Balancing fairness and efficiency

One common criticism of economics is that it focuses too much on efficiency, and not enough on things like equality, fairness and the welfare of future generations. In the extreme version of the criticism, the focus on efficiency is a deliberate plot to keep resources in the hands of the wealthy.

The economic definition of efficiency—also called Pareto efficiency, after the Italian economist Vilfredo Pareto—is easy to understand. Basically, it’s just the same thing as gross domestic product. The more things we produce—including goods like TVs and cars, but also services like insurance and back massages—the fewer resources we are wasting. Perfect efficiency—called Pareto optimality—is a situation in which the economy is so efficient that it’s impossible to give one person more without taking something away from someone else. In other words, perfect efficiency is a world where there really is no free lunch.

Economists focus on efficiency for several reasons. The first is probably historical. As historian Adam Tooze notes in his book The Deluge, government attention to economic statistics increased dramatically after World War I. The US, with its massive economic output, had tipped the scales decisively in favour of the Allies, so total output was believed to be an indication of warfighting strength. That logic seemed to repeat itself in World War II, and again in the Cold War, in which the US is widely believed to have outspent the Soviet Union. Greater economic efficiency probably means a more militarily powerful nation.

The second reason economists focus on efficiency is that it’s clear and unambiguous. Human welfare, on the other hand, is tricky to define. Should we care about people’s ability to fulfil their desires, or their emotional happiness? Should we value each member of society equally, or should we place more emphasis on the poorest and most disadvantaged? What is “fairness”, and how should it factor into our economic calculus? Economists usually shy away from taking a stand on these difficult philosophical questions, and stick to thinking about what will boost GDP.

The critics, however, make some good points. The most obvious flaw in the efficiency concept is the question of time— by producing more today, we leave fewer resources for our descendants. A policy that is Pareto optimal today may be robbing from our unborn grandchildren. Thus, static efficiency, or efficiency in the present, isn’t always the same as dynamic efficiency. Economists must take a stand on which one they care about when the two are in conflict.

I also believe that economists are dodging responsibility when they ignore the hard questions of human welfare. After all, a world in which one person owns all the output and everyone else starves to death is technically Pareto optimal, since saving the masses from starvation would require making the monopolist worse off. That’s not the kind of world any of us want to live in.

But the critics of efficiency tend to overreach. First, economic growth usually does enrich the poor as well as the rich. Even the past few decades of global growth, which have seen inequality increase in rich nations, have produced huge gains for the world’s poor, and reduced global inequality in the bargain.

Second, efficiency really does capture how many economic arrangements are simply suboptimal. New policies and institutions really can make things better for everybody.

The real strength of the efficiency concept is that it focuses on gradual improvement. Instead of trying to radically reorganize society from the ground up, efficiency focuses on finding institutional or policy tweaks that make everyone just a little better off.

So far, I think that history has shown that gradual reform is the best way to improve the world. So no, the efficiency concept isn’t perfect, and economists should also think deeply about things like fairness and welfare. But we shouldn’t give up on our quest for a more efficient world

7,000 new industrial training institutes (ITIs)

The Prime Minister’s Office has directed skills ministry officials to open within one year 7,000 new industrial training institutes (ITIs), or nearly half the number of all existing ITIs opened in India across six decades, two officials aware of the development said.

The government’s objective is to double the capacity of India’s 13,105 ITIs, which now collectively train 1.86 million students in skills related to fabrication, electronics and automobile industries. Expanding the capacity of these institutes—set up to create foot soldiers especially for the manufacturing sector—is critical to boost domestic manufacturing and provide jobs for millions of youngsters joining India’s workforce every year.

The first of the two officials, who termed it “a huge target,” said it was fixed at a meeting between officials from the Prime Minister’s Office and the ministry of skill development and entrepreneurship in the fourth week of December. “But the skills ministry has to achieve it as it has come from the top,” he said, requesting anonymity.

Given the steep target, the skills ministry is exploring the possibility of offering soft loans to private players to open ITIs as the government cannot open 7,000 institutes on its own, the official added. Ministries will also persuade companies operating in their respective areas to adopt old ITIs or open new ones. The issue also came up at a skill conclave with industries in Mumbai on Tuesday.

