23 December 2014
A Rs 12,000-crore year-end gift
How could India increase access to modern cooking energy for millions of under-served citizens while maintaining fiscal discipline? There has been considerable growth in domestic consumption of liquefied petroleum gas (LPG). Connections have increased by nearly 45 million between 2010 and 2013, and now stand at 160 million. Yet, the latest Census revealed that only 28.5 per cent of households reported LPG as their primary fuel for cooking. So the demand for cleaner cooking fuel is still largely unmet, while the subsidy burden keeps rising. The government will have to find a solution, which meets both objectives.
Much of the growth in LPG has been due to massivesubsidies associated with its domestic consumption. Currently, every household with an LPG connection in India, irrespective of its economic or social status, is entitled to 12 subsidised cylinders (of 14.2 kg each) annually. The subsidy amounts to more than half the cost. With rising LPG consumption, the fiscal impact and import dependence are both significant: the subsidy bill for FY14 stood at Rs 48,362 crore, about four per cent of the non-Plan expenditure of the recent budget, while import dependency for LPG has risen to a staggering 89 per cent.
The ostensible reason for the large subsidy is to insulate the common man from any rise in international oil prices and from domestic inflationary conditions. Fair enough, but does it work? Analysts at the Council on Energy, Environment and Water (CEEW) have a simple answer: not very well.
First, access does not seem to be increasing in proportion to subsidy spending. Despite more than 110 million connections in 2011, only 70 million households indicated LPG as their primary cooking fuel.
Secondly, much of the distribution is restricted to urban areas, which have more than 70 per cent of distributors, as well as LPG connections. Even the richest rural households get only about half their total cooking energy from LPG. In short, 80 per cent Indian households continue to use traditional fuels for cooking.
Thirdly, as a result, subsidies are misdirected. The richest 30 per cent of Indians benefit from more than half of the LPG subsidy. The poorest 30 per cent, by contrast, receive a meagre 15 per cent of the total subsidy disbursed.
Fourthly, since the rich benefit far more from LPG subsidies, the poor spend a disproportionately high share of their income on cooking fuel. The poorest 10 per cent of households spend as much as eight per cent of their monthly expenditure on cooking energy as against a mere two per cent and 3.3 per cent by the highest income groups in urban and rural areas, respectively. Even in absolute terms, urban households consuming traditional cooking fuels end up spending more than those using LPG.
The conclusion is that LPG subsidies have to be rationalised to make clean cooking fuel affordable for both households as well as the government. Reducing the limit on subsidised LPG to nine cylinders per annum per connection would create the fiscal space to increase LPG coverage. CEEW's calculations suggest that a cap of nine cylinders would be sufficient to cater to at least 70 per cent cooking energy needs of up to 90 per cent households. Doing so could save the government more than Rs 4,600 crore.
Further, we should consider excluding the top 15 per cent of households (by monthly per capita income, MPCE) from the LPG subsidy net. This would imply households with MPCE spending of more than Rs 3,900 per month in urban areas and Rs 2,000 per month in rural areas. Even at unsubsidised LPG prices, their cooking expenditure would be well within an affordability limit of six per cent of monthly household expenditure. Households could be identified in different ways, such as income tax, asset ownership (vehicle or specific appliances), or a voluntary asset declaration combined with a "Know Your Customer" type of verification. Once identified, direct benefits transfer should be combined with programmes to increase LPG availability in rural areas and awareness of its benefits. Such an approach could yield another Rs 7,500 crore of savings.
None of this will happen voluntarily. The government's attempt, since August, to do so has received very poor response. Instead, targeted direct benefit transfer might help to reduce market distortions at the distributor's end. If the government feels particularly brave, a differentiated subsidy for middle-income households and below poverty line (BPL) households could be attempted. In fact, the subsidy for BPL households could be even increased while making net savings for the government. The Jan Dhan Yojana could further support benefits transfer by covering the entire LPG consumer base. In pursuit of "good governance", a more rational LPG subsidy programme would be a good start. It would be more equitable for the purposes of increasing access to cleaner cooking fuels for poorer households. It would have positive impacts on indoor air quality (the second biggest reason for premature deaths in India) and the health of women. And it would help the government with its attempts to cut down the fiscal deficit. Savings of at least Rs 12,000 crore ($2 billion) should be a perfect year-end gift for India.
Much of the growth in LPG has been due to massivesubsidies associated with its domestic consumption. Currently, every household with an LPG connection in India, irrespective of its economic or social status, is entitled to 12 subsidised cylinders (of 14.2 kg each) annually. The subsidy amounts to more than half the cost. With rising LPG consumption, the fiscal impact and import dependence are both significant: the subsidy bill for FY14 stood at Rs 48,362 crore, about four per cent of the non-Plan expenditure of the recent budget, while import dependency for LPG has risen to a staggering 89 per cent.
The ostensible reason for the large subsidy is to insulate the common man from any rise in international oil prices and from domestic inflationary conditions. Fair enough, but does it work? Analysts at the Council on Energy, Environment and Water (CEEW) have a simple answer: not very well.
First, access does not seem to be increasing in proportion to subsidy spending. Despite more than 110 million connections in 2011, only 70 million households indicated LPG as their primary cooking fuel.
