Thriving in sabotage

    As the 2011 winter session of parliament in India has stumbled from one disruption to the next, it is hard not to get an impression that the major opposition parties don't want to see the country prosper when they are not in power.

    After successfully stopping the opening up of FDI in retail, they are doing their best to stymie many other initiatives. Objections were raised against Aadhar recently.Folks with a slightly long memory would know that the idea of issuing unique Id's was a brainchild of the NDA government under Prime Minister Vajpayee. This seems to have become a pattern, with several bills stuck in the parliament. The Goods and services tax (GST) reform, pension reform bill and the list goes on.

    Embarrassing the ruling coalition seems to have become the prime motive. It doesn't matter even if it is at the cost of national interest. One can always find a plausible objection to any new reform attempt. If the government moves to resolve those shortcomings, field a new set of reasons for the obstruction.

    As an example, initial opposition to FDI in retail was based on concerns it would harm the interests of small traders. And here is a new take:

“India’s manufacturing sector, at best, is modest. International investors will source internationally and most merchandise sold, in the first instance, would be sourced from the low-cost economies of the world. It will be ill-advised to open the sector till such time we can implement effective reforms to reduce the cost of our own manufacturing by introducing steps such as affordable interest rates, better infrastructure, better trade facilitation, low cost of power, etc.” he said. There was no point in opening up retail when all that stores sell will be cheap Chinese products.

    Sadly, the phenomenon is not unique to India. People who follow politics in the US are very familiar with this public spectacle.The calculation seems to be that it is a risk free strategy. Stop anything that helps the economy and then blame the administration for making no progress.
   
     In India, elected officials need to remember they represent a country still living in abject poverty. Even if we were to make the most optimal policy choices today, many more decades will pass before the hundreds of millions attain reasonable living standards.This is not a game being played to win at any expense.

Scorched earth hypocrisy..

    A vicious blowback to opening of FDI in multi brand retail has started in earnest:

Speaking on the all-party meeting called by the PM to resolve the crisis in Parliament, Leader of Opposition in the Lok Sabha Sushma Swaraj said: “The government should roll back its decision tonight, so that Parliament can function from tomorrow.”

    The outrageous part is that NDA and some of it's allies were pushing for a similar policy change when they were in power until 2004. Perhaps, they are relying on a short public memory.

    Yours truly a few months ago.

As prospects of FDI in multi-brand retail have brightened in recent days, BJP has come out in opposition to the reform. Here is their take:

“We will oppose the decision of the government both at the Centre and by the state governments. The decision of the government would not only affect our domestic retail sector but would also destroy domestic manufacture because the foreign companies would be able to buy products from other countries and flood our markets with imported goods made available at these retail chains,” said a senior BJP leader who is among the policy makers in the party.

    This struck me as odd. If memory served me right, NDA was in favour of allowing FDI in retail during their term in Office(1999 to 2004). In April 2004, when they were still in power, this was Finance minister Jaswant Singh:

Dismissing notions that foreign retail brands would dislodge Indian brands from the market, Singh said the NDA was considering only 26 per cent FDI and not handing over the entire retail trade. “The Indian sherbeth is still there despite Coca-Cola and Pepsi. Our experience is that the Indian brand has great strength,” he said.

    It is hard to explain this shift in position. If anything, supply constraints and food wastage seen year after year make the need for reform even more pressing. This just seems to be opposition to a policy for the sake of it.

    This reminds you of their opposition to the Nuclear deal during UPA-1's term in office. Having suffered the electoral debacle in 2009, some would have hoped that BJP and NDA would be a bit more constructive in their opposition to public policy initiatives. Apparently, those lessons have not been learnt. Voters should not overlook this.

FDI in retail- more 'boldness' warranted

    This week's announcement to allow FDI in multi-brand retail has been greeted with opposition and some guarded optimism. The idea of allowing global majors like Wal-Mart, Tesco, Carrefour into retail has been on the back burner for several years owing to lack of political support. With stubborn high inflation and a perception of policy paralysis, concerns were being raised about the ability of UPA-2 making any progress. This is a good move towards allaying those fears.

    Some of the opposition to FDI in retail stems from fears that it could lead to job losses among small traders. Traditional mom and pop(kirana) stores would be affected most. However, these jobs are protected at an unsustainable cost. Several studies have shown that up to 40% of India's fruits and vegetables are lost because of inadequate storage and transportation facilities. Besides,many of these stores still operate under the tax radar. It is not uncommon for store cashiers to ask customers if the bill should be prepared with or without Value added tax(VAT).

    Yet, optimism surrounding the change may be premature. Most parts of India suffer from deficiencies in the transport network and electricity supplies. Acquisition of land for industrial development is very tricky. Even if a company such as Wal-mart overcomes these hurdles, there are threats by unruly elements to derail businesses that do not fit their ideology.

    For the know-how and technology of modern retail industry to produce results, several areas of India's moribund business environment need drastic improvement. A clear law for acquisition of land needs to be put in place so that new projects get off the ground at a reasonable time frame. Reform of police and judiciary is needed to ensure credible rule of law. Agriculture sector needs more investments and modernization to raise productivity.

    Without reliable physical infrastructure of global standards, retail operations will remain uncompetitive. Potential savings gained by streamlining the supply side are lost in covering for inadequacies of the underlying system

    By opening up FDI in multi-brand retail, UPA-2 has taken a bold new step in moving India's economy forward. They should sustain this momentum by making operating conditions more transparent and efficient with additional reforms. A severe political backlash is bound to erupt. Someday,their grandchildren will be grateful to them for showing courage to do the right thing.

How to lose a billion dollars

    By starting an airline in India. I am merely paraphrasing a popular quote from Richard Branson:

"The easiest way to become a millionaire is to start out a billionaire and go into the airline business."

     Kingfisher airlines' struggle for survival highlights the challenges facing the airline Industry in India. Adding to longstanding problems of congestion in major airports, high taxes on aviation fuel and steep fees charged by metro airports is the cannibalistic competition among airlines. It is not all about private enterprises striving for market dominance. You have a taxpayer funded spectacle in the name of Air India further distorting the playing field. After several years of steep losses and a half-hearted backing from the Government, Air India is still adding capacity in the market and competing for passengers, thereby putting downward pressure on ticket prices.

