to get consumption going again. Hence, a fall in inflation expectations should help.
What will also get consumption going is the fact that increasing disposable income will help people to borrow more, given that their capacity to repay will go up. As Crisil Research points out: “The household sector in India is under-leveraged, with the household debt (from bank and formal non-bank sources) to GDP ratio at just 12% compared with close to 80% in United States. Household debt from commercial banks and non-banking financial companies was nearly Rs 14 trillion as of March 31, 2014, including housing and educational loans. This is just 22% of household consumption. Moreover, most of the debt was accumulated in the last decade and more than 60% was taken to buy houses. If we exclude these housing loans – which do not form a part of consumption — then the ratio falls to 8%.” What this means that there is a huge scope for the Indian consumer to borrow and spend.
All these reasons will essentially ensure that in the financial year starting next month, the Indian consumer will make a comeback with his shopping bags. Crisil Research expects private consumption to grow by 7.8% in 2015-2016. “An increase in purchasing power led by declining inflation and improvement in incomes will ensure a gradual but steady pick-up in consumption demand next fiscal. At the sectoral level, we expect passenger vehicles sales to grow by 9-11% in fiscal 2016, up from 3-5% growth in fiscal 2015. Similarly, household appliances sales are forecast higher – television sales at about 9% compared to a 0.3% decline in fiscal 2015, air conditioners at 15% compared to 9%, and refrigerator at 10% compared to 5%.”
What can spoil this upcoming party for the consumer? The recent unseasonal rains in the Northern states will push food prices up in the coming months. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note: “Disinflation in food prices have ended and it is more likely than not to expect higher food prices from March onward, especially given the recent unseasonal rainfall, which may have impacted some crops.”
Despite this negative, it looks like acche din for the Indian consumer are about to start.

The column originally appeared on The Daily Reckoning on Mar 18,2015

India growing faster than China is like saying Bihar’s growth quicker than Gujarat

chinaVivek Kaul

The ministry of statistics and programme implementation released the GDP growth forecast for the current financial year a few days back. It expects the Indian economy to grow by 7.4% during the course of the year.
This is significantly higher than the GDP growth of 5.5% forecast by the RBI. The ministry has moved on to a new method of calculating the GDP, which has led to this massive jump. In fact, in late January, the GDP growth for the last financial year (2013-2014) was revised to 6.9% using this new method. The GDP growth as per the old method had been at 5%.
Explaining this jump in growth, a Crisil Research note points out: “The Central Statistical Office’s explanation for the upward revision in GDP for previous fiscal is premised on improved efficiency. For instance, the manufacturing sector is generating more value-added from the same level of input. This has led to faster growth in manufacturing GDP which is a measure of the value added.”
The jury though is still out on the possible explanation for this jump in economic growth. The high frequency data doesn’t explain this jump. Car sales remain muted. Tax collections have seen slow growth. Corporate profitability isn’t anything to write about. The number of stalled projects continues to remain huge. Exports are on a decline.
Also, it is worth remembering that the numbers highlighted above are real numbers, unlike the GDP which is a theoretical construct.
Nevertheless, the 7.4% GDP growth number has got the media going. Several news reports have compared India to China and said that India is now growing faster than or as fast as China. Here is a PTI news report which says: “Indian economy will grow by 7.4 per cent this fiscal, outpacing China to become the world’s fastest growing economy, after a revision in the method of calculations.”
Another news report in the Wall Street Journal says: “India expects its economy to grow at 7.4% in the current fiscal year, a growth rate that rivals China’s, reflecting a strengthening recovery but also a recent radical revision in the way the country calculates its gross domestic product.”
It also needs to be pointed out here that for the period October to December 2014, the Indian economy grew by 7.5% as per the new method of calculating GDP. During the same period the Chinese economy grew by 7.3%, in comparison to the same period in 2013.
While technically there is nothing wrong with saying India is growing faster or as fast as China, we also need to keep in mind what base are we talking about. India’s GDP last year was $1.87 trillion. On this base it is expected to grow by 7.4%. China’s GDP last year was almost five times larger at $9.24 trillion. So China has a significant larger GDP than that of India. Even if the Chinese GDP grows by 1.5% it would be adding as much to economic output as India would at 7.4%.
Given this, comparing Indian growth with Chinese growth just doesn’t make any sense. Further, if we look at the GDP growth data provided by World Bank since 1980, it throws up interesting results. Only four times between 1980 and 2013, has the Indian GDP growth been faster than that of China.
Two of those years were 1989 and 1990 when China was probably facing the after effects of the failed Tienanmen Square revolution. In 1981, China grew by 5.2% and India by 6%. The only other year when the Indian growth was faster than that of China was 1999, when the Indian economy grew by 8.8% and the Chinese economy grew by 7.8%. This was when the dotcom bubble was at its peak.
In fact, in 17 years during the period under consideration the Chinese economy has seen double digit growth rates. On the other hand the Indian economy has grown by greater than 10% only once since 1980. This was in 2010 when it grew by 10.3%. The Chinese managed to beat us even then by growing by 10.4%.
Over the years, the Chinese economy has been growing faster than that of India on a much higher base. This has increased the gap between the GDP of the two countries.
In short, saying that the Indian economy is growing faster than China is like saying that Bihar is growing faster than India or to be more specific faster than Gujarat. The gross state domestic product for Gujarat in 2012-13(the latest data that is available and at 2004-05 constant prices) was at Rs 4,27,219 crore. It had grown at a rate of 7.96% in comparison to 2011-12.
Now compare this to Bihar, where the gross state domestic product had grown by 10.73% in 2012-13, which was higher than the GDP growth rate of Gujarat. In fact, between 2006-07 and 2012-13, the economic growth rate of Bihar was higher than that of Gujarat, on five out of the total seven occasions.
But the question is on what base? In 2012-2013, the gross state domestic product of Bihar stood at Rs 1,58,971 crore. As mentioned earlier the gross state domestic product of Gujarat was at Rs 4,27,219 crore or nearly 2.7 times. It is important to further point out that Gujarat has a population of 6.27 crore people and the population of Bihar is 9.9 crore. Hence, Bihar has been sharing a significantly lower GDP with a larger number of people.
So, the point here is that Bihar (like India) is growing on a lower base. Hence, saying that it is growing faster than Gujarat, which is 2.7 times bigger in economic terms and has a smaller population, doesn’t make much sense.
The same logic holds when we compare the Indian GDP growth to that of China. Like Bihar’s economy has a long way to catch up to that of Gujarat, the same stands true of India’s economy when compared to that of China.