If the soft loan proposal takes final shape, the ministry may get higher funds in the Union budget. In the previous budget, the ministry got Rs.1,500 crore but for an individual scheme called Pradhan Mantri Kaushal Vikas Yojana.

ITIs were earlier under the labour ministry and they have (since April 2015) been transferred to the skills ministry.

Skill development minister Rajiv Pratap Rudy confirmed the development, but did not reveal more details. “We are ready to accelerate the pace in capacity-building. Looking at the skills mission, we have to do something different to achieve a huge target,” Rudy said.

The government’s push for ITIs came out in two posts by the PMO’s Twitter handle on Tuesday, citing Modi. “Parents are proud if their child is a graduate but is it the same when a child went to an ITI? Such a mindset needs to change... They say 21st century is our century, but how do we make it India’s century? By giving an impetus to skill development,” the tweets read.

A second official said opening even 1,150 institutes in 2015 was considered a big achievement by the ministry, voicing concerns on meeting the steep target. He too declined to be named. The official also said authorities were in touch with some private education providers under the All India Council for Technical Education (AICTE) for exploring the possibility of opening ITIs. He, however, agreed that the move is in conflict with the current mindset that skill development should be asset-light.

According to data collated by the National Skill Development Agency (NSDA)—part of the skills ministry —21 departments and ministries trained 7.6 million people in 2014-15, as against a target of 10.5 million. In other words, central ministries and departments fulfilled 72% of their target in the last fiscal, almost identical to the figure notched by the previous government in 2012-13. The NSDA has been tabulating skill training outcomes for the last four years.

In fact, in the last four years, central government ministries and departments together missed the skill development target thrice—in 2011-12, 2012-13 and 2014-15. This failure does not augur well for a country that aims to impart skills some 500 million people by 2022, the second government official cited above said.

G. Raj Narayan, managing director of Radel Group, a Karnataka-based defence and aerospace ancillary firm said India’s small and medium enterprises are facing a job-ready manpower shortage and it needs government handholding both in terms of finance and skills. He said authorities need to fix the existing ITIs and their quality issues first before expanding numbers. “Capacity expansion is required, but the quality of a large number of existing institutions needs urgent attention,”said Narayan.

Needed, a national fibre optic network

It must be implemented in a manner that keeps the absorptive capacity of target regions in mind

Information and communication technology (ICT) has been shown to be a powerful facilitator for meeting the Millennium Development Goals. This supports the rationale for the roll-out of Internet access as an enabler of development. However, the provision of basic services using ICT is dependent on the availability of other complementary inputs. This means the decision on the level of a particular ICT service to be provided cannot be made without reference to the presence of those other inputs. The build-out of networks far in advance of the absorptive capacity of a region would therefore appear to be wasteful.

However, in an academic paper titled Universal Service Obligation in the Age of Broadband published in The Information Society, one of the authors establishes two criteria that could be used to support the build-out of networks in advance of the ability of target populations to use them. The first is “time to build”. If ICT infrastructure takes a long time to deploy, then the project needs to be initiated in anticipation of future absorptive capability. While wireless broadband is amenable to relatively rapid build-out, taking a fibre optic network from the last viable point (for example, the district headquarters) to the village can take two to three years.

The second is “technological discontinuity”. The capabilities of the technologies used for providing access develop in a discontinuous, step-wise manner. Each step represents discontinuous jumps in access speed per dollar of investment. At a certain point, rural areas must switch from lower to higher technologies due to the constraint of download speeds. The earlier they do so, the lower the total capital costs of connectivity.

While the optimization of an existing network requires little time to build and represents low technological discontinuity, the build-out of an optical fibre network involves high time to build as well as a high level of technological discontinuity. A fibre optic network is a “durable” solution in the sense that once deployed, it would take care of rural connectivity needs for many years to come, (although last-mile access would continue to be wireless). For these reasons, a case can be made for the government to get involved in the deployment of a national optical fibre network.