Secondly, much of the distribution is restricted to urban areas, which have more than 70 per cent of distributors, as well as LPG connections. Even the richest rural households get only about half their total cooking energy from LPG. In short, 80 per cent Indian households continue to use traditional fuels for cooking.
Thirdly, as a result, subsidies are misdirected. The richest 30 per cent of Indians benefit from more than half of the LPG subsidy. The poorest 30 per cent, by contrast, receive a meagre 15 per cent of the total subsidy disbursed.
Fourthly, since the rich benefit far more from LPG subsidies, the poor spend a disproportionately high share of their income on cooking fuel. The poorest 10 per cent of households spend as much as eight per cent of their monthly expenditure on cooking energy as against a mere two per cent and 3.3 per cent by the highest income groups in urban and rural areas, respectively. Even in absolute terms, urban households consuming traditional cooking fuels end up spending more than those using LPG.
The conclusion is that LPG subsidies have to be rationalised to make clean cooking fuel affordable for both households as well as the government. Reducing the limit on subsidised LPG to nine cylinders per annum per connection would create the fiscal space to increase LPG coverage. CEEW's calculations suggest that a cap of nine cylinders would be sufficient to cater to at least 70 per cent cooking energy needs of up to 90 per cent households. Doing so could save the government more than Rs 4,600 crore.
Further, we should consider excluding the top 15 per cent of households (by monthly per capita income, MPCE) from the LPG subsidy net. This would imply households with MPCE spending of more than Rs 3,900 per month in urban areas and Rs 2,000 per month in rural areas. Even at unsubsidised LPG prices, their cooking expenditure would be well within an affordability limit of six per cent of monthly household expenditure. Households could be identified in different ways, such as income tax, asset ownership (vehicle or specific appliances), or a voluntary asset declaration combined with a "Know Your Customer" type of verification. Once identified, direct benefits transfer should be combined with programmes to increase LPG availability in rural areas and awareness of its benefits. Such an approach could yield another Rs 7,500 crore of savings.
None of this will happen voluntarily. The government's attempt, since August, to do so has received very poor response. Instead, targeted direct benefit transfer might help to reduce market distortions at the distributor's end. If the government feels particularly brave, a differentiated subsidy for middle-income households and below poverty line (BPL) households could be attempted. In fact, the subsidy for BPL households could be even increased while making net savings for the government. The Jan Dhan Yojana could further support benefits transfer by covering the entire LPG consumer base. In pursuit of "good governance", a more rational LPG subsidy programme would be a good start. It would be more equitable for the purposes of increasing access to cleaner cooking fuels for poorer households. It would have positive impacts on indoor air quality (the second biggest reason for premature deaths in India) and the health of women. And it would help the government with its attempts to cut down the fiscal deficit. Savings of at least Rs 12,000 crore ($2 billion) should be a perfect year-end gift for India.
India's tech transformation - Making workers the winners
New technologies will force millions of workers to acquire new skills. Rapid technology advancements will also help India's less-educated workers leapfrog to productive work
Will India’s large, young population – its demographic dividend – turn into a demographic disaster as millions of workers are displaced by technology? New research from theMcKinsey Global Institute examines the impact of 12 technologies (including the mobile internet, cloud computing, the automation of knowledge work, digital payments, verifiable digital identity and the Internet of Things) and concludes that, indeed, the application of these technologies will force millions of workers to acquire new skills, as the jobs they perform are rendered obsolete. Yet, rapid advancements in the same technologies will create new opportunities for millions of workers, including many less-skilled ones, and help them raise their incomes.
Globally, the automation of knowledge work, or machine learning and intelligent applications, can generate a 40 to 50 per cent productivity gain in work that involves processing data and information, interacting with customers or making decisions. In India, we estimate that automation and digitisation across sectors could drive productivity improvements equivalent to the output of some 19 million to 29 million workers in 2025 (five to eight per cent of India’s non-farm labour force). These workers cut across functions such as clerical and customer service, business process outsourcing and information technology, as well as those in manufacturing supply chains, the construction sector and workers engaged in retail trade and transportation.
The overall impact on net job creation could, however, be neutral to positive as technology opens new geographical markets and under-served segments of consumers. But the labour market will adjust to fill potential jobs only if workers are equipped to shift to the more value-added work. Education and skill-building systems need to be up to meeting this challenge.
Technology itself can provide solutions. Skill-building courses can be made available in small slivers — short online modules that workers can take at frequent intervals, focussed on what employers need and are willing to pay for. Adaptive learning systems that customise lessons according to how each student performs, simulated learning that uses technology to impart vocational skills such as welding and nursing in a virtual environment, and hybrid education models that combine MOOCs(massive open online courses) with classroom teaching, could help 18 million to 33 million more Indians acquire job-related skills by 2025.
Technology-enabled labour marketplaces help better matching of jobs and skills, creating millions of micro-entrepreneurs. As digital technologies achieve mass adoption, India’s legions of small-scale, unorganised and independent service providers can use the internet to reach new customers, establish their reputations, collaborate with others, and get more work. Project-based or piecemeal work assignments could be funnelled to technology-based aggregators representing large numbers of professionals such as designers, tax specialists or teachers who want part-time or temporary employment. Certified service providers (such as trained and licensed electricians, nurses or taxi drivers) could connect with customers and find decent paying work.