    Some of the private airlines that were launched in the last few years are either openly backed by relatives of politicians or are rumoured to have financial links to them. Many of these businesses were started during the boom years of 2005-07. Most of them were willing to stay in the market for the stipulated 5 years in order to start flying on lucrative international routes.

    Since 2008, things have gone from bad to worse for the new entrants. The unprecedented spike in oil prices in 2008 followed the sharp slowdown in the economy in 2009. Just as the business cycle was recovering in the last 18 months, oil prices are climbing back up. At the best of times, this is a tough business to be in. It requires huge capital investments, it is highly sensitive to external factors(oil prices, volcanic ash eruptions, communicable diseases) and margins are wafer thin.

    In the last week following the turmoil at Kingfisher, it is strange to hear that one of the solutions being proposed is to allow FDI into the sector. By all means, it is great to have more investments and fresh thinking. But, seasoned foreign airline operators who understand the industry in India are reluctant to take up on that offer.

    Perhaps, the biggest favour the government can do to the industry is to excuse itself from the business of running an airline and liquidate Air India. That would save some precious tax payer resources and destroy some capacity on the more profitable routes. The approach to pricing Aviation Turbine Fuel(ATF) needs to be reviewed carefully. Tax rates levied on ATF give you a distinct impression that the government still thinks commercial aviation is only for the rich elite.
   
    The process of granting bilateral rights to foreign airlines needs to be made more transparent. The stubborn refusal to let Lufthansa operate the A380 to Delhi and the rapid proliferation of gulf based carriers into major Indian cities are two cases in point. Some of the metro airports still suffer serious delays because of congestion throughout the year and especially during the winter due to fog. Despite rapid improvements,infrastructure at some of the airports is still not up to snuff.

    Above all, there should not be any knee-jerk policy changes in order to help any ailing airline. Bring in long term structural reforms and get out of the way so that badly run airlines collapse under their own weight. Until that happens, vain billionaires will continue to fancy their chances in this difficult industry and risk being reduced to millionaires.

India and the Formula 1 circus

    India staged it's first ever formula 1 race with customary fanfare. As is the norm world over, there were plenty of celebrities on hand to witness the circus. Apart from the odd electricity blackout and an occasional dog on the circuit, the entire race weekend passed off without too many embarrassing mishaps. Judging by the live footage, there seemed to be a large audience,presumably most of them from the upper middle classes.

    A reported $400 million that was spent on the circuit came in for some criticism. Allegations of wrongdoing in granting tax breaks for the race provided more ammunition to the critics. There was also the inevitable focus on extreme wealth inequality in the country. Jenson Button and Sebastian Vettel, two of the more perceptive drivers in the field also to noticed it.

Britain's Jenson Button said coming to India was "difficult" for the drivers, who have been stunned at the living conditions glimpsed outside their luxury hotels. "You can't forget the poverty in India. It's difficult coming here for the first time, you realise there's a big divide between the wealthy people and the poor people," he said. ....

German champion Sebastian Vettel caught his first glimpse of Indian life on the 200-kilometre (125-mile) drive from New Delhi to the Taj Mahal, and he said it was a humbling experience. "It definitely brings your feet back on the ground in many ways and makes you understand a lot of things," Vettel said. "It's an inspiration and makes you appreciate things you take for granted."

    If you look past claims that staging a big event like this would elevate India's image, there are some benefits that could be extracted out of hosting an F1 race. Formula 1 is a combination of business,sport,hospitality and high tech engineering. The high tech engineering part should be of particular interest to India. Tata consultancy Services(TCS), India's leading software company already provides IT services to Ferrari.
 
    Most global car makers are planning new factories in India to corner a share of the fast growing market.Gujarat's fast rise as a new auto hub is a case in point.There are several areas of technology in F1 that are relevant to road cars.After a late start, F1 has fully embraced Kinetic Energy Recovery System (KERS), the energy capture technique used in today's hybrid cars. F1 teams allocate vast resources for research on vehicle aerodynamics, transmission systems, driver safety aids and many other areas.Under the new FIA president Jean Todt , fuel efficient engines are also getting increased impetus.

    If appropriate industrial policy is put in place, the huge interest shown in F1 can be harnessed to get young engineers to develop competencies in these areas. All those car makers who are trying to design India-specific models would be happy to dip into a pool of homegrown talent.

    In the greater scheme of things $400 million is not a lot of money, especially when the entire investment was made by a private enterprise. As for any irregularities in the acquisition of land and special treatment by the government, there is a state election scheduled for 2012 in Uttar Pradesh. Going by recent trends of voters punishing corrupt incumbents, there is a decreasing likelihood of such deeds going unnoticed.

Has high inflation become intractable?

    As high inflation continues for an extended period, interest rates are expected to be raised further. The central bank's attempt at tamping down inflation through tighter monetary policy is understandable.

   Reform efforts at bringing in foreign direct investment into food and multi-brand retail have gone nowhere. If sweeping reforms were enacted swiftly, multinationals would be willing to invest heavily in the retail sector.If that happens,is the underlying infrastructure prepared to take advantage of fresh investments that may stream in? The answer is mostly, no. Apart from shortcomings with the road and rail network, stories about severe electricity shortages like this are not hard to find across India. Steps to enhance the road network are announced every once in a while. The actual progress however, has been frustratingly slow.

   Then there are factors beyond the control of India's government. Crude oil prices after reaching a high of more than $110 earlier this year have moderated. If the world economy returns to trend rates of growth, prices of commodities could spike again. This would make life harder for policy makers in India.

    In the absence of adequate steps to address India's chronic supply side bottlenecks, this may be a lost cause for the foreseeable future. Meanwhile,shocking levels of food wastage and malnutrition among millions of underprivileged will continue to blight the country. Not to mention other side effects,namely higher wages and slowing growth driven by higher inflation.

From Smartphone to Superphone

    As announcements of newer versions of Apple and Android smart phones roll in, you have to wonder what would the next big evolution of smart phones look like. Larger screens, niftier cameras, diverse set of applications and games have already ensured that the current set of phones are the most powerful portable devices a regular user has ever known. Yet, this may just be the tip of the proverbial 'iceberg'.
 
