Hail the invisible hand of the state

The current debate in India about how to trigger a quantum jump in industrial manufacturing activity and, thus, create large-scale employment is largely centred on ways to reduce the role of the state - in allotting land, in environmental clearances, in firing workers and so on. Yet the case studies of two industries that came from origins even smaller than where manufacturing is today and have become international success stories - the Indian pharma industry and the Indian information technology (IT) services industry - proves the opposite point. Neither would have come to their current stellar role in the Indian economy without the active but largely invisible hand of the Indian state.

The Indian pharma industry has grown from minuscule revenues in the late 1960s to a world player with an annual revenue of $40 billion (of which $15 billion is in exports) and an activity base of 20,000 plus manufacturing units employing over 29 million people. The case of the software services industry is even more striking; it employed just 8,500 people in 1990 and had a revenue of a mere $165 million (tiny Ireland had a $185-million software industry at that time). Today, its size is $118 billion, with $100 billion as exports. The people directly employed in the industry is reported as exceeding two million, with another seven million employed indirectly. Both these industries have also created multiplier effects in sectors such as housing construction, transport services and household goods, as young chemists and programmers set up homes, and bought cars and home appliances.

What was the magic? Unfortunately, finding the key to these success stories is like that old tale of the blind men of "Hindoostan", who, when asked to describe an elephant, said that it was like a wall, snake, spear, tree, fan or rope, depending upon which part of the elephant each touched.

Proponents of the "market economy" will say that the success of these two industries is an example of what energetic Indian entrepreneurs can achieve when the government of India steps aside. Reinforcing this view is India's business press, which frequently features stories about software and pharma industry millionaires. Proponents of "globalisation", such as New York Times columnist Thomas Friedman, in his book The World Is Flat, credit globalisation: increased world trade that spreads prosperity around the world. Proponents of "privatisation" say that decades of public sector efforts in these industries (Electronics Corporation of India in the case of IT and Hindustan Antibiotics are often quoted as examples) came to nothing until the private sector was "allowed" to participate. To them, this is proof that the government needs to privatise many other industries as well. And, of course, there are those that say that the state's only role should be to provide zero income tax on export incomes, government-sponsored software parks and export zones.

But actual case studies of these two industries tell another story. The rise of the Indian software services industry can be traced back to two mega projects sponsored by the Union government: the computerisation of public sector banks and Indian Railways. These two projects, apart from providing an impetus to the start-up and growth of hundreds of software development companies, also had another dimension. Far-sighted government policymakers like N Seshagiri of what was then called the department of electronics, the forerunner to the current ministry of IT, insisted that these applications be built using such technologies as the Unix operating system and relational database systems; the world was then getting ready for a paradigm change that would unleash an insatiable wave of demand for computer programmers well versed in these specific technologies as the world shifted from mainframe computers to client server computers. Thanks to the banking and the railway projects, Indian companies had a ready stock of thousands of software programmers well versed in these new technologies, who could be immediately deployed on assignments abroad.

The rise of India's pharmaceutical industry is based on similar visionary moves by the Indian state. In 1970, the government introduced a new patents Act reforming the 1911 one, which excluded pharmaceuticals and agrochemical products from eligibility for patents. Patents on molecules, which are products of chemical reactions or on mere admixtures and the like, were made non-patentable in India. Only the method of making the product was patentable. This resulted in the Indian pharmaceutical industry developing considerable expertise in reverse engineering of drugs that are patentable as products throughout the industrialised world but not in India.

