Sunil Jain

Regulatory Roulette

2009-07-27T23:07:00.000-07:00

•Telecommunications: Rs 40,000 crore a year on 2G networks, and another Rs 35,000 crore likely on building the 3G network in the coming year
•Power: Rs 200,000 crore to expand capacity by 30,000–40,000 MW in the next five years
•Airports: Rs 35,000 crore to build/modernise six airports, with another Rs 60,000 crore to modernise 20 more in the next two years
•Ports: Rs 40,000 crore to build/expand eight to 10 ports
•Metro rail: Rs 10,000 crore apiece for new metro rail services in cities like Hyderabad, Kolkata, Bengaluru, Mumbai and Chennai

Going by these numbers, it would be natural to assume that all is well with the country’s infrastructure sector.1 However, while there have been significant victories, there have been equally noteworthy defeats. So, while the government managed to push through with its public–private partnership (PPP) model for the Hyderabad metro,2 as opposed to the government-funded plans in cities like Kolkata and Bengaluru, it also got the cabinet to pass the Hoda committee recommendations on fixing port tariffs3 before calling for bids. On the flip side, vested interests forced the government to put off even the partial privatisation of the Amritsar and Udaipur airports. While a new model format has been designed to ensure that even the kind of favouritism seen in pre-selecting bidders on the basis of their technical qualifications4 gets eliminated, it has been given the go-by in the recent bids for the modernisation of the New Delhi railway station. In fact, there is a concerted effort to drop it altogether on the grounds that it discriminates against Indian infrastructure developers.5 It has already been dumped in the road sector.
So is everything hunky dory with the sector and, by implication, with the regulatory regime that governs it? Yes and no. There can be little doubt that in the sectors where independent regulators have been put in place, such as telecom and power, the system has evolved in a more transparent manner. Having said that, there is consider¬able scope for favouritism and regulatory capture, more often by the very government that installed the independent regulatory mechanism as a means to free the sector from its clutches. This inefficient system has, however, not inhibited investment because the scale of shortages often imply that there are big revenues to be earned, as also because most players feel they can manipulate the system to their advantage.
This paper attempts to capture salient regulatory successes and failures in recent years. It goes much beyond just regulation since no such discussion is complete without an understanding of the process of tendering and of various other government processes involved in each stage of the project’s life.
INTRODUCTION
Much of India’s regulatory history is really about telecom since this is where the first regulatory structures were put in place and, naturally enough, this is where the most bitter court battles have been fought. Though there is no doubt that regulation has contributed to a better functioning system, a very large part of this change has been the result of long and expensive court battles.
The biggest achievement in telecom regulation, and this came with¬out any court battles, is the directive forcing telephone providers to allow interconnection facilities with one another6 and at rates fixed by the regulator. However, the principle of calling party pays (CPP), which effectively reduced tariffs by half, came only after a bruising court battle and a very public and head-on col¬lision between private mobile phone players and the government. At one point, private players cut off interconnections with various phone services (including those of the state-owned BSNL/MTNL) which they regarded as illegal; they followed this up with full-page advertisements in newspapers justifying their behaviour and expos¬ing what they saw to be the government’s bias. After this episode, the telecom minister lost his job.
Telecom, power, ports and petroleum (and, soon, the airports sector): regulatory experience has not been uniform across sectors. While telecom and power both have appellate structures where ap¬peals against regulators’ decisions can be made,7 this is not so in the ports and petroleum sectors. Further, while the structure of the Telecom Regulatory Authority of India (TRAI) leaves less scope for government intervention (in theory if not in practice), this is not so in the case of other regulators. The government’s ability to dismiss regulators in the other sectors is quite high.
Another concern centres on the fact that governments simply refuse to let regulators do their jobs; conversely, few ex-bureaucrats-turned-regulators, as they are increasingly in most sectors, want to upset the status quo anyway.8 So, while the National Democratic Alliance (NDA) government dismissed the first TRAI for being too independent, subsequent governments became savvier. In fact, the NDA itself, under another minister, appointed a TRAI chief who was in sync with the government’s think¬ing, and that is how the Reliance Infocomm CDMA-based mobile service was legalised. Under the United Progressive Alliance (UPA) government, the first telecom minister either simply ignored TRAI’s recommendations or, at times, announced changes without going through the legal requirement of consulting TRAI. His successor did one better: he consulted the TRAI but took his pick from its recommendations, thus prompt¬ing the TRAI chief to say that the government was cherry-picking. This is illus¬trated in the case of the new 2G licenses (all mobile services cur¬rently on offer are 2G ones, with limited data transfer speeds) that were sold for a song early in 2008. Not only was there blatant favouritism, but the government also lost more than $10 billion in the bargain. A similar pattern can be observed vis-à-vis 3G9 licenses which are to be auctioned, as the government has done its best to ensure that newcomers face a more difficult time than existing 2G mobile phone firms.
If a partisan choice of regulators isn’t bad enough, the govern¬ment has also taken to packing appellate tribunals with its chosen appointees. In the case of the Telecom Dispute Settlement and Appellate Tribunal (TDSAT), the Ministry of Communications wanted members that TDSAT chief, Justice Arun Kumar, did not agree to. For instance, Justice Kumar felt that the outgoing BSNL chief, A K Sinha, could not become a member as there were a large number of cases at the TDSAT against BSNL. This face-off resulted (briefly in 2007) in a situation when the TDSAT was unable to func¬tion because it did not have enough members.
In addition, the government has also ensured that successive regulatory systems, after telecom, are more under its control. The provisions of the bill introduced to set up the airports regulator pro¬vides for its easy dismissal by the government, dependent only on an internal inquiry.10 In the case of the appellate body, by contrast, the chairman and members can only be dismissed after a reference is made to the Supreme Court. The same internal inquiry is sufficient to dismiss the newly-appointed petroleum regulator.
In the case of ports, a detailed study posted on the website11 of the Committee on Infrastructure (the CoI is, in turn, serviced by the Planning Commission) found that the Nhava Sheva International Container Terminal (NSICT) got concessions worth about $1.5 billion thanks to the complicity of the shipping ministry and the port regulator, Tariff Authority for Major Ports (TAMP). NSICT, according to Bharat Salhotra,12 who did the study, was allowed to charge excessive tariffs and, between 2002 and 2005, earned a return in excess of 100 per cent as against the permitted 20 per cent on equity.
In this particular case, the NDA government actually gave instruc¬tions to the port regulator that helped the private sector players. In another case—that of the privatisation of the Delhi electricity system—the Delhi High Court ruled that it was incorrect for the Delhi government to give instructions to the regulator. However, coming as it did about five years after privatisation, this ruling had little practical consequence. Yet another example involves the regu¬larisation of Reliance Infocomm’s illegal mobile services: when the telecom regulator wrote to the telecom secretary asking him to ensure that Reliance Infocomm did not contravene the law, he was asked not to raise the matter again, and certainly not in public.
The delay in the appointment of the airports regulator (still depen¬dent on the regulatory bill getting passed) will be critical. Most of the country’s major airports are well on their way to being privatised/modernised. As such, the regulator’s role will be limited as there will be no way of verifying costs or of laying down guidelines on how costs should be calculated. In a recent case, the Delhi electricity regu¬lator pointed out that a large portion of the expenditure shown by one of the private firms was excessive and disallowed this while calcu¬lating the year’s tariffs.
In the absence of a regulator in the airports sector, the Ministry of Civil Aviation performs this role, making a mockery of the system since it is ministry decisions presumably that private players want to
appeal against. Apart from the ministry’s questionable role in allowing the technical selection of bidders for the Delhi and Mumbai airports to get distorted, the ministry (and most of the govern¬ment machinery) allowed the Delhi airport franchisee to come up with complex finan¬cial engineering enabling it to reduce the government’s share of the revenue substantially in comparison to the initially promised amount. Extensive media debate has forced a re-evaluation of many of the pro¬posals, but the process is still far from complete.
Roads, too, do not have a regulatory system and any disputes, as those over delays and payments, are settled by the very ministry which penalises the contractors in the first place. And since each state has a different system of functioning, there is enough scope for firms to work out deals that, to the layman at least, look terribly one-sided and offer great scope for favouritism.
So, in states like Rajasthan and Tamil Nadu, a private entrepre¬neur who has built highways has secured very high returns. Typically, the private firm sets up a joint venture with the state government, gets
the government to contribute large amounts of zero-interest subor¬dinate debt (since the contribution is not in the form of equity, the private firm continues to be a 50 per cent owner of the subsidiary), and also gets hefty commissions for organising the raising of debt and for pro¬ject completion. In one case,13 while the state government had put in Rs 44 crore and got Rs 0.02 crore, the private firm put in Rs 70 crore and got Rs 91 crore back.
In the petroleum sector, while there are two regulators, one for downstream activities and the other for upstream, the government remains all powerful. For instance, in the dispute between the Ambani brothers on the Krishna–Godavari basin (KG basin) gas, there is enough evidence to show that the petroleum ministry has not been as impartial as it should have been.
As in the telecom sector, there have been some significant regu¬latory successes in the power sector too: the introduction of the concept of Availability-Based Tariffs and some discipline in terms of overdrawing power from the electricity grid are two such examples. Much of this, however, was in the early days of reforms. Subsequent years have seen a slowdown in momentum and progress has been very poor on critical parameters, such as ‘open access’. The regulatory mechanism has not insulated the sector from the political process as a result of which, for example, the loss of electricity due to theft remains very high, making the sector financially unviable as a whole.
TELECOM
With 8–9 million new subscribers being added to the mobile network each month, this sector remains one of the best performing ones in the country. While there is enough reason to be critical of telecom regulation, it remains true that the industry would not have succeeded if critical rules and regulations had not been put in place by the regulatory regime. Of late, however, regulatory successes have been few, overshadowed as they have been by large failures.
After the first TRAI under Justice Sodhi was dismissed for act¬ing as if it had supreme powers over the sector, things ran pretty smoothly for some years. Then, in 2003, communications minister Arun Shourie rammed through with the regularisation of Reliance Infocomm’s illegal CDMA-mobile services despite the TDSAT ruling that Reliance be asked to stop offering its service in the manner it was. More recently, communications minister A Raja selectively picked from a bunch of TRAI recommendations and awarded spectrum at bargain-basement prices; while one of those companies has now sold 45 per cent of its equity for a sum that is nearly six times what it paid just six months ago, another has sold 60 per cent. All told, the cost of this largesse means that the government has got roughly $10 billion less than it should have got while issuing the 2G spectrum.14 And now, the new policy on auctioning spectrum (3G spectrum), which will allow mobile phone firms to offer broadband internet speeds on mobiles, consciously tilts against newcomers and tries to restrict the bidding to a handful of existing mobile phone firms.
Not surprisingly, the real growth in telecom took place after the mid-1990s, when the private sector was first allowed entry. From a total of around 5 million subscribers (of fixed land-based phones) in 1991, there are over 300 million today. While just a little over one-fourth of these connections are provided by the public sector, their revenue share is significantly higher—34 per cent of the 2007–08 indus¬try revenue of Rs 129,083 crore.15 Bearing in mind that tariff levels for mobile and long distance calls have, on an average, fallen by around 90 per cent since the mid-1990s, the revenue growth is clearly attributable to an increase in subscribers and in usage.