Rapid technology advancements will also help India’s less-educated workers leapfrog to productive work. Advancements in voice, language, and graphical interfaces will make complex knowledge and expertise available to workers on inexpensive hand-held devices that are easy to navigate. Even a semi-skilled person could become a knowledge-enabled worker in fields such as health care, financial services and logistics, or functions such as marketing and inventory planning, with just a few weeks of basic training in using these tools. Such workers can be deployed in local communities to deliver essential services. In Uganda, for example, the Grameen Foundation equips its community knowledge workers – well-regarded members of local farming communities – with smartphones that have weather, commodity prices, crop management and disease control-related apps. The workers share knowledge with other farmers and train them to use the apps themselves.
Several factors must fall in place to improve the odds so that technology becomes a positive force for the labour market on a large scale. Partnerships need to flourish, for instance, between technology companies, domain experts who can impart skills (such as agricultural universities or colleges of alternative medicine) and organisations with grass-roots experience. Standards and certification systems must evolve to help build mutual trust between customers and service providers in order to clear the market. And in addition to high-speed internet access, the widespread use of digital payments and verifiable digital identity will be essential to ensure that workers end up as winners in the race against technology.
Will India’s large, young population – its demographic dividend – turn into a demographic disaster as millions of workers are displaced by technology? New research from theMcKinsey Global Institute examines the impact of 12 technologies (including the mobile internet, cloud computing, the automation of knowledge work, digital payments, verifiable digital identity and the Internet of Things) and concludes that, indeed, the application of these technologies will force millions of workers to acquire new skills, as the jobs they perform are rendered obsolete. Yet, rapid advancements in the same technologies will create new opportunities for millions of workers, including many less-skilled ones, and help them raise their incomes.
Globally, the automation of knowledge work, or machine learning and intelligent applications, can generate a 40 to 50 per cent productivity gain in work that involves processing data and information, interacting with customers or making decisions. In India, we estimate that automation and digitisation across sectors could drive productivity improvements equivalent to the output of some 19 million to 29 million workers in 2025 (five to eight per cent of India’s non-farm labour force). These workers cut across functions such as clerical and customer service, business process outsourcing and information technology, as well as those in manufacturing supply chains, the construction sector and workers engaged in retail trade and transportation.
The overall impact on net job creation could, however, be neutral to positive as technology opens new geographical markets and under-served segments of consumers. But the labour market will adjust to fill potential jobs only if workers are equipped to shift to the more value-added work. Education and skill-building systems need to be up to meeting this challenge.
Technology itself can provide solutions. Skill-building courses can be made available in small slivers — short online modules that workers can take at frequent intervals, focussed on what employers need and are willing to pay for. Adaptive learning systems that customise lessons according to how each student performs, simulated learning that uses technology to impart vocational skills such as welding and nursing in a virtual environment, and hybrid education models that combine MOOCs(massive open online courses) with classroom teaching, could help 18 million to 33 million more Indians acquire job-related skills by 2025.
Technology-enabled labour marketplaces help better matching of jobs and skills, creating millions of micro-entrepreneurs. As digital technologies achieve mass adoption, India’s legions of small-scale, unorganised and independent service providers can use the internet to reach new customers, establish their reputations, collaborate with others, and get more work. Project-based or piecemeal work assignments could be funnelled to technology-based aggregators representing large numbers of professionals such as designers, tax specialists or teachers who want part-time or temporary employment. Certified service providers (such as trained and licensed electricians, nurses or taxi drivers) could connect with customers and find decent paying work.
Rapid technology advancements will also help India’s less-educated workers leapfrog to productive work. Advancements in voice, language, and graphical interfaces will make complex knowledge and expertise available to workers on inexpensive hand-held devices that are easy to navigate. Even a semi-skilled person could become a knowledge-enabled worker in fields such as health care, financial services and logistics, or functions such as marketing and inventory planning, with just a few weeks of basic training in using these tools. Such workers can be deployed in local communities to deliver essential services. In Uganda, for example, the Grameen Foundation equips its community knowledge workers – well-regarded members of local farming communities – with smartphones that have weather, commodity prices, crop management and disease control-related apps. The workers share knowledge with other farmers and train them to use the apps themselves.
Several factors must fall in place to improve the odds so that technology becomes a positive force for the labour market on a large scale. Partnerships need to flourish, for instance, between technology companies, domain experts who can impart skills (such as agricultural universities or colleges of alternative medicine) and organisations with grass-roots experience. Standards and certification systems must evolve to help build mutual trust between customers and service providers in order to clear the market. And in addition to high-speed internet access, the widespread use of digital payments and verifiable digital identity will be essential to ensure that workers end up as winners in the race against technology.
The digital year India Inc will remember 2014 as the year when the threat and the opportunity of the digital world became real
It was a year when foreign airlines finally invested in Indian carriers, old and new - Emirates in Jet and AirAsia andSingapore Airlines in AirAsia India and Vistara respectively. And another one, SpiceJet, came close to going kaput. It was also a year of big-bang acquisitions as Sun Pharma gobbled up Ranbaxy and Kotak Mahindra Bank proposed a merger of ING Vysya Bank with itself. In all, $43 billion was spent onmergers and acquisitions involving Indian firms this year. Adesi, Satya Nadella, took the corner room at the world's biggest tech firm, Microsoft, and Vishal Sikka, an expat Indian, took the reins at Infosys as the promoters finally bid adieu.
