The mysterious Factor X that did our exports in last year

India’s stupendous trade deficit of $185 billion in 2011-12 - which is enough to wipe out two-thirds of our foreign currency reserves if capital flows and remittances did not give us a helping hand - can be explained in three ways: policy paralysis, benign official neglect of key danger signals, and a mysterious Factor X.

The policy paralysis relates to the UPA government’s inability to dent petroleum product demand - the largest item on our import list - by raising prices and reducing subsidies. This is why we received an oil import bill of $155.6 billion during the last financial year. India imports 75-80 percent of its crude oil requirements, and by failing to act on demand, especially diesel, we have effectively mortgaged our national interest to the Gulf sheikhdoms.

Benign official neglect is what we could call the unconscionably huge imports of gold and silver in a year when the signals on trade deficit were becoming clear as early as September 2011. In 2011-12, we imported $61.5 billion worth of gold and silver. That is more than twice the gold held by the Reserve Bank of India as part of official reserves. Didn’t anyone on Mint Street or Udyog Bhawan alert Mr Anand Sharma, our worthy commerce and industry minister, about the danger of this private gold party? Duties were raised too little, too late to under the damage to our trade deficit and reserves. The whole country paid the price for this lax attitude, which sent down the rupee, ruined Pranab Mukherjee’s fiscal numbers, and worsened inflation.

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[caption id=“attachment_282413” align=“alignleft” width=“380” caption=“We received an oil import bill of $155.6 billion during the last financial year.Reuters”]  [/caption]

“What has primarily driven the trade deficit is petroleum and gold. In these, imports were higher by about $69 billion, compared to 2010-11, and that almost entirely accounts for the rise in the trade deficit from $118 billion in 2010-11 to $185 billion in 2011-12,” Commerce Secretary Rahul Khullar is quoted as saying in Business Standard.

Which brings us to the mysterious Factor X. The interesting thing about exports - which grew by 21 percent against imports by 32.1 percent for the whole year - is that till about half-time, exports were simply booming.

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What happened in the second half, that exports all but collapsed, while imports kept on growing at the old pace? What was this Factor X that did us in?

“The year-on-year growth is irrelevant. Last year was a boom period for exports. Comparison should be done on a month-on-month basis. The export market had effectively collapsed from September in the previous financial year….The first six months were almost schizophrenic, while the remaining six months saw a marked deceleration,” Khullar said.

That exports collapsed is obvious from the numbers, but why did they collapse? The crisis in Europe could be one explanation, but can that alone explain why exports, which rose at 52 percent in April-September 2011 (versus imports of 32.4 percent), came down to just 21 percent for the whole year. Fears of a Greek default were surfacing well before June 2011 - and if exports had to be impacted, they would have happened even earlier than September 2011, one would think.

Could the mysterious Factor X then be the result of manipulation of export numbers in the first half, and even in the previous year?

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It is worth recalling that in October 2011, Kotak Securities first raised doubts about the humongous growth in exports in 2010-11 . Among other things, they said that “Our study of exports data of major engineering companies (including automobiles and metals) shows that the increase in their exports does not reconcile with the steep increase in official exports data. In fact, the gap is quite substantial.”

As Firstpost wrote then: “The official export data shows 79 percent year-on-year (engineering) export growth in 2010-11. Exports by engineering companies in the BSE 500 (the cream of India Inc) show just 11 percent growth. If you want to know the difference in dollars, the engineering export jump accounts for $30 billion (up from $38 billion to $68 billion). The figures for the BSE 500 show a jump of just Rs 61 billion (rupees, not dollars). Converted at the rate of $ 1= Rs 44, this is just $1.38 bn. Where did the rest of the $28-and-odd billion come from?”

The answer seems obvious: exports may not have “collapsed” after September, but may merely have been recalibrated to reflect the real levels minus the overinvoicing suspected earlier.

In December 2011, a red-faced Khullar was forced to revise export data downwards by more than a net $9.4 billion, attributing it to “data entry” errors and software glitches. But, as we noted before , “the real goof-up is not merely $9.4 billion, but much bigger. For example, the figures given out…spoke of a $15 billion over-reporting of engineering exports, and a $12 billion underestimation in the case of petroleum and gems and jewellery. The net figure may be $9.4 billion, but what has really happened is a $27 billion error - since one error in engineering and another in petroleum and gems cannot really cancel each other out.”

(For the record, the engineering export growth in 2011-12 was 16.9 percent - and this includes the boom of the first half and the collapse of the second).

So is the mysterious Factor X, which cut short our export miracle story in the second half of 2011-12, really the Kotak report, which may have alerted everybody to the possibility of overinvoicing in export figures? If this is right, it means India Inc was busy bringing its black money back to the country due to the huge ruckus on Swiss bank accounts both in India and abroad in the first half, and reverted to the normal exports when it seemed like there might be closer scrutiny of their performance.