    When we step out of the house to go to work on a regular day, there are a few items we must carry with us. A cell phone aka smart phone is only one of them. We need a wallet with debit/credit cards, car keys and driver's license(if you drive to work), home keys, possibly an identity/access card to enter our place of work. Many of the cards and forms of identity are pieces of plastic with a magnetic tape with some data on it.

    The next generation of phones ought to have the ability to merge all these items into one device. They should have face recognition software(rumored to be in the yet to be unveiled nexus prime) as well as a finger print reader. If a device can reliably read these two key biometric attributes of a person, verification of identity becomes reasonably secure.
   
    Biometric authentication of identity should enable payment for all our purchases using the device.Google wallet already does this. But what if we completely eliminate the need for having separate credit and debit cards? Your phone is your card.

    The Driver's license would be a digital document on the phone. A signal from the phone will allow you to open and start your car(this is already out there). Use biometric identification and commands from the phone to open doors to our homes and offices.

    Obviously, all data would be stored remotely so that if a phone is lost, the data would not be. And if the phone is stolen, the device is unusable without biometric(fingerprint and face recognition) authentication. Yes, there would be privacy and security issues. They definitely do not sound unsolvable.

    I did not mention voice recognition, because it has been around for a while. The iphone 4S seems to have taken it a step further. Not sure it is advanced enough to recognize my name, especially my full south Indian name, which is so long, i am too lazy to type.

   It is realistic to expect a smart phone to have all of these features and more in the near future. I look forward to the day when i just have to carry a phone around and nothing else. May be we should call it the 'superphone', for it would be much more than a smartphone.

Emirates - The national airline of India

    Most major Indian commercial airlines have been dire financial state for the last few years. Air India cannot meaningfully utilize it's relatively new Boeing 777 long range fleet. Yet, it has a large order of 787's in the pipeline.With losses topping a billion dollars every year,it is not sure if it can pay for the new jets. The picture for private airlines is not rosy either. There are questions about the financial viability of Kingfisher .Jet airways has been struggling to turn consistent profits in recent quarters.

    Amidst all this, the rise of Emirates in India has been relentless.They have a large presence in most large Indian cities with multiple daily flights.

Emirates flies 185 weekly flights to 10 destinations in India using Boeing Co. 777-300 aircraft, according to a statement from the carrier in July. The carrier has said it wants to fly Airbus SAS’ A380 superjumbos to India as well.

    One analyst describes it this way:

In India, said Strickland, Emirates has become the de facto national airline. "They are where Air India would have been if it had been better managed," he said.
Clark said he expects a healthy traffic between Seattle-area software companies and the "silicon areas" of India where software is a big export.

    For Indians who hope to have a decent national airline , this may come as a disappointment. But is it really such a bad thing? I would say no. Commercial aviation is a tough business to be in. It is capital intensive and highly vulnerable to external factors like crude oil prices. At the best of times, profit margins can range in the low single digits. India would be well served to liberalize the civil aviation further and get out of the business of running airlines altogether. This is a domain better left to the private players to fight out.

   As long as the aviation business is regulated effectively for safety and transparency, passengers couldn't care less if it is a national or foreign carrier that they fly on their next trip.

Fight against graft,is civil society to be faulted?

    As more skeletons tumble out of the closets of corrupt politicians, you have to examine the approach employed by the civil society in it's fight against corruption. Their hard-line negotiating stance during the clashes with the government has been disconcerting.

    Some have questioned the legitimacy of the whole movement in light of the democratic framework of the country. The argument from the ruling UPA-2 goes along these lines: elected representatives are best suited to make legislation, popular opinion would force the government to do the right thing anyway.

    For decades in India, there has been widespread disenchantment over corruption in public life. After 1991, the sheer sums of money involved in scandals have skyrocketed , often measured in billions of US dollars.In contrast, total alleged value of kickbacks in the Bofors scandal from the 1980's feels like petty change. Yet, until 2011's surge in investigations and imprisonments, there was hardly any accountability in the system.

   In the aftermath of the economic boom, the mighty and connected have often seemed above the law. The civil society has no way of fighting these new barons of power using regular tools of law and justice on the books. They had to come up with something disruptive. So, we have India against corruption(IAC) and myriad other organizations. Often, their demands have sounded unreasonable, their tactics have looked more like blackmail. But they have been peaceful. They have sought to reform the existing establishment, not uproot it.

  Until IAC or someone else figures out a better way to bend the will of the government, popular protests are the best available means.No country can have it's rules and constitution set in stone. They need to reform with changing times.

Articles of interest - Sept 05 2011

Here are some interesting reads:

• Debacle of disinvestment- Bloomberg. 

• The unparalleled challenge of Aadhar - nytimes/ndtv

• Understanding modern India - book review in FT

• Voice of the middle classes - economist

UPA 2 - Too busy to govern

    Throughout the kerfuffle between Anna Hazare led India against corruption(IAC) and the government , there is one element of UPA's second stint that has not received deserved scrutiny. It is the slowdown of the economy and a loss of momentum in enacting badly needed reforms.

    Even as late as a few months ago there was a possibility of forward movement, with several bills waiting to be tabled.  Demands for a Joint parliamentary committee(JPC) to probe the 2G scam consumed most of the budget session between February and May. The current session has so far been spent dealing with the Anna Hazare fast.

    After extracting concessions from the government on Lokpal,  IAC seems to be signaling more such fights to come. To be sure, they have plenty of items on the agenda. There are far too many institutions of  government desperately in need of reform.

    The UPA could get ahead of this by coming out with a roadmap of reforms not just to tackle graft but also to accelerate growth. They could set out a time table for the passage of various bills and start moving ahead with them. If no significant progress is made in the three years before the next scheduled elections, UPA's second term could very well be remembered for it's political knife fights with the civil society and little else.

Corruption - The democracy rebound

    Emerging from posting exile. Was busy with the move. Then was without internet for two weeks, courtesy the Verizon strike.

    The politically out of favour big-wigs are now caught up in their respective run-ins with law enforcement authorities. See here, here and here to get the context. Reasonable citizens are right to question the timing of these investigations. For politicians, all these cases make it very clear that being out of power is not only bad for your career, it could also land you in all kinds of legal trouble. That is unless if your integrity is beyond question. These days in India, finding a politician whose integrity is beyond reasonable doubt is as rare as the Indian cricket team winning a test series in England or Australia.

