Export surge or return of black money?

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by Virendra Parekh

on 26 Aug 2011

Is India’s export performance too good to be true? Has the world suddenly become enamoured of Indian merchandise? Or is the illicit wealth stashed abroad by unscrupulous Indians coming back as export proceeds?

Undeniably, India’s export performance in recent months has been nothing short of spectacular. In July, exports grew by a whopping 81.5 per cent year-on-year to reach $29.30 billion. Total merchandise exports during April-July stood at $108.3 billion, registering a growth of 54 per cent. In the year ended March 2011, as the economy recovered from the impact of the global financial crisis, India’s exports grew a record 37.6 percent to $246 billion.

Frankly, these numbers are puzzling. The world economy has hardly been in great shape, and, till recently, the exchange rate had appreciated very sharply, particularly in real terms, over the last two years. Reserve Bank of India (RBI) had some time ago identified global demand and the exchange rate level as the two most important drivers of export growth. And this stands to reason: most of India’s exports consist of non-differentiated goods which are principally traded on the basis of comparative advantage in prices in the invoicing currency. These prices in turn depend on the exchange rate.

In March, the government admitted that merchandise import data were underestimated owing to a technical glitch. Could a similar error, but in the opposite direction, have occurred in the exports data?

No, says Mr. K T Chacko, director of Indian Institute of Foreign trade. Export data released by the Directorate General of Commercial Intelligence and Statistics, he points out, are based on shipping bills submitted by exporters to port authorities and customs stations across the country. Since exporters are entitled to duty reimbursements under various export promotion schemes, they subsequently file bank statements of receipt of export proceeds for claiming such benefits. There is no incentive for any official agency to inflate or deflate the export data.

Still, what explains the unprecedented growth in exports? The surge is attributed to phenomenal performance by engineering products, bullion and petroleum products. India, we are told, has reduced its dependence on traditional export markets such as Europe and US, and focused on some promising markets in Asia, Africa and Latin America. This diversification of export basket and export markets, we are told, has paid off.

If there were any doubts about the genuineness of export numbers and plausibility of official explanations for them, these were confined to some of the local economists and some sections within the Reserve Bank of India.

But now they have come in question from an important class of stakeholders: foreign investors. Wealthy foreign investors, hedge funds and institutions ask FIIs to handle their money. They also purchase participatory notes – an instrument that allows them to trade in Indian stocks – from FIIs and foreign brokerages. Besides the great consumption story that enabled India to weather the crisis in 2008, these investors have been drawn by India's robust export figures.

These investors are now asking their India portfolio managers and India economists with MNC banks, on whom they rely for advice and research reports to buy shares, whether the recent export data are to be trusted in the face of some glaring anomalies.

Interestingly, for the first time, value of exports (FOB or free on board) from India is higher than value of world imports (which includes cost, insurance and freight). Logically, exports should be a little lower than reported import numbers at the buyers' end which include insurance and freight.

Then again, monthly trade statistics from IMF indicate that other countries’ numbers on import from India do not match with the commerce ministry’s numbers on exports from India. For example, in India’s trade data, exports to Indonesia, Pakistan, China, South Africa, Iran reportedly grew by close to 100 per cent in the three months prior to January 2011. But numbers from most of these countries on imports from India do not show a corresponding growth. Also, Chinese data of imports from India show that growth is almost nil in the past eight months, with a dip in May 2011.

Jefferies, a global securities and investment banking group, has pointed out in a recent strategy note that export acceleration is not reflected in shipment data. Also, the reports say that production statistics from industries like auto and iron & steel do not justify the high export growth in these sectors. “Eight months is a long enough period for these numbers to not be counted as statistical oddities” the note says, adding that “there is no statistical beneficial low base effect in exports currently”. “Right or not, export data needs inspection,” the note contends.

There is another explanation, difficult to prove but quite plausible. Unscrupulous politicians, bureaucrats and businessmen, who have stashed their illicit wealth abroad, are bringing some of it back to the country in the name of exports. Quite a few of them have helpful outfits functioning abroad. This mode of repatriation of secret wealth not only launders money, but also earns export incentives as bonus.

Here is a related bit of information. The agreement signed with Switzerland for sharing banking information on demand is likely to come into force by September. The government has received information about Indians having accounts in Swiss banks and is taking appropriate action to bring back funds stashed abroad. Deposits of Indians in Swiss banks have shown a steady decline over the years and had more than halved to Rs. 9,295 crore last year from about Rs. 23,373 crore in 2006, Finance Minister Pranab Mukherjee has said quoting Swiss National Bank data.

Indeed, what is happening in exports and Swiss bank accounts may be part of a larger development. As is known, there are a couple of dozens of states which happily act as safe havens for tax evaders of the world. Indians who have secreted away their unaccounted (mostly ill-gotten) wealth in these places are a worried lot. The anonymity and security of their vaults can no longer be taken for granted. The repeated promises and assurances from the government of impending action to detect these accounts and take appropriate action are actually a wake up call for the corrupt.

In the circumstances, it makes eminent sense at least to shift the money to a safer place. It would be even better if the money can be laundered and brought back to India, repatriation becomes an attractive option. Exports are just one of the routes for the home-bound money. It is this money which has set gold on fire, which has sent owned homes beyond the reach of the middle class and is fuelling speculation in all commodities including food grains, edible oils and sugar.

Large chunks of illicit wealth stashed away by unscrupulous Indians are already returning home. That is bigger news than the surge in exports.

The author is Executive Editor, Corporate India, and lives in Mumbai

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