Who should pay for the fibre optic network? Recall that the fundamental driving force for government intervention stems from the role of connectivity as an enabler of development. Hence, the government’s financial obligation needs to be limited to the level of connectivity required to enable the provision of the requisite amount of developmental goods. The levels of provision of services implied by high-speed connectivity (especially through a fibre optic network) are so high that one may question the necessity of governments paying for the entire network. After all, these levels of development may not be a consumption norm or a systemic necessity in the society in question. As an example, governments do not normally place an emphasis on creating super-specialty hospitals in rural areas.

The degree of production and demand externalities that accrue after threshold penetration levels are reached may also not justify the expense. Therefore, the cost should be shared between the public and private sector with the public sector paying for the basic level of connectivity required to provide development inputs and to internalize the positive impact arising from demand and supply externalities. The calculation of this level would depend on commercial and technical factors, and may not be amenable to an elegant analytical solution. Yet, the point remains that the liability of the government needs to be limited.

However, the lack of a business case for deployment in the vast majority of target geographies, and the thorny business environment, make it difficult for the private sector to bear the initial investment. Therefore, the government should pay for the upfront costs of building the network and collect a revenue share for a specified number of years.

In parallel with the fibre optic project, a wireless network closely aligned with complementary inputs and the absorptive capacity of the target population should be rolled out to provide basic necessities immediately and prepare the population for the coming of the fibre optic network. Superimposing lofty urban wireless standards on these interim rural networks in the cause of parity would be profligate and short-sighted.

The option of using a build-own-operate-transfer model for building the national optical fibre network is not recommended on account of the operating challenges of rural networks, the low ability to pay, and the uncertainty regarding the availability of complementary inputs that would trigger a virtuous cycle of usage. The operating competence of the private sector should be leveraged by tendering projects for building and maintenance through a reverse auction process.

The national optical fibre network should be divided into a number of state-level projects in order to secure the buy-in of state governments, crucial for obtaining right-of-way permissions. Vertical integration of the private infrastructure operator and the service provider should be permitted in order to strengthen the business case and trigger operational efficiencies. A phase-wise roll-out should be planned: the universal service need not be a uniform service. First, the economically well-off subset of the 250,000 gram panchayats should be targeted. After demonstrating success in these clusters and incorporating lessons learnt, further roll-out should take place.

The aim is to create a humming optical fibre network, not a white elephant.

Space parks to lift ISRO run rate

To engage domestic firms in launch vehicles — from integrating sub-systems to assembling and launching the PSLV.

Two space industry enclaves or “parks” that have been conceived — one for launchers at Sriharikota and a smaller one at an existing Bengaluru spacecraft campus — signal increased privatisation of the nation’s space programme over the next five years.

For now, the facilities will be “captive” to drive the future missions of the Indian Space Research Organisation.

First, ISRO wants to groom and engage domestic industry in the launch vehicles area from integrating sub-systems up to assembling, and even launching the PSLV.

This well-established rocket has put Indian and foreign satellites of up to 1,600 kg into space.

ISRO Chairman and Secretary, Department of Space, A.S. Kiran Kumar, told The Hindu: “Internal discussions have just started on the mechanism of forming a (launch vehicle) consortium. A few key industry players working in the space programme have been sounded.”

Eventually the future consortium will be fully responsible for building and launching the light-lift PSLV rocket.

Currently industries such as Hindustan Aeronautics Ltd, Godrej & Boyce, Larsen & Toubro, MTAR and Walchandnagar Industries produce 80 per cent of the launch vehicle parts and sub-units.

These production works are scattered across their respective locations. The launch industry initiative must be close to ISRO’s launch complex, the Satish Dhawan Space Centre, at the 145-sq km Sriharikota range, on the lines of the launch complex of Europe’s Arianespace in French Guiana, Mr. Kiran Kumar told The Hindu.

Satellite support

On the spacecraft front, ISRO plans to increasingly support small and mid-sized industries at its 10-year-old second spacecraft complex, the 100-acre ISITE, at Marathahalli in Bengaluru.