    2011 is proving to be the start of a new era. I cannot remember the last time these many national politicians and bureaucrats were under investigation or sent to prison. Some would say , corruption has never been more rampant. But there is a brighter side . Legal action being pursued against all these worthies shows that people's voices are being heard. And that is no small achievement for a young democracy such as India's.

    For the past several decades, people who came to power in all levels of government would start engaging in corrupt practices immediately. The tacit understanding was that everybody did the same and there were no adverse consequences. Help yourself to as much as possible for as long as you were in power.And expect to go unpunished when you are out of office. The numerous investigations this year show that this may slowly be changing. That is the kind of rebound only a democracy with a semblance of accountability can produce.

    There is an awful lot that needs to be done to strengthen institutions of justice in the country. People will truly believe things have changed when guilty verdicts and convictions start getting handed to those who richly deserve it.

BJP's comeuppance in Karnataka

    A new chief minister has been sworn into office in Karnataka after Mr. B. S. Yeddyurappa resigned under the cloud of corruption charges. For a relatively forward looking state in India, Karnataka has had highly unstable state governments for more than three decades now. The job of Chief Minister of the state has changed hands 17 times in 33 years.Here is a listing of all those who have held the job:

1	D. Devaraj Urs	28 February 1978	7 January 1980	Indian National Congress
2	R. Gundu Rao	12 January 1980	6 January 1983	Indian National Congress
3	Ramakrishna Hegde	10 January 1983	29 December 1984	Janata Party
4	Ramakrishna Hegde	8 March 1985	13 February 1986	Janata Party
5	Ramakrishna Hegde	16 February 1986	10 August 1988	Janata Party
6	S. R. Bommai	13 August 1988	21 April 1989	Janata Party
	President's rule	21 April 1989	30 November 1989
7	Veerendra Patil	30 November 1989	10 October 1990	Indian National Congress
8	S.Bangarappa	17 October 1990	19 November 1992	Indian National Congress
9	M. Veerappa Moily	19 November 1992	11 December 1994	Indian National Congress
10	H.D. Deve Gowda	11 December 1994	31 May 1996	Janata Dal
11	J. H. Patel	31 May 1996	7 October 1999	Janata Dal
12	S. M. Krishna	11 October 1999	28 May 2004	Indian National Congress
13	Dharam Singh	28 May 2004	28 January 2006	Indian National Congress
14	H. D. Kumaraswamy	3 February 2006	8 October 2007	Janata Dal (Secular)
	President's rule	9 October 2007	11 November 2007
15	B. S. Yeddyurappa	12 November 2007	19 November 2007	Bharatiya Janata Party
	President's rule	20 November 2007	27 May 2008
16	B. S. Yeddyurappa	28 May 2008	31 July 2011	Bharatiya Janata Party
17	D. V. Sadananda Gowda	03 August 2011	Till date	Bharatiya Janata Party

                                                        Source : wikipedia

    A quick recap of the events in the last seven years is warranted here. Until the assembly elections of 2004 BJP was a marginal player in the state politics of Karnataka. With a hung assembly verdict in the 2004 elections, the party got it's opening in the state. They however, were thwarted by a shaky coalition between Congress and JD(S) which assumed power. This alliance collapsed after H.D. Kumarasway(HDK) engineered a coup by strking an alliance with BJP in early 2006. The apparent agreement was to share the Chief Minister's post for 20 months each for the rest of the duration of the assembly. Having been in power for 20 months, when JD(S) was unwilling to make way for a member of BJP to become the chief minister, the government eventually collapsed .There was president's rule for about six months.

    Fresh elections were held once again in 2008. This time around the fed up electorate seemed to be inclined to give BJP a clean chance at governing the state. Although no party got the requisite seats for an absolute majority , BJP managed to cobble together enough numbers to present a stable coalition. This was seen by optimists as a start of a fresh new chapter. Having suffered unstable governments in the previous four years, many thought this would bring much needed stability to the state. And since BJP had come to power in a southern state for the first time, many thought they would go the extra mile to provide good governance and establish a solid base.
  
    But it wasn't meant to be. Now just after three years , there is another chief minister. Misigivings between various groups within the ranks of BJP were reported by the media during the swearing in ceremony. The new administration will have two more years before the term of this assembly ends. There is little hope of any good coming out of this new dispensation.

    In the last few assembly elections across various states, voters have rewarded improvements in governance with renewed mandates and have punished those that gained notoriety for corruption and poor performance. New elections in Karnataka, when they happen may not be an exception.

Prospects of a slowdown

    As the uproar over corruption scandals continues during the monsoon session of parliament, policymakers would be wise to take a good look at the developed world economies.
  
    After an embarrassing showdown over raising the debt limit,  prospects for the US economy are becoming very uncertain.  With political gridlock continuing till the elections in 2012, chances of new growth boosting measures are close to zero.Any possibility of rapid growth for the US in the next 2 years looks very unlikely now. Meanwhile, in Europe the debt crisis is now threatening to engulf Italy and Spain. 

    There is hardly any encouraging news from the western economies, which are India's biggest export markets.At home, signs of the slowdown are becoming increasingly evident. On the brighter side, western companies may seek to outsource more of their work overseas to countries like India. Commodity prices may decline with a slowdown, helping the government in it's fight to bring down inflation

   Along with efforts to strengthen the safety net,lawmakers should make a big push to kick start investments in Infrastructure. It would contribute handily to growth. Apart from improving overall living conditions it would also provide badly needed employment to the vast masses of people who need it.

Raising rates - fighting inflation with both hands tied

    In it's effort to rein in inflation, RBI raised rates for the eleventh time in the last fifteen months. I apologize for the poor quality of the graphs. If you squint a little you will see the trend of rate hikes.

                                          India benchmark Interest rates:

 

Source:tradingeconomics.com

     Here is how inflation has been trending. The rate of inflation has been at hovering above 8 to 9 percent for the last 18 months.

Source:tradingeconomics.com

    Despite recent slowdown in sales of goods like cars, the underlying demand picture in India remains quite robust. Unfortunately, structural problems such as poor infrastructure, antiquated labour laws,lack of investment in agriculture remain stumbling blocks for the supply side in bridging the gap.

