THE WINNERS INTERNATIONAL SME CONVENTION 22nd to 24th April 2018 in New Delhi, India Business Beyond Borders Statement by Norbert W. Knoll von Dornhoff, General Secretary of WUSME World Union of Small and Medium Enterprises 3rd edition – 4/17/2018
Machine tools are at the core of manufacturing—without a powerful machine tools segment, manufacturing excellence cannot be achieved. Thus, India’s vision to emerge as a global manufacturing hub is closely linked to its capability in machine tools.
WUSME World Union of Small and Medium Enterprises
International SME Convention in New Delhi, April 22nd – 24th 2018, Business Beyond Borders
Title: The Indian Economy: GDP (PPP) per capita, Exports, Trade Balance, FDI - Foreign Direct Investments and Economic Growth in a country comparison Statement of WUSME General Secretary Dr. Norbert W. Knoll von Dornhoff, Professor of economic and fiscal policy, International University of Entreprenology, Hawaii, USA
Abstract The primary goal of each country is to increase the prosperity of its people and to alleviate poverty. The most important measure of success is the GDP (PPP) Gross Domestic Product per capita. A decisive contribution to economic growth is been generated by exports, FDI - international direct investment and economic partnerships. As the vast majority of companies are SMEs (including crafts and farms), they contribute significantly to the prosperity of the population and employment. I thought it useful to have a closer look at the economic development of the Indian economy in comparison to BRICS Countries and smaller European Countries (west: Austria, east: Poland). In my brief contribution, I would like to present three examples of recommendations on how governments could further improve their support of the international economic relations of SMEs and Crafts in their Countries.
1.) The Austrian Model for the Promotion of External Economic Relations and its financing. It is one of the most successful export promotion systems in Europe. 2.) Cooperation of domestic banks in India with the European Investment Bank (EIB), taking use of EU programs available in non EU Countries for SMEs and working together with United Nations Agencies, e.g. the UNIDO. 3.) Additional funding for associations promoting SMEs: A very interesting initiative in Hungary: The “1% Law”
The Approach to SMEs and Crafts development in Countries being in different stages of economic and social development is what we call the „Staircase to Success”, starting with reforms of National and International Institutions aiming at the reduction of constraints for doing business up to igniting innovations and taking advantage of additional and new business opportunities and the enhancement of International Trade- and Business Partnerships – Business Beyond Borders. This statement contains information (http://www.enterprisesurveys.org/graphing-tool) on constraints for SME development In India as published by der WOLDBANK’s companies surveys, and some basic relationships between GDP per capita, export volume per capita and direct foreign investments in India, compared to selected Countries in Europe. Being aware that SMEs and Crafts supporting Institutions are of deciding importance for the success of their members in successfully doing business beyond borders, we recommend the introduction of additional innovative instruments to enable them to improve their support. We describe here three examples.
Constraints – World Bank Enterprise surveys India for the first time moved into the top 100 in the World Bank’s Ease of Doing Business global rankings on the back of sustained business reforms over the past several years. This was announced by the World Bank Group’s latest Doing Business 2018: Reforming to Create Jobs report. Last year the report had ranked India at 130. India performs well in the areas of Protecting Minority Investors, Getting Credit, and Getting Electricity. The country’s corporate law and securities regulations have been recognized as highly advanced, placing India in 4th place in the global ranking on Protecting Minority Investors.
While there has been substantial progress, India still lags in areas such as Starting a Business, Enforcing Contracts, and Dealing with Construction Permits. In fact, the time taken to enforce a contract is longer today, at 1,445 days, than it was 15 years ago (1,420 days), placing the country in 164th place in the global ranking on the Enforcing Contracts indicator. TABLE 1 Ranking Ease of Doing Business
An Enterprise Survey is a firm-level survey of a representative sample of an economy's private sector. The surveys cover a broad range of business environment topics including access to finance, corruption, infrastructure, crime, competition, and performance measures. The World Bank’s Enterprise Analysis Unit is a team of economists and firm-level survey experts that both conducts Enterprise Surveys and draws upon this wealth of firm-level data from developing countries to produce research on the micro-economic foundations of growth. INDIA: Business owners and top managers in 9,281 firms were interviewed from June 2013 through December 2014.
Main Constraints for doing business of SMEs in India Table 2 Top business obstacles
Indian Companies responded that corruption and limited access to electricity are the biggest obstacles for doing business. They feel rather comfortable with educated workers, the political stability and the administration.
Business Beyond Borders: India in comparison to other BRICS and selected European Countries GDP (PPP) per capita and EXPORTS per capita (2016 and 2017) Countries
GDP (PPP) p.c.
