governance, political economy, institutional development and economic regulation

Kejriwal plunge

(photo credit: fundamental.bogs.com)

How justified is Mr. Kejriwal, the Chief Minister (CM) of Delhi in assuring auto rickshaw (tuk tuks) owners and drivers -his niche supporters numbering around 100,000 – annual rate revisions in tandem with rising costs, when he denies a similarly supportive regulatory regime to the three private companies which supply power to consumers in Delhi?

As a Dilli-walla, who has not had to use an inverter during the last five years because electricity is available on tap- a saving of Rs. 5000 per year- it seems obvious to me that privatizing electricity supply has been the biggest boon for citizens.

But to sustain supply at a reliability level of 99.5%, the DISCOMS have to buy sufficient power to meet peak load and maintain the wires, related transmission and distribution equipment and meters sufficiently well, to avoid breakdowns and to meter consumption accurately. Privatisation has given Delhi what only Bombay (also privately supplied) used to have a two decades ago – reliable electric supply.

Build institutions, don’t undermine existing ones

The Delhi Electricity Regulatory Commission’s (DERC) consistently fair, participative and effective decision making has supported this achievement. Not surprisingly, a recent independent survey, done by the premier Jaipur based, consumer advocacy institute- CUTS, which reviewed institutional arrangements and consumer perception, assessed the DERC as the state electricity regulator most responsive to citizen grievances.

It is consequently, decidedly odd, that the Mr. Kejriwal should try and undermine the institutional credibility of the electricity regulator by insinuating that the private DISCOMS are being favoured by the DERC tariff determination process at the cost of consumers.

Most recently Mr. Kejriwal has alleged that the newly appointed in-charge Chief Secretary (who apparently was not his choice) is also in cahoots with the two Reliance power DISCOMS.

Mr. Kejriwal has erred in mixing up the issue of whether or not the CM should choose the Chief Secretary with the unrelated issue of whether, or not, the person appointed to that position, by the Lt. Governor, has the right credentials to occupy that post.

On the first issue, good governance norms would dictate that, at the very least, the CM should be consulted and preferably should concur in the appointment of the Chief Secretary (CS). After all, unless the CM and the CS trust each other, government will become dysfunctional. The worst thing for a government is to admit publicly that it is out of control. This holds irrespective of the legal position that the Lt. Governor is not bound to seek the CMs advice on the issue since Delhi is only a “make believe” State Government with limited functions.

Populism is not sustainable

The Kejriwal government is coming across as populist, anti-reform and anti-organised private sector. Add to this the constraint that being recent rulers, with no administrative experience, it appears ham-handed at doing what it wants. The result is that even good intentions get warped by inept execution.

Why Messers Kejriwal and Sisodia seem bent upon wasting time and political capital on burnishing their populist image, even though there are still more than four long years to go before elections, is puzzling.

That Mr. Kejriwal looks to the common man for his support is welcome. After all more than 40% of Delhi residents live either in slums or in slum-like colonies. But more than “freebies”- like cheap power and free water- what each of these “slum dwellers” want is a better life for their children and a job.

Generating new jobs

Generating 1 million “good” jobs in Delhi over the next four years is a colossal task and the CM would do well to focus his energies on this task. He will need the active collaboration of the private sector to achieve this goal. The continued availability of reasonably priced, good quality electricity will be crucial so tinkering with what is working well (privatized electricity utilities) is dangerous and irresponsible.

It is all very well to grandstand by dis-allowing the entry of multi-brand retail in Delhi. In any case, these space-intensive, “deep pocket” entities which seek to provide a “complete shopping experience”, would rather locate in adjoing NOIDA or Gurgaon, where commercial space is cheaper. But what does the government plan to do to “clean up” the existing local market places and make small shopkeepers more competitive?

Why not create new jobs by servicing public spaces better with private security; better maintenance; toilets; take-a-break-spots; green spaces and parking facilities to enhance the shopping experience.  The popular Dilli Haat (market) started two decades ago is one such example.

Make the rich pay for using public road space

Delhi has around 2 million cars. Most of them are parked overnight on the streets and adjoining side-walks. Why not charge car owners for this privilege, especially at a progressive rate? Rate progression would mean that for every incremental car per household, the rate increases. Even a flat charge per car of Rs 500 per month would yield an additional revenue of Rs 1000 crore per year (rule-of-thumb basis) equal to 3% of the 2015-16 Budget estimate of Rs 35,000 crores.

The incremental proceeds could be used, in the colony where it is collected, to provide and maintain colony roads; drains; sewage systems; street lights and water supply systems. More importantly, the fee will provide a disincentive to own multiple cars; encourage owners to dump old, unused cars and free up public parking, cycling and walking space.

Public transport

The CM should also note that whilst today electricity in Delhi is of the same quality as in Mumbai, the same cannot be said of the public buses. Ensuring a 24X7 public transport system, which is secure and accessible within a maximum ten minute walk from any urban mohallah (community), is an enormous challenge which goes beyond just buying more buses. Meeting this public transport infrastructure gap will hurt he CMs support group the most – the 100,000 auto rickshaws who provide an inefficient, insecure and costly substitute for public buses. But it can garner the CM the support of 60% of the 25 million Dilli-wallas who can only afford to travel by bus.

There are still more than four years to go for the Delhi elections and it is sad to see the Kejriwal government not using this time to deliver substantial gains to Delhi citizens. Grandstanding by “taking on” the Government of India via the Lt. Governor is unlikely to get it votes. Delhi is not a city which tolerates “whiners”.

BJP ruled municipalities provide no “benchmark” competition

The only silver lining for Mr. Kejriwal is that the three Municipal Corporations, all controlled by the BJP, are even worse. It is shocking that the Modi “magic” has not brushed-off on its local worthies and the municipalities remain mired in inefficiency and corruption.

Far from setting governance standards which would force Mr. Kejriwal to up his game and perform better, the Delhi municipalities are making it absurdly easy for Mr. Kejriwal to “shine” by comparison. This is shortsighted of the BJP and bad for Delhi citizens.

End game

Mr. Kejriwal has already lost the support of the middle class. Sadly he is in danger of losing the poor also, unless he takes service delivery beyond the level of rhetoric. He knew the limited character of the Delhi government before he contested. If he now feels constrained for power he has to wait till 2017 when he will get a chance of consolidating his power base in the three municipalities. Alternatively, he has to wait till 2019 in the hope of getting a congenial partner at the national level, who will cede fuller powers to Delhi State.

Either way he has a clear three years in which he can focus on improving what lies squarely within his ambit today- electricity supply, roads, public lighting, water, drains, sewage collection and treatment and social services. Even this seems a handful given the shallow bench strength of the AAP.

Trilema

(photo credit: http://www.financialexpress.com)

Reposted from Asian Age May 15, 2015 http://www.asianage.com/columnists/modi-s-trilemma-1

India’s bland foreign policy has traditionally been based on the principle of “please all and offend none”. Things changed under Indira Gandhi when we pivoted to the Soviets and teamed up against the “capitalists” in the West. But post-1990, once the Soviet dream evaporated, we reverted to the “offend none” tactic. The UPA years were a continuation of this approach, which suited the soft-spoken, nominal Prime Minister Manmohan Singh.

Things have changed since then. Prime Minister Narendra Modi is a muscular, energetic man and wants his foreign policy to reflect that energy and purpose. But he faces the classic problem of managing an “impossible trinity” comprising the US, a weakening Russia and an emerging China, which today attracts allegiance from countries cutting across traditional power blocs.

East Asia, other than Vietnam and Australia, feeds off China’s economic growth. China will likely add $6 trillion of new wealth (GDP increase over 2015) in the period 2015-24 and this is a powerful magnet that dulls the pain of negotiating with China over “disputed territory” in the South and East China Sea.

Similarly, Sub-Saharan Africa increasingly depends on Chinese investment “aid” and mineral export to China. Even Russia prefers to diversify its energy exports away from Europe to China, but not to India or Japan.

China is an immediate neighbour of India. A dispute over border demarcation in the west and east lingers. Neither party is really willing to resolve it because it is convenient for both.

For China, the ongoing border dispute presents it with the opportunity to build roads through Pakistan-occupied Kashmir (PoK), linking into Karachi on the Arabian Sea and the still-to-be-built Chinese port of Gwadar in Balochistan province, next to the Iranian border.

For India, the border dispute and China’s dodgy moves to build infrastructure through PoK, with the concurrence of Pakistan, is a package problem. It serves to legitimise a tit-for-tat aggressive development of Arunachal Pradesh, a border territory claimed by China. The area has significant hydro potential estimated at around 30 GW and is of strategic importance to safeguard the north-eastern states of India to its south.

It is fashionable to couch India’s need for China in commercial terms — trade and investment. But China is a much more efficient manufacturer than India and hence a trade deficit ($40 billion doubling to $80 billion in three years) is inevitable, with India as the junior exporting partner. Seeking investment from China is one way of plugging the hole created by the trade deficit. But such investment benefits China as much as India.