You need to peer really hard to detect this kind of invisible hand of the state. Mariana Mazzucato, professor of science and technology at the University of Sussex and the author of The Entrepreneurial State - Debunking Public vs. Private Sector Myths, did just that and uncovered the role of the American state behind what is generally seen as the ultimate artifact of entrepreneurial vision, the Apple iPhone. "What actually makes the iPhone a smartphone, instead of a stupid phone?" she asks in a recent TED talk. And answers that it is the internet; the Global Positioning System (GPS), which detects your geographic location; the touchscreen display that makes it also a really easy-to-use phone. She points out that "the very smart, revolutionary bits about the iPhone, are … all government-funded … the Internet was funded by the Defense Advanced Research Projects Agency (DARPA) of the United States. The GPS was funded by the [United States] military's Navstar program … the touchscreen display was funded by two public grants by the CIA [Central Intelligence Agency] and the US National Science Foundation", and in the American pharmaceutical industry, "a full 75 percent of the new molecular entities with priority rating are actually funded in boring, Kafkian [United States government] public sector labs".

From Yojana to NITI

There once was a time when the belief prevailed that theeconomy was some intricate Rube Goldberg contraption of connected pulleys, cogs, levers and conveyor belts that achieved desired results by pressing required buttons. And it wasn't confined to the Fabian acolyte Jawaharlal Nehru. The whole world recovering from ravages of a global war (and the depression preceding it) subscribed to it. John Maynard Keynes was the high priest of pump-priming to get economies going. The showcase of the Soviet Union's achievements post-war was accepted as proof positive of efficacy of planning.

Thus was born the Planning Commission of India in 1950, charged with the task of fostering development. Prime Minister Narendra Modi announced its imminent replacement in his Independence Day address, but the new name, structure and key personnel became known only a week ago.

From When Dinosaurs Ruled the Earth ...
India was the first non-Communist practitioner of central planning. Economists worldwide keenly watched the experiment. The starting point was the celebrated Harrod-Domar model. In essence, it suggested with breath-taking simplicity that savings, which were exogenous, equalled investment, which in turn bore a fixed relationship with the rate of growth. Ergo, all that was required to achieve the desired rate of growth (the model made no distinction between growth and development) was to crank up savings to the required level.

But macroeconomic policy design remained largely in the realm of guesswork, as it does even today in countries with far more reliable databases. Disaggregation followed with the Mahalanobis two-sector models and the Leontief intersectoral transaction tables. The commission set sector-specific output and investment targets based on them. It had the final say on resource allocations, and told the states not just what to do but how to do it as well.

"Quantitative targeting of domestic production became irrelevant ... [because of] obsolete methodology ... and working practices," Nitin Desai observed in these pages ("RIP Planning Commission", Business Standard, August 21, 2014) and with good reasons. Plan funds were tied to the straitjacket of the commission designs. These comprised more often than not recycled versions of tried, trusted and failed schemes, since powerful interests, political as well as bureaucratic, demanded their continuation. States became increasingly frustrated with this approach, but yielded to the agency controlling funding. A measure of arbitrariness was evident as early as 1980. I prepared a note about this and V Kurien took it to a commission meeting. It received a barely polite hearing. The Maharashtra government's earnest pleas for effecting modifications to the prime minister's package for suicide-prone districts in the late 2000s fell on deaf ears.

The Planning Commission had morphed into Tyrannosaurus rex.

... to Where Eagles Dare?
The dysfunctional evolution of the Planning Commission provides two vital lessons to the new NITI Aayog. One, it must give up the impossible task of modelling and prescribing for a continental macroeconomy, and two, it must give up the obsession to micromanage projects on the ground. It ought to concentrate on key interventions cutting across states and subject disciplines instead. That would enable it to carve out a unique role for itself offering innovative approaches in this era of new federalism.

Here is a sampler of such projects, all high on the government priority list:

The Northeast: The region remains a distant outpost full of promise and poverty. Decades of grand assurances from central agencies brought it not improved connectivity but varieties of rice not suited to the local palate and fruit-processing plants without matching logistics and marketing support. No other territory has suffered as much from the Planning Commission's dogged prescription of one-size-fits-all schemes. Its potential - hydropower, horticulture, tourism, craftsmanship - remains barely exploited, adding to the already enormous sense of alienation. Inclusiveness acquires an added, more urgent dimension east of Kolkata.

