governance, political economy, institutional development and economic regulation

Posts tagged ‘Rajasthan’

BJP self goals dim the shine

Gadkari 3

It is not often than an innocuous government statement becomes the fulcrum of a storm. The sudden announcement that Minister Nitin Gadkari’s plan to announce a policy for 100% electrification of transportation by 2030 was off the cards, sent shock waves through the industry and political analysts.

Subsuming Gadkari’s proposed electric vehicle policy in a broader Alt Fuel Policy makes sense 

To be fair, not having a narrow policy just for electric vehicles makes sense. Nesting actions, needed to achieve cost-effective electrification in transportation, within a broader “alternative fuels policy”, ostensibly, being prepared by the NITI Aayog, as disclosed by Amitabh Kant – the NITI CEO, who works directly with the NITI Chair – Prime Minister Modi, makes perfect sense.

It is good practice not to choose specific technical options via a policy. Instead, good policy formulation should specify a generic pathway to achieve the final outcomes- in this case lower carbon emissions, clean air and reduced congestion. In the best-case, simplistic scenario, tax incentives for the transportation industry, should be linked to the carbon emissions and road area saved per unit of travel, irrespective of the technology option adopted by them.

Leaving the technology option to industry – electric, hybrid or hydrogen-fuel powered, ensures that the market for innovation is not artificially distorted in favour of any technology.

Why put all our eggs in a China basket?

But, life is rarely that simple. Consider that China has emerged as the leading low-cost manufacturer of electric vehicles. They have also firmed-up supply chains of lithium for the manufacture of associated high efficiency batteries. Natural resource constrained Japan, is in contrast likely to push for a clean, hydrogen powered vehicle.

chinese-electric-cars

Strategically, our relationship with China is cool if not chilled. We lean towards a “Triad” of the US, Japan, India – for collaboration in security and transnational infrastructure development. The choice of Japan, as the partner for the Industrial corridors project to link Indian metros by fast passenger and freight trains and for the proposed Asian Africa Growth Corridor, are illustrations of such cooperation. Closer logistics integration with the US and Indian military forces, is another. Joint patrolling of the sea lanes in the South China Sea is yet another.

Clearly, relying solely on electrification of transportation, has strategic implications with respect to tying our future to China, which begs a more nuanced approach. Ministers Nitin Gadkari and Piyush Goyal might have thought up the electrification push, early in 2017 when Minister Goyal was in charge of Power, Coal and Renewable Energy, to absorb the stranded capacity of 30,000 MW in the power sector.

Boosting efficient electricity consumption by creating demand makes sense

The capacity of distribution utilities to absorb electric power is constrained by the low, regulated retail tariffs versus the higher grid cost of delivering power using coal or gas generation. This makes it sensible to explore alternative options for using power for customers who are willing to pay cost based retail prices for electricity. If additional solar capacity comes up to meet the target of 175 GW of renewable power by 2020 at grid supply prices of 4 cents per unit (kWh), capacity utilization in coal and gas-based generators will fall even lower than 60%.

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Are cabinet ministers being shown who is boss?

Modi Jaitley

At the best of times there is more politics than economics in public policy formulation. But with elections around the corner, every action of government, acquires heightened importance. So, for example, could the trashing of Mr. Gadkari’s policy initiative be an indication that Prime Minister Modi is showing him who is the boss? Ministers Gadkari and Goyal are perceived to be the most effective members of the cabinet. With reverses in recent bye elections in Rajasthan and a perceived tough fight ahead in Karnataka and Madhya Pradesh, has it become necessary for PM Modi to flex his muscles to keep the cabinet orderly?

The PNB scam adds to the slight of losing three bye elections in Rajasthan

Political leaders are notoriously sensitive to perceived loss of power. Given PM Modi’s larger than life persona, this is surely, his personal Achilles heel. The BJPs lucky run over the first four years seems to be petering out. They could avoid responsibility for the Rs 10 trillion of non-performing banking assets they inherited from the UPA. But the most recent case of a fraud of Rs 110 billion in the Punjab National Bank due to poor controls and oversight by a clutch of banks shows that things have not changed.

