Solar power: truth versus hype

Solar power: truth versus hype
There are hidden costs to India’s ambitious solar energy programme and serious doubts about its feasibility
Before the Paris climate summit, India had pledged to increase its share of non-fossil fuels to 40% of the total power generation capacity by 2032. India has an ambitious plan to add 100 gigawatts (GW) of solar power by 2022. Keeping in mind India’s high import dependence and chronic energy poverty, it is imperative that solar energy should be given impetus. The tariff for solar power has fallen from Rs.18 per unit a few years ago to an unprecedented level of below Rs.5 per unit—a big step in promoting clean energy. However, one must look critically at the reasons behind the massive cost reduction of solar cells and modules, along with the techno-economic feasibility of India’s solar ambitions.

Unfortunately, the reduction in the cost of solar power is not the result of a technological breakthrough in terms of enhanced conversion efficiency, but due to the dumping of cheap imported solar cells and modules by foreign cell manufacturers who enjoy massive state subsidies to practise predatory pricing and, thereby, destroy the domestic solar industry. High import dependence on solar cells and modules has its own ramifications on India’s energy security. While solar power developers in India are bidding aggressively, they are not leaving enough room for cost escalation. The contract for solar power doesn’t include a tariff revision provision. Though solar power projects do not involve any cost associated with fuel, their pricing projections are exposed to risks related to foreign exchange fluctuations and equipment replacement costs.

Further, a massive injection of solar power of the scale envisaged may perturb grid stability. Solar farms, unlike coal and nuclear power plants, cannot deliver the same amount of continuous electricity. To maintain grid frequency, grid operators must be able to predict precisely what the solar energy input at any given hour will be. But such an exact prediction every time is impossible. A small error in judgment will trigger frequency fluctuations and, thereby, instability in the grid. Moreover, India needs to have massive backup power plants and a delicate balance between base and peak load power plants when power from solar energy would not be available.

Massive land requirements to erect solar panels amplify the issues further. A 1 megawatt (MW) solar photovoltaic (PV) power plant should require around 2.5 acres. However, owing to the fact that large ground-mounted solar PV farms require space for other accessories, the total land required for a 1 MW of solar PV power plant would be around 4 acres. So investment in solar power must provide for a mammoth hidden cost.

Even from the environmental standpoint, while solar power plants involve much lower carbon emissions over their lifecycle than coal-based plants, solar power is not entirely clean. Manufacturing a PV solar cell requires huge amount of energy, starting from the mining of quartz sand to coating the cell with ethylene-vinyl acetate—most often derived from the burning of dirty fossil fuels. While there is no carbon emission associated with the generation of electricity from solar energy, there are emissions associated with various stages of the PV lifecycle, including the extraction of raw materials, production of materials, module manufacture, and system and plant component manufacture. All these cast serious doubt on the feasibility of India’s ambitious solar energy programme.

Germany’s solar experience

India must learn from Germany’s experiment with an ambitious solar energy programme. In Germany, the high rate of returns on solar projects encouraged huge investment for around 38GW though solar power, contributing just 6% of the total electricity demand in 2014 (according to Germany’s federal ministry for economic affairs and energy). Solar power is still the least efficient among Germany’s other renewable energy technologies, but 50% of total green energy subsides go to solar power. To address unaffordable and unreliable solar power, which increases power tariff and government subsidies, Germany renewed its focus on renewable technologies. According to Bloomberg, German utilities have started using lignite, a cheap and inferior coal with low heat content that spews more greenhouse gases than any other fossil fuels, for power generation.

The New York Times also reported on 8 April 2014 that key German industries have repeatedly expressed concern that the rapid and costly expansion of renewables could undermine the strength of the country’s industrial base, ultimately putting 800,000 jobs at risk. High usage of solar and other renewable energies is also causing instability to Germany’s electric grid, which prompted industrial consumers to purchase generators and other emergency backup systems to protect equipment from being damaged during disruptions.

Road ahead

India must explore all supply options, which include conventional and renewable energies like solar, wind, small hydro and biomass, to bridge the burgeoning demand-supply gap.