Ganga renaissance: The premier river system continues to suffer unimaginable degradation even as thousands of crores have gone down the drain in the last 30 years. The problem is not just of cleaning up, but also of rejuvenation of sources and managing the sedimentation. That calls for a varied pool of knowledge and experience. Setting up a few waste-treatment plants does not even scratch the surface. And at least half a dozen states with a third of the country's population must be on board.

Sagarmala: India's large coastline and its location has become a security concern when it could be its greatest asset in an interdependent world. Infrastructure is only the beginning. Ports must be connected through cost-effective multi-modal transport network to hinterland manufacturing facilities competitively producing goods for the world market. When discounted for quality and labour productivity, the much-touted Indian cost advantage often disappears altogether. "Make in India" subsumes some of these concerns and must be linked to the project.

All these projects require large commitments of resources. More importantly, they need out-of-the-box solutions based on multi-domain expertise and situation-specific improvisations, not lazy stereotyping. Above all, they must be pursued with a sense of urgency. In other words, tasks cut out for an ideal NITI Aayog.

This is only for starters. But the new body must learn to hasten slowly and establish its credentials through actions.

The extinct dinosaurs have left two vastly different descendants: the loathsome lizards and crocodiles resembling their forebear, and the graceful birds. That just about sums up possibilities for the NITI Aayog.

How GST will benefit traders and manufacturers

Concept of manufacture will be replaced by value added which is numerically measureable and is not controversial

I found during my interaction with traders and manufacturers that they are essentially interested to know about the structure of GST and the benefits that are likely to come to them. The benefits are common in many cases, but are also different in some other respects. I propose to discuss these specific aspects in this article. The advantages for manufacturers and traders are the following:

• One tax: The common base for charging GST for Centre and the state will consist of an amalgamation (subsuming) of several central taxes and state taxes which will enable them to give one tax rather than giving about 16 taxes.
• Common market: There will be a common market in the absence of CST and entry tax. At present, goods are being sold mostly within the state in order to avoid paying the CST which is not credited at the stage of manufacture or in course of trading. Good quality products being manufactured in one part of the country will find more market in the farthest part of the country because there will be no CST and no entry tax
• Distinction between goods and services will go: In some cases, there is a distinction between goods and services when they are sold as a package. These controversies will go.
• Invoicing will be simpler: At present, the invoices are more detailed since taxes on goods and services are written separately for one transaction. With the introduction of GST only one rate will be written.
• No entry tax: The Economist November 8, 2014 has reported (page 67) that India's long distance truckers are parked 60 per cent of the time. This also leads to delaying of delivery of goods at destinations. The abolition of entry tax will be a great boon for the movement of goods by road transport.
• Common exemptions between Centre and states: Now the exemptions given by the Centre and the states being different, the final price becomes different in different states. In the GST regime, exemptions will be common between the Centre and the states which will make the rates of duty same all over India.
• Big central excise tariff will go: I will be the happiest to see when this big and fat central excise tariff goes away. It has got eight digit classifications like 44079990, 76069110. They attract different rates many times. All these will be replaced by one rate. What a relief!
• Concept of manufacture will go: Manufacture is a highly complicated concept. It is defined mostly by judgements of Supreme Court and high courts. It is a den of controversy. The concept of manufacture will be replaced by the concept of value added which is numerically measureable and is not controversial.
• Classification controversies will go: Now, classification controversies are galore since there are so many rates of duty. This problem will also go if the exemptions are limited.
• Problem of identification will go: At present, identifying a commodity like whether it is rubber or resin, paper or board, ash, or dross dominate the proceedings since rates of duty are different. These controversies will be over.
• Undue enrichment law will go: At present, there is a law in central excise and service tax which provide for refusing refund of higher duty paid in case the burden of higher rate of tax imposed already has not been passed on to the consumer. This is a highly litigated law which will necessarily have to go because GST will be a combination of so many taxes apart from these two taxes. And these taxes do not have the same provision. Moreover, if the unjust enrichment of law is made to apply to GST as a whole, the purpose of seamless movement of goods and services will be defeated.
• Zero rating will be more comprehensive and more easy: Even without GST, zero rating (giving relief for the input duty) is possible, but it does not give relief for some of the duties. With GST, zero rating will be more comprehensive.