Figure 1
Telecom Growth

While the spread of telephony and the dramatic fall in prices is an indirect testimony to the efficacy of regulatory policy, the biggest achievement, as mentioned earlier, is the facility of interconnection (the user of one phone service, say Reliance, being able to talk to, or receive calls from, users of, say BSNL) first announced by the first TRAI chief in 1999. After many iterations, the first comprehensive interconnection usage charge (IUC) order was announced on 24 Janu¬ary 2003. This laid down, on the basis of costs, the exact charges to be paid when a call originated from another network, the cost to be paid for carrying calls over different distances, and the charges to be paid while terminating the call on another network. These principles also stipulated that a certain maximum timeframe had to be set for all interconnections to take place as, without rule and time-based interconnection, no telephony is possible.
It is the use of this cost-based principle that led the regulator to argue, for instance, that tariffs of leased lines were around 70 per cent higher than they should be—based on their costs as well as inter¬national benchmarks. And though it took over a year for TRAI to finally get service providers to fall in line (the case was dismissed by the TDSAT once when VSNL argued that TRAI had not shared its data on the matter), the sharp reduction in leased line costs which is currently taking place is owed entirely to TRAI.
Another issue which has been successfully resolved, though no thanks to the regulator, has been that of points of interconnection (POI).16 Just a few years ago, in 2005, TRAI found that BSNL was refusing to give private operators POI to enable their subscribers to talk to BSNL subscribers. Of the 918 pending demands of private operators cited by the TRAI, 367 had been pending for more than a year. TRAI ordered that such interconnection, which is the life¬blood of the telecom industry, be provided within 90 days. BSNL success¬fully challenged TRAI’s jurisdiction at the TDSAT and the case is now pending at the Supreme Court.
But with the equation changing and private lines significantly outnumbering those of BSNL, the latter no longer has so many out¬standing POIs. Indeed, the most congested POIs are now with Bharti Airtel, more as a consequence of demand rising much faster than investment. Between December 2007 and March 2008, for instance, the number of POIs with higher-than-acceptable congestion levels fell from 315 to 275 while the number of subscribers rose from 233 million to 261 million. There is still a long way to go, but trends clearly indicate improving levels of quality and, more importantly, that the outstanding regulatory issues are not so great any more as far as POIs are concerned.
Reliance Mobile, Phase 1
In 2001, fixed-line phone providers like Reliance Infocomm began offering their customers full-blooded roaming facilities17 (essentially, they were offering mobile services without having paid the licence fees) through the use of wireless in local loop (WiLL) or code divi¬sion multiple access (CDMA) technology. Initially, fixed phone providers brought their copper line till a central area in a colony and, instead of extending this to each house, they connected each house wirelessly through WiLL/CDMA. With improvements in tech¬nology, the distances of the wireless signal too increased. So, the fixed phone licencees whose licence fee was much lower than that of licencees of mobile services, and who also enjoyed better commercial terms (their subscribers, for instance, did not have to pay for each incoming call and they got to keep a larger share of long distance revenues), were now able to offer full-blown mobile services. The Cellular Operators Association of India tried, in vain, to remedy this situation by variously appealing to the ministry, to TDSAT,18 to the Supreme Court.
TDSAT finally gave a split verdict in August 2003. While the head of TDSAT, the only judicial member, ruled that the WiLL service had to be stopped, the other two members ruled that while the ser¬vices should not be stopped, a method should be found to ensure that the mobility offered was restricted. The government, however, refused to implement the order and, in October 2003, came up with a new policy recommending unified access. This allowed the WiLL mobile players to offer full mobility after paying a license fee equal to that paid by the most recent cellular licensees (who were awarded the license in an auction a few years prior to this). The penalty plus license fee added up to around Rs 2,000 crore. Reliance had, in the meantime, built up a big subscriber base by virtue of the fact that it offered (till then, illegally) mobile services, and the value of this subscriber base was far greater than the penalty imposed.
Calling Party Pays
When finally introduced on 1 May 2003, the directive of calling party pays (CPP) single-handedly changed the fortunes of the mobile industry. Till then, if someone made a call from a mobile phone to a fixed line network, a fixed charge was paid to the fixed line com¬pany. Yet, when the reverse was done, the mobile phone com¬pany did not get paid. Since a WiLL/CDMA-mobile was still classified as a fixed line, users did not have to pay CPP when they called a regular mobile.
By 2003, when the WiLL mobile phones began stealing the march over the cellular ones (since they offered incoming calls free), cellular firms decided to take action and cut off all POI with the WiLL phones. A crisis ensued, with the then communications minister Pramod Mahajan reading the riot act to cellular firms, fol¬lowing which the latter put out full page advertisements in newspapers exposing the policy-induced favouritism shown to WiLL-mobile firms. Within a week of this, on 24 January 2003, CPP was brought in for cel¬lular firms as well! It is a different matter that the TRAI chief then delayed the launch of CPP for another few months. With CPP, effectively, the tariffs on regular mobile phones halved and that is when the industry really took off.
ADC Regime
Access deficit charge (ADC) is perhaps the only instance of firms sub¬sidising their competitors. In May 2003, TRAI announced that a sum of Rs 13,000 crore had to be paid to BSNL to compensate it for installing below-cost phones (subsidised to the subscriber), and this money would be recovered through a cess of sorts on all phone calls. The industry, however, pointed out that the calculations were incorrect and, within four to five months, TRAI revised this figure down to Rs 5,335 crore—the amount of ADC charges were to fall with each passing year. Detailed rates were then fixed of the ADC to be paid on both national and international long distance calls. TRAI, in June 2004, determined a range of ADC payments depending upon the rentals BSNL charged its customers: if the rental was Rs 200 per month, the ADC had to be Rs 1,402 crore and this would go up to Rs 3,436 crore if the rentals was Rs 156. In January 2005, however,
TRAI decided to plump for the figure of Rs 5,300 crore it had esti¬mated prior to its detailed calculation.
Other than forcing the industry to fund the competition, ADC had several other problems. For one, TRAI never fully established BSNL’s need for funds so raised, as is evident from the back and forth on the amounts of ADC. Also, since ADC was charged on long distance calls, there was an incentive to mask international calls (see the section on ‘Reliance ADC theft’ later in this paper) as local and therefore avoid making a payment on it to BSNL. Over the years, however, ADC rates were lowered and it has recently been phased out completely.
Reliance ADC Theft
Within a year of helping regularise Reliance Infocomm’s illegal mobile services, the government began helping it again; this time after the company was caught trying to avoid the ADC payments. Towards the end of 2004, there was enough evidence to show that Reliance was changing the calling line identification (CLI) on inter¬national calls received by its network and replacing these with local numbers. Since an ADC of Rs 4.25 per minute had to be paid on every international call, either received on a network or made from it, this masking had the potential of saving more than Rs 1,000 crore. When the Department of Telecom’s (DoT) investigation wing first confronted Reliance with this, the company denied it; later when numbers on which this was happening were given to Reliance, the company admitted that it had reserved 30,000 numbers in Mumbai, Chennai and Kolkata for the purposes of CLI change.
In spite of this the regulator refused to investigate the matter, citing problems of insufficient staffing. Apart from the theft angle, allowing Reliance to get away with this meant that the firm could, and was, offering cheaper long distance telephony to its subscri-
bers and this gave it an unfair advantage over the competition. It was clearly a matter for the regulator to take action on. While staffing was an issue, TRAI did not even attempt to ask Reliance how it was offering US-to-India calls for 11.9 cents (Rs 5.47 a minute) when it had to pay Rs 4.25 for the ADC, Rs 1.15 (2–3 cents) for carrying the calls to India and another 30 paise to the telephone firm in India on whose lines the calls terminated.
Even as the government jailed all small offenders who in the past offered ‘callback’ facilities to avoid paying the high official long dis¬-
tance rates, it repeatedly refused to take strong action against Reliance. In fact, the suggestion of cancelling its license was ignored completely, and the period of investigation limited to keep the penalties down. Reliance was not even asked to furnish details of accounts of its US subsidiaries/affiliates which sold the Reliance calling cards used for the ADC-avoidance game.
Tata to Propriety
One of the more bizarre stories in India’s telecom regulatory history is that relating to the Tatas and then communications minister Dayanidhi Maran. Both have interests other than telecom in common: the Tatas own a direct-to-home television service and Maran’s brother runs Sun TV. In 2006, Tata Sky approached Sun TV to buy its feed; there was a dispute on the commercial terms and the matter went to the TDSAT which ruled that, according to the rules laid out by TRAI, Sun would have to supply the channels Tata Sky wanted. Sun refused to comply and, in mid-2007, the matter came up before TDSAT once again.
While TDSAT gave the two sides some time to resolve the issue, the Tatas went back to TDSAT with another problem, this time vis-à-vis their telecom firm Tata Teleservices. The Ministry of Com¬munications had threatened to encash the company’s bank guarantees for not paying what is called ‘microwave access’ fees and the dispute was over the fee amount. The Tatas alleged that the ministry had completely arbitrarily changed the way the fee was to be calculated. The ministry calculated the Tata’s back-taxes from 1999–2000 and applied penalties on this, all on the basis of some new rules that were, equally arbitrarily, backdated to March 2005.
TDSAT saw this to be somehow connected to the Tata Sky–Sun dispute. The government lawyer backed down, saying that the minis¬try would examine the Tata arguments; TDSAT got him to commit that the government would not make any more threats of encashing Tata bank guarantees till the matter was examined by the TDSAT. Nothing more has been heard of the matter since.
Reliance Mobile, Phase 2, and Others
When, in early 2007, it became evident that the defence forces would be releasing 20–25 MHz of spectrum, the government asked TRAI if new players could be allowed entry. Though saying yes, TRAI was ambivalent on the issue of auctioning spectrum (this was curious since the previous disbursement of spectrum/licenses, in 2001, was through an auctioning process). This ambivalence apart, TRAI decided to dramatically hike the minimum number of subscribers a firm had to have to be eligible for extra spectrum.19
TRAI was also asked if CDMA/WiLL mobile firms like Reliance should be allotted GSM mobile spectrum. It said yes, sub¬ject to a higher annual licence fee. Once the new norms governing subscri¬ber numbers required for additional spectrum were in place, the govern¬ment no longer felt legally obliged to give the about-to-be-released spectrum to existing telecom firms and this opened the gates for new firms.
What followed was perhaps the most disgraceful episode in India’s telecom history. In the fourth week of September 2007, communi¬cations minister A Raja announced that only applications submitted by 1 October would be considered for allocating spectrum. A mad rush followed and, apart from various firms whose antecedents are still not known, even real estate firms put in applications for this spectrum.
While it remained unclear as to just how the government would allot the spectrum among the scores of applicants, at 2.45 pm on 10 January 2008, the ministry announced that those wanting licenses would have between 3.30 and 4.30 pm that day to deposit their cheques. Another mad rush followed and clearly those who knew when the window would open were in a better position. The chosen few then got spectrum at a price of Rs 1,651 crore for an all-India license, or exactly the same price paid by firms who bid for such spectrum in 2001 (at a time when there were a total of 4 million mobile phone users in the country, a figure that is reached in just two weeks today).20
In September 2008, one of these beneficiaries, Swan Telecom, sold 45 per cent of its equity to UAE-based Etisalat for $900 million. In other words, Swan got a valuation 5.8 times of what it had paid the government, and all this in the space of just six months. A month later, Unitech brought in Telenor with a 60 per cent stake, taking the enterprise value of its mobile operations to Rs 11,620 crore. Apply this increased valuation to all the 120 licenses the government allotted at bargain-basement prices, and it will be evident that the government underpriced the spectrum by at least $10 billion!
As for the dual-technology issue, Raja chose to accept part of the TRAI recommendations, junking the one on higher annual licence fees, for firms who would now have both GSM and CDMA mobile spectrum. A separate category of dual-technology users was announced on 19 October 2008, a day after Reliance Communications (as it is now known) was issued a letter of intent (based on an application it had made in 2006 when the policy did not allow firms to get both GSM and CDMA spectrum on the same license!). So, after missing the bus on cellular or GSM-mobile services in 1994 (Reliance walked out of most auctions after it felt the bids were atrociously high), Reliance
was given another chance in 2003 when it got CDMA-mobile; and when it realised that the majority preferred using cellular or GSM-mobiles, it got yet another chance.
For a Favoured Few
If interconnection is the first mantra in telecom, roaming is the other. So, for example, Vodafone subscribers in India should be able to use their phone in the UK. This is done through a roaming agree¬ment that Vodafone has with some UK operators. Similarly, within India, telephone firms do not have networks in each city or village and depend on roaming agreements to allow their subscribers to use their phones while roaming. While such agreements work well among most operators, BSNL does not allow private operators to roam on its networks. Not being able to mandate roaming is clearly a failure of the regulatory system. But what is even more curious is BSNL’s recent decision to enter into a roaming arrangement with Swan Telecom, a company which does not have one subscriber till date. Even more curious: not only has BSNL allowed Swan to have inter-circle roaming (a Swan customer in West Bengal can use the BSNL network in Uttar Pradesh), it has also allowed intra-circle roaming (a Swan customer in Lucknow can use the BSNL network in Allahabad). This obviates the need for Swan to roll out a full net¬work in the states/cities in which it has a license.
Keep it Closed
The 3G policy is even more bizarre than the allotment of new 2G spectrum. While the newcomers in the 2G space were asked to pay the same fees as that paid by those who got the license in 2001 (on the specious grounds that a level-playing-field had to be maintained), the opposite was envisaged in the case of 3G. In this case, the government has announced a policy which states that if a new player wins the 3G bid, it will have to first buy a 2G license. That is, it can either deposit Rs 1,651 crore with the government and get a 2G license (a 2G license which will have no spectrum as there is none to give), or the 3G aspirant can buy out an existing 2G player at a huge premium as has been seen from the cases of Swan and Unitech.
AIRPORTS
Pending an airport regulatory bill, all regulatory functions have been carried out by the Ministry of Civil Aviation. While the independence of the regulator is yet to be seen, what is visible are constraining ac¬tions on part of the government. The Airports Economic Regu¬latory Authority bill makes it clear that the regulator can be removed by the government after an internal inquiry; in contrast, the chairman and members of the appellate body can be dismissed only after a reference is made to the Supreme Court.