The column originally appeared on www.firstpost.com on Feb 12, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

The IMF growth forecast for India needs to be taken with a pinch of salt

imf-logoVivek Kaul

“The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith


Every bull market needs a story. In fact, different phases of the same bull market need different stories.
The latest story to hit the Indian stock market is that India will grow faster than China in 2016. This economic forecast has been made by the International Monetary Fund (IMF) in the World Economic Forum Outlook Update which was released yesterday (January 20, 2015). In this update, the IMF expects India to grow by 6.5% against China’s 6.3%.
This forecast is along the lines of another forecast made by the World Bank on January 14, where it said that India will grow by 7% in 2017-2018. It expects China to grow by 6.9% during the course of that year.
The IMF offers reasons as to why it sees growth in China slowing down from 7.8% in 2013 to 6.3% in 2016. “Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation,” the IMF states.
For India, the IMF states that the “weaker external demand” will be “offset by the boost to the terms of trade from lower oil prices and a pickup in industrial and investment activity after policy reforms.”
As far as justifications are concerned, you cannot get more general than this. Having said that, this bit of news drove the BSE Sensex to rally by 1.84% to close at 28,784.67 points on January 20. The foreign insitutional investors who have been at the forefront of driving the Indian stock over the last few years, bought stocks worth Rs 1275.59 crore. The domestic insitutional investors, who on most days do the opposite of what the FIIs are doing sold stocks worth Rs 761.7 crore.
With India likely to grow faster than China in the years to come, it is but natural that FIIs want to bet their money on India. Nevertheless, the question is, should the IMF forecast on India (or even their forecasts in general) be taken so seriously?
IMF forecasts in general have a certain amount of optimism bias built into them. As Chris Giles wrote in the Financial Times in October 2014: “Between 2011 and 2014, these forecasts have averaged 0.6 percentage points higher than the outturn…In the very laudable exercise to examine what went wrong, the fund discovered about half of its errors came from predicting greater strength in Brics countries – Brazil, Russia, India and China – than occurred.”
So, in the recent years the forecasts made by IMF have been going wrong big time. In fact, in the aftermath of the financial crisis, the forecasts have been going wrong since 2009. As Alex Christensen writing in a June 2014 article for Global Risk Insights points out: “Every year since 2009, the IMF has overestimated the growth of not only the US but also of Europe and the world…Since 2009, when economic prospects looked dour, these forecasts have consistently been too optimistic. In 2010 and 2011, the IMF projected the world to catch up to the pre-crisis GDP trend by 2015. Now, it projects that world output will still be 4% lower than the pre-crisis trend in 2018.”
What these insights tell us is that IMF forecasts usually turn out to be wrong. In fact yesterday’s outlook release was an update on forecasts first made in October 2014. And sample what IMF had to say in this release: “Global growth in 2015–16 is projected at 3.5 and 3.7 percent, downward revisions of 0.3 percent relative to the October 2014 World Economic Outlook (WEO). The revisions reflect a reassessment of prospects in China, Russia, the euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices.”
In a period of less than four months the IMF has had to revise the global growth numbers majorly. Taking these factors into account, it is safe to say that IMF’s forecast for India growing at 6.5% in 2016 will turn out to be wrong. And given this, this and other forecasts made by the IMF need to be taken with a pinch of salt.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on www.firstpost.com on Jan 21, 2015