Southern tycoons 800% more generous than northern

While many of the industrialists are based in Western India, those based in Southern India donated the most with around Rs 13,300 crore

Leading businesspeople from Southern India donate eight times more to philanthropic causes than those from the North.

That was the finding of the Hurun India Philanthropy List 2014, which looks at how much Indian businesspeople have donated to various causes over the past year (specifically, from November 2013 to October 2014).

Prepared by the Shanghai, China-based Hurun Research Institute, the second edition of the yearly list considers anyone who has contributed more than Rs 10 crore. Icons from the IT (information technology) industry dominate the top 10, with Azim Premji of Wipro alone having donated Rs 12,316 crore to stay on top for the second year in a row.

While many of the industrialists are based in Western India (19, in cities such as Mumbai and Pune), those based in Southern India donated the most with around Rs 13,300 crore.

If we look at how much has been donated by each sector, industrialists from Technology, Media and Telecommunications (TMT) contributed the most with Rs 15,151 crore. People from less glamorous sectors, such as energy and manufacturing, did their bit too. The chart below highlights the biggest contributors in those sectors.

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Looking at the causes philanthropists support, it is clear that education is a subject close to everyone’s hearts, with more than half of the top 50 (27) contributing to it; the sector gets donations of around Rs 15,800 crore. The amounts contributed to other causes pale in comparison, so we thought we’d highlight the biggest contributors to the others in the chart below. Special mention goes to Hemendra Kothari from the investment company DSP Blackrock; he contributed Rs 12 crore to environmental efforts.

Since this is the second edition of the Hurun philanthropy list, we can compare it with figures from last year. In the chart below, for example, we see that Shiv Nadar of HCL contributed Rs 1,864 crore less this year, although he was still third in the 2014 list with donations of Rs 1,136 crore.

 

While some might say that the Hurun list reduces philanthropy to a competition and thereby demeans it, it is still one of the few efforts that record and measure giving in India.

In that sense, the list is an essential tool to understand philanthropy, as it exists, in India today.

It’s just that India had to wait for a research institute in China to do it for us.

Amartya Sen to launch MCLI's first set of translated texts on Jan 15

On Thursday, Nobel laureate Amartya Sen will be inaugurating a series of books in New Delhi which is, arguably, unlike any set of works published before. For, Sen will be launching the first five books of the Murty Classical Library of India (MCLI), set up at Harvard to publish English translations of ancient Indian classical texts, not only from Sanskrit but a host of Indian vernacular languages, from Bengali to Telugu to Hindi to Kannada.

The books, five of which will be published every year for the next hundred years, will offer readers around the world and in India access to unique works that one would otherwise find difficult to find in a library, let alone a book store. For instance, among the first works being released is Therigatha, an anthology of poems in Pali written by the first Buddhist women which might well be the oldest examples of women’s writing.

“I started this (MCLI) four years ago, when I was in Harvard University. In Harvard, for example, if you want to learn classics, they teach you only Greek and Latin. Our question was why only these, why not old Tamil poetry or Punjabi play or Malayalam text? So, now, we're doing these translations and making them available to people in India and the US,” Rohan Murty, who had donated $5.2 million along with his family to launch MCLI, had told Business Standard earlier. Murty did his PhD in computer science from Harvard University and had recently taken leave from the university to spend a year as executive assistant to his father and Infosys founder Narayana Murthy. “This is the first time this is being done with Indian texts — people are used to seeing Greek and Latin texts, now they will start seeing books in ancient Tamil, Hindi and other Indian languages,” he said. Murty was clear that though there would be some works in Sanskrit the focus would be on the vernacular languages.