Two corporate biggies were sent to jail, Subrata Roy and Jignesh Shah, and one stayed there as the year drew to a close. And many a firm faced the regulator/judicial/shareholder whiplash - realtor DLF found its appeal against the competition regulator turned down by the Supreme Court and Maruti and Tata Motors faced the ire of institutional investors over new investments and executive pay respectively. And as many as 230 coal blocks awarded by the previous government were cancelled by the Supreme Court.
But perhaps the most life-changing trend was the advent of the digital age on the Indian business firmament. It disrupted neatly built business models, changed staffing patterns in people-driven industries, and even forced policy to take cognisance of new ways in which people and businesses were interacting.
Digital touched every business - apparel, consumer durables, electronics, property development and broking, retailing, even taxi services! It was a year when digital attracted money, talent and consumers by the hordes. Much has been written on the fund raising by e-commerce firms such as Flipkart, Snapdeal, Housing.in and so on, but just to reiterate, the sector raised over Rs 25,000 crore of private money, higher than what all new public issues managed to raise on the stock market this year. Japanese technology investor SoftBank alone invested $1 billion in Indian firms, and Flipkart alone raised around $2 billion in 2014.
Flush with funds, e-commerce firms made a beeline for premier engineering campuses, becoming perhaps the biggest recruiters at the IITs. By one estimate, apparel e-tailers Jabong and Myntra will, in a year or two, overtake traditional ones such as Trent and Shoppers Stop in sales. And Flipkart has already pipped the Daburs, Godrej Consumers and Maricos of the world in valuation.
The response from traditional businesses was varied, depending on the level of unease the online brigade has put them through. There was much protest against the deep discounts offered by the new kid on the block - mostly from consumer durable firms that saw these upstarts undermining their brands. They threatened to deny warranties on products sold through the online platform. Why, even big businesses-led traditional retail complained, believe it not, about level playing fieldvis-à-vis e-commerce! Reminds one of the Bombay Club, the famous protectionist group of leading Indian industrialists in the 90s that tried, unsuccessfully, to halt the march of global competition that started crowding our shores post liberalisation in 1991. Others, like the mobile retailers in the south, closed ranks and tried to build on the elusive economies of scale through common sourcing. The consumer, however, continued to flock to online sales unperturbed.
Indians across metros and small cities took to online shopping like duck to water. According to an eBay survey, e-commerce has already touched people in over 3,000-odd cities and hold your breath, over 1,200 villages! No wonder, the chief of the country's biggest conglomerate, the salt-to-software Tata group, asked its firms to delve deep on how the digital ecosystem is changing consumer behaviour in their respective sectors.
The going though was not all smooth for e-businesses. When business models have run ahead of rules, as they invariably would with an intrinsically innovative ecosystem like digital, scraps with regulators and government are inevitable. So taxi hailing service Uber was first made to change its payment model to comply with the banking regulator's two-step authentication, and then hauled over the coals and banned nationally when it came to light after an unfortunate rape incident in the national capital that it was not registered with transport departments across states. The world's largest e-tailer Amazon found itself in the tax department's crosshairs over stocking supplier products in warehouses. And there was much heartburn during Flipkart's Big Billion Day sale, when its IT systems were overwhelmed by consumer traffic. The site's owner managers promptly apologised to all visitors, perhaps a first for an otherwise thick-skinned India Inc, proving that the challengers are not just innovative, but quick learners too.
Two corporate biggies were sent to jail, Subrata Roy and Jignesh Shah, and one stayed there as the year drew to a close. And many a firm faced the regulator/judicial/shareholder whiplash - realtor DLF found its appeal against the competition regulator turned down by the Supreme Court and Maruti and Tata Motors faced the ire of institutional investors over new investments and executive pay respectively. And as many as 230 coal blocks awarded by the previous government were cancelled by the Supreme Court.
But perhaps the most life-changing trend was the advent of the digital age on the Indian business firmament. It disrupted neatly built business models, changed staffing patterns in people-driven industries, and even forced policy to take cognisance of new ways in which people and businesses were interacting.
Digital touched every business - apparel, consumer durables, electronics, property development and broking, retailing, even taxi services! It was a year when digital attracted money, talent and consumers by the hordes. Much has been written on the fund raising by e-commerce firms such as Flipkart, Snapdeal, Housing.in and so on, but just to reiterate, the sector raised over Rs 25,000 crore of private money, higher than what all new public issues managed to raise on the stock market this year. Japanese technology investor SoftBank alone invested $1 billion in Indian firms, and Flipkart alone raised around $2 billion in 2014.
Flush with funds, e-commerce firms made a beeline for premier engineering campuses, becoming perhaps the biggest recruiters at the IITs. By one estimate, apparel e-tailers Jabong and Myntra will, in a year or two, overtake traditional ones such as Trent and Shoppers Stop in sales. And Flipkart has already pipped the Daburs, Godrej Consumers and Maricos of the world in valuation.
The response from traditional businesses was varied, depending on the level of unease the online brigade has put them through. There was much protest against the deep discounts offered by the new kid on the block - mostly from consumer durable firms that saw these upstarts undermining their brands. They threatened to deny warranties on products sold through the online platform. Why, even big businesses-led traditional retail complained, believe it not, about level playing fieldvis-à-vis e-commerce! Reminds one of the Bombay Club, the famous protectionist group of leading Indian industrialists in the 90s that tried, unsuccessfully, to halt the march of global competition that started crowding our shores post liberalisation in 1991. Others, like the mobile retailers in the south, closed ranks and tried to build on the elusive economies of scale through common sourcing. The consumer, however, continued to flock to online sales unperturbed.