EXPORTS p.c.
Austria China India Poland Switzerland
49247 16624 7174 29251 61360
18897 1704 256 5688 36321
Table 3 GDP (PPP) per capita and exports GDP (PPP) p.c. and EXPORTS p.c. 2016/2017 70000 60000
Int Dollars
50000
40000 30000 20000 10000 0 Austria
China
India
Poland
Switzerland
Countries GDP (PPP) p.c.
EXPORTS p.c.
Table 3 shows a direct causality of the volume of exports and the GDP (PPP) per capita. In Austria 33% of the GDP are generated by exports.
GDP per capita based on purchasing power parity (PPP) is the gross domestic product converted to international dollars using purchasing power parity rates. An international dollar has the same purchasing power over GDP as the U.S. dollar has in the United States. GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and
degradation of natural resources. Data are in constant 2011 international dollars. Table 4 GDP (PPP) per capita
GDP per capita (PPP based) is gross domestic product converted to international dollars using purchasing power parity rates and divided by total population. An international dollar has the same purchasing power over GDP as a U.S. dollar has in the United States. A purchasing power parity (PPP) between two countries, A and B, is the ratio of the number of units of country A’s currency needed to purchase in country A the same quantity of a specific good or service as one unit of country B’s currency will purchase in country B. PPPs can be expressed in the currency of either of the countries. In practice, they are usually computed among large numbers of countries and expressed in terms of a single currency, with the U.S. dollar (US$) most commonly used as the base or “numeraire” currency. Current Population of India (2018) - India, with 1,349,913,876 (1.34 billion) people is the second most populous country in the world, while China is on the top with over 1,415,489,506 (1.41 billion) people.
The Global Competitiveness index
is composed of 12 pillars of competitiveness. The pillars are organized as followed: Basic requirements (Institutions, Infrastructure, Macroeconomic Stability, Health and Primary Education); Efficiency enhancers (Higher Education and Training, Goods Market Efficiency, Labour Market Efficiency, Financial Market Sophistication, Technological Readiness, Market Size), and Innovation and sophistication factors (Business Sophistication, Innovation). Table 5 Competitiveness WEF Index
The Trade Gap Definition: Net trade in goods and services is derived by offsetting imports of goods and services against exports of goods and services. Exports and imports of goods and services comprise all transactions involving a change of ownership of goods and services between residents of one country and the rest of the world. Data are in current U.S. dollars. If a country exports a greater value than it imports, it has a trade surplus, positive balance, or a "favourable balance", and conversely, if a country imports a greater value than it exports, it has a trade deficit, negative balance, "unfavourable balance", or, informally, a "trade gap". A positive balance adds to gross domestic product, while a negative balance subtracts from GDP.
Table 6 Trade balance
Annual growth rate of exports of goods and services based on constant local currency. Aggregates are based on constant 2010 U.S. dollars. Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments.
Table 7 Exports growth
Technology licensed from foreign companies (percentage of firms) – manufacturing firms only Table 8 Technology licensed
Foreign direct investment
are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by GDP. Table 9 FDI % GDP
Measure: billion U.S. dollars Source: TheGlobalEconomy.com, The World Bank Definition: Definition: Net trade in goods and services is derived by offsetting imports of goods and services against exports of goods and services. Exports and imports of goods and services comprise all transactions involving a change of ownership of goods and services between residents of one country and the rest of the world. Data are in current U.S. dollars. Apart from being a critical driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment. The Indian government’s favourable policy regime and robust
business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others. India has become the most attractive emerging market for global partners (GP) investment for the coming 12 months, as per a recent market attractiveness survey conducted by Emerging Market Private Equity Association (EMPEA). The World Bank has stated that private investments in India is expected to grow by 8.8 per cent in FY 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby drive the growth in India's gross domestic product (GDP) in FY 2018-19. 2016 India ranked with 1,96% of the GDP third of BRICS, with 4,35% for Brazil, 2,54% for Russia, 1,52% for China, and 0,7% for South Africa. Source: India Brand Equity Foundation https://www.ibef.org/economy/foreign-direct-investment.aspx
Three Examples of Recommendations for Actions The Austrian Model Foreign Trade Austria is the internationalization and innovation agency of the Austrian economy. The Chamber of Commerce offers information and contacts on all matters relating to foreign business: export, import, foreign investment, country information, international industry developments. The Chamber of Commerce presents Austrian companies abroad, arranges business contacts, advises from the initiation to the execution of transactions, helps to solve problems and brings global trends to the members. More than 50 percent of Austria's economic output is earned abroad: the internationally active Austrian companies are making a major commitment and tireless efforts to boost the economy, growth and jobs in the state.