India’s growth story, whilst not as impressive as China’s, is sufficiently dramatic in these economically hollow times to garner eyeballs. New value creation (cumulative value addition to GDP over 2014 levels) of $1.4 trillion over a decade from now is not a trifle. A share of just 20 per cent (similar to its share today) in India’s new value creation could feed an annual growth of 0.3 per cent for China.

Growing economic ties with India — soon to be the fourth largest economy in the world (after the US, China and Japan) — enhance China’s “strategic prestige”. This is the “pull” factor. There is also a “push factor” which Indian strategists tend to emphasise — China’s paranoia that India may become part of a US effort to encircle China along with Japan. This “fear factor” is over hyped.

China knows well that the Indian psyche favours reconciliation rather than confrontation. India routinely prefers turning a Nelson’s eye to occasional intransigence but abhors subjugating its sovereignty to any foreign influence — a hangover of our colonial mindset. India could never be a link in an American chain to “contain” China.

China is unconcerned about future competition from the US. Over the next 30 years, the US will morph demographically into being dominated by fast-growing Hispanic and African-American communities; an ageing, minority white population; the inherited disadvantage of high wages and even higher citizen expectations; degrading infrastructure and increasing inequality. What this will mean for the “can do” spirit and mojo which defines the US, is unclear.

Despite such uncertainties, the US remains a long-term natural ally of India. Its plural culture, democratic values, federal institutional arrangements, history of innovation and grounded belief in religion and “family first” gels well with India.

A weakening US and a strengthening India make a perfect combination. The combined GDP of the US, India and Japan will be double of China’s GDP in 2024 and their future value addition — a key “convening” factor for attracting allies — will be higher than that of China.

Finally, the significant Indian community and private sector investment in the US and Europe provide a ready base for developing P2P (people to people) and B2B (business to business) contacts.

All this is reflected in the determined efforts of Mr Modi to establish a trade, investment and communication bridgehead with the US, Japan, Germany and Australia.

The traditional third leg of the impossible trinity has been Russia. But the gains from trade or strategic alignment are scarce. A close strategic friendship with Russia elicits no apprehension in Beijing because Russia is today a “toothless bear” plagued by a natural resource-export dependent economy. Russia, ruled by “grasping” oligarchs, has to reform and shed its macho image. Its best bet is to integrate into Europe, where it belongs. Consequently the “real” third leg of the trinity in future is Europe, with Germany and Russia as possible focal points.

Mr Modi’s strategy to navigate the impossible trinity of US, China and Europe-Russia is clear. Engage with the US, Japan and Germany aggressively and integrate into their value chains. Keep expectations low but exchange lofty targets with the Chinese and the Russians. But, most importantly, keep your powder dry and gear up India’s economy, because our best friend is our own strength and resilience.

Ni Hou

(photo credit: india.com)

Arun Shourie- minister in the earlier NDA government and senior BJP leader was being strategically alarmist when he went public on May 1 warning Prime Minister Modi against succumbing to the seductive spell, which the Chinese put on Pandit Nehru (India’s first Prime Minister) eagerly accepting his diplomatic largesse and support whilst remaining firm on giving nothing in return, which was not expressly bargained for and agreed.

Mr. Shourie has a flair for the dramatic and an uncanny ability to be evocative in his speech, sweetly hitting hardest, where it hurts the most. The Chinese “betrayal” of Pandit Nehru’s “brotherly” love by invading India in 1962 broke Nehru’s heart and spirit. He succumbed to the body blow two years later. China supporters maintain that unclear messaging from India forced China to retaliate since it perceived India as being bent on unilaterally disturbing the status quo along an un-demarcated Himalayan border between the two countries. Be that as it may, the China-India 1962 war, in which, despite heroic, determined but futile resistance from an ill-equipped and poorly led Indian army, China soundly trounced India, has left an open wound for India, which is still raw more than five decades later.

One doesn’t need to go back to 1962 to be sure that China is not a natural ally for India. We are just too similar with few complementarities and hugely competing priorities.

India-China, twins separated at birth?

Both countries are in a race for fuel, which neither have and both need to grow their economies and feed their people. One out of every three humans is either Chinese or Indian. China is racing to achieve high income economy status (per capita GNI> US$ 12,746) whilst India is striving to be an upper middle income economy-where China is today (per capita GNI> US$ 4,125). Both need to find export markets to fuel their growth. Both are relative “outsiders” to the high table of developed countries and both are jostling for space. Both peoples are hugely entrepreneurial and compulsively competitive. But there the similarity ends.

Even twins grow differently

India is barely at the threshold of being a lower middle income economy but its international, political engagement is larger than its economic heft. China is already an upper middle income economy but traditionally prefers to remain below the international diplomacy radar and boxes well below its weight, except when it perceives its national interest directly at stake.

India is a democracy of long standing, grounded on the compulsion of complex heterogeneity and plurality. China is a largely homogenous, beneficent, authoritarian meritocracy.

India is has been institutionally and ideologically networked into the developed world due to its colonial heritage and the facility with English. But it is a recent and somewhat unwilling, entrant to the international trade and investment value chains. China’s culture and values are unique and somewhat autarkic but its planned tapping of developed country knowledge, innovation, research and technology market has worked well. Its pragmatism, easy adaptation to change and determined implementation of a growth strategy by integrating into trade and investment value chains, sets it apart from even its East Asian neighbours, most certainly India and previously communist countries.

Given the lack of complementarities and the visibly rivalrous character of the relationship why has Prime Minister Modi steadfastly wooed the Chinese?

Why China eyes India

China knows well what it wants from India. It wants to service India’s booming market with cost competitive goods and services. This is why a bilateral trade target of even US$ 100 billion per year is rather limited for China. Given a choice it would rather shoot for US$ 200 billion so that it can buy into India’s growth prospects for adding at least 1% to its GDP growth over the next few years.

Growth is flagging in China. This is worrisome for the leadership which has built its credibility by “filling people’s pockets to shut their mouths”- a snide reference to the grand political bargain in which Chinese citizens agree to trade in individual freedom for material gains.

India has a trade deficit of 50% of US$ 37 billion with China. Bilateral trade is US$70 billion.  This is higher than the aggregate trade deficit which is 20%. Further expansion of trade will likely worsen this deficit, since China is a more efficient mass producer of goods. Trade with China is consequently only a lever for India with which to negotiate alternative benefits in investment; security cooperation and mutually supportive diplomatic stances in multilateral fora.

So what is it about China which should excite India?

China made Indian Gods

Rather than predictably moan about the trade deficit with China Prime Minister Modi should praise the Chinese people for their achievements.

First, thank them for sending affordable goods to India thereby directly benefiting Indian consumers and forcing Indian industry to become competitive through attrition of uncompetitive businesses.

Second, thank China for being a role model for developing countries on the following three counts. (A) Illustrating the virtues of savings and investment led growth, particularly in manufacturing (B) Establishing the necessity of increasing public investment in human development and social protection (C)  Providing to the developing world a model for enhancing employment, jobs and rapid reduction in poverty

Third, invite them to visit India as Tourists, Students, Scholars and Friends so that our great cultures can learn from each other directly.

The gloved fist

Much has been made of the Chinese excursions into India even as President Xi was eating Dhoklas with Prime Minister Modi in September 2014.  Was this part of an elaborate Chinese plan to remind India that sipping green tea together does not mean China will give up its claims on Indian territory? Or were they a Peoples Liberation Army game plan to stab the reformist Xi in the back and undermine his international credibility? We may never find out. But what it does illustrate is that diplomacy is like sleeping with snakes-one has to sleep light, remain vigilant, move slowly but definitively and remain calm and unperturbed by the ensuing rattles.

Chinese cash

Should we fear Chinese investment in India? Clearly they have the cash and we have the need for it. One reason why we need the cash is to generate jobs. This means that the standard Chinese model of project implementation which relies on Chinese expatriates does not suit our needs. Rather they should build Indian skills in project implementation in keeping with their celebrated record in project implementation.

Partnership with Indian companies is the best model for Chinese investment in India so that social benefits and tax revenue flows downwards to the people of India whilst corporate profits flow to China. Other than a very short negative list of investments in sensitive border areas, Chinese investment should be welcomed. In fact co-partnership in international value chain related production can be of mutual benefit in services, engineering and chemicals.

End game

Prime Minister Modi’s China strategy must needs be minimalist. India looms too large in China’s neighbourhood for comfort. China will pull no punches in consciously trying to establish its dominance in South Asia and thereby cramp Indian influence. This is very similar to the effort India spends on cultivating Vietnam now and Taiwan earlier to the chagrin if China.

The best that India can hope to do is to stop China from playing “spoiler” in India’s unfolding growth story. Chinese support for Pakistani Terror or Maoist rebels in east India is an illustration of such proxy efforts. The best way of neutralizing “spoilers” is to co-opt them into the game as active participants. We must encourage China to develop significant investment stakes and trade links with India so that they too benefit from India’s growth. Actively encouraging highway and rail links across borders is a good place to start. India must aim to become “too big” in the Chinese investment portfolio for it to stall Indian growth- this is what “protects” the US.

It is inconceivable that Mr. Shourie is oblivious of this imperative to reach out to China. Could it be then be that his highly publicized “missive” to the PM was just a charade, dreamt up by the BJP “dirty tricks” department, to build up PM Modi as a strong and forceful leader with the reach; the credibility and the strategic depth to ignore inner-party, high level resistance to warming up China-India relations? In other words was Mr. Shourie’s advice given with the full knowledge that it would be ignored?