The focus should be on cleaner coal technologies along with nuclear power for India’s base load power generation. Cleaner coal technologies like super and ultra-supercritical combustion as well as coal-to-gas have the capability to minimize the emission of greenhouse gases from thermal plants due to their higher thermal efficiency. Domestic coal should be our major source in order to make energy affordable.

It is also important to accelerate India’s three-stage nuclear programmes so that we can utilize our vast thorium reserves to produce electricity at stage three. The renewed interest in nuclear energy in advanced economies like the US, France and Germany provides an important signal of its viability and safety.

Energy conservation and energy efficiency improvements have a significant potential to reduce energy consumption, which has a direct bearing on emission reduction at lower cost.

'Nairobi Package'

Ex-post-facto approval on the approach adopted by India at the Tenth Ministerial Conference of the WTO held in Nairobi, Kenya during 15-19 December 2015

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi has given its ex-post facto approval for the approach adopted by India at the Tenth Ministerial Conference of the WTO held in Nairobi, Kenya during 15-19 December 2015.

Background

The outcomes of the Conference, referred to as the 'Nairobi Package' include Ministerial Decisions on agriculture, cotton and issues related to least developed countries (LDCs). These cover a Special Safeguard Mechanism (SSM) for developing countries, public stockholding for food security purposes, a commitment to abolish export subsidies for farm exports and measures related to cotton. Decisions were also made regarding preferential treatment to LDCs in the area of services and the criteria for determining whether exports from LDCs may benefit from trade preferences. A Ministerial Declaration was also adopted.

In the run-up to the Nairobi Conference, it became clear that the Conference would determine the future of the Doha Round of trade negotiations. While the Round is very important for greater integration of developing countries in the global trading system, a few developed countries were strongly opposed to the continuation of the Doha Development Agenda (DDA). India took the stand that the DDA must continue after the Nairobi Conference and no new issues must be introduced into the WTO agenda until the DDA has been completed. The Nairobi Ministerial Declaration acknowledges that members "have different views" on how to address the future of the Doha Round negotiations but noted the "strong commitment of all Members to advance negotiations on the remaining Doha issues."

In view of the reluctance of developed countries to agree to continue the Doha Development Agenda post-Nairobi, India negotiated and secured a re-affirmative Ministerial Decision on Public Stockholding for Food Security Purposes honouring both the Bali Ministerial and General Council Decisions. The decision commits Members to engage constructively in finding a permanent solution to this issue.

Similarly, India negotiated a Ministerial Decision on another very important issue which recognizes that developing countries will have the right to have recourse to an agricultural Special Safeguard Mechanism (SSM) as envisaged in the Doha mandate. Members will continue to negotiate the mechanism in dedicated sessions of the Committee on Agriculture in Special Session. The WTO General Council has been mandated to regularly review the progress of these negotiations. This is a crucial decision in view of the differing views about the future of the Doha Round.

Members also agreed to the elimination of agricultural export subsidies subject to the preservation of special and differential treatment for developing countries such as a longer phase-out period for transportation and marketing subsidies for exporting agricultural products. The Ministerial Decision also contains disciplines to ensure that other export policies are not used as a disguised form of subsidies. These disciplines include terms to. limit the benefits of financing support to agriculture exporters, rules on state enterprises engaging in agriculture trade, and disciplines to ensure that food aid does not negatively affect domestic production. Developing countries have been given a longer time to implement these rules.

Another Ministerial decision extends the relevant provision to prevent 'evergreening' of patents in the pharmaceuticals sector. This decision would help in maintaining affordable as well as accessible supply of generic medicines.

India supported outcomes on issues of interest to LDCs including enhanced preferential rules of origin for LDCs and preferential treatment for LDC services providers. India already provides substantial preferences in these areas to LDCs.

Another area under negotiation in Nairobi dealt with the rules on fisheries subsidies. Like India, several other countries had strong reservations on this issue due to the lack of clarity. This was in tune with India's position. There was no outcome in this area of the negotiations. A group of 53 WTO members, including both developed and developing countries, also agreed on a timetable for implementing a deal to eliminate tariffs on 201 Information Technology products. Duty-free market access to the markets of the members eliminating tariffs on these products will be available to all WTO members. Though not a party to the Agreement, its benefits will also be available to India.