What is also not clear is how the new regulator is to fix tariffs since most of the costs will already have been incurred before the appointment of the regulator. In the Delhi/Mumbai/Hyderabad/Bengaluru airports there are few laid out procedures on how, for instance, competitive bidding should be done for contracts above a certain value. In fact, there is no procedure to have these costs vetted be¬fore incurring them. So, if the costs are a given, the tariffs that result out of them are also largely a given. The Delhi airport’s costs, for instance, have risen from around Rs 3,300 crore to around
Rs 8,900 crore; the consortium explains this in terms of the expanded capacity of the airport. While there has been a big furore over the user development fee (UDF) in the Bengaluru and Hyderabad airports, high costs have ensured that if a cost-based UDF were to be levied in even the Airports Authority of India (AAI)-built Amritsar airport, it would be around Rs 1,000 a passenger, underscoring the need to keep a very strict vigil on costs.
The airport regulator will also have to define just what constitutes divisible revenues since, as in most infrastructure projects, airport pro¬jects are also likely to continue to be based on revenue share agree¬ments. In the case of the Delhi airport, where the winning con¬sortium won the bid on the promise of sharing 46 per cent of topline revenue with the AAI, it subsequently proposed a structure which would have reduced the topline considerably by creating a host of subsidiary companies. Since the topline was to go to the subsidiaries, only the declared profits of the subsidiaries would have been shared. This would have considerably reduced AAI’s share and was the subject of much acrimony between the AAI and the private consortium. The consortium also planned on taking very large one-time deposits from builders who it sub-let AAI land to. The plan of not sharing this with AAI created another furore, so much so that AAI asked the consortium not to go ahead with its land development plans. The last word has not been heard on this as, if the consortium is to go ahead with its airport plans, it needs a substantial infusion of equity from the AAI. The terms of this infusion, however, are something that the Ministry of Civil Aviation needs to decide.
PORTS
Unlike the telecom and power sectors where there is a separate regu¬latory and appellate process, the process of appeal in the ports sector lies with the Ministry of Shipping. While the process is flawed, private sector interest in port development has been very high. Since setting up of what are called ‘minor ports’ requires only permission of the state government, the private sector has focused primarily on this. Private ports today carry about one-third of India’s external traffic. In addition, most major ports also have private berths.
Regulation in the ports sector has been very erratic, heavily influ¬enced by the ministry, and dependent largely on the head of the Tariff Authority for Major Ports (TAMP). The Nhava Sheva International Container Terminal (NSICT) story best exemplifies this.
Before getting to the details of this story, it is important to under¬stand how port privatisation in the country has happened. As in the case of airports, telecom and several PPP projects, ports also work on the system of revenue share with the government. This means that bidders have to calculate their revenues and costs to ascertain how much they can afford to share with the government while still being profitable. At one level, the revenue share is a cost but it is a cost that TAMP does not take into account while fixing tariff levels for the port; if they did, a bidder could win any bid by offering to share 99.99 per cent of its revenue with the government; if all
99.99 per cent were to be considered a cost, it would result in a hugely inflated tariff for all users. This is the approach TAMP followed in the early 2000s. So, while giving the tariff order for the Chennai Container Terminal Limited in 2002, TAMP refused to allow the revenue-share royalty payment to be counted as a cost; similarly, in the PSA Sical case at the Tuticorin port, royalty payments were not counted as a cost.
The NDA government, however, directed TAMP to consider the revenue-share royalty as a cost. In 2005, the UPA government forma¬lised this, stating that while royalty payments would not be treated as costs for deals struck after 29 July 2003, they would be treated as a cost for deals before this date if the royalties resulted in a loss for the new concessionaires. In this case, the revenue-share bid of the second bidder would be taken into account. So, let’s say firm X won with a bid of 35 per cent and firm Y bid 25 per cent. Now, if firm X is making losses with its 35 per cent royalty payments, then a 25 per cent royalty will be treated as a cost by TAMP.
If this was not bad enough, when the tariffs for NSICT were being calculated in August 2005 for the immediately preceding period (2000–05) and projected for 2006–08, TAMP allowed it to pass through as royalties as costs even though no losses were being made. In fact, things got so bad that the shipping ministry asked TAMP to reduce the amount of royalty being treated as a cost. This concession allowed NSICT to, over its 30-year concession, benefit by $1.46 billion. Conversely, in the case of the Chennai Container Terminal Limited, TAMP refused to allow expensing of royalty and found, in March 2002, that the company still made a profit of
19.5 per cent. The ministry, however, directed TAMP to allow some part of the royalty as a cost.
The other way in which TAMP helped NSICT is through the manner in which it fixed tariffs. If a port had Rs 100 as costs after includ¬ing reasonable profits and 100 units of freight, the tariff al¬lowed was fixed at Re 1 per unit. If, however, the number of units doubled, with costs remaining the same, the tariff would be halved to 50 paise per unit. When TAMP fixed NSICT’s freight, it assumed a traffic far lower than actually happened (the traffic was around two-
thirds higher than forecast). Logically, the higher profits that NSICT got should have been taken away. TAMP, however, allowed NSICT to retain the 2000–05 excess profits and lowered the rates for 2006–08 by what it itself admitted was too little.
It is, however, unfair to just target TAMP. Given that the regulator has to look at costs to determine tariffs, the process of determining costs is very important. One way to do so is to look at benchmark costs and efficiency levels. But Guideline 2.4.1 of the rules which determine TAMP’s functioning states ‘This would, therefore, natu¬rally exclude any comparison of an operator … with … different oper¬ators.’ Guideline 2.13, which deals with unforeseen profits of the type got from traffic projections exceeding the actuals, states that a company gets to keep half of these. So, a private port gains from showing lower traffic projections and getting tariffs fixed on this basis and then gets to keep half the profits.
PETROLEUM
During the late 1990s, the government opened up the retail end of this sector to private players and, in return, committed investment in the upstream section (in refineries, for instance). A slew of companies announced plans to set up retail outlets as the government declared that it would phase out subsidies in petroleum pricing. One of them was Reliance Industries Limited which, in any case, had a signifi-
cant investment in the upstream sector. Over the years, however, the government failed to phase out subsidies; in fact, they got worse as global crude prices rose. Despite the recent softening in global oil prices, the under-recoveries at the retail end could be around Rs 200,000 crore in 2008.
While the government forces the public sector oil companies to bear the losses, it cannot mandate private oil firms to do the same. In an ideal world with a regulator, the government should have been asked to bear the burden of the consumer subsidy. Indeed, that is what Reliance Industries proposed with some justification. After all, if there were no Reliance petrol pumps, consumers would have gone to the government-owned IOC/HPCL/BPCL and the government would have borne the subsidy, either directly or indirectly. So why not give the subsidy to Reliance? That way, the subsidy burden would not go up, but IOC/HPCL/BPCL would be spared the cost of building the new retail outlets they needed to meet the rising consumer demand. The government, however, was wary of handing out what seemed to be outright dole and so rejected the request. Reliance then did what any rational investor would: having, in any case, reduced sales from its outlets to a bare minimum and, instead, exporting most of its pro¬ducts over the last few years,21 it is today in the process of closing down even those pumps it ran at very low levels of sales.
There are two regulators, one for upstream exploration activities (Directorate General of Hydrocarbons) and another for downstream retail level activity (Petroleum & Natural Gas Regulatory Board). The retail regulator, however, has no powers to fix retail prices—that remains the exclusive preserve of the government. Interestingly, however, despite there being an appellate tribunal, the Ministry of Petroleum’s role continues to be a powerful one. In the case of the gas supplies from Reliance Industries Limited’s KG basin, for instance, the ministry’s role has, at best, been dubious, designed to show how powerless the regulatory and appellate process is.
In 2004, Reliance Industries won a global bid called for by the state-owned NTPC asking for supplies for its Kawas and Gandhar power plants. Around the same time, the Ambani brothers reached an agreement (now in the courts) that KG basin gas would be supplied to Anil Ambani’s power plant in Dadri in Uttar Pradesh, being exe¬cuted by Reliance Natural Resources Limited (RNRL). Since the NTPC contract was a global one and clearly an arms-length one, the con¬tract between the two brothers was identical in terms of pricing and other terms and conditions.
After a period of time, however, Reliance Industries decided it wanted to change some of the terms in the NTPC contract and sent it a fresh contract, duly signed from its side. NTPC refused to accept this, and rushed to the Bombay High Court asking it to ensure that Reliance Industries fulfilled its obligations.
As for the contract with RNRL, Reliance Industries sent it to the petroleum ministry for approval. It did so because, under the contract it signed with the government when it got the license to prospect for oil and gas in the KG basin, it agreed to split a certain part of the re¬venue with the government. Since the revenue clearly depends upon the prices got, ensuring that the price is correct is important. This is why the RNRL contract was sent to the government. The ministry, however, rejected the contract saying that the price discovery was not an arms-length process. This was actually incorrect since, under the contract, the ministry had no power to fix prices; rather, its only role was to ensure that it got its share of profits at the correct price (alternately, it could take it in the form of gas). That is, the gas could be supplied free as long as the ministry’s share was calculated at the market price. Indeed, the view that the ministry could not fix the price of gas was something the ministry reiterated time and again, even to questions raised in parliament and to an empowered group of ministers (EGoM).
If this was not bad enough, in June 2008, the government came out with a gas utilisation policy aimed at ensuring that RNRL never got the gas, never mind that this ensured Reliance Industries did not have to fulfil its contractual obligations to NTPC either or the power shortages this would cause. On 25 June, the Press Information Bureau issued a release on the recommendations of an EGoM on how gas was to be used. While one would expect the EGoM to make such recommendations for all gas found in the country, the release laid out the priorities for allocating only KG basin gas! The allocation prior¬ities? First, for existing gas-based urea plants, then 3 mmscmd for existing LPG plants, up to 18 mmscmd for gas-based power plants
lying idle due to lack of gas and for plants that will come up during 2008–09 (neither NTPC nor Dadri are going to come up in 2008–09!), 5 mmscmd for city gas projects, and the rest for exist¬ing gas-based power plants. If this was not enough to ensure that the Dadri plant never came up, additional guidelines said only those users who were connected to a gas grid can get gas—Dadri’s gas grid application has been pending with the ministry for more than two years!
It gets worse. While the NTPC case has hardly moved at the Bombay High Court, when the Reliance–RNRL case came up, the gov¬ernment lawyer stated that no conclusive deal had been struck between NTPC and RIL—since the RNRL contract was based on the NTPC one, not having an NTPC contract meant the RNRL contract was also null and void. But since this statement knocked the bottom out of the NTPC case against Reliance Industries, the power ministry (which controls NTPC) and NTPC protested. The petroleum ministry said it had not briefed the lawyer to make this statement and asked him to retract it formally. Interestingly, however, there are several communications from the lawyer to the petroleum ministry where he categorically states that all statements he made were based on the ministry’s briefings.
ROADS
Progress in this sector has been patchy. Initially, after the govern¬ment came out with the Golden Quadrilateral policy of four-laning important road routes in the country and bid out large stretches of roads, progress was quite rapid. Over the last five years, however, this has slowed considerably. Even so, the project did not suffer from the kinds of problems that have plagued so many other infrastructure sectors, one of them being price gouging. The reason for this is that, at the outset, the government came out with a policy that laid down just how much tariff could be charged from users. Hence, there was never any doubt in anyone’s minds—those who controlled the road or those who used it—as to what the tolls were. Sadly, however, the government did not pay much attention to getting full-fledged private participation in the sector. By and large, projects have been given to contractors on a piece-rate basis; only a small fraction involves the private sector on a build-operate-transfer basis.
In regulatory terms, however, the big problem in this sector is the absence of an independent regulator/arbiter. A good example is the Delhi–Gurgaon expressway where the contractor, the DS Group, has come in for some pretty serious flak due to inefficient traffic clear¬ance at toll plazas. Not only does this clearly show that the com¬pany got the traffic projections completely wrong (and therefore did not provide for enough toll plazas), but there is also a problem of con¬tracting since the contract did not lay down any service standards. Yet another problem which will haunt the project is the likelihood of the final bill for the expressway running into a thousand crore rupees. The reason for this is that the ministry kept changing the design of the project, in some cases till even two years after the project was awarded. But when it gives its bill, the DS Group will have to submit it to the same ministry which made the changes and that ministry may not necessarily be interested in clearing it. The issue could end up in courts for decades.
State governments do not even have these rules, and pretty much make them up depending upon bilateral negotiations. In some cases, state governments have practically given an open hand to private build¬ers. In several cases, builders and the state governments form a joint venture and though both have equal share of equity, the state is asked to provide zero-interest subordinate debt as well. While this increases the state’s contribution to the project, its equity, however, does not go up commensurately. In addition, the private partners get a commission for arranging debt funds as well as a commission for completing the final project. Since commission is linked to the spending, there is an automatic incentive to keep costs high.
In the case of the Noida Toll Bridge Company, a study available on the Planning Commission website (http://www.infrastructure.gov.in/pdf/NOIDA.pdf ) points out that the returns for the project are in excess of 40 per cent (the project came up on the basis of a 20 per cent assured return) and rise with each year of the project. Interest¬ingly, the way the project has been structured, every time there is a shortage in revenues (that is, not enough traffic on the bridge), this gets added to the capital costs of the project on which a 20 per cent return has to be paid. As a result, the 30-year concession period has already risen to 70 years. And the way the project is structured, the greater the failure to get commuters on the bridge, the greater the returns for the project.
ELECTRICITY
Nothing tells India’s electricity story quite as evocatively as the losses of state electricity boards, the rising power shortages and poor capa¬city addition. In the last five years, India added just around 21,000 MW of power (a figure that is roughly half that planned). While in the current plan the government is looking for 78,000 MW of add¬itional capacity, most reckon that the best case scenario is around half that. That this should happen is hardly surprising, given that the losses of the main buyers—the state electricity boards—continue to mount: compared to an average rate of return of minus 12.7 per cent in 1991–92, the figure was almost double at 24 per cent in 2006–07; revised esti¬mates for 2007–08 are 18 per cent, but it is safer to wait for the actuals to come out.