ISITE, short for ISRO Satellite Integration & Test Establishment, is already open to a few suppliers who assemble and test their spacecraft systems for the ISRO. In the coming years, more satellites will be needed for replacing the ageing ones in orbit and new advanced communication, Earth observation and navigation spacecraft.

Mr. Kiran Kumar said, "ISRO plans to ramp up the frequency of satellite launches. In the last two years we did up to five launches [of both PSLV and GSLV rockets] in a year. The plan is to double this in two years and take it to about 16 over the next four years. Industry’s present capacity is unable to meet our increasing launch frequency, for both internal and commercial satellites. We expect a private-public industry consortium initiative to improve industry's capacity and our frequency."

SHAR is also putting up a second Vehicle Asssembly Bay to improve the pace of building launchers. In the coming years more satellites would be needed for replacing the ageing ones in orbit and new advanced communication, Earth observation and navigation spacecraft; and launchers, too. ISRO also hopes to build satellites for international operators.

Improve the investment climate

India’s growth performance in 2015 has fallen short of our expectations and needs. A strong recovery is possible in 2016 with growth rate exceeding 7.5 per cent but that is contingent on private investment showing substantial improvement.

The year 2015 has ended on a lacklustre note. The growth rate projected by the International Monetary Fund (IMF) is 3.1 per cent, with advanced economies growing at around 2 per cent and developing economies at 4 per cent. These are not inspiring numbers. The World Bank estimates are even lower. However, there have thankfully not been any economic explosions.

Even Europe stumbled through despite the problem of Greece rearing its head from time to time. The oil-exporting countries suffered most with a sharp decline in oil prices. This group included not only countries in West Asia but also Russia and Venezuela.

However, what is more surprising is that even countries which had gained as a consequence of a fall in crude oil prices have not really shown faster growth. Among the developing economies, the major concerns are centred at China. With trade surpluses falling, China has to turn to its domestic demand to spur the economy. There have also been concerns about its financial system.

A dismal picture

Among the countries coming under the Brazil, Russia, India, China, South Africa (BRICS) bloc, only India has shown a good performance. However, the Indian story needs more elaboration. Before dealing with India, let us see what the picture looks like globally for 2016.

The IMF had projected the global growth rate for 2016 to be 3.6 per cent, with advanced economies growing at 2.2 per cent and developing economies growing at 4.5 per cent. At this point, it is not clear whether these projections will hold. A recently released World Bank report shows lower numbers for both 2015 and 2016. However, the direction of change is similar.

Among the advanced economies, one country that may show an improved performance is the United States. The recent decision to hike the policy rate by the Fed is some indication that monetary policymakers believe that the U.S. economy is on a recovery path. It is, however, to be remembered that the Fed has not yet relaxed its accommodative posture, which indicates that the recovery is fragile. Oil prices are not expected to rise, which means that oil-producing countries will continue to be in a limbo. Among the developing economies, concerns about the performance of China will continue. If anything, China’s growth rate will further decline.

While the improved performance of the U.S. is a helpful factor, the rise in interest rate may have its own effects on capital flows to developing economies. As a consequence, financial markets may see greater volatility. Thus, the picture, as a whole, does not look very encouraging. Only a few countries are likely to show better performance. Luckily, India can be one among them but some important steps need to be taken.

The mid-year economic analysis estimates India’s growth rate in 2015-16 to be between 7 and 7.5 per cent. This is a fair assessment. Looking at the performance from the supply side, in agriculture, the growth rate may not be higher than the previous year which itself was low. The erratic weather in 2015 does not hold out much promise for 2015-16.

In the services sector, the growth rate may not be much different from that of the previous year. The only possibility of improvement is in the industrial sector. The Index of Industrial Production (IIP) for April-October 2015 shows a distinct improvement over the corresponding period of the previous year. Looking at the problem from the demand side, external demand, as reflected in the performance of exports, has been weak. Overall, exports during the period of April-October declined by 17.6 per cent. Much of this is due to the decline in the export of petroleum products, by more than 50 per cent. However, non-oil exports also declined by 8.7 per cent during this period. This does not auger well for many industries.

