'Informal' challenges to industry loss from counterfeits & smuggling

I just read a very interesting report. It came out a few months earlier, but I have read it now. It’s called “Socio-Economic Impact of Counterfeiting, Smuggling and Tax Evasion in Seven Key Indian Industry Sectors” and you will find it at http://www.ficci-cascade.com/. CASCADE is acronym for Committee against Smuggling and Counterfeiting Activities Destroying Economy. The seven sectors chosen are auto components, alcohol, computer hardware, FMCG (personal goods), FMCG (packaged food), mobile phones and tobacco. What’s done is the following. Let’s take NSS (National Sample Survey) data for 2009-10. Subject to some matching problems, this gives annual consumption figures for these seven categories. That’s demand. Supply comes from - Imports (data from Directorate General of Commercial Intelligence & Statistics, DGCIS), formal factories (data from Annual Survey of Industries, ASI) and registered MSMEs (micro, small & medium enterprises). Since demand is greater than supply, the demand is being met from somewhere. The study calls this the “grey market”. Across the sectors, the estimated shares of the grey market are 29.6% for auto components, 10.2% for alcohol, 26.4% for computer hardware, 25.9% for FMCG (personal goods), FMCG (packaged food), 20.8% for mobile phones and 15.7% for tobacco.

If you were asked to do a study using all-India data, as opposed to administering a specific questionnaire to respondents, you would probably do something very similar. However, other than matching and time-lags in data, there is an issue. India is substantially an informal economy. Large chunks of goods and services are produced in the informal/unorganized sector. With economic development, every economy goes through a process of formalization. However, that doesn’t mean the informal/unorganized sector is illegal in any sense. It isn’t necessarily “grey”, suggesting illegality. You might say this is precisely the reason MSME production is part of the exercise. But there is a problem with MSME data too. The 2006-07 MSME Census covers registered MSME units and a substantial part of MSMEs are unregistered. That non-registration is often voluntary – high compliance costs, taxation, labour laws. I am not picking holes in the CASCADE report. As I said, anyone would probably approach the problem no differently. My issue is more with the way one reads the report. Yes, there is a sales loss to industry. (The combined sales loss to industry is estimated to be Rs 72,969 crores in 2012.) Yes, there is a tax loss to government. (The combined tax revenue loss is estimated to be Rs 26,190 crores in 2012.). Yes, smuggling is bad. Yes, sub-standard goods are bad. (I would have preferred sub-standard to counterfeit, since we don’t know which one it is.)

To complete the story, there is a separate pharmaceuticals component too. (Read the report.) However, I am not very sure what policy conclusion one deduces, precisely because one cannot segregate “grey” or illegal from informal. There is certainly a counterfeit component, almost certainly more pronounced for some of those sectors. That has quite a bit to do with not just consumer awareness, but also regulatory mechanisms and enforcement of legislation. Beyond that, since tax exemptions are likely to continue, one should probably highlight the high compliance costs of registration for MSMEs, also relevant because many incentives are conditional on registration. There are problems of comparability across MSME Censuses. With that caveat, why is there this variation across States? Why is it low in some States? And why has registration increased in some States, but not in others? In much of policy, the problem is one of formalizing the informal. Read this report for one aspect of this.