Table 1
Financial Performance of the State Power Sector
1991–92
2005–06
(actual) 2006–07
(P) 2007–08
(RE) 2008–09
(AP)
Commercial losses
(excluding subsidy;
in Rs crore)
4,117
22,733.80
28,824.90
25,701.40
26,461.80

Rate of return (ROR %)
–12.7
–19.7
–24
–18
–14.3

Source: Planning Commission.

Table 2
Energy Generated (gross; in billion KWH)
Year Year
1950–51 6.6
1960–61 20.1
1970–71 61.2
1980–81 129.2
1981–82 131.1
1982–83 140.3
1983–84 151
1984–85 169.1
1985–86 183.4
1986–87 201.3
1987–88 219
1988–89 241.3
1989–90 268.4
1990–91 289.4
1991–92 315.6
1992–93 332.7
1993–94 356.3
1994–95 385.5
1995–96 418.1
1996–97 436.7
1997–98 465.8
1998–99 496.9
1999–2000 532.2
2000–01 554.5
2001–02 579.1
2002–03 596.5
2003–04 633.3
2004–05 665.8
2005–06 697.4
2006–07 (P) 744.3
Source: Ministry of Power.

With generators reluctant to set up the required capacity, India’s peak power deficit has risen from 11.8 per cent in 2001–02 to around 15 per cent right now while the average deficit has increased from 7.5 per cent to around 10.6 per cent in the same period.
In a nutshell, what this really means is that, with a few exceptions, regulators have not been able to insulate the electricity system from political interference. State electricity boards, or their successors, have not been able to either stop theft levels or hike tariffs to remunerative levels. If another 40,000 MW of power is to be added in the next five years, it would mean another Rs 35,000 crore being added to the annual losses (based on current loss levels). Why would any banker want to finance these projects?
The case of privatising power in Delhi is the best example of just how bad the system is. We have chosen Delhi since this is the most high-profile project in the country, with both the central and state governments involved in conceptualisation. If this is in trouble, imagine the prospects for projects in other parts of the country.
The project was mired in controversy from the outset, and rightly so since the state government offered concessions only to the last two bidders after all others had walked out. During the negoti¬ations, the Delhi government assured the private bidders that they would be allowed annual hikes of 10, 10, 10, 5 and 3 per cent—that is, roughly a 40 per cent tariff hike over five years. What was allowed, instead, was around 11 per cent over the first four years! Not sur¬pris¬ing that the private players feel aggrieved. It did not help that the Delhi government underestimated the amounts of investments required—each Rs 100 crore of investment requires a 0.5 per cent or so hike in tariff levels. While the state’s consultants estimated that Rs 1,019 crore was required to fix the system, the firms have actually put in Rs 3,200 crore in the first four years!
So what the regulator did was to disallow certain expenditure. For one, it reduced the depreciation allowed to these firms—this was contested in the court and the regulator lost. In addition, certain items of expenditure were put in abeyance: companies were told that they would get paid a flat interest rate on these expenses for a while; and the cost of power was taken as lower than what it is likely to be in the latest tariff order—but all of this will have to be given to the firms sooner or later. But, given the highly political nature of elec¬tricity tariffs (the last time around, the Delhi government forced the companies to absorb half the tariff hike while it absorbed the other half), it is uncertain if this will be allowed either.
Other major issues that have yet to be resolved though there is both a regulatory and an appellate structure in each state, are issues like ‘open access’. Under the law, regulators were to allow firms/big users to buy power from wherever they liked—the power would just be wheeled in on the existing power lines for a small fee. However, thanks to the opposition of the state electricity boards, open access has not been allowed.
At the end of the day, it all boils down to whether the system has been freed up enough to be able to cut losses. For, whether it is open access or trading in electricity, as long as there is a significant shortage, nothing is going to work. And the power sector cannot cut losses unless there is the political will to raise tariffs and to allow state electricity boards to take tough action to curb theft. None of this is true in the sector so far.

Bottomline: India’s infrastructure regulatory system is far from per¬fect, is open to regulatory capture, and will improve only after affected parties regularly and strongly challenge it, in the courts and out of them. If there are large investments despite all this, it is because the acute shortages are an indication of the revenue potential of infrastructure provision. Also, most existing players do not regard regulatory uncertainty as something to be afraid of; rather, they are largely confident of their ability to manipulate it. This uncertainty is instru¬mental in keeping away newer and less confident players, thus retarding the level of competition. Infrastructure gets built, even if with a lag and at possibly far greater expense.
NOTES
1. Of the total investments announced as of June 2008 (and captured in the CMIE CapEx database), around half is in the infrastructure space, of the type described in this paper. Total infrastructure investment in the country is in the region of 5–6 per cent of GDP, or around Rs 250,000 crore per year, and it needs to go up to around 8–9 per cent if India is to sustain a 7–8 per cent GDP growth over the medium-to-long term.
2. While the central and state governments expected to pay anywhere between 30 and 40 per cent respectively of the project’s Rs 12,410 crore cost as a one-time capital subsidy, the winning bid offered to pay the government Rs 1,240 crore (the present value of the Rs 30,300 crore to be paid over the lifecycle of the project).
3. The Nhava Sheva International Container Terminal (NSICT) was found to be overcharging customers by over 80 per cent between 2002 and 2005 due to faulty regulation. However, according to the new norms, ceiling tariffs will be indicated in the bidding documents which will also detail how efficiency gains are to be accounted for and passed on to consumers.
4. When the Delhi and Mumbai airports were privatised, it was found that the marking done on the technical bids had favoured the Anil Dhirubhai Ambani Group; these marks were then reversed after a series of committees looked into the matter.
5. Instead of the project authorities deciding in an opaque manner on which firms make the technical cut, the new format simply asks bidders to list their previous experience and weighs these in a pre-specified manner. So, for an airport project, each consortium will give details of the airports built by them and the passengers using them—the idea being that, for an airport project, it is the experience in build¬ing and running airports that matters. Since few Indian firms of even the size of L&T have built airports on their own, this means they have to tie up with global majors to qualify on even technical grounds. And since it is the foreign players whose experience counts, they will typically give the Indian players a minor¬ity share in the joint venture used to do the bidding. The Planning Commission, whose idea this
was, argues it is not its job to create work for Indian firms but that its mandate is to ensure good quality infrastructure gets built.
6. Had the interconnect regulation not been there, the subscribers of private mobile connections would not have been able to connect to BSNL/MTNL who controlled the entire market initially. This would clearly have circumscribed the potential subscriber base for private providers who, today, account for three-fourths of all mobile telephony in the country.
7. The very first telecom regulator, the TRAI, used to preside over appeals against its own judgements. When the TRAI was dissolved (for, among other reasons, telling the government that the state-owned telecom firm MTNL could not offer mobile phone services on its fixed land license even though the government had notified this), it was replaced by a new structure that separated the regulatory and appellate structures.
8. The first regulatory chiefs—Justice Sodhi at the first TRAI and S L Rao at the first CERC—were not bureaucrats, but they were the early exceptions.
9. 3G refers to spectrum on which, thanks to improvements in technology, mobile firms can offer subscribers internet speeds that are comparable to those available on broadband today.
10. The telecom regulator cannot be dismissed without a reference to the Supreme Court.
11. http://www.infrastructure.gov.in/pdf/NSICT.pdf.
12. He can be reached at bharat.salhotra@sloan.mit.edu.
13. See K Malmurugan and Sabina Narayan. 2006. Evolution of an Integrated Urban Facility: The IT Corridor Story.
14. A Raja, for the record, dismisses this as incorrect and argues that the value paid includes money for revenues likely to be generated by these companies in the future. See http://www.pib.nic.in/release/release.asp?relid=44348 and http://www.pib.nic.in/release/release.asp?relid=44661.
15. The public sector share is higher due to a higher share of BSNL in the long distance traffic.
16. Literally, a point on company A’s network which allows company B to connect its subscribers to company A’s subscribers.
17. While Tata Telecom also offered mobile phone services on fixed line licences, these did not have roaming facilities of the type offered by Reliance Infocomm. Hence, while a person registered with a Tata phone in Delhi could not use it in Gurgaon, a Reliance subscriber had no such restriction.
18. TRAI figured the only way to offer restricted mobility would be through the use of a switching system called V5.2 and so it recommended that this system be included in the licenses of the WiLL players. Reliance Infocomm, however, used a Mobile Switching Centre which is what the cellular firms used and could hence offer full mobility. The then TRAI chief, M S Verma, even wrote to the telecom secretary, Shyamal Ghosh, on the matter in January 2001 and was told to stop raising the matter.
19. Under the existing norms, the existing mobile phone players were entitled to extra spectrum since they had enough subscribers to justify this. The government, however, refused to give this to them—had it done so, none of the extra spectrum released by the defence forces would be left, and so there could not possibly have been any new licensees.
20. Among the firms who got the new licenses were Swan Telecom, Unitech, Loop Telecom, Datacom, Idea Cellular and Reliance Communications.
21. A very large part of India’s export boom comes from exports of petroleum products by Reliance which, ironically, is a direct fallout of distorted domestic pricing policies.

Singur reprise

2009-07-26T22:26:00.000-07:00

INTRO:Without land, big projects will not take off.

Trinamool Congress chief Mamata Banerjee must be happy that she has managed to stall the Land Acquisition as well as Rehabilitation and Resettlement Bills in Cabinet, prospective pieces of legislation that would have set the rules for industry to acquire land for large industrial projects. She may not be alone, given the UPA’s stress on fiscal transfers as its preferred route to poverty eradication. The real solution to poverty, however, as anyone with even half an economics degree will tell you, is roads, electricity, industrialisation and urbanisation — look for any country that has all four and the chances are that poverty levels will be low there. That is why it is vital that these two Bills be passed.

Contrary to what Ms Banerjee may profess, the proposed Bills are not anti-people, nor are they designed to help just businessmen. Indeed, as the Prime Minister apparently tried to point out in Cabinet, the two Bills are an improvement on what exists in terms of fairness, while also facilitating industrialisation. The key provision is that any company that wants to set up a large project cannot ask the government to forcibly acquire the land, citing eminent domain; it must first buy 70 per cent of the land required, and do this directly from those who own the land. It is only after this that the state can step in to buy the rest from those holding out, and even here there is the guarantee of a 60 per cent price premium on the average price of the previous three years. In other words, the state will step in only to ensure that a minority does not hold back the wishes of the majority. Also promised is resettlement of the displaced families before the land is taken over, and a social impact assessment if more than a certain number of families are displaced.

One would have expected that the people who might oppose such a stringent law might be those who want to set up projects, because it will make their work infinitely more difficult, and also make land acquisition more costly. Instead of opposing the Bill in its entirety, Ms Banerjee could have argued for better terms on behalf of those she seeks to represent, but she did not do that. For instance, the usual practice is for state governments to first buy the land and then change its land use stipulation; as everyone knows, changing land use from agriculture to industry usually multiplies land value manifold—and so far the benefit of this gift in increased value has gone to companies. Ms Banerjee could have argued that some of this benefit must go to those who are asked to sell their land.

Instead, by blocking these Bills, she has solved nothing. While the two Bills would have forced a better deal for land-owners (ie farmers), their non-passage means that states will rely on an old law that dates back to colonial days, and continue their practice of taking over land without a by-your-leave. It is this policy that caused a backlash and prevented the SEZ policy from taking off, for state governments would simply announce that various tracts were to be taken over for a pittance. Ironically, the states which will suffer the most are the ones with the most poor people. With a few exceptions, in most of the more prosperous states, land acquisition is not as much of a problem. So, it is the poor who need the land acquisition and R&R bills the most, and it is they who have been denied by Ms Banerjee. The people of Singur have already paid the price for following Ms Banerjee; they have lost the Nano project, and with it the prospect of good jobs and spin-off benefits for the local area. Must more people suffer in the same fashion, merely because Ms Banerjee does not want the pitch queered for her state assembly election campaign?

Don't dial this merger

2009-07-26T21:59:00.000-07:00

INTRO:A merger of BSNL and MTNL will be a bad idea

One lesson the government should learn from the Air India-Indian Airlines merger fiasco is that combining two sick people ends up making them sicker. Sure, merging BSNL and MTNL, as has been suggested by BSNL chief Kuldeep Goyal, will increase their turnover to more than that of market leader Bharti — this suggests advantages in costs/marketing. Also, metros where MTNL operates have the highest-paying customers (though overall metro revenues are stagnating now) and, with most company head offices located here, the corporate network solution business is a big opportunity.

But it’s only in the movies — like Tom, Dick and Harry — where people with different disabilities (one is deaf, the other dumb and the third blind) combine into one person with no disabilities. Both BSNL and MTNL are firms in trouble, for one reason or another, such as the stopping of the ADC subsidy in the case of BSNL. While BSNL’s turnover remained steady at around Rs 39,000 crore for the past few years, its profits fell by more than half in 2007-08 (to Rs 3,009 crore); in 2008-09, they are expected to fall to around Rs 300 crore. While the subscriber base grew 13 per cent in 2008-09, revenues are likely to fall by around 7-8 per cent (Bharti’s subscriber base, in contrast, rose over 50 per cent and revenues around 47 per cent).

Why BSNL has done so badly is obvious. Till 2006, and even some part of 2007, it matched Bharti mobile subscriber for mobile subscriber though it got less revenues since its subscribers were in smaller towns/rural areas. Then A Raja became telecom minister and decided he wanted to reduce the price of the telecom equipment BSNL had ordered despite an open competitive bid, and also halved the order size. Starved of capacity, BSNL’s market-share crashed (http://www.business-standard.com/287284/). And now, in its next tender, with a losing company going to court, the process of adding capacity has again halted! So even if you merge BSNL and MTNL, as long as their ability to expand depends upon the vagaries of a minister or can be checked by one court case somewhere, they’re certain to fail. And lack of marketing savvy has meant BSNL has been able to do nothing to stop one-two million people surrendering their landlines every year (giving them a free broadband connection, for instance, was surely an idea that could have been tried?). And given that Bharti (30 million) today has more rural mobile subscribers than BSNL (19 million), it would appear the rural thrust is not completely loss-making.

