The magnitude of India’s trade with China in 2021 has raised several questions ever since these statistics were released by the official agencies of the two countries some weeks back. The official Indian data released by the Directorate General of Commercial Intelligence and Statistics (DGCIS) showed that India-China trade in 2021 was valued at $110.5 billion, the first time it had reached the three-figure mark. Imports from China were at $87.5 billion while exports to China were worth $23.0 billion.
However, the General Administration of Customs, China (GACC) reported significantly different figures. Total trade, according to GACC, was $125.6 billion in 2021, with China’s exports to India at $97.5 billion and imports from India at $28.1 billion. Thus, GACC’s report stated that total trade between China and India was $15.1 billion higher than that reported by the DGCIS. Interestingly, this difference had increased from $5.2 billion in 2018.
It is not that discrepancies in trade data between two countries, when sourced from their respective official sources, are peculiar to only India-China trade. Trade data between India and the United Arab Emirates (UAE), India’s third largest trade partner, shows even larger discrepancies. The source of this data is the World Integrated Trade Solution (WITS) database of the World Bank, which provides comparable trade data for the two countries. In 2020, India reported that its total trade with the UAE was $41.8 billion, while the UAE reported that its trade with India stood at $28 billion, in other words, India reported that its trade with the UAE was $13.8 billion higher than the corresponding figure reported by the UAE. This discrepancy arose as India reported that exports to the UAE were $1.5 billion higher than the latter’s imports from India, while the UAE reported that its exports to India were $12.4 billion lower than the latter’s imports from the UAE. It may be pointed out that similar trends have been observed at least since 2015.
It should be obvious to any student of trade that for any pair of countries, value of exports of one country can never be equal to the value of imports by the other. Simply put, India’s exports to a partner country cannot be equal to the partner country’s imports from India. This happens because export values of products usually reflect their market values (also called free on board, or FOB), while imports are inclusive of cost, insurance, and freight (CIF). Normally, the difference between the FOB value and the CIF value of a given consignment is assumed to be 10 per cent; higher differences are generally called trade mis-invoicing.
Data on India’s trade with its two partner countries mentioned above show considerable extent of trade mis-invoicing. Thus, when China’s exports to India on a FOB basis should have been smaller than the CIF value of India’s imports from China for the reasons mentioned above, the actual numbers are just the opposite. However, the FOB value of India’s exports to China is lower than the CIF value of China’s imports from India, as it should normally be the case.
But the difference between the two figures in 2021 was 22 per cent, well above the accepted threshold of 10 per cent. Trade mis-invoicing has increasingly been recognised as a problem as it is a significant source of illicit financial flows (IFF) plaguing many countries. Although the problem of IFF has been in existence for a long time, it is only during the past decade that it has gained currency among policy makers.
Available research suggests that IFFs originating from developing countries have been quite significant, which have adversely affected the availability of resources for their economic development. According to the High-Level Panel on Illicit Financial Flows from Africa (2015), the continent lost over $50 billion annually from IFFs, which was larger than its Official Development Assistance. The Sustainable Development Goals specifically refer to the significant threat posed by IFFs in Goal 16.
Incentives to mis-invoice trade values vary across jurisdictions. A common motivation to mis-invoice is maximising profits. To reap the maximum benefits, traders manipulate the values on the invoices submitted to the customs authorities for avoiding the tariffs that should be levied. Empirical studies also show that when the tariffs are high, firms tend to underreport imports. However, some commentators have argued that in a world of declining tariffs, motivation for trade mis-invoicing comes from elsewhere, open capital accounts being one of them.
Foreign exchange market controls also provide motivation to the traders to engage in fraudulent trade practices to gain extra foreign exchange. Exporters would choose to misreport if exchange rate is overvalued. Similarly, an importer would under-invoice if the tariffs are higher than the market exchange rate. Trade mis-invoicing, according to this view, may be driven by a desire to bypass administrative hurdles, instead of tariff-avoidance.