The “no cash transactions” rule has hit the profitability of the diamond and gems industry 

More worryingly, the market capitalization of listed jewelry companies has become less than one half of their debts. Their profitability is plunging. Their interest cover ratio is barely above the red line of 1.5X with sundry debts increasing to 43% of sales.

Difficult to value jewels have always been a favoured route for hawala (over invoicing imports and under invoicing exports), which is one way to safely transfer black money abroad. Much of this is often brought back as FDI or more likely foreign portfolio investment in the stock market where returns have been generous, inflation has been subdued and the Rs artificially stable such that even exchange risk was minimized, at the cost of exports and at the cost of making domestic production uncompetitive versus imported goods.

Finance Minister Jaitley faces the heat for poor oversight over publicly owned banks

More importantly it is the timing of the expose which is like rubbing salt into the wounds of bye-election losses for the BJP, which campaigns based on “zero tolerance for corruption”. Unfortunately, Finance Minister Jaitley will be in the line of fire too, much as Minister Suresh Prabhu, was hounded out for recurring railway accidents.

Silence breeds discontent and distrust. Communicate please.

With barely a year to go for elections, the number of moving parts is increasing by leaps and bounds. The French Rafale fighter jet deal was also poorly managed. Even worse, communications outreach has failed to dispel the fiction, that it is another “Bofors scam”. Champions get moving when the going gets tough. The BJP had a fabled communications team leading up to the 2014 elections. Today, ensconced in power, the last thing on its mind seems to be, sharing carefully thought through public policy positions with citizens, in a credible manner. Not having an opposition has its own downsides. Or is it the BJP’s unerring instinct to dim the light, just when it is shining.

Also available in the TOI blogs February 17, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/bjp-self-goals-rub-off-the-shine/

A new “living wage” f0r Delhi

Populism, buttressed by dodgy economics, has become the fashion statement in politics. Last year, the Union government approved handsome “real” increases in government salary. There was little justification for doing so since the government salaries were already fully indexed to inflation and the largesse couldn’t have been justified as a reward for higher productivity.

The default justification was that more money in the hands of government employees would kick start a virtuous circle. Higher demand for goods and services would lead to expanded supply, more jobs and just possibly, more income for the rest of us.

AAP disrupts the cozy status quo in Delhi

This week, the Aam Aadmi Party government in Delhi, used similar tactics to grab eyeballs on Independence Day. Evoking the high moral stance of re-distribution of wealth and the economic principle of boosting demand as justification, the government declared massive increase in the minimum wage. In effect, it imposed a “living wage”, for workers in Delhi.

The impossible dream of “mandating” the end of poverty

Child searches for valuables in a garbage dump in New Delhi

The concept of a “living wage” — pegged significantly higher than the minimum wage — with an eye to decrease poverty has been used in over 100 urban jurisdictions in the United States since the late 1990s. It has also been used to set the national poverty level in India. But it is pegged at very low levels.

In Delhi, chief minister Arvind Kejriwal has proposed that the minimum wages of unskilled labour will be increased from Rs 9,500 to Rs 14,000, semi-skilled Rs 10,600 to Rs 15,500 and for skilled Rs 11,600 to Rs 17,000.

The hike seems unreasonable given that the minimum wage in Delhi is already 35 per cent higher than in neighbouring Uttar Pradesh and 72 per cent higher than in adjoining Haryana.

Delhi is rich but…

It is true that Delhi is relatively rich. Its per capita income of around Rs 18,300 per month is the highest among the states of India and the top 10 metros. Consequently, there is a case for setting the “living wage” in Delhi reasonably higher than in the neighbouring states, purely on the grounds of equity.

The real issue is whether a 47 per cent increase is warranted and how comprehensively should the “living wage” be applied? If it is applied just to the establishments governed by the Factories Act, then it is little more than populism. There are only around 8,000 such factories in land-hungry Delhi and employment in them is static.