MTNL is equally troubled. While its mobile subscribers have doubled in the last four years (the hike in all subscribers is lower due to, as in the case of BSNL, people returning their landlines), overall revenues have fallen slightly. MTNL made losses of Rs 414 crore on its core telephony in 2008-09, but declared a profit of Rs 216 crore (Rs 407 crore in 2007-08) after taking ‘other income’ into account — in the last quarter of 2008-09, however, even the ‘other income’ of Rs 202 crore didn’t prevent it from making a loss of Rs 83 crore. MTNL’s marketing savvy is best demonstrated by its 3G foray — along with BSNL, it has got at least a year’s headstart over the competition, but it has virtually no 3G customers and is now asking private players to develop its network using, if need be, their own branding!

Apart from the obvious problems of getting two different organisational cultures to merge, there is also the issue of staffers and pay disparities — from 33 per cent in 2007-08, MTNL’s wage-to-turnover bill rose to 47 per cent in 2008-09 (due to arrears and a hike in salaries) while that for BSNL is around 23 per cent (2008-09 data is not yet out). Since a merger will necessarily result in BSNL salary levels going up to MTNL ones, the result of expenses rising while revenues are stagnating can only be disastrous.

StatsGuru

2009-07-26T20:29:00.000-07:00

JulyStatsGuru

Potholed pathways

2009-07-20T20:07:00.003-07:00

INTRO:Unless the creases in the transport sector are ironed out, and more competition introduced, the target GDP is not achievable

While the transport sector has grown at a healthy 10 per cent a year during the last decade (12 per cent for roadways, 1.4 for railways and 8 per cent of sea and air ports) this is the sector that has the greatest potential to hold back India’s GDP growth targets of 8 per cent in the next decade – the sector will have to grow at an even faster rate if GDP is to accelerate. Thanks to severe congestion of the main arterial highways for instance, truck and buses travel at just around 25-30 km an hour, a clear indication of just how much extra time and money is being wasted – in 1996, to cite just one instance, the Rakesh Mohan report on infrastructure estimated the economic losses from bad roads at anywhere upto Rs 30,000 crore a year, or around 1 to 2 per cent of GDP each year. Close to 40 per cent of India’s six lakh villages, in fact, don’t even have all-weather roads.

Despite the much longer route they have to take, shipping goods to the east coast of the United States is far cheaper from south-east Asian countries in comparison with that from India. Shipping goods from Bangkok to the east coast costs 18 per cent less as compared to shipping from either Mumbai or Chennai. In comparison with China, the extra shipping costs from India could be as high as 35 per cent .

To be sure, the government has done a lot to try and fix things since the early 1990s. It passed a Multi-Modal Transport Act to facilitate door-to-door shipments – Concor was created in 1991 – and in 1993, the government amended the Merchant Shipping Act to allow Indian vessel owners and operators access to the capital markets. For the first time in the country’s history, in 2000-01, capacity at the major ports was greater than the actual traffic through the ports, and the ratio has only got better in subsequent years. In just the last decade, the share of minor ports, many of them new private sector developed ones, is up from around 6 per cent to 25 per cent in total ports traffic, and the private sector has been allowed to create capacity in major ports as well.

Similarly, repealing the Air Corporation Act of 1953 and replacing this with an act, in 1994, that allowed competition and private participation in the scheduled domestic air transport services lead to a dramatic surge in traffic – between 1994-95 and 2001-02, the number of aircraft kilometres flown grew 155 per cent and the passenger kilometres by 76 per cent . By 2000-01, private operators carried 48.2 per cent of the passengers in the country, and today, Jet Airways has a higher market share than Indian Airlines.

Yet, for all this, the transport sector remains very inefficient. While airport charges in India are on an average 80 per cent higher than the international average, air travel in India costs a lot more. So, while a Delhi-Goa return ticket costs Rs 20,470 a Delhi-Bangkok return ticket costs just Rs 17,980. The entry of no-frills airlines may well change this, but for now, the capacities on budget airlines are still very small. The fact that the largest private airline, Jet Airways, still makes large losses also suggests the problem may have to do more with the airlines policy rather than lack of competition between the airlines.

And, in the case of ports, while Indian ports charge less for cargo related services than global ones (JNPT charges $42,744 as compared to Singapore’s 59,049), the vessel related charges are four times higher ($37,860 versus 9,745), as a result of which the total costs in India are around a sixth higher.

The reason for this sorry state of affairs eventually boils down to policies that inhibit competition in the sectors. In the case of the ports sector, for instance, despite allowing the private sector to invest in major ports, there are few instances of this happening, as it is up to the port authority (the government) to decide to let competition in. In the JNPT where this was done in 1999-00, there has been a dramatic surge in productivity. In 1998-99, the total container traffic in the port was 6.69 TEUs. In 2002-03, this jumped to 19.29, and of this 12.01 was done by the new P&O run Nhava Sheva terminal. While the gross berth productivity is 31.3 moves per hour in JNPT, it is 57.3 in the Nhava Sheva.

Nor despite the government’s talk of corporatising ports has there been any action on this so far. Even today, tariffs in the sector were controlled by a Tariff Authority for Major Ports (TAMP) which has made little attempt at increasing competition but just functions as a cost-plus pricing centre. Till very recently, in fact, the TAMP used to set floor prices below which the ports were not allowed to compete. Now, the government has asked TAMP to begin considering looking at putting ceilings instead.

Worse, in the case of the railways which are the primary medium for transporting containers across the country’s vast hinterland, the Indian Railways has a total monopoly over this, through the Container Corporation of India (Concor). Apart from raising costs, Concor has only 3,000 wagons as against the demand of over 5,000 wagons at present. In fact, Concor’s station at Tuglakabad near Delhi has containers lying around for a week at various points in time, waiting to be transported to the ports .

In the aviation sector, similarly, the government is just about allowing private airlines to fly abroad, and insists that operators fly certain un-profitable routes, sort of in the nature of a universal service obligation, the barriers to entry are still very high, and all manner of levies are put on aviation fuel.

Aviation Sector

While the International Civil Aviation Organisation (ICAO) estimated that every $100 spent on air transport produced benefits worth $325 for the economy, it is estimated that foreign exchange transactions of $22.5 billion are directly facilitated by the civil aviation sector in India, and another $96 billion indirectly according to the Naresh Chandra committee on the aviation sector . Indeed, 95 per cent of tourist arrivals into the country are by air, and 40 per cent of the country’s exports/imports take the aerial route.

India has an eminent position in the civil aviation sector with a large fleet of aircrafts. In all, 56 airlines are operating scheduled air services to and through India and 22 foreign airlines are over flying Indian territory. There are over 450 airports and 1091 registered aircrafts in the country. In addition to the three public sector airlines Air India, Indian Airlines, Alliance Air - there are two private operators - Jet Airways, Sahara India Airlines. There are also 41 non-scheduled air transport operators. Additionally 34 applicants have been granted NOC by the Ministry of Civil Aviation for setting up non-scheduled air transport operation. Air Transport has a significant role to play in a vast country like India with major industrial and commercial centres located far apart.

In May, 1953 consequent to the coming into force of the Air Corporations Act, 1953 - Government of India nationalised the airline industry. In accordance with this act, the two air corporations, viz. Indian Airlines Corporation and Air India International, were established and the assets of all the then existing air companies (nine) were transferred to the two new Corporations. The operation of scheduled air transport services was made a monopoly of these two Corporations and the Act prohibited any person other than the Corporations or their associates to operate any scheduled air transport services from, to, or across India.

In 1994 the wheel turned a full circle as the Air Corporation Act, 1953 was repealed with effect from March 1994 and with that ended the monopoly of the Corporations on scheduled air transport services. The air transport in India has been opened to operation of scheduled services by any carrier who fulfils the statutory requirements for operation of scheduled services. The repeal of Air Corporations Act has thus demonopolised the domestic air transport services and enabled private operators to provide scheduled air transport services.

In fact, liberalisation in civil aviation industry began in 1986 with the introduction of Air Taxi system to boost development of tourism. Though there were several restrictions relating to seat capacity, airports, timing and fare, the scheme was liberalised over a period of time. Even the fare was totally deregulated, allowing air taxi operators to charge any fare. With Open Sky Policy many private operators began operation in the domestic sector.

Table 1. Passengers Carried Since 1992 On Domestic Sector (in lakhs)

Year Indian Airlines (Domestic) Private Air Carriers Total Domestic Growth of Domestic Air Transport (%) Private Air Carriers (market share) Indian Airlines (market share)
1992 80.58 4.11 84.7 5.14 4.85 95.15
1993 67.46 20.92 88.38 4.32 23.67 76.33
1994 68.94 36.1 105.05 18.86 34.36 65.64
1995 70.82 48.93 119.75 13.99 40.86 59.14
1996 69.99 49.08 110.07 -8.08 44.59 55.41
1997 73.79 41.35 115.14 4.61 35.91 64.09
1998 69.46 49.14 118.6 3.01 41.43 58.57
1999 65.38 56.92 122.3 3.12 46.54 53.46
Source: http://civilaviation.nic.in/moca/acvl.htm

Despite the obvious advantages of a healthy aviation sector, however, all players have been hobbled by unfavourable policy, which, by the way, hurts public sector players as much as it does the private ones. The civil aviation policy, for instance, insists that all scheduled carriers fly at least 10 per cent of their capacity on trunk routes in the north eastern sector, Jammu & Kashmir, Andaman & Nicobar Islands and Lakshadweep (category-II routes). Since load factors in this region are poor, naturally it is a loss making proposition. Thanks to political pressures, the state-owned carrier Indian Airlines, in fact, is forced to fly 17 per cent of its flights on this route, and incurs an extra annual loss of Rs 62 crore due to this. What this does, of course, is to lower Indian Airlines’ competitive powers and so restricts inter-airline competition.

In addition, the law also states that 50 per cent of trunk route flights have to be flown on Category III routes (that is, on non-trunk and non-category-II routes). In these routes too, IA is forced to fly a greater share of its flights in comparison with private airlines. According to figures provided by airline officials, IA flies 74 per cent of flights servicing these smaller towns and loses Rs 134 crore a year on this . IA flies from Delhi to Chandigarh, for instance, even though there is a regular and popular Shatabdi Express on this route. Short haul flights, aviation experts point out, add dramatically to an airline’s costs as, apart from higher fuel costs, frequent landing and takeoff reduces the aircraft’s life.

It gets worse. While the central government levies unreasonable charges on aviation fuel, the states compound this with high sales taxes, as a result of which airlines flying in India pay around 75-80 per cent more for the pleasure of buying fuel in the country. So, while it costs around Rs 10,200 to buy one kilolitre of aviation fuel internationally, it costs Rs 20,210 to buy the same in Chennai and Rs 22,090 in Kolkata .

Apart from lowering the viability of airlines and therefore hurting competition, this also affects inter-airline competition as any airline that is able to fly overseas and pick up fuel there is better placed – this explains the rush by private airlines to fly abroad, and the reluctance of Indian Airlines to allow this. The issue of high taxes will hit budget airlines as well, especially since they are not going to be flying on overseas routes and will not be able to pick up cheap fuel.

In addition to this, there is a 15 per cent Inland Air Travel Tax which was first introduced as a ‘fuel surcharge’ during the first Gulf war, and even a Passenger Service Fee. All told, the government collects around 15 per cent of the total revenues of domestic airlines through just these means.

While these issues hit both the publicly owned as well as privately owned airlines, there are serious level playing field or competition issues as well. In the airports, like in Delhi for instance, the state-owned Indian Airlines has a full terminal to itself while the private-sector competitors are all cramped up in one terminal – this, despite the fact that Jet Airways alone has a higher market share than Indian Airlines. This has been possible because all terminals are controlled by the government-run Airports Authority of India, and only Indian Airlines is allowed to provide third-party ground handling services.

Bilaterals, or flying to foreign destinations remains a monopoly of Air India. Why talk of private airlines, breaking this monopoly has been a long-standing demand of even the other public sector airline, Indian Airlines. As of now, India uses under 40 per cent of her bilateral rights. The government has just cleared a proposal to allow private airlines to fly to south Asian countries, but there is no proposal as yet to allow them to utilise bilaterals to other countries.

Other policy restrictions that restrict competition include not allowing foreign airlines to hold a stake in Indian airlines. Since those most interested in the airline business have to be other airlines, this means there will be less foreign players setting up airline firms in India. In addition, the government also decides the minimum number of aircrafts that airlines own/operate as well as the minimum capital that an airline should have .

Ports

India’s 12 major ports handle around 75 per cent of the total traffic in the country, down from over 90 per cent just a decade ago. The major ports are operated by port trusts that are under the control of the central government, while the 140 minor ports function under the purview of state governments.

While there has been a fairly dramatic turnaround in Indian ports, and the average turnaround time for vessels in India’s ports has improved from 8.1 days in 1990-91 to 3.7 in 2001-02, this is still very high compared to just a few hours in ports like Colombo. And, what makes things worse is that, except for the JNPT (where you already have two operators and a third will soon be introduced), handling costs have gone up by around 15 per cent on an average in the period 1995-96 to 2001-02 – this at a time when India’s costs are already higher than those in other countries .