“India should focus on branding its software business”

al ries 2Vivek Kaul  
Al Ries first rose to fame in 1972 when he wrote a series of three articles on a new concept called “Positioning” along with Jack Trout. In 1981, the Positioning book was published and has since sold well over 1 million copies. The book has sold over 400,000 copies in China alone. The two authors also wrote Marketing Warfare, Bottom-Up Marketing, Horse Sense and The 22 Immutable Laws of Marketing.
Al is also the co-founder and chairman of the Atlanta-based consulting firm Ries & Ries with his partner and daughter, Laura Ries. Along with Laura he has written bestsellers like War in the Boardroom and The Origin of Branding. In this interview he speaks to FirstBiz on how countries can go about branding themselves. 

Can countries be branded like products?
It depends on the size of the country. The bigger the country, the harder it is to brand. The smaller the country, the easier. Brand USA, a partnership between the travel industry and the U.S. government, is planning a $200-million campaign to attract tourists to America. The theme: “United States of Awesome Possibilities.” That’s a ridiculous idea.
On the other hand, take a small country like Kenya. What is Kenya’s major tourist attraction? Wild animals from lions to elephants to giraffes. So how would I brand Kenya? “The world’s largest zoo.” How is branding a country different from branding a product?
It’s essentially the same as branding a product. So how to you brand a product?
Narrow the focus. BMW narrowed its focus to “driving” and became the world’s largest-selling luxury-vehicle brand, ahead of Mercedes, Audi, Lexus, Cadillac and Lincoln.
What makes Singapore different from every other country in the world? Housing. 80 percent of the residents of the country live in apartments, not houses. As the world’s population continues to increase, more and more people are going to have to live in high-rise apartment buildings. Here’s how I would brand Singapore: “City of the Future.”
Can you give us examples of countries which have branded themselves well?
I know of only two, both small countries. Guatemala, a country in Central America, is branding itself as “The heart of Maya country.” An ancient civilization, the Maya have left hundreds of imposing temples scattered throughout Central America. But the country that has the most temples and other historic sites is Guatemala. (I once suggested the country change its name to Guatemaya). The other is Grenada, a country in the Caribbean sea, which is branding itself as “The Caribbean the way it used to be.” In other words, without all the fancy high-rise hotels for tourists.
How can a country go about branding itself?
The basic principle is to narrow the focus. But that’s extremely difficult for a large country. That’s why a large country should forget about branding the country. It should brand its major city instead. Instead of branding America, we should brand New York City, the one city most tourists to America want to visit.
Turkey is a large country that is trying to brand itself with a silly slogan, “Turkey is ready.” A better direction is to brand Istanbul as the best place in the business world for a global headquarters.
Could you elaborate on that?
Consider a company with representatives in the major cities on six continents: Johannesburg, London, Mumbai, New York, Sao Paulo, Shanghai and Sydney. Now where should a company like this one hold it corporate meetings? Istanbul.
Here are combined mileage statistics for a single representative from each city attending a potential global meeting held in these major cities.
Sydney . . . . . . . . 58,784 miles
Johannesburg . . . 58,676 miles
Sao Paulo . . . . . . 50,846 miles
Mumbai . . . . . . . 49,450 miles
New York . . . . . 46,342 miles
Shanghai . . . . . . 44,925 miles
London . . . . . . . 42,472 miles
Istanbul . . . . . . . 40,411 miles
And it’s not just location that gives Istanbul an advantage. Companies like to hold meeting in “neutral” locations, so that local representatives don’t dominate the meetings. Istanbul is not a European city. Istanbul is not an Asian city. Istanbul is a cosmopolitan city with roots in both continents.
And how would you brand Istanbul?