Private consumption could pick up partly because of the benefit accruing to consumers due to the fall in petroleum prices. The consumption goods sector of IIP has done well. Public sector investment has shown a rise. Capital expenditure of the Central government during the period April-October 2015 rose by 31 per cent. However, it must be noted that bulk of the public investment came from the public sector enterprises.

Public investment alone inadequate

The Achilles heel here is private corporate investment. All surveys point to continued stagnation in this area. Thus, from the demand side, the only redeeming feature is the rise in public investment. But that by itself will not be adequate to pull the economy strongly forward. Thus, the overall assessment is that the growth rate in 2015-16 may not be higher than that in the previous year.

What about the Financial Year of 2016-17? Are there signs which point to a faster growth? The external environment, as already noted, will not be encouraging. India’s exports will face a challenging task in 2016. There is an imperative need to reverse the current negative trend.

In 2015-16, one favourable factor operating on growth has been public sector investment. Despite a lower-than-expected growth in nominal GDP, revenue growth has remained close to the budgetary expectations. On the expenditure side, the subsidy burden came down because of a fall in crude prices. All this kept government expenditures at budgeted levels and allowed it to stick to the fiscal consolidation path. Capital expenditures rose substantially.

Pay Commission burden

The fiscal picture for 2016 however is going to be tough. The additional burden imposed by the Seventh Pay Commission is substantial. The expenditure on pay and pension will increase by 20 per cent and it will amount to a burden of 0.4 per cent of GDP, after taking into account the additional tax revenue on the increased emoluments.

Against this background, the ability of the government to raise money for capital expenditures will be limited. However, relaxing the fiscal consolidation path is not a solution. There is some validity in the argument that the desired level of fiscal deficit should depend upon the phase of the cycle. However, our experience shows that even in the years when the economy was doing well, we were not able to abide by the mandated level, let alone improve upon it. A larger fiscal deficit will not only take up a greater share of the available pool of savings but also cause an increase in the interest rates. This is hardly conductive to a growth in private sector investment.

Private consumption may show a rise, particularly because of the additional income in the hands of government employees. This has happened in the past every time a pay commission’s recommendations have been implemented. The hope for a substantial growth in 2016-17 thus revolves around the behaviour of private corporate investment or private investment in general.

The present position of private corporate investment is that while there has been some improvement in relation to stalled projects, there is no strong pick up in the new projects. This situation has to change, if the pace of the recovery is to speed up this year.

The corporate sector faces several internal problems, including a slow growth in nominal sales revenue and high levels of debt. For the investment climate to improve, investors’ confidence in the system must be enhanced. The government has an important role to play here.

It is true that the reform agenda of the government has been stymied because of logjam in Parliament. But much can be done to restore and enhance confidence even within the present structure. The government can easily remove cumbersome rules and procedures and tone up the delivery system.

Globally, the prognosis for 2016 is not that good. Among the major advanced economies, the only country that can show some improvement is the United States. Among the emerging economies, the slowdown in the performance of China and the consequent further devaluation of yuan may have serious spillover effects.

India’s growth performance in 2015 was certainly a bright spot. It has, however, fallen short of our expectations and needs. A strong recovery is possible in 2016 with growth rate exceeding 7.5 per cent but that is contingent on private investment, particularly private corporate investment, showing substantial improvement. Creating a proper investment climate is the need of the hour.

Indian agriculture needs smart investment

The government must ensure its budgetary focus on the sector is well directed

Veteran farmer leader Sharad Joshi, founder of the Shetkari Sanghatana, who passed away last month, swam against the tide for much of his career. A proponent of free markets, leveraging technology and infrastructural reforms in areas like water management, he was an outlier in an economy where state control in agriculture was the default wisdom.

He would have been guardedly pleased with the tenor of the government’s statements on agricultural reform in the lead-up to the 2016-17 budget. Chief economic adviser Arvind Subramanian and finance minister Arun Jaitley have both stressed the need for public spending on agriculture; the latter has singled out utilizing technology for maximizing yields, efficient use of water and giving farmers access to timely market information. But he would also, perhaps, have pointed out that much has been left unsaid.