The crux of the problem is that despite all the changes over the past decade, efficiency levels remain very poor by global standards, and port capacities are around just 50-60 per cent of those in comparable ports in Asia. While Indian ports charge less for cargo related services than global ones (JNPT charges $42,744 as compared to Singapore’s 59,049), the vessel related charges are four times higher ($37,860 versus 9,745), as a result of which the total costs in India are around a sixth higher. The reason why the vessel charges are higher, needless to say, is due to the inefficiency and extra manpower at government-run ports that is loaded onto the charges. A couple of years ago, around Rs 600 crore were spent on dredging Tuticorin’s port, and this cost was passed on to users, a practice which few ports anywhere in the world follow . It doesn’t help that, according to a World Bank estimate, Indian ports use just 30-35 per cent of the equipment used by other ports.

While India’s ports suffer disadvantages like lower drafts, this policy of loading on the ports inefficiencies onto prices makes things even worse. According to a presentation made by JNPT Chairman Ravi Budhiraja at a recent conference, while the Singapore port has a draft upto 15 meters and Colombo 14, JNPT’s draft is only 11 meters. On a per teu basis, JNPT is competitive with other ports when it comes to cargo related charges – while JNPT charges $42.7, Singapore charges 59.1, Dubai 90.4 and Colombo 105.3. This advantage, however, is frittered away by the much higher vessel releated charges (for berthing, pilotage and towing). JNPT’s vessel related charges are 37.9 versus 7.2 for Colombo, 6.4 for Dubai and 9.7 for Singapore .

The reason for the higher vessel related charges, of course, is the complete stranglehold of labour gangs in the ports and the refusal to allow modernisation on an adequate scale. The Singapore port has 118 quay cranes for instance versus Dubai’s 28, Colombo’s 21 and JNPT’s 16. When it comes to rubber tyred gantry cranes, Singpore has 375, Dubai 46, Colombo 65 and JNPT 43. Both Singapore and Dubai have over 30 rail mounted gantry cranes while both Colombo and JNPT have just four each. Not surprisingly, while Singapore handled 16.8 million teus in 2002, JNPT handled only 1.93. On an average, the employee productivity at a typical Indian port is in the range of 200-440 teu as compared to 1,080 in the West Port of Malaysia and 2,300 in Singapore. As a result, while Singapore turns around ships in under 12 hours, JNPT and Cochin take around 37-50, and Chennai takes 145 hours.

In the few ports where there has been some competition, like the JNPT, the difference is discernible. While there was just one operator at JNPT, the container traffic grew steadily from 0.34 lakh teus in 1989-90 to 6.69 lakh teus in 1998-99, the introduction of a new player the next year resulted in a major change, and by 2002-03, the port’s container traffic leapt up to 19.3 million teus – of this 12 came from the new Nhava Sheva terminal. Nhava Sheva’s productivity levels are at least two thirds higher than those of JNPT, and not surprisingly its turnaround time is also around a third less and its traffic volumes around two-thirds more.

And while there is a great private sector initiative (theoretically the private sector can invest in all existing ports as well), the fact is that most major ports have just one operator, and that is the port authority itself, or the government. The 10th plan assumes that, of the Rs 16,311 crore that will be invested in the sector, Rs 11,256 crore will come from the private sector, but it is difficult to see how efficiency levels can be hiked unless genuine competition is allowed and more private sector participation is allowed in the major ports. The way forward is to corporatise ports, but this has not happened so far. According to the plan, JNPT was to be corporatised first, followed by the Haldia Dock Complex which would be delinked from the Calcutta Port Trust. Kandla, Tuticorin and Mangalore were to be done after two years; Mumbai, Paradip, Vizag and Chennai a year afterwards, and so on.

In the event, apart from the competition provided by the privately-owned minor ports, there is very little competition in other ports. As a result, a port regulator, the Tariff Authority for Major Ports or TAMP, has been set up, but this body effectively functions as a cost-plus centre with little effort at reducing costs or introducing competition. In any case, under the 1997 amendment to the Major Port Trust Act of 1963 (this amendment created the TAMP), the government allowed the major ports as well as itself the right to establish their own rates irrespective of what the TAMP said! Besides, the TAMP has no power to regulate Terminal Handling Charges by private operators, and nor does it have the power to requisition records, summon or cross-examine witnesses or even impose penalties for non-compliance.

Roads

While the total length of the national roads network has increased 3.4 times between 1951 and 1995, the total vehicle fleet has grown from 0.3 million in 1951 to 12.5 million in 1998, and truck registrations have gone up 32 times from 82,000 in 1951 to 2.64 million in 2000. While India spends around 0.7 per cent of GDP on roads each year, the US spends 1.3, and Japan 3.9 .

Apart from the poor growth (between 1951 and 1995, only around 11 km of 4-laned national highways were built each year), the quality of roads is very poor – while China has 15,000 km of 4 or 6-lane access controlled expressways, India has only under 5,000 km of four-laned highways. According to a World Bank analysis, around half the national highway network is good, a quarter ‘fair’ and the rest ‘poor’. Given the huge congestion, truck and bus speed average 30-40 km per hour on the highway, against expected speeds of double that. It often takes 5 days for a truck to travel from Delhi to Kolkata’s 1,500 km distance. While the formation of the NHAI has been a big step forward in catalysing development of the national highways, it is estimated that there is a 43 per cent shortage in the funds required for maintaining the national highways.

From a policy point of view, though, apart from the shortage of good quality roads, there are few outstanding issues. The NHAI’s outstanding four-laning programme, it is true, consists of very few BOOT and annuity projects, but toll rates are the same on all national highways – to that extent, there is no issue of anti-competitive practice.

From the point of view of road transport, however, the competition picture is quite different. On the face of it, with around 1 million to 1.5 million truck owners, the trucking industry is very competitive. In reality, however, things are quite different, as prices are really controlled by around 5,000-6,000 transport firms who book orders from customers, and each day’s rates are typically fixed each morning when the ‘market’ opens, based on the reading of the demand-supply situation – according to industry sources, in only about 2-3 per cent of cases do customers directly access the truck owners and book their goods. Most big transporters, in fact, have very few trucks of their own – the largest, Transport Corporation of India (TCI) has less than 400 trucks of its own. While 90 per cent of truck owners possess less than 3 trucks each, another 5-6 per cent own between 5 and 10 trucks each, and just 2-3 per cent have more than 50 trucks. Indeed, over the last decade, the trucking industry has got even more fragmented.

While the total size of the orders booked is around Rs 160,000 crore, not all of this is passed on to the truckers. In the case of the large logistics firms, who do around Rs 3,000 crore of business annually at the present, around 10-15 per cent of the money paid by the consignor is paid to the truckers. The parcel booking firms who account for around Rs 90,000 crore of annual business generally pass on between 30 and 40 per cent to the truckers. Transport contractors, typically small operators, pass on around 60 per cent of freight to the truckers. All told, of the Rs 160,000 crore business, around Rs 100,000 crore gets paid to the truck owners.

In Baddi in Himachal Pradesh, a recent news report in The Economic Times (March 23, 2004), the truckers union decides what prices to charge, and even charges Rs 45,000 to allow other truckers to become members of the union! In places where there is no union, it is the transporters that fix prices. In the case of a route like the Delhi-Ludhiana one, for instance, the freightage paid to truckers has remained around Rs 5,000 per truck between 1996-97 to 2003-04 (it fell to 3,700 in 1999-00) while the rate at which transporters booked cargo has gone up from Rs 75 per quintal to 110 in the same period. (1996-97 is an important year since it was a peak sales year with 2.21 lakh new trucks being sold in that year.)

Interestingly, this has taken place in a period when costs have gone down dramatically for the industry. Between 1996-97 and 2003-04, for instance, the seed money required to buy a truck fell from 35 to 5 per cent, interest rates from 13 to 5 and the payment period has also gone up from 3 to 4 years. While prices of trucks have gone up from Rs 520,000 to Rs 6,60,000 for a popular model, the premium of 1996-97 has been replaced by a discount today, effectively keeping the price roughly similar. Tyre costs, a major cost ingredient, have gone down, though diesel prices have more than doubled. However, according to the Indian Foundation of Transport Research and Training (www.iftrt.org), this too has been neutralised, though through a unique method.

According to data collected by IFTRT, on an average, trucks used to be overloaded by around 50-60 per cent in 1996-97 (overloading means, for instance, a 17 ton payload truck actually carrying 25 tons of goods), and this went up to around 160 per cent in 2003-04. This overloading, interestingly, has been made possible due to the fact that various state governments today issue passes for Rs 12,500 per month that legalise such practices. An IFTRT study found that, while diesel prices were raised twice, by one rupee per litre each time, in the space of 15 days in December last year, freight costs went up by under a per cent in most sectors – they went up by 5-6 per cent in sectors like Delhi and Kolkata, but this was due to the fact that the UP government withdrew its Gold Card that allowed rampant overloading around the same period. On an average trip from Mumbai to Delhi, according to the Asian Institute of Transport Development, a fourth of the total costs would comprise of speed money to various officials including the police.

Another anti-competitive practice followed, this time in the name of the truckers, is by states who fix minimum freight rates – indeed, Section 67 of the Central Motor Vehicles Act even provides for fixing this floor rate. States like Karnataka, West Bengal, Orissa and Uttra Pradesh have fixed this. How much this lowers competition can be seen from the fact that, when this was fixed at around Rs 11.5 per tonne kilometer in West Bengal two years ago, the transporters association there protested and said the measure would be inflationary! At that time, they paid the truckers around Rs 6 per tonne kilometer.

Increased competition in the sector will require stopping state governments from issuing over-loading permits, or even fixing minimum freight rates. Encouraging larger fleet consolidation should also be the accepted policy principle.

Railways

The world over, long distance freight is carried by railways, but in India the share of the railways in traffic is declining with each passing year, to around 40 today – while road traffic has grown by 12 per cent annually in the last decade, rail traffic has gone up only 1.4 per cent annually .

(Source: Indian infrastructure report)

Indeed, apart from reasons to do with the railways pricing themselves out of the market – freight rates have gone up faster than those for passengers, and the ratio of passenger to freight rates to 0.32 which is the lowest in the world – the railways is too bankrupt to invest money in developing tracks. In the last ten years, the arrears in track renewal have increased from 3,500 km to more than 12,200 km according to the Rakesh Mohan committee on railways. Thanks partly to this, and partly to the supreme emphasis paid to passenger traffic, freight trains in India run at average speeds of 23 km an hour as compared to an ideal speed of 40-50 km which is possible with the modern locomotives and electrification.

While the Indian Railways had a surplus in 1998-99, the financial situation is rapidly deteriorating with the return on capital falling 4.2 per cent and the operating ratio (expenses to income) rising to 98.8. With government support declining with each budget, the railways are resorting to increased market borrowings, and lease payments have jumped to 11 per cent of ordinary working expenses in 2001. According to estimates made by the railways, with even the declining share in traffic, a fourth of ‘rail links will experience traffic approaching or exceeding charted capacity by the year 2006-07.’ Thanks to over usage, studies show the present rate of train failures cause a loss of around 20 per cent of line capacity.

While natural monopolies like the railways are difficult areas to introduce competition, there is much that can be done. Indeed, a comparison with China is helpful since the situation in that country was quite similar to India some years ago. In the early 1990s, passenger services in China ran at a loss too (India loses around Rs 4,100 crore on this each year). Between 1994 and 1998, however, China raised passenger fares 75 per cent and its passenger fare to freight ratio rose from 0.86 to 1.15, as compared to India’s 0.32. As a result of not hiking passenger fares and an overstaffed railway, Indian Railways has one of the highest freight rates in the world (0.062 in PPP dollars in 1995 versus 0.025 for China). During 1981-82 to 1998-99, there was a 137 per cent hike in wages as against a 78 per cent hike in productivity – Indian Railways spends 53 per cent of its gross traffic receipts on salaries as compared to 15 for China Rail. (Within India, while the Western Railway had 1,316 employees for the same stretch of track, the Konkan Railway Corporatin had only 677.)

Interestingly, China Railways had a staff strength of 3 million in 1998, but by separating its non-core activities in 1998, it reduced this to 1.6 million. The railways need to do this in India as well, to both lower costs for itself as well as to modernise its non-core manufacturing units – outdated technologies for locomotives as well as passenger coaches, for instance, makes the core operations less efficient. In China, for instance, all construction companies have been moved out of the railways and they now compete with one another.

To begin with, as in China, it would be a good idea to get the zonal railways to maintain their respective infrastructure and begin to compete with each other. Zonal railways need to be given flexibility to fix tariffs (at least in some areas), and a mechanism needs to be evolved (a regulator?) to keep an eye on costs and revenues, to ensure freight is not as heavily overcharged as it is today – if the railways social burden is paid for through the budget or paid for by users, the freight rates could be brought down by as much as 40 per cent. As a first step, certain operational streams, like transportation of oil or cement or iron ore could be licensed out to private operators, and then a view taken based on the experience.

Certainly, the railways needs to move on the old proposal to allow operators, when allowed, to procure their own wagons – corporatising and even selling off of wagon maintenance workshops, similarly, is a step that should be considered. Given the huge shortage of containers, and the huge hold up of traffic at Tuglakabad for instance, licensing out services like Concor is another step that needs to be considered. Of course, if private firms are to be able to use this opportunity, they will have to be allowed equal access to engines to pull these wagons – this requires a neutral regulator to ensure the railways do not squeeze out competition by not allowing them to move their wagons .