Govt will need to invest Rs 15.70 lakh cr for 24x7 power supply by 2018-19: report

The Centre will need a whopping Rs 15.70-lakh crore to provide power round the clock, to everyone.

Providing reliable, secure and quality power to everyone between 2015 and 2019 is one of the flagship projects of the Bharatiya Janata Party-led National Democratic Alliance.

The proposed investment will result in the sale of about 1,280 billion units.

These are the key findings of a sub-group appointed by the Forum of Regulators, headed by Karnataka ElectricityRegulatory Commission chairperson M R  Sreenivasa Murthy.

The forum discussed the report at its meeting last month and decided to forward it to the Union power ministry for further action.

According to the report, the generation projects envisaged for completion by 2018-19 need to be given priority in fuel linkage. The highest priority should be given to achieve plant-load factor of 80-85 per cent for coal-based thermal plants and adequate coal linkages and supplies should be ensured for all commissioned capacities and for the plants likely to be commissioned within the next five years.

This is necessitated as the projected domestic coal requirement will be 800 million tonnes by 2016-17 against the projected availability of only 560 million tonnes for the power sector. The sub-group has a made a strong case for the formation of a special purpose vehicle to expeditiously obtain environmental and other clearances before auctioning of coal blocks for exploitation  by mining companies.

The sub-group has suggested that the concept to commissioning time be pruned to 40 months for generation and the conceptualisation to award process be also reduced to five to six months from 21 months. As far as gas-based power projects are concerned, they should be bundled with other sources of energy to make peak power affordable for distribution companies. Furthermore, the sub-group has recommended that emphasis on renewable capacity addition particularly in solar and wind energy be given considering the short gestation period.

On the increase in the transmission capacity, the sub-group has pitched for a mission mode-approach for achievement of 100 per cent electrification of un-electrified households, particularly, states which have less than the national average proportion of electrified households. A separate machinery with special funding arrangements should be carved out to implement the programme in Bihar, Assam, Uttar Pradesh, Jharkhand and Odisha, where less than 50 per cent of the households have electricity supply.

On strengthening power distribution, the sub-group has suggested that a special programme should be launched for aggressive reduction in aggregate transmission and commercial losses with an objective that these losses are cut at the rate of two per cent per year over the next five years. Besides, star-rated pumps should be made mandatory where agricultural consumption exceeds 10 per cent of the total electricity consumed in the state.

In addition to this, adoption of solar irrigation pumps need to be encouraged by providing 50 per cent of the cost subsidy.

In order to improve the financial health of the distribution sector in particular, the sub group has recommended the availability of adequate institutional finance be ensured, timely payment of subsidies by state governments and adequacy, regularity of tariff revision by the state electricity regulatory commissions and segregation of agricultural feeders from other rural feeders.

Rajan gets 'Governor of the Year' award

Global magazine Central Banking has honoured Reserve Bank of India (RBI) governor Raghuram Rajan with Governor of the Year award for 2015.

The judging panel, comprising editorial staff and former central bank governors, cited Rajan's disciplined and focused approach to tackling macroeconomic instability.

The Central Bank of the Year title has gone to the Reserve Bank of New Zealand. Former Banque de France head Jacques de Larosière was given the Lifetime Achievement Award for his lengthy struggle for monetary order, the magazine said in a statement on Monday.

The panel members singled out Rajan’s forthright observations about some of the less welcome developments in the global economic, financial and monetary system, which the judges believe represented an important voice for change.

“I am honoured to be named governor of the year by Central Banking ,” said Rajan.

“This award is a recognition of the part the RBI and its staff have been playing in bringing macro economic stability to the Indian economy, in creating more competition and new growth opportunities in the banking and financial markets, as well as in expanding financial inclusion,” he added.

While praising the coordination efforts of the government, Rajan said he his work was far from over.

“All our collective efforts should be seen as work in progress – inflation has to be fully tamed, growth has to be brought back to potential and the banking system cleaned of distressed assets, even while we build the platform for the financial sector to support strong and sustainable growth,” said Rajan.