PSLV-C31 Successfully Launches India's Fifth Navigation Satellite IRNSS-1E

PSLV-C31 Successfully Launches India's Fifth Navigation Satellite IRNSS-1E

ISRO's Polar Satellite Launch Vehicle, PSLV-C31, successfully launched the 1425 kg IRNSS-1E, the fifth satellite in the Indian Regional Navigation Satellite System (IRNSS) today morning (January 20, 2016) from Satish Dhawan Space Centre SHAR, Sriharikota. This is the thirty second consecutively successful mission of PSLV and the eleventh in its 'XL' configuration.

After the PSLV-C31 lift-off at 0931 hrs (9:31 am) IST from the Second Launch Pad with the ignition of the first stage, the subsequent important flight events, namely, strap-on ignitions and separations, first stage separation, second stage ignition, heat-shield separation, second stage separation, third stage ignition and separation, fourth stage ignition and satellite injection, took place as planned. After a flight of about 18 minutes 43 seconds, IRNSS-1E Satellite was injected to an elliptical orbit of 282.4 km X 20,655.3 km inclined at an angle of 19.21 degree to the equator (very close to the intended orbit) and successfully separated from the PSLV fourth stage. After injection, the solar panels of IRNSS-1E were deployed automatically. ISRO's Master Control Facility (at Hassan, Karnataka) took over the control of the satellite. In the coming days, four orbit manoeuvres will be conducted from Master Control Facility to position the satellite in the Geosynchronous Orbit at 111.75 deg East longitude with 28.1 deg inclination.

IRNSS-1E is the fifth of the seven satellites constituting the space segment of the Indian Regional Navigation Satellite System. IRNSS-1A, 1B, 1C and ID, the first four satellites of the constellation, were successfully launched by PSLV on July 02, 2013, April 04, 2014, October 16, 2014 and March 28, 2015 respectively. All the four satellites are functioning satisfactorily from their designated orbital positions.

IRNSS is an independent regional navigation satellite system designed to provide position information in the Indian region and 1500 km around the Indian mainland. IRNSS would provide two types of services, namely, Standard Positioning Services (SPS) - provided to all users - and Restricted Services (RS), provided to authorised users.

A number of ground stations responsible for the generation and transmission of navigation parameters, satellite ranging and monitoring, etc., have been established in eighteen locations across the country. In the coming months, the remaining two satellites of this constellation, namely, IRNSS-1F and IG, are scheduled to be launched by PSLV, thereby completing the entire IRNSS constellation

The case for going universal

Maternity entitlements are an important policy tool for encouraging better maternal health. This is why we need to do away with conditionality in cash transfer schemes

Since the National Food Security Act (NFSA) was passed in 2013, policy circles have been buzzing with talk of reforms in the public distribution system (PDS). Less well appreciated is the NFSA’s potential to call attention to, and help address, poor maternal nutrition — an aspect of food security that is extremely important for health, well-being, and productivity.

Indian women are unhealthily thin when they begin pregnancy — the 2013-2014 Rapid Survey on Children finds that a little less than half of the women aged 15-18 are underweight. Further, women gain too little weight during pregnancy to nurture healthy babies. Maternal nutrition is so poor that Indian women actually weigh less at the end of pregnancy than sub-Saharan African women do at the beginning. As a result, India’s neonatal mortality rate is high, birth weight is low, and far too many children suffer the consequences of being undernourished in the womb.

The NFSA legislates a “maternity benefit of not less than Rs. 6,000” to “every pregnant and lactating mother.” Unfortunately, except for laudable efforts in Odisha and Tamil Nadu, and a small pilot programme called the Indira Gandhi Matritva Sahyog Yojana (IGMSY) which is active in only 53 of India’s 676 districts, maternity entitlements have not been implemented.

Government’s role

Maternity entitlements would be a good idea even if they weren’t already written into law. The health of future Indians depends on women gaining more weight during pregnancy. Maternity entitlements could be used to purchase vegetables, fruits, dairy products, eggs, or meat, which are essential for healthy pregnancies but are not distributed through existing programmes.