    Crude oil which plays a critical role in India's inflation picture has been stubbornly high. Food and commodity prices are largely outside the realm of influence of RBI's monetary policy If the global economic picture remains stable or gets better, monetary policy alone in India would not help tame the inflation. A spirited policy response from the government is urgently needed.

Yeddy makes it to Bloomberg headlines!

And this is all i have to say. For now.

Articles of interest

Here are some interesting reads:

• Using rice husks and solar to power rural India (bloomberg)

• After two decades need for a new wave of reforms (economist.com)

Reform agenda: signs of a heartbeat?

    After having spent the majority of the last few months addressing one scandal after another, UPA-2 seems to be showing some willingness to move the reform agenda forward. There still haven't been any concrete results on the ground.But the news that has been filtering out lately has been promising.

    There has been a steady stream of positive developments on the likelihood of opening FDI in retail. A green regulator is being set up to help smooth environmental clearances to Industry.The rural development minister is promising to table a land acquisition bill.

    For a government mired in endless controversy over corruption charges, a fresh push for reforms could not have come at a better time. UPA-2 might yet do some good before it's term ends in three years.

Articles of interest

 Here are some interesting reads:

• Tax evasion in India (bloomberg)

• Failure to feed India's people (thestar.com)

• Keeping A380 from flying to India (bloomberg)

Tata Nanos and more: prizes to get sterilized

    In controlling birth rates and population growth, sterilization has long been part of public health policy in India. The policy has had it's criticisms. Recently Rajasthan and to some extent Karnataka have taken it a step further. They are offering cars and other rewards as an incentive for people to get sterilized. Some say this another form of coercion.

    The BIMARU states still have very high fertility rates. It will be several decades before they get to a Total Fertility rate(TFR) of 2.1 required for the population to stabilize. For these states, bringing down birth rates is a worthy endeavor. However, providing inducements for people to get sterilized is not a sustainable way to achieve that goal. A sharper focus on improvement of health-care and education coupled with rapid growth in GDP would go a long way. Rising income and educational levels are much more potent in bringing down TFR.

    States in the south achieved a TFR of 2.1 or below a few years ago. They still have grinding poverty. Equitable growth which could bring upward mobility to a wider swathe of the people is needed urgently there.

Opposing FDI in retail - Opportunistic maneuvering

    As prospects of FDI in multi-brand retail have brightened in recent days, BJP has come out in opposition to the reform. Here is their take:

“We will oppose the decision of the government both at the Centre and by the state governments. The decision of the government would not only affect our domestic retail sector but would also destroy domestic manufacture because the foreign companies would be able to buy products from other countries and flood our markets with imported goods made available at these retail chains,” said a senior BJP leader who is among the policy makers in the party.

    This struck me as odd. If memory served me right, NDA was in favour of allowing FDI in retail during their term in Office(1999 to 2004). In April 2004, when they were still in power, this was Finance minister Jaswant Singh:

Dismissing notions that foreign retail brands would dislodge Indian brands from the market, Singh said the NDA was considering only 26 per cent FDI and not handing over the entire retail trade. “The Indian sherbeth is still there despite Coca-Cola and Pepsi. Our experience is that the Indian brand has great strength,” he said.

    It is hard to explain this shift in position. If anything, supply constraints and food wastage seen year after year make the need for reform even more pressing. This just seems to be opposition to a policy for the sake of it.

    This reminds you of their opposition to the Nuclear deal during UPA-1's term in office. Having suffered the electoral debacle in 2009, some would have hoped that BJP and NDA would be a bit more constructive in their opposition to public policy initiatives. Apparently, those lessons have not been learnt. Voters should not overlook this.

Corporate investments - Good news and bad news

    First the good news. Indian companies are growing their overseas businesses at a rapid pace in recent years.

Despite the global economic turmoil, 93 per cent of the Indian mid-sized companies, which do international business, saw growth in revenues from their overseas business, a HSBC survey said here today.
It added that 95 per cent of the companies with global footprint plan to expand their current international business in the next two years. ...

 Interestingly, almost 50 per cent of them have reported that their revenues from abroad have grown faster than domestic revenues in the past 12months.
While 69 per cent of the firms saw their international business growing faster or at the same pace as their domestic business, the report said.

    This is great for both the companies involved and their employees. Apart from establishing new markets for their products, companies and employees gain valuable exposure to international practices and techniques that can be adopted at home. This could also help them compete better with foreign companies in their own backyard.

    Now the bad news. One of the reasons for this outward push is that companies are finding it hard to do business in India.

Here's an economy that's growing at close to 8%—plus a huge market—at a time when the US and Europe are struggling with creaking growth, growing unemployment and rising debt; and yet the buzz across boardrooms is that investing abroad is "at least headache-free". They complain about frustrating delays in government approvals at all levels, primarily those related to land acquisition and the environment.

    At a time when millions of jobs need to be created every year to meet the needs of a growing young population, this is very disappointing. Finding evidence to support Deepak Parekh's claim is not very hard. Land acquisition has been a perennial problem with most large projects, both public and private. There are renewed talks of a land acquisition bill. This could not come soon enough.

    There has been encouraging news about opening up FDI in multi-brand retailing. This needs to be coupled with renewed impetus on infrastructure investments. Society of Indian Automobile Manufacturers (SIAM) is renewing their call for labour reforms.
   
    If India has to pull hundreds of millions of it's citizens out of poverty, it needs to attract investments at much higher rates than being witnessed now. And that cannot be achieved with reforms in a whole raft of sectors.

Got room for another minister in Tihar?

    New details of the Aircel sale and subsequent 2G spectrum allocation are gracing the headlines today. Every new revelation like the ones below highlight the brazenness of the whole affair.

Counsel said “this gentleman [C. Sivasankaran, promoter of Aircel] was forced to transfer all his shares to the Malaysian company. Only after the transfer took place in March 2006, action was taken on all the applications for licence. The Letter of Intent was issued to the Malaysian company in November 2006 and the licence was granted in December 2006.
...

On other aspects of the 2G spectrum case, Counsel said that prima facie the CBI had evidence to show that Loop Telecoms was a front company of Essar, which also stood corporate guarantee for Loop when it applied for a State Bank of India loan.

The status report noted: “Essar was the group behind Loop but two days before the grant of Unified Access Service Licence (UASL) licence they reduced their stake to approx 2 per cent.