“Crossroads of the world.” Sometimes it’s a good idea to compare yourself with another country or another location. Jamaica is a small country in the Caribbean, but it has mountains and waterfalls similar to Hawaii in the Pacific Ocean which is a major tourist attraction for Americans. Here is how we would brand Jamaica: “The Hawaii of the Caribbean.”
Most people think New Zealand is a country. But it’s also an island. Actually, it’s two islands. The North island and the South island. Here is the slogan we developed to brand New Zealand: “The two most-beautiful islands in the world.”
Any other examples?
Colombia is a country in South America that has had a lot of civil wars. But Bogota, the capital, sits on the natural trade route from North America to South America and would make an ideal location for foreign companies to establish their South American headquarters. Furthermore, Bogota sits on top of the equator, but at 8,000 feet above sea level. As a result, warehouses need no air conditioning and no heating all year long. Our proposed branding slogan: “Air conditioned by God.”
Would you suggest that when the reputation of a country is clear and positive, products that are made in that country carry an extra credibility?
Every country has a “natural” position established by decades or centuries of publicity.
Germany is “engineering.”
France is “wine.”
Italy is “fashion.”
Switzerland is “watches.”
Japan is “automobiles.”
America is “computers.”
India is “tea.”
So when you brand a product, it can be helpful to relate your product brand to the country’s position. For example, I met once with the CEO of a Swiss company developing a new automobile brand. Does an automobile from Switzerland make any sense, he asked me? Sure, I said and I have a headline for your first ad: “Runs like a watch.” 
What does India need to do to brand itself well? What sort of Indian products will it help sell? The first decision to make is, Do we want to build a brand to attract tourists or to attract business? You can’t do both. Potentially, India can have a great tourist business, but the current visa situation is seriously undermining that possibility. So I would suggest India focus on business, rather than tourists.
What type of business should India focus on?
Darjeeling tea is one possibility. But it would take forever to broaden the territory covered by the Darjeeling “tea gardens.” A better possibility is “computer software.”
India has three advantages in software. First of all, India turns out more college graduates than any other country in the world. Second, computer software today is primarily developed in the English language which put countries like China at a serious disadvantage. Third, wage levels in India are lower than in most developed countries.
Then, too, opportunities are opening up in software because the market is fragmenting. Microsoft is not nearly as dominant as it once was. Also, the raft of new electronic products (smartphones, tablet computers and many more to come) will continue to generate strong demand for software.
How can a strong country brand help companies and brands originating from that country ?  Many brands take advantage of this idea by including the name of their country or city in their logotypes. Paris is known for cosmetics and L’Oréal is a leading French cosmetics company. The company’s logotype says: L’Oréal Paris. And the Lancȏme logo also includes the name “Paris.”
In one of the columns that I read on country branding it was suggested “ Brands across the board from particular countries can command higher prices than those from other countries, simply by virtue of the strength of the country’s brand.” Do you believe in that? Could you give us examples on the same?
The best example is Switzerland which has a monopoly on expensive watches. A quartz watch made in Japan and sold in America for $500 or so will keep better time than a mechanical watch like Rolex that sells for $5,000 or $10,000.
So why do people pay thousands of dollars for a mechanical watch? Because it’s a Rolex from Switzerland. The same is true for wine from France. Fashion from Italy. Spain is the world’s largest producer of olive oil. But Spain doesn’t have the same reputation for olive oil as Italy. So much of Spain’s olive oil is shipped to Italy and then sold on the world market as “Olive oil from Italy.”
The interview originally appeared on www.FirstBiz.com on March 7, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)