The government should put new emphasis on educating women and their families about weight gain during pregnancy. It should combat the common, though false, notion that women should eat less, not more, during pregnancy. It should talk to people about the fact that pregnant women are often treated poorly by their own families; they are expected to work hard and eat little. Despite clear difficulties of addressing entrenched gender and age hierarchies with government action, maternity entitlements are a good way to signal to families just how important a time pregnancy really is.

Last September, the Supreme Court issued a notice to the Centre about non-implementation of maternity entitlements. A representative of the Ministry of Women and Child Development (MWCD) responded in late October. The response suggests that if the Finance Ministry allocates funds for maternity entitlements (the Finance Ministry has, at present, allocated funding only for the 53 IGMSY districts), the MWCD would expand IGSMY in its current form. There are several reasons why this is a bad idea.

IGMSY is a conditional cash transfer, which means that mothers only receive benefits if they meet certain requirements. Recipients must register pregnancies with a village health worker, receive ante-natal check-ups, take iron-folic acid supplements, receive immunisation, attend infant-feeding counselling sessions, breastfeed for six months, and begin complementary foods at six months. These are steps to raising healthy children, but making them conditions for receiving benefits makes little sense.

Conditional cash transfers have been successful in Latin America, where health systems are well-developed. In India, though, major deficiencies in the provision of health services mean that conditional transfers will not work similarly. Conditional transfers solve demand problems, but India chiefly faces supply problems. Conditions that have to do with mothers’ behaviour rather than participation in services are nearly impossible to verify. Verifying behaviour which occurs in private, at home, constitutes an undue burden on health workers. Further, the need to document the fact that conditions have been met invites corruption: many health workers demand to be paid for producing paperwork that “verifies” the unverifiable.

Universalise entitlements

Although the NFSA clearly legislates a universal entitlement, IGSMY, which MWCD proposes to expand, restricts benefits to the first two births. This position appears to be based on the ill-conceived notion that universal transfers increase fertility.

Certainly, people respond to incentives. But a Rs. 6,000 transfer is not large enough to persuade parents to raise a child they don’t want. Children are expensive: the 2011 India Human Development Survey found that parents spend an average of Rs. 4,207 per year educating each 5-18-year-old child, not to mention what they spend on food, clothing, and medicines.

Some recent research, casually cited in media reports, claims that Janani Suraksha Yojana (JSY) incentives for institutional birth have slowed fertility decline. The basis of this claim is that between 2001 and 2008, fertility decline was slower in States with high JSY incentives than in those with low incentives. This argument, however, overlooks the fact that NFHS data show that this pattern was applicable even before JSY was launched.

No social-scientific evidence supports the idea that families would be motivated to raise another child by JSY incentives of Rs. 1,400, or maternity entitlements of Rs. 6,000. Regrettably, social biases may be at play when government officials baulk at universal entitlements: the Centre for Equity Studies finds that restricting participation to the first two births would disproportionately exclude mothers from poor and minority backgrounds.

Maternity entitlements are an important policy tool for encouraging better maternal health. But a well-designed programme would not merely scale up the IGMSY. It would be, as the law already requires, a universal programme, and it would do away with conditionality in favour of educating families about the importance of investing in healthy pregnancies.

The hidden wealth of nations

India’s biggest source of FDI is India itself, money departing on a short holiday to a tax haven and then routed back as FDI. Will the government muster up the political will to clamp down on the tax-allergic business elite?

This could be a bumper year for the ever-lucrative tax avoidance industry. The 2015 final reports of the Organisation for Economic Co-operation and Development (OECD)-led project on Base Erosion and Profit Shifting (BEPS) — which refer to the erosion of a nation’s tax base due to the accounting tricks of Multinational Enterprises (MNEs) and the legal but abusive shifting out of profits to low-tax jurisdictions respectively — lays out 15 action points to curb abusive tax avoidance by MNEs. As a participant of this project, India is expected to implement at least some of these measures. But can it? More pertinently, does it have the political will?

The BEPS project is no doubt a positive development for tax justice. If India’s recent economic history tells us anything, it is that economic growth without public investment in social infrastructure such as health care and education can do very little to better the life conditions of the majority. Which is why curbing tax evasion to boost public finance is part of the United Nations’ Sustainable Development Goals (SDGs).