Similarly, could it be that the recent government action against Greenpeace and the Ford Foundation for crossing red lines by supporting activities against the national interest, were also initiated to project Mr. Modi’s government, ahead of the China visit, as being strongly nationalistic, able and willing to cock a snook at the US, just to illustrate, that India is not wedded to any traditional power block.

Far-fetched or not, PM Modi leaves for Beijing on a stronger wicket, as a friend of China, than he started with in September 2014, in part, thanks to Mr. Shourie.

Reposted from The Asian Age May 5, 2015 where it first appeared http://www.asianage.com/columnists/shrimatiji-awaits-achche-din-800

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India is on a roll. The “helicopter-top down” view looks good. Growth is to be 7.5 per cent this fiscal and 8 per cent by 2018 (World Bank’s India Development Update report 2015) outdoing China, which cannot but be a matter of satisfaction. We are now besting China at their home grown “game” of sustained growth.

Home loan rates are also down. Stalled infrastructure projects are being restarted. Government is “intervening” decisively with upfront public investment to reduce the commercial and political risk for private investors. There is more “method” now to the earlier “madness” in the allocation of natural resources like spectrum and coal mining rights. Gas exploration regulations have been “tweaked” to make them more “investor friendly”. On land acquisition, state governments are showing the way though political rhetoric still trumps consensual problem solving.

Overseas, India is stepping up to the plate forcefully. The global narrative on India is changing. Canada is selling us uranium once again. India’s risk-averse nuclear regulatory framework is being applied innovatively to fit with the international risk sharing, contractual norms. India is once again a part of the global and regional public decision-making chain.

A signal of strategic maturity is India turning down the offer to bid for the 2024 Olympic Games. The growth dividend from such mega public events is iffy. More importantly, this is a frank recognition that it is not yet time for India to party.

How do things look bottom up? High expectations but fewer results just about sum it up. The common woman is still waiting.

That inflation is no longer surging is a relief. More importantly, the subtle but unsavory regulatory dispute between the Reserve Bank of India and the ministry of finance is resolved. Both now have bright lines defining their separate roles for growth sustaining, macroeconomic stability. This augurs well for the poor, who suffer the most from inflation and instability.

The average Indian household is not resilient to “shocks” principally because their pockets are so shallow. Food, cooking gas or kerosene and electricity constitute more than 50 per cent of an average Indian’s household budget despite subsidies. All three perch on an unstable stool of administered prices.

There are huge political economy barriers to making food supply fiscally sustainable. But shaping food demand away from the monoculture production of water intensive, risky crops unsuited to the local agro-climatic conditions can drive local jobs and reduce subsidies.

India is trapped in the Green Revolution led productivity enhancement of fine cereals — rice and wheat — which led to south India consuming chapattis and the north wolfing down dosa, thus creating a pan-India balanced, administered market.

Cereals are a staple diet for the price-sensitive poor because of subsidised retail supply prices. But, more worryingly, administered high farm gate prices — used as an inefficient instrument of income assurance for farmers — have led to fine cereal production, crowding out other weather-resilient local crops. Weather-resilient coarse cereals and legumes languish for want of research and fiscal support.

No surprise then that a fine cereal-intensive diet has become the diet of choice even of the middle class (30 per cent of the population) which, whilst not rich, is not desperately poor either. One-third of even the wealthiest children in India are malnourished, not because they don’t eat enough but because they don’t eat healthy.

A second revolution must herald the end of the great Indian tradition of a cereal-intensive diet. The time is ripe for a second revolution in food demand. Six hundred million Indians, who can afford to eat healthy, need to move to a more balanced combination of lentils, milk products, fish, meat, vegetables, fruit and coarse cereals. Doing so could create the demand incentive for food growers to diversify away from the subsidised monoculture of wheat and rice into more weather resilient local food varieties and packaged options.

Prime Minister Narendra Modi is the gold standard for illustrating the ability of positive outreach and communication to shape opinion and events. He should lend his heft to a campaign for revolutionalising food demand away from fine cereals to more sustainable local substitutes. Associating private sector partners in research and NGOs in extension work for developing and mainstreaming these substitute crops would also be a rich source for productive, new jobs for our science graduates.

Energy (transport and cooking) is the second big-ticket spend for households, which is why cooking fuel and road and rail passenger fares are subsidised. But low oil prices are precariously dependent on the continuation of the current US and Saudi strategy to sanction Iran and Russia by bleeding their oil revenues. This is a temporary factor. Similarly, normalisation of world economic growth is likely to boost oil prices in the medium term, upsetting the “happiness” apple cart for both retail consumers and the stability of the foreign exchange balance of the country.

In electricity, the neglected, dominantly state-owned distribution utilities are crying out to be fixed. Some of their angst relates to their own inefficiency — they continue to lose 27 per cent of the electricity they buy due to theft, collusive metering and poor operations. But below-cost tariffs for domestic and agricultural users have resulted in an accumulated loss of Rs 100,000 crore ($16 billion). This is recognised by regulators as due to the utilities but remains parked as a notional asset with no assurance of when or how utilities are to recover it.

Things have now come to a head. Poor utility finances are holding up the conclusion of power purchase agreements with generators, which in turn negatively affects the operationalisation of 20,000 MW of new investment in generation and shall ultimately impact consumers with either poor quality or higher prices.

At the heart of improving the life of the common woman is to drive hard for stability, reduce the risks she faces and move quickly to dilute the inevitable shock. Traditionally the government has focused on the latter — better disaster management is one of them. But the far more fundamental work is to enhance individual risk resilience. Jobs help the most in meeting this objective.

Realty is a jobs-intensive sector. The construction splurge of the previous years — driven by bank loans available at low and mostly negative interest rates — created a two years’ over-supply of “inert economic assets” which generate no jobs post construction because they are empty shells. The challenge is to fill these empty spaces — shops, offices and homes — with people who are willing either to rent or buy and use them.

Intervening administratively — rent control and allocating vacant space, as done in the past, or even worse, caps on the sale price of property — would be a ham handed, extremely leaky approach out of step with the times.

A better way is for municipalities and banks to provide price disincentive — higher property tax and higher interest rates for loans on properties kept vacant. Having to pay more on vacant properties can discourage speculation, drive better utilisation of inert investments and generate social returns — jobs for people and taxes for the government.

A year is a lifetime in an intensely contested, democratic polity. This is why the government must squeeze out the “fat” in the system whilst planning for the future. Over the past decade, we had much more of the latter and very little of the former. Given the head winds building up, it is critical for the government’s longevity to redeem its compact with voters by delivering real, near-term, fiscally neutral improvements in consumer welfare. Think long but act now should be the mantra

DC

(photo credit; namakkal.tn.nic.in)

Prime Minister Modi, addressing the civil service officers, last week, made three telling points. First, he asked the bureaucracy to shrug off the inhibitions of the past and think big and assured that resource constraint would not limit them.

Second, he exhorted the bureaucracy to change citizens’ perception of babudom by personal example.

Third, he advised that social and human development were core sovereign areas that babus should focus on.

Taking the second first, he was bang on. Babus have taken a severe beating over the last three decades, with even the government giving this institution short shrift. Cleary, this PM is different. This warmed babu hearts, as it was meant to and possibly sparked off in a few, the determination to be different. But unless some core steps are taken to create the enabling environment for babus to earn respect, the warmth will dissipate quickly.

There are three key issues which bedevil the bureaucracy and unless these are dealt with widespread change is a dream.

Management by Janampatri

First, the bureaucracy remains mired in colonial, vertical hierarchies, with each having its own jagir of positions that only they can occupy from induction to the day they retire. Aspirants work hard to join the various silo like career lines, not because they have a talent or even liking for the type of work they do, but based purely on differential career prospect, which bear no relationship to the value addition. This is clearly out of sync with the horizontal institutional structures which are the new work place.

Of course change has to be gradual to be fair to those, who for no fault of theirs have become what the system made of them. Starting with the top is always the best way to signal change. Recruit all senior positions in the Government of India on contract for fixed terms through open selection, based on core competencies. This is what will incentivize junior babus to be performance oriented; acquire relevant skills and to specialize.

The electron is mightier than the pen

Second, government has to go 100% digital to manage the ensuing burden of monitoring, managing and rewarding performance. Digitisation also establishes audit trails, which cannot burn down, as files do. It is also crucial for fixing accountability. Lastly, digitisation promotes transparency and access to information. India lost an opportunity when it did not become part of the steering group for the Open Data initiative of President Obama in 2013. But this is where we should be heading.

Pay for value addition not status

Third a common problem, across bureaucracies, is that that the most unskilled get paid the highest relative, to the market comparators and the most skilled are severely underpaid. The logic behind this “madness” was socialism which expected you to “give” to the nation per your capability but to expect only what you needed. Since there is not much variance in human need- roti, kapda, makaan- pay scales across the vertical levels of babus were compressed unreasonable in a show of faux equity. Even today the highest gets paid only 10 times the lowest. This needs to change. In the private sector, where pay is related to value addition, this ratio is meaningless. The start should be made by making all senior positions-Joint Secretary and above- contractual, filled by open selection through UPSC and paid on market rates.