Indians across metros and small cities took to online shopping like duck to water. According to an eBay survey, e-commerce has already touched people in over 3,000-odd cities and hold your breath, over 1,200 villages! No wonder, the chief of the country's biggest conglomerate, the salt-to-software Tata group, asked its firms to delve deep on how the digital ecosystem is changing consumer behaviour in their respective sectors.
The going though was not all smooth for e-businesses. When business models have run ahead of rules, as they invariably would with an intrinsically innovative ecosystem like digital, scraps with regulators and government are inevitable. So taxi hailing service Uber was first made to change its payment model to comply with the banking regulator's two-step authentication, and then hauled over the coals and banned nationally when it came to light after an unfortunate rape incident in the national capital that it was not registered with transport departments across states. The world's largest e-tailer Amazon found itself in the tax department's crosshairs over stocking supplier products in warehouses. And there was much heartburn during Flipkart's Big Billion Day sale, when its IT systems were overwhelmed by consumer traffic. The site's owner managers promptly apologised to all visitors, perhaps a first for an otherwise thick-skinned India Inc, proving that the challengers are not just innovative, but quick learners too.
Three areas of regulatory attention for 2015
The process of selecting and appointing personnel to run the regulatory agencies is the weakest link in the system
It is that time of the year. As 2014 winds down, it is time to take stock of where things stand in the legal and regulatory policy space. The community of those interested in India (within and without) has extraordinarily high expectations from the government they have voted into office.
The expectations that have been sold this year are prone to causing disappointment next year. Media reports suggest that industry has already started expressing disappointment, behind closed doors for now. Rome was not built in a day. But the building blocks of expectations, and of disappointment, take time to put in place and one has to be careful in placing them.
Large segments of policy that can directly affect the community are under the control of those who are not elected to office, such as regulators - for good reason, but equally trapping an important component of policy in a vacuum without accountability. What then, should regulatory policy-makers worry about in 2015? Three broad areas, this column will argue.
First, is the lack of clarity in approach to regulatory policy: increasingly, not only the legislative strategy, but also the enforcement strategy appears unhinged. When a problem is germinating, no regulator wants to own it. Classic examples: collective investment schemes; Sahara's purported fund-raising; and Uber's taxi service that claims not to be one. The last among these can even be attributed to regulators feeling shy of being perceived as "un-cool" and "backward" by asking whether in the name of innovation the system is being gamed. Yet, at the first sign of trouble, imposing a ban comes easiest. Sticking to the same examples: treating any pool of Rs 100 crore as a collective investment scheme regardless of character; asking Sahara to repay (obviously non-existent "investors") tens of thousands of crores within weeks; and banning Uber.
With enforcement, matters are worse. One example is: using emergency powers and remedial powers to inflict serious penal pain without justifying the choice of a measure. Seeking to prohibit a person from economic activity without justifying why the restraint is necessary or why a real legal penalty would not better serve the purpose, is now par for the course. Worse, one penal officer of a regulator imposes extraordinary and harsh penalties while another takes a realistic view, both, in parallel on identical facts and circumstances. Financial firms with a pedigreed name get treated right while those with mom-and-pop shop names come in for harsh treatment. Faced with the risk of this criticism, highly pedigreed names become prime targets for extraordinarily harsh action to be made poster-boys of how regulators are not deterred by pedigree.
Not for nothing is it said that every statement about India can be as true as the diametrically opposite statement. Coming up with a reasonable and logical regulatory and enforcement policy is critical to make doing business predictable. Political correctness in not speaking up about regulatory excesses merely because the one at the receiving end of unfair treatment being a "violator" lays the foundation for ill-treatment of the non-violators with the only requirement being levelling an allegation that a non-violator is a violator.
Second, is accountability of regulatory actions. The discourse is currently divided on the if-you-are-not-with-us-you-are-against-us principle that George Bush sold for his "war on terror". Indeed, the shrillness of the debate is as high as discussions on terrorism - with one end of the spectrum saying that any oversight erodes regulatory autonomy and the other end arguing that unless every single regulatory move including policy can be second-guessed, there would be no accountability.
The quest of each side seeking what it considers to be the "best" becomes the enemy of the "good". Fixing a good middle ground and starting with judicial review of penal regulatory decisions is a good place to start. Every piece of oversight need not be judicial. There are other means of building institutional strengths of accountability for policy decisions including, the regulation of how regulators should formulate policy. This comes in for far greater opposition from incumbents in regulatory agencies. If one does not bite this bullet and focus on pinning down a clear and accountable path for regulatory transparency and accountability, we will have a bunch of sheriffs running amuck grabbing headlines every day, but with a market that feels no more secure or clear about how to conduct itself.
Finally, the mode of selecting and appraising performance of regulators needs serious reform. No matter how good a policy may be, it can only be as good as the people implementing it. The single weakest link in the regulatory food chain is the selection and appointment of personnel who would run the regulatory agencies. Even weaker is the process of how to select the selectors. Selection committees are formed but their incumbents either do not take it seriously and delegate the work to colleagues, or expect to go by intuition and gut and back horses that are unable to cope with running on race day. Selection committees are not given a mandate to invite applications either. No other aspect of regulatory policy needs greater attention than this one.