    When most of these actions are alleged to have taken place , UPA-1 was still in it's early precarious years. They had several prickly coalition partners to live with. The position of DMK was significantly stronger than it is today. Scandals as big as that of 2G spectrum allocation were unheard of back then. It is plausible that there was a lack of political will on the part of UPA-1 to rein in it's partners at that time.

   The political landscape looks very different now.Despite all their protestations, none of the mainstream parties seem to be ready for fresh parliamentary elections in the wake of all the corruption scandals. In that sense, UPA-2 should feel secure enough for the time being. For a coalition whose credibility is in tatters, this is a chance at some redemption.There could not have been a better time to pursue these charges vigorously.

If Indian states were countries ..

    Click through this graphical presentation from the economist web-site. It provides an excellent comparison of Indian states and territories with countries of comparable size and population.
   
    Be sure to explore the three different tab options, "GDP", "GDP per person" and "Population". Within each tab, click on a state of your choice to see more data. Although India as a whole is one of the 10 countries by GDP, a closer look at individual states and the country each of these states is compared to is deeply illuminating.

Aadhar: Privacy and data security concerns

    Unique Identification Authority of India (UIDAI) has been creating partnerships with existing organizations to speed up the process of enrolling people. As the issuance of Unique Identification numbers(Aadhar numbers) gathers momentum, questions about the scheme's effect on personal privacy and data security have not gone away:

Early last month the Cabinet Committee on Security in a seemingly unrelated move gave partial approval for a Home ministry project, National Intelligence Grid (Natgrid). The development alarmed the privacy advocates to again raise a cry over Aadhaar. Among other things, Natgrid, being run by an ex-army man, Capt Raghu Raman, reportedly seeks to integrate 21 databases -  railways, airlines, stock exchanges, income tax, bank account details, credit card transactions, visa and immigration records, telecom service providers and chemical vendors.

    Fears of big brother taking over people's lives may be overblown. However, concerns around the integrity of the system are warranted. Although biometric data is not part of the system, United states of America has a version of Aadhar, the social security number(SSN).  The SSN of a person can be stolen and misused.
   
    You cannot travel in western europe and the UK for a few seconds without being videotaped by thousands of cameras that are located in every corner. This again is a serious threat to an individual's privacy.
   
    Fears of misuse of personal data and images are legitimate.But the prevalence of abuse has not been so egregious and unchecked that the very existence of such systems in these countries could be questioned. A striking difference between these two examples and that of Aadhar is that the western world has a credible rule of law. Sadly, you cannot always say that about India.
   
    Measures should have been announced and put in place to address this problem prior to issuing Aadhar numbers in a large scale. There has not been much evidence of that.

   Lately, with development of infrastructure we have seen an unfortunate tendency to do things in the reverse order. With regard to privacy and data security concerns, UIDAI may be following the path of that lousy tradition.

UPA 2 - sputtering reforms drive

    In May 2009, after the re-election of UPA alliance for a second term many of us hoped that the reform process would get a reboot. After a resounding win without the support of the left parties the obstacles to reform agenda seemed minimal. For those who expected swift action, the last two years have proved rather disappointing.

    Talk of police reform has disappeared from the public conversations lately. The Union law minister has been talking up judicial reforms.But there is no endgame in sight. Prospects of Lokpal bill remain uncertain. Financial reforms have been on the cards for the last couple of years with no progress. And there is no mention of tackling much needed labour reforms.
   
    On the brighter side, although targets have been missed the disinvestment program has been restarted. UPA-2 is pinning great hopes on "Aadhar" in it's efforts to reduce waste in administering welfare programs.
   
    Reading the reporting on his interaction with the media yesterday, you get the sense that the Prime Minister has a clear idea of the path forward. Despite all the negative press about him lately, he still is the best person to be on the job. He needs to crack the whip and show that he means business with a renewed emphasis on reforms.

Fuel price rise - tough medicine

    The raising of fuel prices over the last weekend was greeted with customary anger.  Cost of transportation fuels, especially diesel having a negative impact on the already high inflation are warranted. Inflation in India cannot be lowered  without addressing the supply side issues.

    Attacks by the opposition and allies of UPA notwithstanding, some of the subsidies are hard to justify.Cooking gas(LPG) is primarily used by the middle classes. In recent years, increasing number of diesel car models are offered in the market. Apart from being greener, these cars also take advantage of the subsidies that were never targeted at this sector.

    With crude oil prices still remaining above $90 a barrel,such misuse of government funds is unsustainable.Incomes of middle class families have risen steadily through the last few years. They ought to take this increase on the chin and carry on.

Two decades of reforms - decline in fertility rates

    Total fertility rate(TFR) is the average number of children born to a woman over her lifetime. When the TFR reaches 2.1 , it is called the replacement level of fertility. This is the level at which the population stabilizes.
    Generally,poor countries start out with a high total fertility rate(TFR). As they grow richer the TFR stabilizes. In turn , the population also stabilizes. One of the common refrains you hear about India is that the population of the country is too high. No doubt, the total population of the country is very large.What about the growth rate? One of the primary drivers of population growth is TFR. Here is the trend line:

    It is a little hard to get the exact number from the graph, India's TFR is around 2.6 now. The number has seen a steady decline over the last 20 years. According to an estimate,India's TFR would reach 2.1 around the year 2025. In the past 20 years , the rate of GDP growth has been steady and rising. This should translate to a rapidly decreasing TFR. Here is a snapshot of some of the states:

TFR rates for select states

    The choice of states in this graphic is deliberate. Bihar,Madhya Pradesh, Rajasthan and Uttar Pradesh commonly known as BIMARU states have seen sluggish growth in GDP and socio-economic development for the most part of the last two decades. Then there are the relatively progressive states of Gujarat,Maharashtra,Tamil Nadu, Karnataka and Andhra Pradesh. The TFR's for these two groups of states are in two seperate leagues. Here is the same data in numbers:

TFR decline in numbers for states

   
As you can see, compared to the BIMARU states, the states with greater GDP growths in the last two decades have seen a larger decline in TFR. The BIMARU's together make up more than a third of the country's population. Although some of these states have shown some promise lately, they still have a long way to go. Until then , these states will be a drag on every indicator of overall progress for the country. It is about time policy makers put more effort into improving the lot of these states.