Transport CUTS

2009-07-20T20:07:00.001-07:00

Potholed Pathways
Unless the creases in the transport sector are ironed out, and more competition introduced, the target GDP is not achievable

Sunil Jain

While the transport sector has grown at a healthy 10 per cent a year during the last decade (12 per cent for roadways, 1.4 for railways and 8 per cent of sea and air ports) this is the sector that has the greatest potential to hold back India’s GDP growth targets of 8 per cent in the next decade – the sector will have to grow at an even faster rate if GDP is to accelerate. Thanks to severe congestion of the main arterial highways for instance, truck and buses travel at just around 25-30 km an hour, a clear indication of just how much extra time and money is being wasted – in 1996, to cite just one instance, the Rakesh Mohan report on infrastructure estimated the economic losses from bad roads at anywhere upto Rs 30,000 crore a year, or around 1 to 2 per cent of GDP each year. Close to 40 per cent of India’s six lakh villages, in fact, don’t even have all-weather roads.

Despite the much longer route they have to take, shipping goods to the east coast of the United States is far cheaper from south-east Asian countries in comparison with that from India. Shipping goods from Bangkok to the east coast costs 18 per cent less as compared to shipping from either Mumbai or Chennai. In comparison with China, the extra shipping costs from India could be as high as 35 per cent .

To be sure, the government has done a lot to try and fix things since the early 1990s. It passed a Multi-Modal Transport Act to facilitate door-to-door shipments – Concor was created in 1991 – and in 1993, the government amended the Merchant Shipping Act to allow Indian vessel owners and operators access to the capital markets. For the first time in the country’s history, in 2000-01, capacity at the major ports was greater than the actual traffic through the ports, and the ratio has only got better in subsequent years. In just the last decade, the share of minor ports, many of them new private sector developed ones, is up from around 6 per cent to 25 per cent in total ports traffic, and the private sector has been allowed to create capacity in major ports as well.

Similarly, repealing the Air Corporation Act of 1953 and replacing this with an act, in 1994, that allowed competition and private participation in the scheduled domestic air transport services lead to a dramatic surge in traffic – between 1994-95 and 2001-02, the number of aircraft kilometres flown grew 155 per cent and the passenger kilometres by 76 per cent . By 2000-01, private operators carried 48.2 per cent of the passengers in the country, and today, Jet Airways has a higher market share than Indian Airlines.

Yet, for all this, the transport sector remains very inefficient. While airport charges in India are on an average 80 per cent higher than the international average, air travel in India costs a lot more. So, while a Delhi-Goa return ticket costs Rs 20,470 a Delhi-Bangkok return ticket costs just Rs 17,980. The entry of no-frills airlines may well change this, but for now, the capacities on budget airlines are still very small. The fact that the largest private airline, Jet Airways, still makes large losses also suggests the problem may have to do more with the airlines policy rather than lack of competition between the airlines.

And, in the case of ports, while Indian ports charge less for cargo related services than global ones (JNPT charges $42,744 as compared to Singapore’s 59,049), the vessel related charges are four times higher ($37,860 versus 9,745), as a result of which the total costs in India are around a sixth higher.

The reason for this sorry state of affairs eventually boils down to policies that inhibit competition in the sectors. In the case of the ports sector, for instance, despite allowing the private sector to invest in major ports, there are few instances of this happening, as it is up to the port authority (the government) to decide to let competition in. In the JNPT where this was done in 1999-00, there has been a dramatic surge in productivity. In 1998-99, the total container traffic in the port was 6.69 TEUs. In 2002-03, this jumped to 19.29, and of this 12.01 was done by the new P&O run Nhava Sheva terminal. While the gross berth productivity is 31.3 moves per hour in JNPT, it is 57.3 in the Nhava Sheva.

Nor despite the government’s talk of corporatising ports has there been any action on this so far. Even today, tariffs in the sector were controlled by a Tariff Authority for Major Ports (TAMP) which has made little attempt at increasing competition but just functions as a cost-plus pricing centre. Till very recently, in fact, the TAMP used to set floor prices below which the ports were not allowed to compete. Now, the government has asked TAMP to begin considering looking at putting ceilings instead.

Worse, in the case of the railways which are the primary medium for transporting containers across the country’s vast hinterland, the Indian Railways has a total monopoly over this, through the Container Corporation of India (Concor). Apart from raising costs, Concor has only 3,000 wagons as against the demand of over 5,000 wagons at present. In fact, Concor’s station at Tuglakabad near Delhi has containers lying around for a week at various points in time, waiting to be transported to the ports .

In the aviation sector, similarly, the government is just about allowing private airlines to fly abroad, and insists that operators fly certain un-profitable routes, sort of in the nature of a universal service obligation, the barriers to entry are still very high, and all manner of levies are put on aviation fuel.

Aviation Sector

While the International Civil Aviation Organisation (ICAO) estimated that every $100 spent on air transport produced benefits worth $325 for the economy, it is estimated that foreign exchange transactions of $22.5 billion are directly facilitated by the civil aviation sector in India, and another $96 billion indirectly according to the Naresh Chandra committee on the aviation sector . Indeed, 95 per cent of tourist arrivals into the country are by air, and 40 per cent of the country’s exports/imports take the aerial route.

India has an eminent position in the civil aviation sector with a large fleet of aircrafts. In all, 56 airlines are operating scheduled air services to and through India and 22 foreign airlines are over flying Indian territory. There are over 450 airports and 1091 registered aircrafts in the country. In addition to the three public sector airlines Air India, Indian Airlines, Alliance Air - there are two private operators - Jet Airways, Sahara India Airlines. There are also 41 non-scheduled air transport operators. Additionally 34 applicants have been granted NOC by the Ministry of Civil Aviation for setting up non-scheduled air transport operation. Air Transport has a significant role to play in a vast country like India with major industrial and commercial centres located far apart.

In May, 1953 consequent to the coming into force of the Air Corporations Act, 1953 - Government of India nationalised the airline industry. In accordance with this act, the two air corporations, viz. Indian Airlines Corporation and Air India International, were established and the assets of all the then existing air companies (nine) were transferred to the two new Corporations. The operation of scheduled air transport services was made a monopoly of these two Corporations and the Act prohibited any person other than the Corporations or their associates to operate any scheduled air transport services from, to, or across India.

In 1994 the wheel turned a full circle as the Air Corporation Act, 1953 was repealed with effect from March 1994 and with that ended the monopoly of the Corporations on scheduled air transport services. The air transport in India has been opened to operation of scheduled services by any carrier who fulfils the statutory requirements for operation of scheduled services. The repeal of Air Corporations Act has thus demonopolised the domestic air transport services and enabled private operators to provide scheduled air transport services.

In fact, liberalisation in civil aviation industry began in 1986 with the introduction of Air Taxi system to boost development of tourism. Though there were several restrictions relating to seat capacity, airports, timing and fare, the scheme was liberalised over a period of time. Even the fare was totally deregulated, allowing air taxi operators to charge any fare. With Open Sky Policy many private operators began operation in the domestic sector.

Table 1. Passengers Carried Since 1992 On Domestic Sector (in lakhs)

Year Indian Airlines (Domestic) Private Air Carriers Total Domestic Growth of Domestic Air Transport (%) Private Air Carriers (market share) Indian Airlines (market share)
1992 80.58 4.11 84.7 5.14 4.85 95.15
1993 67.46 20.92 88.38 4.32 23.67 76.33
1994 68.94 36.1 105.05 18.86 34.36 65.64
1995 70.82 48.93 119.75 13.99 40.86 59.14
1996 69.99 49.08 110.07 -8.08 44.59 55.41
1997 73.79 41.35 115.14 4.61 35.91 64.09
1998 69.46 49.14 118.6 3.01 41.43 58.57
1999 65.38 56.92 122.3 3.12 46.54 53.46
Source: http://civilaviation.nic.in/moca/acvl.htm

Despite the obvious advantages of a healthy aviation sector, however, all players have been hobbled by unfavourable policy, which, by the way, hurts public sector players as much as it does the private ones. The civil aviation policy, for instance, insists that all scheduled carriers fly at least 10 per cent of their capacity on trunk routes in the north eastern sector, Jammu & Kashmir, Andaman & Nicobar Islands and Lakshadweep (category-II routes). Since load factors in this region are poor, naturally it is a loss making proposition. Thanks to political pressures, the state-owned carrier Indian Airlines, in fact, is forced to fly 17 per cent of its flights on this route, and incurs an extra annual loss of Rs 62 crore due to this. What this does, of course, is to lower Indian Airlines’ competitive powers and so restricts inter-airline competition.

In addition, the law also states that 50 per cent of trunk route flights have to be flown on Category III routes (that is, on non-trunk and non-category-II routes). In these routes too, IA is forced to fly a greater share of its flights in comparison with private airlines. According to figures provided by airline officials, IA flies 74 per cent of flights servicing these smaller towns and loses Rs 134 crore a year on this . IA flies from Delhi to Chandigarh, for instance, even though there is a regular and popular Shatabdi Express on this route. Short haul flights, aviation experts point out, add dramatically to an airline’s costs as, apart from higher fuel costs, frequent landing and takeoff reduces the aircraft’s life.

It gets worse. While the central government levies unreasonable charges on aviation fuel, the states compound this with high sales taxes, as a result of which airlines flying in India pay around 75-80 per cent more for the pleasure of buying fuel in the country. So, while it costs around Rs 10,200 to buy one kilolitre of aviation fuel internationally, it costs Rs 20,210 to buy the same in Chennai and Rs 22,090 in Kolkata .

Apart from lowering the viability of airlines and therefore hurting competition, this also affects inter-airline competition as any airline that is able to fly overseas and pick up fuel there is better placed – this explains the rush by private airlines to fly abroad, and the reluctance of Indian Airlines to allow this. The issue of high taxes will hit budget airlines as well, especially since they are not going to be flying on overseas routes and will not be able to pick up cheap fuel.

In addition to this, there is a 15 per cent Inland Air Travel Tax which was first introduced as a ‘fuel surcharge’ during the first Gulf war, and even a Passenger Service Fee. All told, the government collects around 15 per cent of the total revenues of domestic airlines through just these means.

While these issues hit both the publicly owned as well as privately owned airlines, there are serious level playing field or competition issues as well. In the airports, like in Delhi for instance, the state-owned Indian Airlines has a full terminal to itself while the private-sector competitors are all cramped up in one terminal – this, despite the fact that Jet Airways alone has a higher market share than Indian Airlines. This has been possible because all terminals are controlled by the government-run Airports Authority of India, and only Indian Airlines is allowed to provide third-party ground handling services.

Bilaterals, or flying to foreign destinations remains a monopoly of Air India. Why talk of private airlines, breaking this monopoly has been a long-standing demand of even the other public sector airline, Indian Airlines. As of now, India uses under 40 per cent of her bilateral rights. The government has just cleared a proposal to allow private airlines to fly to south Asian countries, but there is no proposal as yet to allow them to utilise bilaterals to other countries.

Other policy restrictions that restrict competition include not allowing foreign airlines to hold a stake in Indian airlines. Since those most interested in the airline business have to be other airlines, this means there will be less foreign players setting up airline firms in India. In addition, the government also decides the minimum number of aircrafts that airlines own/operate as well as the minimum capital that an airline should have .

Ports

India’s 12 major ports handle around 75 per cent of the total traffic in the country, down from over 90 per cent just a decade ago. The major ports are operated by port trusts that are under the control of the central government, while the 140 minor ports function under the purview of state governments.

While there has been a fairly dramatic turnaround in Indian ports, and the average turnaround time for vessels in India’s ports has improved from 8.1 days in 1990-91 to 3.7 in 2001-02, this is still very high compared to just a few hours in ports like Colombo. And, what makes things worse is that, except for the JNPT (where you already have two operators and a third will soon be introduced), handling costs have gone up by around 15 per cent on an average in the period 1995-96 to 2001-02 – this at a time when India’s costs are already higher than those in other countries .

The crux of the problem is that despite all the changes over the past decade, efficiency levels remain very poor by global standards, and port capacities are around just 50-60 per cent of those in comparable ports in Asia. While Indian ports charge less for cargo related services than global ones (JNPT charges $42,744 as compared to Singapore’s 59,049), the vessel related charges are four times higher ($37,860 versus 9,745), as a result of which the total costs in India are around a sixth higher. The reason why the vessel charges are higher, needless to say, is due to the inefficiency and extra manpower at government-run ports that is loaded onto the charges. A couple of years ago, around Rs 600 crore were spent on dredging Tuticorin’s port, and this cost was passed on to users, a practice which few ports anywhere in the world follow . It doesn’t help that, according to a World Bank estimate, Indian ports use just 30-35 per cent of the equipment used by other ports.

While India’s ports suffer disadvantages like lower drafts, this policy of loading on the ports inefficiencies onto prices makes things even worse. According to a presentation made by JNPT Chairman Ravi Budhiraja at a recent conference, while the Singapore port has a draft upto 15 meters and Colombo 14, JNPT’s draft is only 11 meters. On a per teu basis, JNPT is competitive with other ports when it comes to cargo related charges – while JNPT charges $42.7, Singapore charges 59.1, Dubai 90.4 and Colombo 105.3. This advantage, however, is frittered away by the much higher vessel releated charges (for berthing, pilotage and towing). JNPT’s vessel related charges are 37.9 versus 7.2 for Colombo, 6.4 for Dubai and 9.7 for Singapore .