However, notwithstanding the BEPS project, MNEs and their dedicated army of highly paid accountants are not about to roll over and comply. Again, if past history is any indication, the cat-and-mouse game between accountants and taxmen will continue, with new loopholes being unearthed in new tax rules.

Empowering tax dodgers

The primary cause of concern here is the quality of India’s political leadership, which has consistently betrayed its own taxmen. All it takes — regardless of the party in power — is for the stock market to sneeze, and the Indian state swoons. We’ve seen it happen time and again: the postponement of the enforcement of General Anti-Avoidance Rules (GAAR) to 2017, and more spectacularly, on the issue of participatory notes, or P-notes.

Last year, the Special Investigation Team (SIT) on black money had recommended mandatory disclosure to the regulator, as per Know Your Customer (KYC) norms, of the identity of the final owner of P-notes. It was a sane suggestion because the bulk of P-note investments in the Indian stock market were from tax havens such as Cayman Islands. But the markets threw a fit, with the Sensex crashing by 500 points in a day. The National Democratic Alliance (NDA) government, which had come to power promising to fight black money, promptly issued a statement assuring investors that it was in no hurry to implement the SIT recommendations. Given such a patchy record, what are the realistic chances of India actually clamping down on tax dodging?

Let’s take, for instance, Action No. 6 of the OECD’s BEPS report: it urges nations to curb treaty abuse by amending their Double Taxation Avoidance Agreements (DTAA) suitably. The obvious litmus test of India’s seriousness on BEPS is its DTAA with Mauritius. By way of background, Mauritius accounted for 34 per cent of India’s FDI equity inflows from 2000 to 2015. It’s been India’s single-largest source of FDI for nearly 15 years. Now, is it possible that there are so many rich businessmen in this tiny island nation with a population of just 1.2 million, all with a touching faith in India as an investment destination? If not, how do we explain an island economy with a GDP less than one-hundredth of India’s GDP supplying more than one-third of India’s FDI?

We all know the answer: Mauritius is a tax haven. While not in the same league as Cayman Islands or Bermuda, Mauritius is a rising star, thanks in no small measure to India’s patriotic but tragically tax-allergic business elite. In Treasure Islands: Tax Havens and the Men Who Stole the World, financial journalist Nicholas Shaxson notes how Mauritius is a popular hub for what is known as “round-tripping”. He writes, “A wealthy Indian, say, will send his money to Mauritius, where it is dressed up in a secrecy structure, then disguised as foreign investment, before being returned to India. The sender of the money can avoid Indian tax on local earnings.”

In other words, it appears that India’s biggest source of FDI is India itself. Indian money departs on a short holiday to Mauritius, before returning home as FDI. Perhaps not all the FDI streaming in from Mauritius is round-tripped capital — maybe a part of it is ‘genuine’ FDI originating in Europe or the U.S. But it still denotes a massive loss of tax revenue, part of the $1.2 trillion stolen from developing countries every year.

What makes this theft of tax revenue not just possible but also legal is India’s DTAA with Mauritius. It’s a textbook example of ‘treaty shopping’ — a government-sponsored loophole for MNEs to avoid tax by channelling investments and profits through an offshore jurisdiction.

For instance, as per this DTAA, capital gains are taxable only in Mauritius, not in India. But here’s the thing: Mauritius does not tax capital gains. India, like any sensible country, does. What would any sensible businessman do? Set up a company in Mauritius, and route all Indian investments through it.

India signed this DTAA with Mauritius in 1983, but apparently ‘woke up’ only in 2000. India has spent much of 2015 ‘trying’ to renegotiate this treaty. But with our Indian-made foreign investors lobbying furiously, the talks have so far yielded nothing. Meanwhile, China, which too had the same problem with Mauritius, has already renegotiated its DTAA, and it can force investors to pay 10 per cent capital gains tax in China.

Changing profile of tax havens

Tax havens such as Mauritius thrive parasitically, feeding on substantive economies like India. Back in 2000, the OECD had identified 41 jurisdictions as tax havens. Today, as it humbly seeks their cooperation to combat tax avoidance, it calls them by a different name, so as not to offend them.