A 'Unique' challenge

This piece in business standard illustrates the size of the challenge faced by the Unique Identification Authority of India(UIDAI). Any system that can hand out an average of 1.5 million biometric cards every month is mighty impressive. In this case, that rate of performance is barely enough to keep up with the growth in population.The goal is to generate one million identification numbers a day:

Even a cursory look at the UIDAI website for the month-wise enrolments of Aadhaar numbers shows the enormity of the task.
In February, the UIDAI generated 1.11 million Aadhaar numbers. In March, the generation of numbers saw an increase of 37.5 per cent to 1.78 million, only to fall again to 1.32 million in April. In May, it showed an increase of 64 per cent to reach an all-time high of 2.16 million. At present, in the month of June, 1.5 million Aadhaar enrollments have taken place. The sudden rise in May is attributed to vacations in schools and colleges.
R S Sharma, director general of the UIDAI, says he sees no reason to doubt the authority’s ability to generate a million numbers every day by October. Others in his department doubt his optimism.

They have roped in some of the top talent to work on this.Smart thinking has gone into awarding contracts:

When an individual is enrolled, his biometric data must be compared with everyone else’s to ensure there is no duplication. Sometimes the workers who show people how to place their fingers on the scanner accidentally scan their own fingerprints. As enrolments hit a peak of about 1m a day, the system will need to carry out a staggering 14 billion matches per second.

This mighty task has been awarded to private contractors in an unusual way. There are three vendors: Accenture and L-1 Identity Solutions of America, plus Morpho of France. The firm that does the fastest, most accurate job gets 50% of the work; the others get 30% or 20%. This allocation is frequently reassessed, so if the second-best firm starts doing better, it picks up some work from the leading firm. This keeps everyone sharp.

    Most large projects suffer from cost overruns and delays. It is hard to imagine UIDAI being immune to such problems. At a time when responsible democracies rarely build large monuments to showcase their countries , this project comes close to being a national monument albeit an effort to do some public good.

Will it be a worthy initiative? All of us will have to wait to find out.

After lokpal ..

The endgame for lokpal bill is yet to be reached. But it seems reasonable to assume that some variant of the bill will be passed eventually. If the overall goal of activist groups is to tackle corruption in public life, you have to ponder about the next step.

    The idea of Lokpal is borrowed from variants of the Ombudsman model of other developed countries. Holding public administrators accountable is a fine goal. But there are a lot of other parts of the system in dire need of fixing too. The judicial system should be an area of focus.

    The system is famously slow, with more than 30 million cases pending in courts. Disposal of cases is inefficient. Even the most straightforward cases take forever to be resolved. Lately, the quality and integrity of judges has also come under the scanner.
   
    Anna Hazare is suggesting that judiciary reform is the next big item on the agenda.There has been talk of a  reform bill for some time now. But not much progress has been seen on that front. From the civil society's point of view, if and when the lokpal bill is resolved this ought to be the next big fight to pick.

Number two investment destination?

This new study from ASSOCHAM caught me by surprise. It says Karnataka is the second most preferred investment destination in India now. A regular news junkie would surmise that most of these investments would be in the services sector. But, the study says that manufacturing was the largest component.

Nearly 44 per cent of these are in manufacturing sector followed by 22.4 per cent in services, 15 per cent in power and about 14 per cent in real estate. The projects are in different stages of implementation, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in its study titled ‘Karnataka – Next Growth Leader in the Making.’

    Karnataka has a history of volatile politics. Except for the period between 1999 and 2004 the state has not seen a single chief minister complete a full term since 1977. And lately, the state has been in the news for mostly the wrong reasons.

Robust infrastructure, active policy support are essential pre-requisites for the manufacturing sector to thrive. One has to wonder if the state has turned a corner of if this is just a blip.

Black money - got any ideas?

    So the Government is seeking ideas from simpletons like you and me to combat the problem of black money. They have even created an email-id , bm-feedback@nic.in to send in ideas. A cynical observer would think this is just another dog and pony show. I am going to take the bait and offer my sparkling idea.

    The overall amount of black money in tax havens is estimated at about $500 billion. Some say that the figure could be as high as $1.4 trillion. Since we are not sure , i am going to assume it is about $250 billion - a low-ball figure to be sure.

   My solution has two two parts to it. Step one, get the tax haven countries to share account information. Step two,create a framework to repatriate that money.

   First, offer a free trade agreement to the relatively clean tax-havens like Switzerland. Their banks will be allowed access to the banking and financial sector of a growing Indian economy in exchange for concrete information of illicit accounts held in their countries. Build pressure on tax haven countries that are unwilling to co-operate. This could be a real possibility.

"It is a big issue in India. At the same time, it is a global issue. People are uniting against it." Owens said. He said the OECD had adopted a set of criteria for blacklisting tax havens if they refuse to cooperate.

"We are making sure that all countries, including OECD member countries like Switzerland, Luxembourg and Austria, implement the decisions. Otherwise they will face sanctions," said Owens.

The Paris-based OECD, a grouping of 34 countries, accounts for nearly 80 percent of world trade. Although India is not a member, it has close relations with OECD and has joined its multilateral platform initiative to check tax evasion and money laundering.

    Assuming that the total value of illicit money is close to my estimate of $250 billion , a reasonable mechanism has to be put in place to entice the repatriation. Levy a 40% tax on the money stashed away. That would yield a revenue of $100 billion to the exchequer. Make it mandatory for the other 60% of the money(a total of about $150 billion) to be invested in an independently constituted Infrastructure development fund.
    Long term Infrastructure bonds would be issued and a reasonable interest would be paid out. That way, the erstwhile tax evaders can still keep part of the money and earn some income out of it. The infrastructure fund can then leverage itself to a ratio of 1:10. With a capital of $150 billion , it could borrow up to $1.5 trillion for investments in infrastructure. That could easily satisfy the investment needs for the next five year plan.

Alright, the whole idea may sound infeasible. But,i am not offering unsolicited advice. I was wondering if you folks had any thoughts ? If there is something to offer, post your views as comments. I will collect them all and send an email to bm-feedback@nic.in.

Rethinking NREGS

    When NREGS/NREGA was launched in 2005 it was seen by many as another well intentioned idea destined to be wasteful. However, it has proven to be popular and successful to some extent. Now, some of the unintended consequences are coming to light.