The tasks of the Chamber of Commerce are varied and extensive. It is an advocacy and service organization for business people that thinks member-oriented and is guided by economic principles. The financing of the Economic Chamber organization is mainly through the contribution of its members. This has in comparison to other states, in which the chambers z.T. financed by public funds or state subsidies, the decisive advantage that the Chamber of Commerce can represent the interests and concerns of its members independently and without instructions (no state influence!) emphatically and consistently. I recommend to apply the „Austrian Model” for all Entrepreneur Organizations comprising VAT paying members. Beneficiares shall only be registered entities and licensed persons. The administration should be done by a „Foundation for Economic Development and Crisies Prevention - FED”, based on legislation. What is the basis for the determination of the Chamber Allocations ? The so-called assessment basis consists of: • Value added tax charged to the Chamber member (exception: sales tax incurred on sale of a business) • Import VAT owed by the Chamber member (incurred on import from non-EU countries) • the income tax owed by the Chamber member (which is payable on acquisition from an EU country) • the VAT payable to the member of the Chamber due to the services rendered by the other member to the member of the Chamber for his company (reverse charge) What is the Allocation Rate rate? The rate is uniformly 3.0 ‰ for all federal states (state chamber share 1.8 ‰, federal chamber share 1.2 ‰) of the assessment basis.
EIB and India Finance instruments that can make projects happen The EU bank improves people’s lives by providing finance and expertise for projects supporting innovation, SMEs, infrastructure and climate action. EIB’s extensive lending, blending and advisory capacities are at the service of all EU citizens, as well as citizens in many non-EU countries. Lending Lending is EIB’s main activity. The Bank uses its financial strength to borrow at good rates, and passes the cost advantage onto economically viable projects that promote EU policy objectives. Projects financed by EIB in the last years: VOLKSWAGEN INDIA VOLKSWAGEN INDIA PRET Construction of new car plant for production of three small efficient models in state of Maharashtra Industry India Signed 2009/09/15 http://www.eib.org/projects/loan/loan/20090004 INDIA SOLAR POWER INDIA SOLAR POWER PRET Energy India Signed 2017/01/31 http://www.eib.org/projects/loan/loan/20150931 RABO INDIA GL RABO INDIA GL PRET Financing for small and medium-scale ventures Credit lines India Signed 2003/10/03 http://www.eib.org/projects/loan/loan/20020522
The 1% Law in Hungary What is the 1% tax? Per the Hungarian 1% Law, tax payers can request that 1% of their previous year's paid personal income taxes be given to support the activities of a non-profit organization and another 1% be given to a
church/religious organization without any loss to their income. Designating is easy, confidential, and enables them to support a worthy cause in Hungary at no financial cost to them. The 1% law is a good opportunity to demonstrate public support and raise funds for a special cause. How does this program work? A full list of approved charities and registered churches is available. To submit the 1+1% designation(s) electronically, separately or as part of the tax return process, one can submit the request by May 22, 2018. The tax authorities will transfer the donation directly to the selected charity.
Tentative Conclusions With its average annual GDP growth rate of 5.8% over the past two decades, and reaching 6.1% during 2011–12, India is one of the world's fastest-growing economies. However, the country ranks 140th in the world in nominal GDP per capita and 129th in GDP per capita at PPP. In order to unleash the full potential of India’s economy, particularly of SMEs, the biggest obstacles for their development, these are corruption, insufficient availability to electricity and too high tax rates will have to be removed in the forthcoming years. While indicators enhancing business beyond borders, such as Foreign Direct Investments (FDI), access to finance, competitiveness, and Ease of Doing Business Institutions have been significantly improved in the last years, the Trade Balance of the Indian Economy is still unfavorable and reduces the GDP for speeding up India’s domestic production. SME supporting Organization in India will have to focus on attracting technology transfer (e.g. licenses of foreign companies) to India and promoting exports and business partnerships worldwide. Therefore, they will need a sustainable income for their services, independent of business cycles. Intensified cooperation of Indian Banks, SME Institutions and entrepreneurs with the European Union, e.g. with the EIB - European Investments Bank, the World Bank and IFC, and with United Nations Agencies, e.g. UNIDO and -last not least- with WUSME World Union of SMEs would decisively foster the development. Contact: Norbert W. Knoll von Dornhoff – mailto: knollvondornhoff@europe.com