Just making these three changes can inject skills into the bureaucracy; make them more responsive to public needs and generate the right incentives for those in line for senior positions.

Are we heading for a fiscal surplus?

What about the other significant point of the PM-thinking big and learning to work with “plenty” instead of coping with resource scarcity.

The source of the PM’s confidence that a fiscal bounty is around the corner is unclear but the point is relevant in the context of his objective “minimum government, maximum governance”.  If the physical size of the government is reduced to only the skills required for core sovereign functions, the ensuing surplus public funds can be deployed.

Focus the bureaucracy on core sovereign functions

His remark gains heft when linked to his third point that he did not visualize a big role for the bureaucracy in areas which were earlier considered “prime “ positions- industrial development, commerce and infrastructure, since these were not core sovereign responsibilities. Developed economies function very well, through professional bodies and the private sector in these areas, using light touch regulation.

Instead he exhorted the bureaucracy to align their skill set with what people expected of them- enforcement of the rule of law; social protection and human development. Working with and for the disadvantaged, is a core sovereign function. This must have come as a shock to many babus, aspiring for career in the glamorous world of industry, infrastructure and commerce.  But, if and when translated into reality, a focus on using the bureaucracy primarily to fulfill social objectives is very welcome.

Management of “plenty”

Are there special skills required to work with plenty? A fiscal bounty or “plenty” has obvious advantages in improving funding even for functional areas like personnel management, accounting, auditing and technical consultancy which are fundamental to public efficiency; in improving the timely availability of budgeted amounts or in making government more receptive to innovation requiring some additional up-front cost. But perversely, plenty also breeds its own “spoilers”.

Keeping the “Locusts” at bay?

First, “plenty” attracts locusts in droves each trying desperately to get at a slice of the action. If the institutional arrangements are poor, or the government weak kneed, “locusts” will gnaw away till they bring down the very tree they feed on. The UPA 2G and coal allocation scams were exactly these.

So PM Modi is correct that the bureaucracy will need to change their skill set if they are to manage “plenty” as efficiently as they have been managing scarcity all along.

The might of public finance breeds civil service arrogance

Second, the most pernicious outcome of public plenty is the perception, within government, that it can go it alone without the collaboration of other stakeholders- civil society organisations; NGOs and the private sector. The collateral damage is of “know all” babus and surrounding supplicants, who would prefer to allow government to make costly mistakes rather than risk point out an error for fear of being labeled as a “problem creator”.

The systematic subservience, during the colonial period, of local public management systems to centralized, top-down arrangements like the District Collector or the Police Superintendent, have left an enduring miasma of suspicion, envy and mistrust, which still colours the relationship between the people and the State, seven decades into our independence.

Resource scarcity has the advantage that it humbles the State and its representatives and forces them to take help from the local community thereby creating horizontal working relationships between the State and Non State Actors. Loosening of the fiscal strings can retard this healthy socio-political institutional development.

The State has to progressively step up partnerships with CSOs and NGOs, not only when it is driven to do so by budget constraints but because of the social and economic benefits accruing from letting people manage their own affairs.  Decentralisation and direct democracy has multiplier effects, beyond just the fiscal mirage of making personnel liabilities off-budget for government.

The begging bowl is easier than community effort

Third, one of the biggest problems in lavishly funded, extended United Nations relief and rehabilitation missions is how to wean the beneficiaries away from the psyche of dependence on an beneficent external actor, be it the UN or the government.

A government of plenty begets the same dilemma. In the face of the might of public finance, the internal juices of communities, to fund and manage their own needs, dry up. Instead it is so much more convenient to stand in line with a begging bowl every time the PM comes calling and to lobby for public funds in the capital.

Gold plated stranded assets

Fourth, at the best of times due diligence, design, planning and execution of public projects is made impossibly inefficient by process norms and the political economy constraints of spending public money per the “value for money” principle. When money is scarce, decisions get pared down to the essentials. Conversely well-funded public entities make bad investments merely because they can afford to do so.

Public decisions-be they big or small, are so difficult to get made that the tendency is to lump what should be a series of separate decisions into a single omnibus project which becomes so big and involves so many stakeholders that it “just cannot fail” and has to be approved. But this also generates surplus capacity.

This tactic is unsuited to an era of rapid technological change. Excessive future commitments can become stranded assets-technology which is no longer efficient. Building 100 GW of solar capacity in the next five years has precisely this risk.

There are four key ingredients for making good decisions in a time of plenty going by the acronym- COLON.

First- Collaboration with all stakeholders is key to inclusion. Embed it in government process. Second-Outcomes like reduced electricity outages, should be monitored rather than inputs like project spend or intermediate outcomes like project completion. Third-LOcal decision making is key for ensuring buy in. Leave room for it even if it means slower implementation. FourthNo is what a Finance Minister should say to politically motivated, low social return investments. Currently we have only the fourth ingredient.

neutered

Photo credit: http://www.yourpurebredpuppy.com)

Netizens- citizens who participate in public debate from the comfort of their broadband enabled “home” space- are a furiously engaged and vocal lot in India. 800,000 of them voiced their support for the nebulous concept of “net neutrality” in an outpouring of outraged emotion, similar to the 2011 Arab Spring which put paid to Hosni Mubarak in Egypt.

Unlike the Arab Spring, this was the revolt of the empowered- internet penetration in India is barely 20%; broadband access is just 8% and 80% of net access is by the privileged owners of smart phones. This boils down to a privileged population of around 9 million netizens in a country of 1230 million citizens.

Like the Arab Spring, the netizen revolt was against a “perceived” threat to their empowerment-in this case cheap access to the internet- which ironically is also one of PM Modi’s promises to the entire Nation.

Keen to dampen the “revolt of the privileged” and anxious to avoid a political fallout, Ravi Shankar Prasad, the Union Telecommunication Minister, hastily set up an expert committee this week to advise him on the subject and publicly re-committed to make the net accessible for all. Sundry netas (politicians) waded in, some equating “net neutrality” with democracy, others raising it to the level of a fundamental right.

The occasion for this frenzy was an exceedingly well articulated and informative Consultation Paper issued by the telecom regulator-TRAI, calling for comments by April 24, on the need, or otherwise, to regulate Over The Top (OTT) services- communication service providers like Facebook or Google; content providers like You Tube or Netflicks; apps providers like Apple or Cloud computing and storage; e-commerce sites like eBay, Amazon and Flipkart. All these provide unregulated, unlicensed voice, audio or text services; they do not need to buy spectrum; they free ride over the “telecom pipes” built by telecom providers and incur none of the obligations (user data privacy, transparency in data management, data security) loaded by the government onto licensed Indian Telecomm providers- Airtel, Vodaphone, Idea, Reliance Comm, TATA Teleservices and Reliance JIO Infocomm.

The cause celebre inciting the wrath of netizens was an impending deal between Airtel-India’s largest and most internationalized mobile services provider and Flipkart-a Singapore-India e-retailer, which went from being a start-up in 2008 to a valuation of US$ 12 billion in end 2014. The deal in question was a “zero-rating” agreement under which customers would get free net access to the Flipkart services with the latter compensating Airtel directly. It is unclear if exclusive hosting of Flipkart on the Airtel network was built into the deal.

Rahul Khullar, the upright and technically brilliant, ex-babu (bureaucrat), economist who chairs the telecom regulator-TRAI, was as astonished as the Minister of telecom by the virulence and strength of the customer reaction. He went public yesterday and blamed the “noise” around the otherwise rather bland, technical concept of “net neutrality (NN)” as an outcome of “a corporate war between a media house and a service provider”.

Here are some facts drawn from the TRAI consultation paper followed by opinions.

 

Perfect NN is a mirage

First, as the TRAI paper acknowledges, perfect net neutrality (NN) is not practiced anywhere nor is it technically efficient. Management discretion with respect to the manner in which data packets move through the telecom pipes must be left with the service provider so that outcomes (service quality and cost) are optimized.

 

Inefficient “Free riders” impose costs

Second, just as democracy, by definition, requires the limitation of certain types of individual freedom in the interest of the common good, “free riding” by any player imposes an unfair cost on someone else, which has to be guarded against. This is best done by allowing the market forces of competition and prices to prevail with the government looking closely only at a single bottom line- sustainable benefit for the retail customer.

Innovation, yes but “free riding” no!

Third, for every start up like Flipkart which goes from zero to hero in five years, including by minimizing their upfront cost through “free riding”, there are Dumbo individual users like me who pay Rs 650 every month for a 3GB data plan but end up using only 1 GB. The spectrum space paid for, but left unused by us, is used by the Flipkarts to leverage their business.

Nothing wrong with that. If you are dumb you should lose out. But here is the knockout punch. Costless “free riding” works for all only till there is spare capacity in the “spectrum pipes”. The contention of the telecom providers is that the growth of data intensive OTT products (movies on YouTube and Netflicks; real time Cloud Storage; voice and audio services like Skype and Google Chat) have shrunk the space available in the “pipes” and reduced the quality of service for customers who use conventional voice and data services provided by telecom companies.  Ergo new investment is needed to upgrade the “pipes” and more spectrum is needed to accommodate the growth of data intensive 3G and 4G services.