Ever since the start of the program, which guarantees 100 days of work a year for rural households, the flow of migrant labour to Punjab and Haryana states has dropped to a trickle, forcing farmers such as Malik to hike farm wages massively, and still he cannot find enough workers.

.....

"Four or five years ago, it used to cost Rs 500-800 ($11-$18) to plant an acre of paddy. Last year the labourers took a tenth of the paddy and Rs 3,000-4,000 ."
This rise in wage levels and farm costs in rural India is worrisome, with evidence it might be feeding into the high inflation that is the government's biggest economic headache and prompting a hawkish stance at the Reserve Bank of India (RBI).

......

Critics say MNREGS is wasteful and riddled with corruption, and the infrastructure created is of shoddy quality.

A recent World Bank study on welfare programmes in India including MNREGS said they did not give the "bang for the rupee" warranted from such huge spending.

    NREGS now costs about 1 percent of GDP, that is roughly in the range of 10 to 15 billion USD a year. It begs the question, Is it the best way to provide jobs to unemployed?

    A better alternative could be the kurzarbeit model that was implemented in Germany. It is a program where the state pays some part of the salary when an employer retains or hires a worker. India could bring about the much needed labour reforms and couple it with incentives for employers to hire and retain workers. That may prove a better alternative to the current form of NREGS.

Two decades of reforms - remittances

    The post reform Indian economy has seen a noticeable influx of foreign money. It has taken the form of FDI, FII and remittances from emigrants. Yet, the last category of inflows have proven to be steady and rising.

    The chart below illustrates the trend since 1981. Growth since 1991, especially in the 2000's is hard to ignore. These inflows now make up about 3.6% of GDP. The trend can be attributed to various factors. Increased outward migration, high tech nature of the skills of migrants and improving investment prospects especially real estate in India have all played a part.

Source: econ.worldbank.org

     Although small in absolute numbers, the outflow of money has also seen remarkable growth lately. Indian companies and individuals are increasingly looking outward for investment and education. This graph below could be a sign of that trend.

Source: econ.worldbank.org

   
    Much like the migrants, money seems to be moving in both directions rather smoothly.

If imitation is flattery ..

For those who have not seen this http://ipaidabribe.com/ , it is worth a peek. It is a web-site run up by an Indian non-profit to combat graft. It is a place where people can vent their anger, read other's stories of fleecing and organize with fellow citizens.

Lately, it has received some publicity in both the national and international press. Now, the web-site has a raft of imitators. One of the sites is apparently named "I made a bribe".

It is unclear if the Indian web-site has caused any change in behavior of those in power. And it is difficult to know if some of the international web-sites would be allowed to flourish. But the idea is certainly causing people to pay attention.

Response from a disgruntled populace

A quick follow up to my earlier post about the movement against corruption. What else can the civil society do in the face of an unresponsive government?

They could try and stage a referendum if the constitution allows it.That is exactly what Italy did today. The state of California has a rich history of doing this as well.

I am not entirely sure this can do a lot of good. What starts out as a well intentioned means of enforcing accountability could end up creating more chaos and grid lock. Read more about California if you are interested.

Two decades of reforms - IT and knowledge industry

The sector that has seen the most dramatic rise as a consequence of reforms of 1991 in India is the  information technology industry.Today the industry contributes 5 percent to the GDP and supports well above 2.5 million jobs in the country. This graph below sourced from this blog post gives you a good idea of the boom since the mid 90's.

The impact of reforms is well illustrated here.The country started as an IT services destination and is now diversifying into more than just IT. Blue chip companies like EADS, Merecedes Benz, GM conduct substantial Research & Development operations out of India these days.

Although the industry is still small when the working population and overall GDP is put in perspective, the future still looks good enough. Policy makers from the early 90's can rightly take some credit for this.

Wriggling out of the Quagmire

So, you are elected to govern a country after winning an election. There are longstanding problems in quality of governance, which you acknowledge but don't make a very serious effort to resolve.

The constitution allows an individual or a group to express their opinions and participate in peaceful protests against perceived grievances. The civilian, unelected entities take up the cause and start raising the issue .The media provides front page coverage to the ongoing fracas. The middle classes are fed up and empathize with the protests despite the colorful background of some of the leaders.

The government is in a pickle.What could possibly be a good response? Would  negotiations with unelected civilians and a counter offensive in the media help get you out of the quagmire?

How about laying out a long term plan to tackle corruption , not just one piece of legislation? Propose a slew of measures, i.e. police reform, reform of judiciary etc. Communicate the plan effectively , appoint an elected representative to oversee a timely and effective implementation.

Wouldn't that send a signal of competence and reassure the people , instead of the on-off, erratic response that we have seen so far?

Shiny new airplanes

When Air India placed a huge order for new planes in 2006, it raised a few eyebrows  for the way the order was placed. There were also questions about the need for so many long haul planes. Now those voices seem to be getting louder.

On the heals of strikes and heavy losses, comes the news that Air India now is reconsidering it's aircraft acquisition plans for the 787's. It is understandable that this is not as big an issue as the 2G scandal, but it is still big enough. As to why this not getting more attention in the media is a mystery to me.

'Aadhar' for a people

The much anticipated Unique ID project, 'Aadhar' is making steady progress. Concerns have been raised about the privacy/security issues and the cost of the project. People who work in the IT industry know that projects of this size generally tend to have teething problems. Missed deadlines, cost overruns and implementation flaws are all part of such a mammoth undertaking.

Any solutions that are devised to reach the entire population for a country the size of India would have to be groundbreaking in nature. 'Aadhar' will not be a silver bullet for all the shortcomings of our system. It could yet to do some good.

The creation of 'Aadhar' is enabling access to banking services for people who never had any. The biggest expected payoff is in the area of administration of existing schemes like NREGA. In theory, the direct transfer of money to the beneficiary's accounts should reduce waste and abuse.

The creation of national population register(NPR) would enable collection of more elaborate data.

During the preparation of NPR, the enumerators will collect from each household 35 details related to total number of persons living there, their sex, number of dwelling rooms, number of married couples, source of drinking water, type of latrine, fuel used for cooking, type of floor, wall, roof, whether anyone owns car/two wheeler, anyone availing bank service among others.

These data points should help in designing and administering any new development schemes. 

As to which of these benefits truly materialize, we will have to wait to find out.