The same list is now called — and this is not a joke — ‘Jurisdictions Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters’. Distinguished members of this club include Cayman Islands, Bermuda, Bahamas, Cyprus, and of course, Mauritius.

Today the function of tax havens in the global economy has evolved way beyond that of offering a low-tax jurisdiction. Mr. Shaxson describes three major elements that make tax havens tick. First, tax havens are not necessarily about geography; they are simply someplace else — a place where a country’s normal tax rules don’t apply. So, for instance, country A can serve as a tax haven for residents of country B, and vice versa. The U.S. is a classic example. It has stringent tax laws, and is energetic in prosecuting tax evasion by its citizens around the world. But it is equally keen to attract tax-evading capital from other countries, and does so through generous sops and helpful pieces of legislation which have effectively turned the U.S. into a tax haven for non-residents.

Second, more than the nominally low taxes, the bigger attraction of tax havens is secrecy. Secrecy is important for two reasons: to be able to avoid tax, you need to hide your real income; and to hide your real income, you need to hide your identity, so that the booty stashed away in a tax haven cannot be traced back to you by the taxmen at home. So, even a country whose taxes are not too low can function as a tax haven by offering a combination of exemptions and iron-clad secrecy — which is the formula adopted by the likes of Luxembourg and the Netherlands.

Third, the extreme combination of low taxes and high secrecy brought about a new mutation of tax havens in the 1960s: they turned themselves into offshore financial centres (OFCs). The economist Ronen Palan defines OFCs as “markets in which financial operators are permitted to raise funds from non-residents and invest or lend the money to other non-residents free from most regulations and taxes”. It is estimated that OFCs are recipients of 30 per cent of the world’s FDI, and are, in turn, the source of a similar quantum of FDI.

Such being the case, all India needs to do to attract FDI is to become an OFC, or create an OFC on its territory — bring offshore onshore, so to speak. That’s precisely what the U.S. did — it set up International Banking Facilities (IBFs), “to offer deposit and loan services to foreign residents and institutions free of… reserve requirements”. Japan set up the Japanese Offshore Market (JOM). Singapore has the Asian Currency Market (ACU), Thailand has the Bangkok International Banking Facility (BIBF), Malaysia has an OFC in Labuan island, and other countries have similar facilities. OFCs, as Ronen Palan puts it, are less tax havens than regulatory havens, which means that financial capital can do here what it cannot do ‘onshore’. So every major hedge fund operates out of an OFC. Given the volume of unregulated financial transactions that OFCs host, it is no surprise that they were at the heart of the 2008 financial crisis.

Apart from accumulating illicit capital (in the tax haven role), channelling this capital back onshore dressed up as FDI (in investment hub role), and deploying it to engage in destructive financial speculation (in OFC role), these strongholds of finance capital also serve a political function: they undermine democracy by enabling financial capture of the political levers of democratic states.

It is well known that political parties in most democracies are amply funded by slush funds that would not have accumulated in the first place had taxes been paid. But today, not least in the Anglophone world, global finance’s capture of the state appears more like the norm.

A lone exception seems to be Iceland, which began the new year on a rousing note — by sentencing 26 corrupt bankers to a combined 74 years in jail. Meanwhile in India, we continue to parrot long discredited clichés about the need for more financial deregulation and a weird logic that mandates a smaller and more limited role for public finance.

World’s largest canyon spotted by Chinese scientists

At over 1000 km long, 1500 metres deep, and 26.5 kilometres wide at the top, it was discovered during the country's latest Antarctic expedition to the South Pole.

The world’s largest canyon far larger than the Grand Canyon in the United States has been spotted by the Chinese scientists who took part in the country’s latest Antarctic expedition to the South Pole.

The canyon, more than 1000 kilometres’ long, 1500 metres deep, and 26.5 kilometres wide at the top, is larger than the Grand Canyon and is the largest canyon discovered on earth, state-run Xinhua quoted Chinese scientists who took part in China’s 32nd Antarctic expedition as saying.