 

The looming transmission capacity gap

Fourth, demand is exploding. Evolved services like VOIP, video services, digital services-including telemedicine, cloud computing and storage are all data intensive and requires data transmission at high speed (data streaming) with no breaks in between, unlike emails and text, which can take intermittent transmission. Text and standard content can be transmitted using a speed less than 1 Mega Bits per second (MBps). Movies in comparison require speeds of up to 10 MBps. Higher the speed more the requirement of spectrum since there are no “data packet gaps”, which can be packed in with say text, to optimize capacity usage – much like airlines pack spare seats with last minute, flexible time, low priced flyers.  TRAI reports that 36% of mobile usage in India is already for movies or video. The global average is 70%.  Growth to global levels is limited only by our quality degrading, low transmission capacity.

The government has no time bound, publicly announced plan for releasing spectrum currently hoarded by the army and by the public sector telecom companies-public gifts to them from before spectrum allocation was liberalized and its commercial value became common knowledge.

A spectrum availability gap consequently looms, as TRAI has pointed out to government. This means that TSPs have no option but to extract higher revenue efficiency from the existing spectrum for upgrading infrastructure.

 

Who should pay for OTT services?

Fifth, it is a standard rule of utility pricing that those on whose account an incremental cost is incurred must be made to pay the higher cost. Prior to the onset of internet based voice, video and instant messaging (chat) the normal share of “voice telephony” in TSP revenues was 70% and the residual 30% was data- sms, emails and other net usage.

Today, globally, the volume of SKYPE (the sms, voice and video over internet firm) traffic is 40% of conventional telephony and its nominal growth is larger than the growth of conventional telephony. Is this the end of the road then for conventional telephone companies? Not quite. In India and similar developing countries, conventional telephony has a reprieve. Until the transmission pipes can be strengthened to deliver good quality OTT services the demand for them will remain constrained. It is not uncommon, even today, for customers to resort to the fixed telephone network when mobile calls have a problem getting connected or get “dropped”.

Clearly, potential customers of OTT services, like movies, cloud computing and music should be ready to pay for the improved net services whilst those who are content with low data intensity conventional services, like text, should be insulated from the price hike. This requires progressive, price discrimination based on data use. Netizens point out that they already subscribe to TSP data plans for high speed access at prices determined by the market.

But TSPs complain that fierce competition constrains them from hiking data access charges for high speed data access. But the generous valuations put by incumbent TSPs in trying to hang onto spectrum allocations in the February 2015 auctions weakens their case of financial stress. The TRAI paper, unfortunately, does not share a marginal cost based assessment of the revenue requirement of TSPs to improve quality and enlarge access.

 

Willingness to pay

Customers should theoretically be willing to pay a higher price for accessing OTT services but India is a very price sensitive market. Over the last two decades, liberalization, fierce private sector competition and a “Nelson’s eye” regulatory approach to the quality of service, resulted in declining telecom rates and increasing usage.  This has fueled a “feel good factor”. No one wants to bust the party.

Whilst conventional TSPs have a vested interest in improving infrastructure quality their business model is under threat from technology and innovation. They have lost business in the lucrative sms market to “free” messaging services like WhatsApp (in the US it charges an annual fee of US$ 1) even though sms charges are nominal at Rs 1 per message. CARE-an Indian rating agency, estimates that the nominal revenues from sms reduced by around Rs 4000 crores (US$ 0.6 billion) in 2013.  TSP voice telephony is similarly under attack from voice OTT services. Call charges at Rs 0.5 per minute are the lowest in the world but still uncompetitive with the data cost of a VOIP call of only Rs 4 per minute. This could mean the capacity of TSPs to bear additional “pain” is limited, especially after the generous amounts bid by them in the February 2015 spectrum auctions.

That leaves only the stand-alone communication, content and app providers like Google, Facebook, Amazon – the free riders- who are unwilling to share this cost. However, their Indian clones, like Flipkart may well be willing to submit to licensing and revenue sharing just to grab market share from the entrenched global players-at least in India.

Three options, for taking us out of this conundrum, present themselves:

 

Back to the future: Minimum data access tariff

First: The nub of the problem is how to extract some of the enormous value being generated in unlicensed OTT services who free ride. TRAI declared regulatory forbearance on telecom tariffs with the onset of competition in services. The results have proved their wisdom. But TSPs complain a combination of artificially created spectrum scarcity have forced spectrum pricing up. Technological innovation has reduced margins on conventional telephony services and revenue flows instead to the OTT providers. The result is shrinking bottom lines for TSPs and cut backs on network upgrades.

One option could be for TRAI to prescribe a minimum tariff for high speed data access, based on the marginal cost of service studies, to ensure sufficient head room for network upgrade and access related investment. This minimum tariff could even be “discovered” by a reverse auction amongst TSPs-along the lines of the coal auctions for user power plants. The alternative is for TRAI do determine the minimum access tariff in the usual manner. This would force user charges for high speed data access up and better compensate TSPs.

The downside is that this option wrecks the ongoing party of the last decade with declining tariff fueling customer well-being. This may not be the best way to ring in Ache Din (PM Modi’s Good Days Are Here assurance)

Bring OTTs into the red tape tangle

Second: The government could license all OTT service providers and divert the additional funds to licensed TSPs to meet their network upgrade costs.  This would provide some financial relief to the TSPs and avoid a direct increase in customer telecom tariffs. But the License Fee would have to be significant to make a difference.

The biggest risk is that OTT providers, who by definition are “innovators”, dislike getting caught in red tape. Many of these are global players and shy of entangling with local laws. They could simply walk away. This may not necessarily be a bad thing since in China it resulted in the development of local clones. But India is presently not China. More significantly high License fees will be a bigger barrier for small local “innovators” who lack the deep pockets of foreign OTT providers.

To avoid the considerable barrier of a high upfront License Fee it could be recovered periodically linked to actual network use by an OTT provider. But this arrangement would need to be tracked by DOT or TRAI generating more red tape for OTT to tangle with.

Most important, PM Modi is in the process of defining an “International India”. Reducing transaction cost is an important part of the initiative. Putting OTTs into the muck of red tape does not align with all the assurances of enhancing the ease of “Doing Business”.

 

OTTs as bulk proxy customers of TSPs

Third, government could work on a dual strategy of massaging both the supply and the demand side of the market. On the supply side, government could announce a time bound plan to release more spectrum to ensure that the scarcity premium on spectrum becomes less burdensome for TSPs.

On the demand side, it could exercise regulatory forbearance from second-guessing the amount of “fat” there is to reallocate between customers, TSPs and OTTs. Instead it could let business arrangements prevail by encouraging mutually beneficial deals between TSPs and OTT providers, whist keeping an eye out to insulate retail customers.

In fact the Airtel- Flipkart deal was a step in this direction. Flipkart proposed to become a proxy, bulk customer for Airtel and pay it directly for the usage of all those who access its services. Small customers of Flipkart would have gained through free access.

To guard against arbitrary blocking or slowing down of access to other OTT providers, who do not choose to have such arrangements or in favour of proprietary OTT products of the TSP themselves, TRAI would need to announce a plan for exercising better oversight over data packet management to limit arbitrary and unreasonable discrimination by TSPs.

This arrangement continues the “party mood” for small consumers. It regularizes an innovative way out of the conundrum, already conceived between Flipkart and Airtel and puts pressure on global OTT players to play ball. India is the fastest growing market for the consumption of OTT products. This provides some leverage to us to lay down reasonable and light handed rules without going to the extreme step of exclusion of foreign OTTs adopted by China.  Democracy is indivisible.

 

 

 

spectrum

(Photo credit: http://www.intelligent-eneregy.com)

Now that the Spectrum Big Bazaar auctions are over, it’s time to sift through the smoke and dust of the financial battle and figure out who lost and who won. But before the juicy part, here are the bare facts for those who don’t spend their lives following spectrum auctions.

Limited spectrum on offer

First, the bulk of the spectrum sold in the 800, 900 and 1800 MHz frequency bands relates to licenses issued in 1995 and 1996 which are now expiring after 20 years. Very little new spectrum has been added by either the government releasing spectrum, currently reserved for the army (TRAI opines at least three times more than required) or from the cache given free to BSNL and MTNL, two government-owned telecom companies which grossly underuse their spectrum allocations because they just can’t compete with private service providers despite the public gift of free spectrum. So much for the “public Kohinoors” the government loves to hoard in public interest.

Fiscal success

Second, the government secured firm bids worth Rs 110,000 crore (US$ 17.8 billion) as revenue from auction—25 or 33% paid upfront and the rest to be paid in 10 annual instalments after a moratorium of three years.

Spectrum in the 900 band garnered an incredible 120% more than the reserved price. TRAI had predicted and service providers moan, that they have paid through their nose just to hang onto spectrum they had till now.

The 1800 band secured an auction value only 14% above the reserved price. TRAI had predicted that the small amount and non-contiguous spectrum on offer would negatively impact valuation despite the 1800 band being a fallback option for supporting service in the preferred and scarce 900 band. The 800 band secured a respectable 64% above the reserve price value.