The expectations that have been sold this year are prone to causing disappointment next year. Media reports suggest that industry has already started expressing disappointment, behind closed doors for now. Rome was not built in a day. But the building blocks of expectations, and of disappointment, take time to put in place and one has to be careful in placing them.
Large segments of policy that can directly affect the community are under the control of those who are not elected to office, such as regulators - for good reason, but equally trapping an important component of policy in a vacuum without accountability. What then, should regulatory policy-makers worry about in 2015? Three broad areas, this column will argue.
First, is the lack of clarity in approach to regulatory policy: increasingly, not only the legislative strategy, but also the enforcement strategy appears unhinged. When a problem is germinating, no regulator wants to own it. Classic examples: collective investment schemes; Sahara's purported fund-raising; and Uber's taxi service that claims not to be one. The last among these can even be attributed to regulators feeling shy of being perceived as "un-cool" and "backward" by asking whether in the name of innovation the system is being gamed. Yet, at the first sign of trouble, imposing a ban comes easiest. Sticking to the same examples: treating any pool of Rs 100 crore as a collective investment scheme regardless of character; asking Sahara to repay (obviously non-existent "investors") tens of thousands of crores within weeks; and banning Uber.
With enforcement, matters are worse. One example is: using emergency powers and remedial powers to inflict serious penal pain without justifying the choice of a measure. Seeking to prohibit a person from economic activity without justifying why the restraint is necessary or why a real legal penalty would not better serve the purpose, is now par for the course. Worse, one penal officer of a regulator imposes extraordinary and harsh penalties while another takes a realistic view, both, in parallel on identical facts and circumstances. Financial firms with a pedigreed name get treated right while those with mom-and-pop shop names come in for harsh treatment. Faced with the risk of this criticism, highly pedigreed names become prime targets for extraordinarily harsh action to be made poster-boys of how regulators are not deterred by pedigree.
Not for nothing is it said that every statement about India can be as true as the diametrically opposite statement. Coming up with a reasonable and logical regulatory and enforcement policy is critical to make doing business predictable. Political correctness in not speaking up about regulatory excesses merely because the one at the receiving end of unfair treatment being a "violator" lays the foundation for ill-treatment of the non-violators with the only requirement being levelling an allegation that a non-violator is a violator.
Second, is accountability of regulatory actions. The discourse is currently divided on the if-you-are-not-with-us-you-are-against-us principle that George Bush sold for his "war on terror". Indeed, the shrillness of the debate is as high as discussions on terrorism - with one end of the spectrum saying that any oversight erodes regulatory autonomy and the other end arguing that unless every single regulatory move including policy can be second-guessed, there would be no accountability.
The quest of each side seeking what it considers to be the "best" becomes the enemy of the "good". Fixing a good middle ground and starting with judicial review of penal regulatory decisions is a good place to start. Every piece of oversight need not be judicial. There are other means of building institutional strengths of accountability for policy decisions including, the regulation of how regulators should formulate policy. This comes in for far greater opposition from incumbents in regulatory agencies. If one does not bite this bullet and focus on pinning down a clear and accountable path for regulatory transparency and accountability, we will have a bunch of sheriffs running amuck grabbing headlines every day, but with a market that feels no more secure or clear about how to conduct itself.
Finally, the mode of selecting and appraising performance of regulators needs serious reform. No matter how good a policy may be, it can only be as good as the people implementing it. The single weakest link in the regulatory food chain is the selection and appointment of personnel who would run the regulatory agencies. Even weaker is the process of how to select the selectors. Selection committees are formed but their incumbents either do not take it seriously and delegate the work to colleagues, or expect to go by intuition and gut and back horses that are unable to cope with running on race day. Selection committees are not given a mandate to invite applications either. No other aspect of regulatory policy needs greater attention than this one.
Excerpts from the Mid-Year Economic Analysis, 2014-15
Medium-term economic growth depends on ensuring macroeconomic stability (which India is achieving) and on creating an enabling environment for the private sector to invest which the new government has embarked upon reflected in the policy reforms enacted thus far.
Fundamentally, India’s medium-term growth prospects are promising, and trend rate of growth of about 7-8 per cent should be within reach.
With basic public good provision and investment tapping into cheap labour, India can easily get closer to its growth frontier laying a strong foundation for the long run.
But India faces challenges. Investment has not durably rebounded. There are the usual headwinds from the external sector. But at the current conjuncture the gradual reversion to normal monetary policy in the US is less of a threat to India, given the improved macroeconomic situation, broad balance in the external sector and reserves that provide a modicum of insurance against shocks.
And, barring exceptional developments such as the ongoing turmoil in Russia, the external environment in terms of oil and agricultural commodity prices, is not likely to turn adverse.
Rather, India faces challenges that are mostly domestic. The most important among them relates to the experience of the past few years that led to over-exuberant investment, especially in the infrastructure and in the form of public-private partnerships (PPPs). There are stalled projects to the tune of Rs 18 lakh crore (about 13 per cent of GDP), of which an estimated 60 per cent are in infrastructure.
In turn, this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one (borrowing is used to cover interest payments). Over-indebtedness in the corporate sector with median debt-equity ratios at 70 per cent is among the highest in the world.