If the intention is to enlarge the coverage of the “living/minimum wage” to all registered shops and establishments, which employ around 20 per cent (one million) of Delhi’s five million workers, then the economic consequences can be more substantial.

Mandated wages hurt business and make it shift out 

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Photo credit: blogs.ft.com

The negative impact will be felt in price-sensitive, low value-addition segments like clothing, food and household goods, where higher wages will hurt business profits. More importantly, will a similar “living wage” follow for the one million workers in the informal sector — household help in rich and middle class homes and in unlicensed small establishments? If so Delhi’s privileged elite and wannabes may have to look for a lifestyle change – let the ayah go and manage their own babies; cook for themselves or use an app to order in; make their own beds; wash and iron their own laundry and learn to use a vacuum cleaner. And what of the ubiquitous car drivers and guards who lounge around the front gate of Delhi homes? Will the well-off opt for Ola and Uber instead?

Poor enforcement can make mandated wage a sham

Mandated high minimum wages, far above the market rate, encounter three problems. First, enforcing payment of the mandated wages depends crucially on clean, clever and consistent regulation. In its absence, it encourages the petty but crippling, corruption of “inspector raj”. Enlarging the scope of inspector raj in Delhi, even as it is being diluted in Rajasthan and Telangana sends the wrong message to investment for increasing jobs and private sector growth in Delhi.

High wages result in loss of unskilled jobs

Second, studies from the US show that the benefits are not uniform across the entire spectrum of workers. On average, unskilled workers lose the most from a high minimum wage because employment declines even as a smaller number of workers, who remain employed, benefit from high wages. Mandated wages rarely benefit skilled workers. Governments tend to be conservative in fixing the differential for skills. Delhi provides only a premium of 21 per cent, or `80 per day between unskilled and skilled work. The market premium is already between 75 to 100 per cent. A mason gets twice the amount as his unskilled worker — often a woman, who does the manual work.

In-migration increases fiscal pressure to provide public services

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High, mandated wages attract in-migrants to cities. photo credit: http://www.rediff.com

Third, pegging a price for labour far above the market rate increases the fiscal burden. This happens directly when government salaries are needlessly enhanced. But it also hits the government budget indirectly, when applied to the private sector. Higher the mandated wage for unskilled work the more attractive it becomes for migrants. With open borders, no control on migration and the Delhi government committed, rightly so, to provide a basic quality of life for all — free water, free medical care, free education, cheap electricity, improved toilets and paved roads — the resulting fiscal impact can be crippling.

Immigrants reduce the market price of unskilled labour

One way of ensuring that market wage rates remain aligned with mandated wages and are not beggared by competition from in-migration, is to licence city workers, as in China. But it is difficult to do this effectively in a governance environment of pervasive corruption. Licensing is a one way street to inefficiency and corruption. If government land cannot be protected from encroachment by the mafia, there is little hope of implementing an equitable worker licensing regime. Railway stations are a good example. Try getting a licensed coolie to carry your bags at the stipulated rates and you are more likely to miss your train.

Test the viability first in government contracts

The high salary of unskilled government workers already provides a wage floor. But the incremental numbers employed are limited. The trend, since 1990s when the government adopted the practices of “new pubic management”, has been to outsource non-core services i.e. cleaning, canteen, security and office support. Worker productivity clearly increases under private management. But there is insufficient evidence that the wages paid to them reflect this higher productivity. The apprehension is that the workers will suffer from price competition to get government contracts.

This is a perverse and unintended outcome. Tightly regulating the private contracts that are funded by the government can ensure that the mandated wages are passed through to workers. And contractors do not corner the wage increase. This is how the financial viability of the enhanced wage rates should be tested before imposing them.

But there is little point in cultivating a small, handsomely paid labour “aristocracy”, as the CPI(M) did, whilst throttling investment and employment.

CPIM

Adapted from the author’s article in Asian Age August 19, 2016 http://www.asianage.com/columnists/how-viable-are-hiked-wage-rates-333

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