The big fight for 900 band spectrum

Third, the 900 band was the star of the auction. Despite comprising only 46% of the spectrum auctioned, it secured the lion’s share of revenue—71% of the total auction value. The 1800 band, comprising 27% of the spectrum auctioned, did the worst with a revenue share of only 9% of the auction value. The 800 band, used mainly for data transfer, balanced its share in spectrum auctioned of 27% with a share of 21% of revenue in auction value.

The institutional short circuit

Fourth, let’s look at the institutional arrangements within which the auctions happened. Telecom Regulatory Authority of India (TRAI) has an overwhelmingly “advisory” role. The real decision making power on spectrum pricing; quantum of spectrum to be sold and the constraints to be imposed on the buyers of spectrum—right to swap, share or leverage spectrum financially, all vest with the Minister in the Department of Telecommunications (DOT).

In this sense, TRAI is very similar to the low profile Central Electricity Authority which is an adjunct of the Ministry of Power and advises it on techno-economic matters. Note that the similarity extends even to the nature of the entity. Both are “authorities” not “commissions” like latter-day utility regulators, including the electricity regulators, are titled.

This institutional arrangement has advantages. It reduces the risk for TRAI in offering innovative advice. After all, should the CAG or the CBI come calling with their inevitable investigations, usually once the government has changed, TRAI can turn around and coolly assert they decided nothing, being mere advisors to DOT. Also, this arrangement liberates TRAI from considerations of political economy- all of which weigh-in for government.

The arrangement also encourages TRAI to be transparent and participatory in its functioning which is a boon for ”Telecom watchers” who are not industry “insiders”.

TRAI’s consultation papers are drafted painstakingly. They provide a wealth of information and outline options for decision making. Most importantly, TRAI encourages open participation. None of this happens in the DOT.

Once an issue reaches the “in box” in DOT, the iron curtain crashes down; information put out is terse; formatted to confuse the “outsider” and as minimalist as Swedish furniture. The cumbersome “Right To Information” route becomes the only way to get access. But even then, the rationale for the many commercial decisions the DOT takes, is never disclosed. TRAI itself has, courageously, voiced its frustration on this “zipped lips” policy of DOT.

Undeniably, DOT could be much more.

transparent and “un-babu like”. Equally, TRAI has to learn to play ball. Adopting a strictly “technically correct” approach is not what an “advisor” is paid to do. In fact, by “islanding” itself, TRAI has cut its significant technical expertise off, from the deliberations in government around the “second best” option, which is the kernel of public decision making.  The correspondence between TRAI and the DOT around its recommendations for the 2015-16 spectrum auctions bears out this institutional short circuit.

The bottom line is that, whilst the existing institutional arrangement could work better, what exists is far better than deciding everything in the cozy confines of the DOT. TRAI Chairs and its members have been outstandingly progressive in safeguarding public interest.

Fiscal success but a tunnel vision?

Fifth, is the question how successful has this particular auction been? Undeniably, from the purely fiscal point of view, no one—hopefully, least of all the CAG—can quibble. But the issues TRAI raised, and which remain unanswered, are pertinent.

Should “public silver” be sold only for short-term gains or should there be a wider strategic objective? Telecom adds 3% to the GDP, so a 30% growth in telecom adds a significant 1% point to national growth and could meet one-eighth of the target of 8% increase in GDP. The bulk of the incremental, “good-jobs” are in the information technology space and depend on robust growth. Identifying needs and monitoring the delivery of social services are strongly dependent on a pan-India telecom network being available. Consider also that in a vast, poor country like India, where 25% of the citizens are domestic migrants who remain culturally, strongly linked to their home village or town and it becomes easy to view telecom access as a necessity for improving the quality of life.

Clearly, no one wants a situation where funds from spectrum sale in the hands of the government, come at a huge cost hurting the growth of private telecom services or adversely affecting their affordability.

The problem is that both government and TRAI are prone to fall back on the “cost-of-service”—heavy handed model of regulation, which entails examining the pockets of the private service providers, either to ferret out if they are making too much profit (DOT) or too little profit (TRAI) and somehow adjust the profit by either squeezing service providers (DOT) or conversely compensating (TRAI) through spectrum pricing.

Undealt with legacy issues compromise the future

The Spectrum Usage Charge (SUC) is one such additional levy, over and above the spectrum cost. It is levied as a proportion of the Adjusted Gross Revenue of a service provider. Actually, there should be no usage charge at all, since spectrum is now auctioned and bidders reflect a part of their expected surplus in the bid. The user charge is a revenue generating instrument, left over from the days when spectrum was “allocated” administratively. TRAI has repeatedly suggested that it be brought down transparently from 5% to 3% before an auction, to induce bidders to reflect the reduced cost into a higher bid. But DOT has resisted this move without ascribing a reason for its obduracy.

More importantly, now that the auction is over, reducing the user charge retrospectively is not an option. Any reduction in license cost will now go directly into the pockets of the service providers. Worse, those bidders who may have “inside” knowledge of a probable post-auction reduction, would have been enabled to bid lower on the basis of this “privileged information”. A classic case attracting the allegation of potential “crony capitalism”.

The current Minister of Telecom is too savvy a person to fall into this trap. But political office is transient with too little institutional memory. In comparison, service providers bid their time better than a leopard and the institutional memory of an elephant. It is an unequal match which can only go against the public interest.

Why go to Nagpur via Kanpur?

But even on the issue of technical efficiency to achieve a narrow fiscal objective, TRAI had raised “red flags” which merit more serious consideration. TRAI had warned of a price war if additional spectrum was not made available for new comers in 900 or 1800 bands. If newcomers have to fight it out with incumbents, clearly, bidders will scrape their revenue models to the bone. This is what has happened.

In the 900 MHz band, the bids are more than 2.2 times the reserve price. Was there really that much undiscovered fat in the revenue models of the service providers? Clearly, if there were such huge margins then the auction has achieved what markets are supposed to do– cut the producer surplus to optimum levels and pass the benefits to customers.

But there could also be a fine print to this bidding madness. DOT has still to take decisions on the property rights of the new spectrum owners. We know that they can share spectrum in the same band (900 and 1800 MHz being considered as one band) with other service providers, but on what terms? When and how will they be able to trade it with spectrum in other bands within and outside their License Areas? When does government intend to implement it’s “in-principle approval” to create a post-auction market for spectrum trading? If not, why not?
All these are “untapped value pools” for enhancing producer surplus post the auctions. Are we sure that this discretion will be used well?

More importantly, recent history in natural resource management in India shows that the use of administrative discretion immediately raises “red flags” and can invite an adverse comment from the CAG or CBI investigations on the charge of “crony capitalism”.

The spectrum auction is for 20 long years. Does this mean that if the Minister or his officers err on the side of complete probity and safety, it effectively seals our economic future at a sub-optimal equilibrium level till the next auction two decades hence? And only because they failed to take these crucial decisions upfront prior to the February auction?

Of course, the Indian bureaucracy has a delightful habit of springing welcome surprises. It is entirely likely that they will find a way out of this conundrum. But TRAI’s observation remains relevant—why go to Nagpur via Kanpur?

Who won and who lost

And finally the juicy part—who won? The Finance Minister won big time. He got around Rs 9,000 crore in FY 2015 to plug part of our fiscal deficit, courtesy the generosity of the winning bidders, who paid up part of the upfront payment before time to meet the March 31st  fiscal deadline.

The DOT lost the opportunity to burnish their image and came out instead looking like bumbling, inefficient, indecisive babus.

TRAI covered itself in short-term glory by being outspoken—almost pugilistic and technically sound.

The handful of six private service providers, being canny business people, frankly don’t care how the government wants to play the game, so long as they win out in the end—which some of them are likely to.

Customers are on a roll with the fizz of tailored talk and data plans and an ascending escalator of bundled services to care too much one way or the other.

And the nation—well, any outcome which helps reach the tight fiscal deficit target helps India get good risk ratings; cheaper credit and most importantly international recognition that PM Modi means business. All’s well that ends well.

Restart

Mihir Sharma’s book (Random House 2015) is the one for you if you are a policy wonk but at a loss for arresting sound bites; a businessperson looking for bright and engaging things to say at your next meeting; a student of economics, politics or sociology grappling with the question why things are so difficult to do in India; or an expatriate keen to remain in touch with the undercurrent of “happening” things in India

Priced at Rs 1.38 per page this is an attractively packaged book for the itinerant reader, which is possibly the only kind of reader available today, in this networked, audio-video afflicted world. Its six parts consist of 68 handy chapters, each of just two to three pages, with its very own evocative title – very readable just after take-off; before landing or in those rare moments between the last public announcement and the arrival of the meal trolley.

Mihir is a master at reeling in the reader and keeping her engaged with very stark opinions, some of which are seemingly evidenced but all of which are likely to strike a chord in the reader….gosh! Wish I had thought of it that way or…wish I could have said that!

He is an entertainer at heart and pulls no punches in going all out at doing just that.