The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 per cent of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector.
India has been afflicted by what might be characterised as the “balance sheet syndrome” with Indian characteristics”. Like Japan after the real estate and equity boom of the late 1980s, and like the US after the global financial crisis, balance sheets are over-extended. The Indian case resembles Japan more than the US, since it is firms’ balance sheets (and not those of consumers) that are over-extended, exerting a drag on future investment/spending.
This syndrome has three distinctively Indian characteristics. First, India is not suffering from recession or stagnation. Economic growth, despite all the difficulties, is still 5.5 per cent not 1 per cent or negative.
Second, drawbacks in the Indian real sector co-exist not with weak macroeconomic demand but with moderately strong demand (at least relative to supply) reflected in moderately high inflation and a moderately high current account deficit. Japanese and American balance sheet recessions were associated with price deflation. A consequence, which contrasts with the current predicament in the Euro area, is that India’s fiscal indebtedness (ie the stock problem) has been improving, courtesy of high inflation, while that in the euro area is worsening from deflation.
Another consequence is that fiscal pump-priming is less of an option for India.
Third, perhaps even more distinctly, the Indian balance sheet problem has also arisen partly out of public-sector financial concerns, which led to the encouragement of private-sector investment in infrastructure via the so-called public-private partnership (PPP) model.
Growth in real capital formation was around 15 per cent and private corporate investment surged, East-Asia-style, over a very short period — from 6.5 per cent in 2003-04 to 17.3 per cent in 2007-08, amounting to an increase of nearly 11 percentage points of GDP. Investment was based largely on the perception that growth rates of 8.5 per cent would continue indefinitely and banks, especially public-sector banks could lend to private sector investors in infrastructure.
As the growth boom faded, projects turned sour, leaving a legacy of distressed assets. This stock problem is weighing down profits and, hence, investment. The problem is compounded by relatively weak institutions. Effective legal processes (the corporate debt restructuring system and the SARFAESI Act) that can allocate the pain of past decisions among investors, creditors, consumers, and taxpayers are a work-in-progress.
The way forward
First, the backlog of stalled projects needs to be cleared more expeditiously, a process that has already begun. Where bottlenecks are due to coal and gas supplies, the planned reforms of the coal sector and the auctioning of coal blocks de-allocated by the Supreme Court, as well as the increase in the price of gas which should boost gas supply, will help.
Speedier environmental clearances, reforming land and labour laws will also be critical.
But even if the backlog is cleared, there is going to be a flow challenge: Attracting new private investment, especially in infrastructure.
The PPP model has been less than successful. The key underlying problem of allocating the burden from the past — the stock problem that afflicts corporate and banks’ balance sheets —needs to be resolved sooner rather than later. The uncertainty and appetite for repeating this experience is open to question.
In this context, it seems imperative to consider the case for reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it.
Note... that while private corporate investment surged in the boom phase, public investment, too, grew by about 3 percentage points. And just as corporate investment declined by 8 percentage points between 2007-08 and 2013-14, so too has public investment by about 1.5 percentage points.
Pro-cyclical public investment during the downward phase has been driven in part by fiscal targets which have resulted in large cuts toward the end of the financial year as the constraints of fiscal consolidation have loomed large.
The case for public investment going forward is threefold. First, there may well be projects for example roads, public irrigation, and basic connectivity — that the private sector might be hesitant to embrace. Second, the lesson from the PPP experience is that given India’s weak institutions there are serious costs to requiring the private sector taking on project implementation risks: Delays in land acquisition and environmental clearances, and variability of input supplies (all of which have led to stalled projects) are more effectively handled by the public sector. Third, the pressing constraint on manufacturing is infrastructure. Power supply and connectivity are key inputs that determine the competitiveness of manufacturing.
For these reasons, especially the difficulty of repeating past experience under conditions of weak institutions, consideration should be given to address the neglect of public investment in the recent past and also review medium-term fiscal policy to find the fiscal space for it. It is worth emphasising that India has a fiscal flow problem but not a stock problem because the ratio of government debt to GDP has declined substantially over the past decade due to a combination of high growth and high inflation.
Going forward, debt dynamics will continue to work in India’s favour as long as growth remains around 6 per cent and the primary deficit remains in the current range of 1 per cent of GDP. A case not just for counter-cyclical but counter-structural fiscal policy, motivated by reviving medium-term investment and growth, may need to be actively considered.
To be sure, a greater role for the public sector will risk foregoing the efficiency gains from private sector participation. A balance may need to be struck with targeted public investments, carefully identified and closely monitored, by public institutions with a modicum of proven capacity for efficiency, and confined to sectors with the greatest positive spill-overs for the rest of the economy.
These may then be able to crowd in greater private investment.
Fundamentally, India’s medium-term growth prospects are promising, and trend rate of growth of about 7-8 per cent should be within reach.
With basic public good provision and investment tapping into cheap labour, India can easily get closer to its growth frontier laying a strong foundation for the long run.
But India faces challenges. Investment has not durably rebounded. There are the usual headwinds from the external sector. But at the current conjuncture the gradual reversion to normal monetary policy in the US is less of a threat to India, given the improved macroeconomic situation, broad balance in the external sector and reserves that provide a modicum of insurance against shocks.