Giant wetland beneath Antarctic ice

China’s expedition team, which launched the search around the Princess Elizabeth Area of the South Pole in last November, has also found many sub-glacial lakes and currents connected to the canyon, forming a giant “wetland” beneath the Antarctic ice.

They also detected large-scale “warm ice” under the sheet along with a number of lakes. Warm ice can easily be melted into water.

‘Will increase research in the area’

“It is very exciting that Chinese scientists led the survey and made the findings,” Sun Bo, vice-leader of the expedition team said. He said the achievements would help significantly with research in the area.

In recent years, science circles speculated through satellite remote sensing measures that there should be a giant canyon or lake covered by ice in the Princess Elizabeth Area.

The Chinese expedition team had surveyed an area of 8,66,000 km with the aid of China’s first fixed-wing aircraft, carrying an ice radar, high-precision differential GPS system.

China launched its 32nd Antarctic expedition with the research vessel and icebreaker Xuelong (Snow Dragon) on November 7. 

 

Can rural India reap digital dividends?

The virtual world has increased the possibilities of trade in the real world 

One of the primary agendas of the liberalization which began in 1991 was to improve competitiveness and reduce the transaction costs which largely restricted India’s trade with the rest of the world. But a quarter century after economic reforms were initiated, this Coasean problem of transaction costs remains more relevant than ever. The World Bank’s latest World Development Report, or WDR, points to the potential of Internet and communication technology (ICT) in pruning these.

The Coase theorem (named after British economist Ronald Coase) states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property. Since the digital revolution, the virtual world has increased the possibilities of trade in the real world, minimizing these transaction costs. Transaction costs include search and information costs, bargaining and decision costs, and policing and enforcement costs.

The WDR cites the example of the Taobao villages in China to show the extent to which the Internet can induce development. Taobao, a consumer-to-consumer portal established by Chinese e-commerce giant Alibaba, allows entrepreneurs to open online stores and sell their products to interested consumers. A Taobao village is a cluster of rural e-tailers where at least 10% of village households engage in e-commerce.

It’s worth looking at the potential benefits of such a model in India. Over half of India’s population depends for its livelihood on an agricultural sector that cannot support it adequately. Structural reforms may improve the sector’s viability, but the only long-term solution is enabling the rural population’s access to other forms of economic activity. An e-retail model that aims at incorporating rural households could offer some utility here.

As matters stand, e-commerce in India is almost entirely an urban phenomenon. Clustering rural retailers as the Taobao model does creates the volume necessary for incentivizing at least some portion of the logistical and financial support urban retailers enjoy. And it could have the secondary benefit of providing a boost to artisans who lack access to a wider market, making traditional crafts unsustainable.

E-commerce ventures structured along similar lines such as ITC e-choupal, Craftsvilla and Kerala’s Kudumbashree have had moderate success in the past.

The major obstacle, of course, is the lack of rural Internet access. India has the ironic reputation of having the second largest number of Internet users and the largest offline population in the world. Internet usage is highly skewed in favour of men and urban households compared to women and rural households. Prime Minister Narendra Modi’s Digital India initiative aims at resolving this bottleneck. Its goal of connecting rural areas with high-speed Internet networks is laudable, as is its focus on digital literacy. How such a mammoth undertaking will play out remains to be seen. And to be successful—particularly in the context of the Taobao model—it must form robust linkages with other government initiatives that range from providing a cradle-to-grave digital identity to universal access to banking services.

Other hurdles wait further down the road. Judging by the government’s Start-up India push, the infant industry syndrome is an occupational hazard in the Indian policy environment. Rural e-commerce should not fall into the same trap. If the Internet has to become an effective catalyst for efficiency and innovation, competition is essential. Alibaba’s Taobao advanced so much on the efficiency frontier due to intense competition from eBay.

The last thing the rural economy needs to add to the protectionism the agricultural sector enjoys is a subsidized, protected retail segment.

ICT alone accounted for one-fifth of global growth from 1995 to 2014. In 1990, American economist Paul Michael Romer said, “Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable… History teaches us that economic growth springs from better recipes, not just from more cooking.” Technological change is an endogenous factor in growth and Internet is technology at its best.