This is not however a 101 quickie to brush up on the Indian Economy complete with a statistical abstract. The relentless but sparkling wit is uplifting for those who like the play of language and know English well; have the time to be titillated and have a rudimentary awareness and interest in the Indian economy and politics.

For those who don’t share these interests “Restart” will most likely nudge them to delve deeper into more serious tomes on the subject or at the very least start reading the newspaper Mihir currently works for-Business Standard.

Despite the tough talk and brusque tone of the book, Mihir is at heart a romantic with a touching but wholly misguided belief in the possibility of “clean” or moral” capitalism.

Crony capitalism can’t “make in India”

He castigates Indian industrialists, as government stooges and mere rentiers, living off their ill-gotten gains gathered in cahoots with an obliging and corrupt government. This naïve 1990’s belief peddled by the multilateral and bilateral donors, principally to assure tax payers at home that their money is not going down the tubes as aid, assumes that it is possible to do business “nobly”.

Sadly the murky history of business fortunes, not just in India, but across the world, does not substantiate this belief except in the new age IT world where innovation trumps connections. But vast amounts of wealth is generally acquired by outwitting the next guy and hanging on to as many monopolies as one can. As Warren Buffet put it- owning the only bridge over a raging river is the best investment.

One would expect Mihir, the realist and straight talker, to defend business a bit more and castigate the government a lot, for perpetuating the crony capitalism we see around us. The job of business is to protect the bottom line of its shareholders in whatever environment it operates in. It is the job of the government to create the right environment.

Poor regulation and worse infrastructure-the missing link

His vision of manufacturing led growth and jobs is “old word” of huge assembly lines like in the US and China. In this world the key to competitiveness is producing to scale. No space here for the virtues of micro, village or small industry. Mihir uses harsh words, albeit deservedly, for industrial and labour regulations, which constrain scaling up by small but outstanding entrepreneurs.  This is now conventional wisdom. But are poor regulations really the key constraint to create an additional 6 million jobs a year or is there considerable scope for additional employment creation just by improving the abysmal and pervasive shortage of infrastructure-an outcome of poor governance and worse public decision making over the last decade?

The urban pot of gold

He subscribes to the view that there is no substitute for rapid urbanization- again something which has become conventional wisdom. Villages are sinks of depravity per Mihir. His analysis of why Indian cities do not live up to his expectation of being social modernisers- breaking down traditional social cleavages and forging new, modern identities is that they are not built as work places and instead are just better places to live in than villages.

Could his view be shaped by the cities he has lived in? Jamshedpur, the TATA exemplar industrial town; the ageing but genteel Calcutta with its heritage of absentee landlords languidly taking in the country air as their barge sailed up the Ganges on their annual soiree to collect rent and its more modern but still investment starved, going-to -pieces, version of Kolkata; babudom afflicted Delhi and Chandigarh where nothing is produced but files? Would he have a different view of he had grown up in Tirupur, Ludhiana or Dhanbad- workplace associated developments all. Is this vision also founded on a premise that good, rewarding work has to be associated with industrial activity? In Mihir’s words good work is that which produces things other people value and will pay for.

Washington calling?

He subscribes to the Washington consensus theology of markets, price decontrol, delicensing and private investment led growth to solve problems and unclog the pipes of the economy. But curiously, he is silent on the associated conundrum of increasing inequity in assets and income, highlighted by Thomas Piketty recently with concentration of wealth in the top 0.1% of the world population which threatens the consensus around growth and possibly throttles any chance of developing a less “angry” society sharply divided between the “haves” and the “have nots”.

The chicken or the egg of social change and economic development

Ironically, albeit correctly, for Mihir social change is fundamental for economic development. His silver bullet for social change, growth and economic development is to “get women working”. This may sound odd to those who believe women already do that and more, though not necessarily in a formal workplace. Consider that across the hilly and tribal regions of India it is women who are the “workers” at home and in the forests and yet this does not automatically lead to women’s empowerment or substantial change in aggregate economic outcomes.

Indeed, the evidence seems to show that it is economic development which provides new entry points by delinking financial reward from ritual status allowing those previously marginalized by culture, ethnicity or religion to empower themselves. This, in fact, is one key driver for migration of the marginalized to where work is available.

But this book is not about options or prescriptions for change. That will follow, one hopes, possibly in a Steven Levitt (Freakonomics) type problem solving sequel to Restart. This book is designed to perturb our placid intellect; churn the mind; force it to react, even aggressively, to challenge Mihir’s outrageous, cynical, trite, trivial and acerbic but always delightfully insightful, in-your-face, logic.

The publishers have been unfair to Mihir Sharma by marketing “Restart” merely as a book on the Indian economy and its problems. Yes, Restart does use the economy lens. But it is actually about all-of-India, in the style of a Ramachandra Guha epic- minus the scholarship.  This is of course as it must be because decision making, attitudes and behavior, which are at the heart of Mihir’s discourse, are interlinked processes.

Is this really the last chance for the Indian Economy as the title claims? I would seriously doubt that. These are turbulent times, which India is negotiating quite well, thank you. But I would have titled the book as “Restart: A pill to shake up India”.

 

Jaitley fat wallet

(photo credit: http://www.firstpost.com)

Imagine if FM Jaitley had admitted in his budget speech of February 28 that of the Rs 17.77 lakh crores (US$ 287 billion) of expenditure he was tabling in Parliament, less than one third was really available for innovating on the past trends and the bulk of the funds relate to liabilities already contracted before the year begins.

Given the lack of fiscal space for new commitments one would think then that the budget would be transparently split between contractual liabilities of past decisions, which are “sunk cost”- loosely defined and new budget allocations to make instant and easy sense to citizens. After all it is the “new” allocations that everyone looks forwards to, assuming that they could perturb the status quo and kick start growth.

But you will not find the budget classified thus, even though the eleven budget documents, excluding the Finance Bill, runs into 949 pages! Instead it is split between Plan and Non Plan expenses – a practice that should thankfully end now with the demise of the Planning Commission– or Revenue and Capital, another archaic distinction, which was traditionally used to track investment expenditure due to the traditional direct linkage between investment and growth. But increasingly, the right kind of revenue expenditure is also critical. Funded by the “revenue black box” are catalysts for efficiency and innovation led growth- skilled employees; functioning institutions and well maintained public assets.

The cost of feeding the public beast

How much needs to be spent just to keep government systems alive even if they do nothing of value for citizens? This is a close proxy for “current liabilities”.

First, civilian employee pay and allowances account for around 8% of total expenditure, not high at all by international standards where high, double digit proportions are the norm.

Second,  expenditure on pension of government employees accounts for 5% of total expenditure but growing rapidly as ex-babu couples age and live longer.

Third, the administrative cost (providing workplaces, consumables and equipment) of managing 3.6 million civilian government employees has to be paid for. Assuming administrative cost to be one third of pay and allowances it amounts to around 3% (0.33 of 8%) of total expenditure.

Fourth, annual interest on government debt accounts for 26% of total expenditure.

Fifth, is expense on maintaining physical assets- the Achilles heel of the government. Chronic under provisioning results in axle-breaking pot holes; overflowing public toilets; broken x-ray machines and no doors or windows in classrooms. Two decades ago the PPP model for providing public services seemed like the way to go but those hopes faded.

Guess what? Maintenance expense is not transparently available as a separate line item in the budget documents. This is not surprising since the government has, inexplicably, not adopted a more complete economic classification of budget items, endorsed by the IMF and followed internationally.

Today we will have to make do with assumptions- albeit conservative ones. A God send is that ever since the promulgation of the FRBM Act the government is obliged to share an asset register of civilian assets (which excludes cabinet secretariat-a code word for India’s spooks; defence; police; atomic energy and space which together account for approximately 46% of the annual CAPEX).

The register of physical assets (excluding land) for 2013-14 values civilian assets at a measly Rs 1.87 lakh crores (US$ 30 billion) for a Rs 141.09 lakh crore (US$ 2 Trillion) economy. It seems designed, like the asset declarations of politicians, to hide more than it reveals.

Assuming a thumb rule asset value 20 times the annual capital expenditure yields a “notional” but more realistic value for government assets (other than land) of Rs 48.76 lakh crores (US$ 786 billion). Annual maintenance at 2% of “notional” asset value requires an additional 5% of total expenditure.

Just these five “tied” revenue expenses, all of which account for 47% of the total expenditure, reduce the “free play” money with the FM to 53% of total expenditure.

The drag of politics

But it doesn’t end here. Central assistance for states is what gives leverage to the PM to negotiate with state governments. In the new “cooperative federalism” framework envisaged by the PM, after the niceties are done, bargaining power will depend on the fiscal muscle the union government can flex in inter-state negotiations. How else could the PM, for example, influence the governments of Haryana and Delhi or the governments of Tamil Nadu and Karnataka to share water with the minimum of bloodletting as the searing heat of May pushes up water consumption? The 2015-16 allocation accounts for just 1% but is highly politically sensitive to change.

Subsidies on items like food, fertilizer and petroleum and interest subsidy account for 14% of the total expenditure and also fall in this category. “We need to cut subsidy leakages not subsidies themselves” is what FM Jaitley remarked in his FY 16 Budget Speech on February 28, 2015.