And, barring exceptional developments such as the ongoing turmoil in Russia, the external environment in terms of oil and agricultural commodity prices, is not likely to turn adverse.
Rather, India faces challenges that are mostly domestic. The most important among them relates to the experience of the past few years that led to over-exuberant investment, especially in the infrastructure and in the form of public-private partnerships (PPPs). There are stalled projects to the tune of Rs 18 lakh crore (about 13 per cent of GDP), of which an estimated 60 per cent are in infrastructure.
In turn, this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one (borrowing is used to cover interest payments). Over-indebtedness in the corporate sector with median debt-equity ratios at 70 per cent is among the highest in the world.
The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 per cent of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector.
India has been afflicted by what might be characterised as the “balance sheet syndrome” with Indian characteristics”. Like Japan after the real estate and equity boom of the late 1980s, and like the US after the global financial crisis, balance sheets are over-extended. The Indian case resembles Japan more than the US, since it is firms’ balance sheets (and not those of consumers) that are over-extended, exerting a drag on future investment/spending.
This syndrome has three distinctively Indian characteristics. First, India is not suffering from recession or stagnation. Economic growth, despite all the difficulties, is still 5.5 per cent not 1 per cent or negative.
Second, drawbacks in the Indian real sector co-exist not with weak macroeconomic demand but with moderately strong demand (at least relative to supply) reflected in moderately high inflation and a moderately high current account deficit. Japanese and American balance sheet recessions were associated with price deflation. A consequence, which contrasts with the current predicament in the Euro area, is that India’s fiscal indebtedness (ie the stock problem) has been improving, courtesy of high inflation, while that in the euro area is worsening from deflation.
Another consequence is that fiscal pump-priming is less of an option for India.
Third, perhaps even more distinctly, the Indian balance sheet problem has also arisen partly out of public-sector financial concerns, which led to the encouragement of private-sector investment in infrastructure via the so-called public-private partnership (PPP) model.
Growth in real capital formation was around 15 per cent and private corporate investment surged, East-Asia-style, over a very short period — from 6.5 per cent in 2003-04 to 17.3 per cent in 2007-08, amounting to an increase of nearly 11 percentage points of GDP. Investment was based largely on the perception that growth rates of 8.5 per cent would continue indefinitely and banks, especially public-sector banks could lend to private sector investors in infrastructure.
As the growth boom faded, projects turned sour, leaving a legacy of distressed assets. This stock problem is weighing down profits and, hence, investment. The problem is compounded by relatively weak institutions. Effective legal processes (the corporate debt restructuring system and the SARFAESI Act) that can allocate the pain of past decisions among investors, creditors, consumers, and taxpayers are a work-in-progress.
The way forward
First, the backlog of stalled projects needs to be cleared more expeditiously, a process that has already begun. Where bottlenecks are due to coal and gas supplies, the planned reforms of the coal sector and the auctioning of coal blocks de-allocated by the Supreme Court, as well as the increase in the price of gas which should boost gas supply, will help.
Speedier environmental clearances, reforming land and labour laws will also be critical.
But even if the backlog is cleared, there is going to be a flow challenge: Attracting new private investment, especially in infrastructure.
The PPP model has been less than successful. The key underlying problem of allocating the burden from the past — the stock problem that afflicts corporate and banks’ balance sheets —needs to be resolved sooner rather than later. The uncertainty and appetite for repeating this experience is open to question.
In this context, it seems imperative to consider the case for reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it.
Note... that while private corporate investment surged in the boom phase, public investment, too, grew by about 3 percentage points. And just as corporate investment declined by 8 percentage points between 2007-08 and 2013-14, so too has public investment by about 1.5 percentage points.
Pro-cyclical public investment during the downward phase has been driven in part by fiscal targets which have resulted in large cuts toward the end of the financial year as the constraints of fiscal consolidation have loomed large.
The case for public investment going forward is threefold. First, there may well be projects for example roads, public irrigation, and basic connectivity — that the private sector might be hesitant to embrace. Second, the lesson from the PPP experience is that given India’s weak institutions there are serious costs to requiring the private sector taking on project implementation risks: Delays in land acquisition and environmental clearances, and variability of input supplies (all of which have led to stalled projects) are more effectively handled by the public sector. Third, the pressing constraint on manufacturing is infrastructure. Power supply and connectivity are key inputs that determine the competitiveness of manufacturing.
For these reasons, especially the difficulty of repeating past experience under conditions of weak institutions, consideration should be given to address the neglect of public investment in the recent past and also review medium-term fiscal policy to find the fiscal space for it. It is worth emphasising that India has a fiscal flow problem but not a stock problem because the ratio of government debt to GDP has declined substantially over the past decade due to a combination of high growth and high inflation.
Going forward, debt dynamics will continue to work in India’s favour as long as growth remains around 6 per cent and the primary deficit remains in the current range of 1 per cent of GDP. A case not just for counter-cyclical but counter-structural fiscal policy, motivated by reviving medium-term investment and growth, may need to be actively considered.
To be sure, a greater role for the public sector will risk foregoing the efficiency gains from private sector participation. A balance may need to be struck with targeted public investments, carefully identified and closely monitored, by public institutions with a modicum of proven capacity for efficiency, and confined to sectors with the greatest positive spill-overs for the rest of the economy.
These may then be able to crowd in greater private investment.
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