News, leads and analysis related to India’s trade and all that’s happened on the policy front during the month of December 2016

Economy
Demonetisation
The end of corruption?

India’s decision to discontinue Rs.500 and Rs.1,000 currency notes (these notes account for close to 86% of notes in circulation in India) with the aim to tackle corruption and to convert India into a cashless economy, had received tremendous popular support. But as days go by, it seems the move may have had a rather unwanted effect on the country’s overall finances. Analysts are hinting that the impact on the GDP could be a negative 0.3% to 0.5% for FY2017. Despite the continuous assurance by RBI that the process will smoothen out in a few days, traders, small scale industries and the likes are in a state of panic, especially those who use cash for transaction.

Exporters are also facing a liquidity crunch and in a recent meeting with Commerce Minister Nirmala Sitharaman, FIEO has suggested an increase in withdrawal limits to 1% of the preceding year’s sales – but a viable solution is yet to be found. According to various sources, the black economy in India is estimated to constitute 25-30% of the GDP. RBI has confirmed that the clean-up process has collected Rs.5.44 lakh crore between November 10 and 18. In the same period, the total cash withdrawals from ATMs and branch counters is Rs.1.03 lakh crore. December 30, 2016 is the last date to surrender the old notes. The common man and businesses today can be seen waiting in queues outside banks to exchange notes, bearing the pain for the greater good. But whether this will bring an end to corruption, only time will tell.

Israel-India 
Bilateral agreement 
Natural partners

A free trade agreement (FTA) between Israel and India has long been on the cards. And last month, Israeli President Reuven Rivlin, while addressing the India-Israel Economic Forum: Innovative Partnership, organised by the three premier industry bodies, FICCI, CII and ASSOCHAM, once again pitched for an FTA. The Israeli President said there is a huge scope for bilateral cooperation in water treatment projects, optics, metals, aviation, diamonds and textiles. Citing an example he said, Israel is a rain-deficient country that has evolved technology solutions to meet its water needs. So, its technology, coupled with its waste water management know-how, could be leveraged by India.

Opportunities for bilateral trade are also abound in agriculture, irrigation and pharmaceuticals. Industry and trade experts suggest that the Israeli defence industry could consider co-producing defence equipment in India as the FDI limits in this sector have been relaxed. To add to that, the technological prowess of Israel can also play an important role in developing India’s smart cities programme.

The current bilateral trade between the duo stands at about $5 billion, which is much lower than its potential. Incidentally, India received FDI worth only $107 million from Israel between April 2000 and September 2016.

India-Mauritius 
Reverse FDI 
A healing pact

In a reciprocal offer, Mauritian Prime Minister Anerood Jugnauth, during his visit to India, stated that the island nation would be inviting Indian pharmaceutical companies, especially those manufacturing Ayurvedic medicines, to set up manufacturing bases in their country.

A partnership with India would be an important step because Mauritius, a hub for international tourism, aims to set up wellness and Ayurveda therapy centres. Representatives from the Indian pharmaceutical industry are contemplating on the proposal as it may come with several benefits – the most obvious being, Mauritius is seen as the gateway into the African continent.

Incidentally, Mauritius, which has a free medical service policy, imports the bulk of its medicinal requirements from India and has always been a popular conduit for FDI into India.

India
Exports
Spring of trade in autumn

There is some good news for India’s foreign trade community. As per the latest figures, India’s merchandise exports have registered a sharp rise of 9.6% y-o-y in October. The figure touched Rs.1,59,000 crore or $23.51 billion, against $21.4 billion during the corresponding month in 2015.

Major sectors that contributed to the growth are gems and jewellery (increased 21.8% y-o-y to $4.38 billion), engineering goods (increased 13.9% y-o-y to $5.27 billion), iron ore (increased 2,835.1% y-o-y to $0.33 billion), petroleum products (increased 7.2% y-o-y to $2.72 billion), readymade garments (increased 10.7% y-o-y to $1.36 billion), marine products (increased 24.1% y-o-y to $0.68 billion), organic and inorganic chemicals (increase 6.5% y-o-y to touch $1.17 billion), and dairy, poultry and meat products (increased 11.5% y-o-y to touch $0.45 billion). However, sectors such as drugs and pharmaceuticals, handloom products, leather and leather products, yarn and fabrics, etc., registered a decline in exports.

Merchandise imports have also witnessed a growth of 8.1%, figures touching Rs.2,28,000 crore or $33.67 billion, bringing an end to a 22-month-long continuous decline. Sectors that saw an increase are gold imports (an increase of 108.4% y-o-y to touch $3.50 billion), pearls and precious semi-precious stones (an increase of 20.1% y-o-y to touch $1.83 billion), and petroleum products (an increase of 4.0% y-o-y to touch $7.14%), etc.
However, the trade deficit has gone up to 4.8% reaching $10.16 billion in October 2016 from $ 9.77 billion in the same month last year.

Buoyed by such a prolific export performance, the experts are now expecting the exports to exceed $280 billion in FY2017. That means a slight increase from the $261 billion in FY2016.

 
India-US 
Bilateral Trade
Growing trust

India and US have reached an agreement on the terms and conditions of the first bilateral advance pricing agreement to be held between the two countries. The deal was reached during a meeting of the Bilateral Competent Authorities of two countries. According to a statement by Ministry of Finance, GoI, 66 MAP cases on transfer pricing issues and 42 MAP cases on treaty interpretation issues were agreed to be resolved successfully. The amount that was locked-up in dispute in these cases between Assessment Years 2000 and 2012, is roughly Rs.5,000 crore. The resolved cases are linked to various issues such as transfer pricing adjustments made for international transactions in the nature of payment of royalty, payment of management fees, cost contribution arrangements, engineering design services, contract R&D services, investment advisory services, marketing support services, software development services, IT-enabled services (both BPO and KPO services) etc., and treaty interpretative issues, for instance, Presence of Permanent Establishment (PE) in India and Profit Attribution to such PEs, disputes pertaining to royalty income versus business income of foreign companies, etc.

India began its bilateral APA process with US by accepting applications from the Indian taxpayers in FY2013, whereas US kicked off its process with India in February this year by accepting applications from US taxpayers.
Now, as disputes are in the process of being resolved, can India expect a surge in investment by US companies?

India-Malaysia
Palm oil imports
A new hurdle

Demonetisation has brought in a new kind of crunch in the country with importers delaying shipments and cancelling the bookings of palm oil, from Malaysia and Indonesia. The reason, a lack of demand in the retail markets that has been attributed to the demonetisation initiative of the government. Malaysia in a statement confirmed that shipments to India saw a drop of 81-85% in the first half of November against the previous month.

Imports of palm oil in October was 739,159 metric tonne (MT). But according to traders, the number in November will drop to 650,000 MT, which will fall further to 520,000 MT in December.
It seems Malaysia will have to wait till the cash crunch in India wanes.