Indian agricultural productivity is cyclical, with high growth periods routinely followed by a drop. The sector is currently in the latter phase; after annual growth rates of 4% across the 11th Plan period, it has been stuttering at 1.7% three years into the 12th Plan. That explains the renewed budgetary focus. And the government has taken cognizance of one of the major reasons—the dependence on the monsoons—with the Pradhan Mantri Krishi Sinchai Yojana. The plan is to extend irrigation cover to every farm and maximize water-use efficiency with an outlay ofRs.50,000 crore over five years.

Rural electrification is the missing link. According to the NITI Aayog’s Raising Agricultural Productivity and Making Farming Remunerative for Farmers report, India—classified as a water-stressed country as per international norms and sliding into water-scarce status—has created irrigation potential through existing infrastructure of 81% of its ultimate irrigation potential, estimated to be around 140 million hectares. Factor in regional variation and the unsustainability of the heavy dependence on groundwater—62% as of 2012-13—and the brute force approach becomes unsustainable. Improving efficiency via measures such as drip irrigation—also proven to improve yields—is far more tenable in the medium to long term. This is only financially sustainable with electric pump-sets—a difficult proposition as of now given the substantial shortfalls both in the scope and the reliability of electrification in rural areas across the country.

The NITI Aayog report also points to one of the most critical and long-running inefficiencies in the agricultural sector, the mandi system. The lack of rural infrastructure and constraints of the various states’ Agricultural Produce Marketing Committee Acts have created long supply chains and compelled farmers to depend on intermediaries, enabling cartelization. This has a cascading effect: farmers receive a low share of the rupee, leading to increased demands for minimum support prices and consequent food inflation.

There have been attempts to work around this. The centre’s Model APMC Act of 2003 provided a template for state governments to adopt. Only 16 have done so thus far, and the initiative suffers from ultimately working within the framework of the mandi system, flawed at its core. The establishment of a National Agriculture Market as an electronic trading portal, approved by the cabinet last year, has a better chance of being effective even with the mandias a back end by enabling farmers’ options for sale and access to markets. But here too, investment to enable transport and storage of produce is essential for the system to function—complicated by regulatory inefficiencies and dithering on foreign direct investment in multi-brand retail that have scared away private investment.

Entitlement spending like the Mahatma Gandhi National Rural Employment Guarantee Scheme and interest rate subvention on farmer loans can only ever be palliative measures; they are of questionable effectiveness at best. The bulk of the demand for MGNREGS funds this year has come from middle-income states, not those hit by drought. Both the Reserve Bank of India and Assocham, among others, have questioned the efficacy of farm loan subsidies. Most of the credit is absorbed by farmers with larger holdings, while the rest—two-thirds of farm holders have less than one hectare of land—continue to depend on money lenders, resulting in high levels of indebtedness.

If the government’s budget focus on agriculture is to have a real effect on the sector, the spending and reforms must address the underlying structural issues.

What agricultural reforms should the government focus on?

‘Cirb Gaurav’.

Scientists at the Central Institute for Research on Buffaloes (CIRB) in Hisar, Haryana have successfully produced a cloned buffalo offspring named ‘Cirb Gaurav’. CIRB scientists have achieved this feat under the project entitled- Cloning for conservation and multiplication of superior buffalo germplasm. Key facts Cirb Gaurav cloned buffalo calf is distinct from the earlier clones produced in India. It has been produced from cells of ventral side of tail of superior bull buffalo. The ventral side of tail was chosen because it is least exposed to sunlight and might have less mutation rate. This part also can be a good choice to produce healthy clones by isolating donor cells. With this achievement, CIRB becomes the India’s second and world’s third institute to produce cloned buffalo. Karnal (Haryana) based National Dairy Research Institute (NDRI) was the India’s first institute to produce a cloned calf. Cloning: Process of creating genetically identical copies of biological matter. It may include genetically identical copies of genes, cells, tissues or entire organisms.