The “Statement of Fiscal Responsibility” tabled under the requirements of the “Fiscal Responsibility and Budget Management  (FRBM) Act, 2003” unveils the FM’s hope that subsidies shall decline from 2% of GDP in 2014-15 to 1.6% of GDP in 2017-18. This could happen if annual GDP growth accelerates to the targeted 7.5% whilst the nominal amount of subsidy grows slower. But it sounds like an over optimistic assessment.

True, subsidies can be better targeted to eliminate waste and corruption. But there are also millions who are eligible for subsidy, but remain unable to access it today, because of complex administrative arrangements and poor documentation.  If the JAM (Jan Dhan, Aadhar, Mobiles) inclusion initiative succeeds it will likely swell the numbers accessing subsidy. Consequently, the jury is out on the net savings that better administration of subsidy can achieve.

Accounting for the amounts committed to assistance for states and subsidies, the “play” money available to the FM reduces from 53% to 38% of total expenditure.

Funding White Elephants

The remaining 38% or Rs 7.18 lakh crores (US$ 116 billion) sounds like a lot of money. But we still have not accounted for the FMs compulsion to fund the variable costs of programs managed by the mind boggling 72 (seventy two) departments of the union government-each a fiefdom in itself.

Not accounted either are allocations for ongoing projects which are unproductive “sunk cost” unless completed and operationalized. Budget 2015-16 proposes parceling out Rs 1.11 lakh crore (US$ 18 billion) of CAPEX  as grants to as many as 375 projects.

Oddly, the budget documents make no distinction between CAPEX allocations to ongoing projects and the CAPEX for new projects. Could this be because making such information public may reveal the absence of fiscal space for new projects or force government to abandon undeserving old projects?

Inefficient governments under-allocate to old projects thereby making space for announcing new ones. This makes sense politically, if sharing “pork” is the mantra of survival. But it happens at the expense of previous investment lying unutilized, worsening thereby the Incremental Capital Output Ratio- jargon for how much bang each buck buys and increases the interest burden every year as borrowed funds lie unproductively in incomplete projects.

To be sure none of this mess is of FM Jaitley’s making. But it is fair to expect him to clean it up since PM Modi’s is a government which works.

There are four initiatives the FM must launch to achieve this worthy objective.

First, he must walk the budget speech to aggressively resuscitate the PPP model and not solely because it pulls private capital into public projects. Partnering with the private sector forces the government to be efficient, effective and results oriented. Entering into explicit contracts with the private sector also makes information public, which can then be used to hold government accountable.

Second, the economic rationale behind civilian investment decisions must be made public. How are potential investments ranked? Hopefully, making the investment and economic analysis public knowledge can reduce the political noise and avoid wasteful decisions. We cannot just leave it to path breaking individual ministers like Suresh Prabhu to be punctiliously technocratic, as he was in the Railways Budget 2015-16. The weight of public opinion, via direct participation, must be institutionalized to assist the government in avoiding “bridges to nowhere”.

Third, at least ruling party MPs must commit time and effort to disseminate the logic of the budget to their constituents. It is for this purpose that Parliament takes a month’s recess during the Budget session- this year from March 24 to April 20. Have, at least, the BJP MPs fanned out to their constituencies to interact with citizens? Doing so would force MPs to understand the provisions better; come across as being well informed and initiate a more substantive dialogue at the local level. Delhi is a fish bowl in which MPs operate. Happenings here do not resonate with the rest of India automatically.

Finally, there is the appeal to save trees by reformatting the budget documents and making them shorter in length (500 pages for starters?) but more transparent in quality and to share both, the genuine constraints and the FM’s innovations to punch above his fiscal weight.

emergency

photo credit: http://www.dw.de

Forty Eight years ago on March 23, 1977 India emerged from the darkness of a 21 month long “national emergency (Article 352 of the Constitution)” into the light of full restoration of fundamental rights. Indira Gandhi- the then Prime Minister, a feisty mother, tired of the excesses of her son- Sanjay Gandhi, called for general elections in January 1977, which resulted in the decimation of the Congress Party in the North and the humiliating defeat of herself and Sanjay from their pocket boroughs of Rae Bareilly and Amethi respectively.

Lest this dark period repeat itself, we must plug the institutional gaps which allowed it to happen in the first place.

Better oversight of the need to impose emergency

First, today the President is the only entity empowered to exercise oversight over the government’s proposal to implement the emergency provisions. This arrangement has not served us well.  The manner in which the Indian President is selected- indirectly by a simple majority of the MPs and MLA vote- only ensures that a “candidate” of the ruling party wins. Any, but the most exceptional, human being is bound to serve those who appointed him. This makes the President unsuited to stand up to a Prime Minister who has a more direct democratic mandate. Fakhruddin Ali Ahmed- no moral giant succumbed to Indira Gandhi’s dark machinations- and approved the Proclamation of national emergency.

But that was as inevitable as the more recent example of the shoo-in, unelected Prime Minister- Manmohan Singh, subverting public interest, presumably under pressure from the Congress Party. Sonia Gandhi- an astute politician ensured her centrality by putting in place a non- threatening President of India (Pratibha Patel-2007 to 2012) and a Gandhi subaltern as Prime Minister.

Can we avoid a recurrence of such crass undermining of our constitutional framework? There are three options.

  1. We could change the manner in which a state of national emergency is approved by making it more inclusive and subject to ex-post-facto approval not only from the Parliament, as presently required, but also by state legislatures. The downside is this is likely to be a clunky process and unsuited to the urgent needs of a “real” emergency.
  2. We could change the manner in which the President is elected to strengthen the incumbent’s independence from the executive and preserve his mandate for guarding against a mala fide “emergency provision” by the government of the day. The best way to do so is to directly elect the President. Whilst there are good reasons why we should adopt a Presidential style of government, doing so, just to safeguard against malicious use of the provisions for national emergency, would be like the tail wagging the dog.
  3. We could narrow down the basis for imposing national emergency by excluding “armed rebellion” as one of the three reasons. The other reasons are “war” or “external aggression”. This approach resonates in these troubled domestic times. A large part of Eastern India is under siege from Maoist and assorted rebels but life goes on there and the situation is improving, without recourse to emergency provisions.

In any event “armed rebellion” is largely a “domestic law and order” issue which is handled by state governments and can be dealt with using the existing laws criminalizing violence and terrorism. Nothing stops the Union Government from coming to the assistance of a state government which needs help in dealing with the break-down of the rule of law.

A State Government, which is unable to manage “armed rebellion”, may yet be reluctant to seek or accept help for political reasons. The proper way to deal with such governments is to impose state level emergency provisions under Article 356 if there is break down of the constitutional machinery at the state level. There could be a number of reasons why there may be a constitutional meltdown in a state and “armed rebellion” is just one of them.

Limit the period

Second, more broadly, the scope of a Constitutional provision for imposing emergency; suspending fundamental human rights and diluting recourse to the higher judiciary against excessive or unjust executive action needs to be relooked.

Independent India has fought four wars till now- 1962-China, 1965-Pakistan, 1971-Pakistan and 1999-Pakistan. They all ended within a month except the last one, fought on the heights of Kargil, which lasted three months. This illustrates that the need for unfettered executive action, unencumbered by clunky constitutional provisions, lasts only for a limited period. Presently, emergency provisions can be extended ad-infinitum merely with Parliaments approval. The 1975 emergency lasted 21 months! That is way too much power to give to a simple majority of Parliamentarians with too few safeguards to guard against the mala fide use of such wide powers.

Forget the “steel frame” 

Third, our dark past showed us that faced by a determined and malign political power the much vaunted bureaucracy crumbles and “crawls” even without specifically needing to do so. The “steel frame” has eroded far too much to be revived. Indeed it is questionable if it should. After all, in modern democracies it is those who have the popular mandate who must rule and be responsible for the outcomes. Professional bureaucrats are today just that- professionals who devise the most optimum way of achieving political objectives. They cannot and indeed must not, be expected to carry the can of defending the nation against tyrants. That is best done by developing robust institutions; formal and informal norms for political behavior.

Make political parties democratic

Fourth, political parties are the vehicles for consolidating and representing the opinions of voters. They continue to be very ineffective in the absence of commonly accepted norms for their internal governance. Even a small public limited company is exposed to more regulatory control to ensure transparency and protect the interests of the small shareholder, as compared to even the largest political party. Media reports suggest that the Congress party could be the biggest real estate owner in India! In the absence of disclosure standards for political parties rumor may well be fact.

Unless a code for ensuring transparency and preserving inner party democracy is imposed on recognized political parties, the “recognition” granted to them by the Election Commission is meaningless. It is instructive that the nascent Aam Admi Party is self-destructing even today on the charge of undemocratic and authoritarian rule by a select few leaders. The Election Commission must be empowered to define and audit standards for the internal governance of political parties- audit and accounting of party funds; election of leaders and protecting the rights of the ordinary member, in much the same way as SEBI does for public limited companies listed on the stock exchange.

Democratic party processes can breed democratic leaders and thereby cut at the root of dynasty; megalomania and delusional complacence.

Time to get working on protecting the ordinary voter from the tyranny of undemocratic political parties.

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