The reason for the higher vessel related charges, of course, is the complete stranglehold of labour gangs in the ports and the refusal to allow modernisation on an adequate scale. The Singapore port has 118 quay cranes for instance versus Dubai’s 28, Colombo’s 21 and JNPT’s 16. When it comes to rubber tyred gantry cranes, Singpore has 375, Dubai 46, Colombo 65 and JNPT 43. Both Singapore and Dubai have over 30 rail mounted gantry cranes while both Colombo and JNPT have just four each. Not surprisingly, while Singapore handled 16.8 million teus in 2002, JNPT handled only 1.93. On an average, the employee productivity at a typical Indian port is in the range of 200-440 teu as compared to 1,080 in the West Port of Malaysia and 2,300 in Singapore. As a result, while Singapore turns around ships in under 12 hours, JNPT and Cochin take around 37-50, and Chennai takes 145 hours.

In the few ports where there has been some competition, like the JNPT, the difference is discernible. While there was just one operator at JNPT, the container traffic grew steadily from 0.34 lakh teus in 1989-90 to 6.69 lakh teus in 1998-99, the introduction of a new player the next year resulted in a major change, and by 2002-03, the port’s container traffic leapt up to 19.3 million teus – of this 12 came from the new Nhava Sheva terminal. Nhava Sheva’s productivity levels are at least two thirds higher than those of JNPT, and not surprisingly its turnaround time is also around a third less and its traffic volumes around two-thirds more.

And while there is a great private sector initiative (theoretically the private sector can invest in all existing ports as well), the fact is that most major ports have just one operator, and that is the port authority itself, or the government. The 10th plan assumes that, of the Rs 16,311 crore that will be invested in the sector, Rs 11,256 crore will come from the private sector, but it is difficult to see how efficiency levels can be hiked unless genuine competition is allowed and more private sector participation is allowed in the major ports. The way forward is to corporatise ports, but this has not happened so far. According to the plan, JNPT was to be corporatised first, followed by the Haldia Dock Complex which would be delinked from the Calcutta Port Trust. Kandla, Tuticorin and Mangalore were to be done after two years; Mumbai, Paradip, Vizag and Chennai a year afterwards, and so on.

In the event, apart from the competition provided by the privately-owned minor ports, there is very little competition in other ports. As a result, a port regulator, the Tariff Authority for Major Ports or TAMP, has been set up, but this body effectively functions as a cost-plus centre with little effort at reducing costs or introducing competition. In any case, under the 1997 amendment to the Major Port Trust Act of 1963 (this amendment created the TAMP), the government allowed the major ports as well as itself the right to establish their own rates irrespective of what the TAMP said! Besides, the TAMP has no power to regulate Terminal Handling Charges by private operators, and nor does it have the power to requisition records, summon or cross-examine witnesses or even impose penalties for non-compliance.

Roads

While the total length of the national roads network has increased 3.4 times between 1951 and 1995, the total vehicle fleet has grown from 0.3 million in 1951 to 12.5 million in 1998, and truck registrations have gone up 32 times from 82,000 in 1951 to 2.64 million in 2000. While India spends around 0.7 per cent of GDP on roads each year, the US spends 1.3, and Japan 3.9 .

Apart from the poor growth (between 1951 and 1995, only around 11 km of 4-laned national highways were built each year), the quality of roads is very poor – while China has 15,000 km of 4 or 6-lane access controlled expressways, India has only under 5,000 km of four-laned highways. According to a World Bank analysis, around half the national highway network is good, a quarter ‘fair’ and the rest ‘poor’. Given the huge congestion, truck and bus speed average 30-40 km per hour on the highway, against expected speeds of double that. It often takes 5 days for a truck to travel from Delhi to Kolkata’s 1,500 km distance. While the formation of the NHAI has been a big step forward in catalysing development of the national highways, it is estimated that there is a 43 per cent shortage in the funds required for maintaining the national highways.

From a policy point of view, though, apart from the shortage of good quality roads, there are few outstanding issues. The NHAI’s outstanding four-laning programme, it is true, consists of very few BOOT and annuity projects, but toll rates are the same on all national highways – to that extent, there is no issue of anti-competitive practice.

From the point of view of road transport, however, the competition picture is quite different. On the face of it, with around 1 million to 1.5 million truck owners, the trucking industry is very competitive. In reality, however, things are quite different, as prices are really controlled by around 5,000-6,000 transport firms who book orders from customers, and each day’s rates are typically fixed each morning when the ‘market’ opens, based on the reading of the demand-supply situation – according to industry sources, in only about 2-3 per cent of cases do customers directly access the truck owners and book their goods. Most big transporters, in fact, have very few trucks of their own – the largest, Transport Corporation of India (TCI) has less than 400 trucks of its own. While 90 per cent of truck owners possess less than 3 trucks each, another 5-6 per cent own between 5 and 10 trucks each, and just 2-3 per cent have more than 50 trucks. Indeed, over the last decade, the trucking industry has got even more fragmented.

While the total size of the orders booked is around Rs 160,000 crore, not all of this is passed on to the truckers. In the case of the large logistics firms, who do around Rs 3,000 crore of business annually at the present, around 10-15 per cent of the money paid by the consignor is paid to the truckers. The parcel booking firms who account for around Rs 90,000 crore of annual business generally pass on between 30 and 40 per cent to the truckers. Transport contractors, typically small operators, pass on around 60 per cent of freight to the truckers. All told, of the Rs 160,000 crore business, around Rs 100,000 crore gets paid to the truck owners.

In Baddi in Himachal Pradesh, a recent news report in The Economic Times (March 23, 2004), the truckers union decides what prices to charge, and even charges Rs 45,000 to allow other truckers to become members of the union! In places where there is no union, it is the transporters that fix prices. In the case of a route like the Delhi-Ludhiana one, for instance, the freightage paid to truckers has remained around Rs 5,000 per truck between 1996-97 to 2003-04 (it fell to 3,700 in 1999-00) while the rate at which transporters booked cargo has gone up from Rs 75 per quintal to 110 in the same period. (1996-97 is an important year since it was a peak sales year with 2.21 lakh new trucks being sold in that year.)

Interestingly, this has taken place in a period when costs have gone down dramatically for the industry. Between 1996-97 and 2003-04, for instance, the seed money required to buy a truck fell from 35 to 5 per cent, interest rates from 13 to 5 and the payment period has also gone up from 3 to 4 years. While prices of trucks have gone up from Rs 520,000 to Rs 6,60,000 for a popular model, the premium of 1996-97 has been replaced by a discount today, effectively keeping the price roughly similar. Tyre costs, a major cost ingredient, have gone down, though diesel prices have more than doubled. However, according to the Indian Foundation of Transport Research and Training (www.iftrt.org), this too has been neutralised, though through a unique method.

According to data collected by IFTRT, on an average, trucks used to be overloaded by around 50-60 per cent in 1996-97 (overloading means, for instance, a 17 ton payload truck actually carrying 25 tons of goods), and this went up to around 160 per cent in 2003-04. This overloading, interestingly, has been made possible due to the fact that various state governments today issue passes for Rs 12,500 per month that legalise such practices. An IFTRT study found that, while diesel prices were raised twice, by one rupee per litre each time, in the space of 15 days in December last year, freight costs went up by under a per cent in most sectors – they went up by 5-6 per cent in sectors like Delhi and Kolkata, but this was due to the fact that the UP government withdrew its Gold Card that allowed rampant overloading around the same period. On an average trip from Mumbai to Delhi, according to the Asian Institute of Transport Development, a fourth of the total costs would comprise of speed money to various officials including the police.

Another anti-competitive practice followed, this time in the name of the truckers, is by states who fix minimum freight rates – indeed, Section 67 of the Central Motor Vehicles Act even provides for fixing this floor rate. States like Karnataka, West Bengal, Orissa and Uttra Pradesh have fixed this. How much this lowers competition can be seen from the fact that, when this was fixed at around Rs 11.5 per tonne kilometer in West Bengal two years ago, the transporters association there protested and said the measure would be inflationary! At that time, they paid the truckers around Rs 6 per tonne kilometer.

Increased competition in the sector will require stopping state governments from issuing over-loading permits, or even fixing minimum freight rates. Encouraging larger fleet consolidation should also be the accepted policy principle.

Railways

The world over, long distance freight is carried by railways, but in India the share of the railways in traffic is declining with each passing year, to around 40 today – while road traffic has grown by 12 per cent annually in the last decade, rail traffic has gone up only 1.4 per cent annually .

(Source: Indian infrastructure report)

Indeed, apart from reasons to do with the railways pricing themselves out of the market – freight rates have gone up faster than those for passengers, and the ratio of passenger to freight rates to 0.32 which is the lowest in the world – the railways is too bankrupt to invest money in developing tracks. In the last ten years, the arrears in track renewal have increased from 3,500 km to more than 12,200 km according to the Rakesh Mohan committee on railways. Thanks partly to this, and partly to the supreme emphasis paid to passenger traffic, freight trains in India run at average speeds of 23 km an hour as compared to an ideal speed of 40-50 km which is possible with the modern locomotives and electrification.

While the Indian Railways had a surplus in 1998-99, the financial situation is rapidly deteriorating with the return on capital falling 4.2 per cent and the operating ratio (expenses to income) rising to 98.8. With government support declining with each budget, the railways are resorting to increased market borrowings, and lease payments have jumped to 11 per cent of ordinary working expenses in 2001. According to estimates made by the railways, with even the declining share in traffic, a fourth of ‘rail links will experience traffic approaching or exceeding charted capacity by the year 2006-07.’ Thanks to over usage, studies show the present rate of train failures cause a loss of around 20 per cent of line capacity.

While natural monopolies like the railways are difficult areas to introduce competition, there is much that can be done. Indeed, a comparison with China is helpful since the situation in that country was quite similar to India some years ago. In the early 1990s, passenger services in China ran at a loss too (India loses around Rs 4,100 crore on this each year). Between 1994 and 1998, however, China raised passenger fares 75 per cent and its passenger fare to freight ratio rose from 0.86 to 1.15, as compared to India’s 0.32. As a result of not hiking passenger fares and an overstaffed railway, Indian Railways has one of the highest freight rates in the world (0.062 in PPP dollars in 1995 versus 0.025 for China). During 1981-82 to 1998-99, there was a 137 per cent hike in wages as against a 78 per cent hike in productivity – Indian Railways spends 53 per cent of its gross traffic receipts on salaries as compared to 15 for China Rail. (Within India, while the Western Railway had 1,316 employees for the same stretch of track, the Konkan Railway Corporatin had only 677.)

Interestingly, China Railways had a staff strength of 3 million in 1998, but by separating its non-core activities in 1998, it reduced this to 1.6 million. The railways need to do this in India as well, to both lower costs for itself as well as to modernise its non-core manufacturing units – outdated technologies for locomotives as well as passenger coaches, for instance, makes the core operations less efficient. In China, for instance, all construction companies have been moved out of the railways and they now compete with one another.

To begin with, as in China, it would be a good idea to get the zonal railways to maintain their respective infrastructure and begin to compete with each other. Zonal railways need to be given flexibility to fix tariffs (at least in some areas), and a mechanism needs to be evolved (a regulator?) to keep an eye on costs and revenues, to ensure freight is not as heavily overcharged as it is today – if the railways social burden is paid for through the budget or paid for by users, the freight rates could be brought down by as much as 40 per cent. As a first step, certain operational streams, like transportation of oil or cement or iron ore could be licensed out to private operators, and then a view taken based on the experience.

Certainly, the railways needs to move on the old proposal to allow operators, when allowed, to procure their own wagons – corporatising and even selling off of wagon maintenance workshops, similarly, is a step that should be considered. Given the huge shortage of containers, and the huge hold up of traffic at Tuglakabad for instance, licensing out services like Concor is another step that needs to be considered. Of course, if private firms are to be able to use this opportunity, they will have to be allowed equal access to engines to pull these wagons – this requires a neutral regulator to ensure the railways do not squeeze out competition by not allowing them to move their wagons .

Making regulation work

2009-07-20T20:05:00.001-07:00

Introduction

With over 218 million telecom connections (178 million wireless and 40 million wire) and in the country in May, amounting to a teledensity of nearly 20, as opposed to just around four in 1996, it’s obvious something good is happening in the country’s telecom industry. More so, when you juxtapose this with the fact that telecom rates have tumbled as well, both for long distance as well as for local calls.

So is it competition that’s at work or is it something else – in most telecom circles, there are 5-6 players offering competing services. Has the regulator ensured there is enough competition, despite the fact that, the world over, dominant incumbents generally try their best to ensure new competitors don’t have access to their customers by denying them interconnection rights.

In India, it’s been a bit of both. Certainly there is enough competition, many argue the industry is too fragmented to survive in its current form; it is equally true that most of what are touted as instances of regulatory success in telecom have been the result of long-drawn court battles initiated by the telecom operators themselves, especially in the early days of India’s brush with private telecom. Indeed, the only reason why no meaningful action has been taken against mobile phone operators whose quality of service has often been found to be below par by the regulator itself, is that consumer groups do not have the same clout as the operators, or the financial power to fight bruising court battles.

This paper will argue that the battle for better regulatory regime in telecom has been fought long and hard, and has not been fully won either. So far, the Telecom Regulatory Authority of India (TRAI) has oscillated between being too brash and independent (Justice Sodhi’s TRAI, the very first one, was actually dissolved by the government) to being virtually a handmaiden of the government (during Pradip Baijal’s tenure).

Relations between the government and the TRAI have also been somewhat of a roller-coaster ride. When the NDA was in power, the TRAI’s recommendations got accepted immediately; when the UPA came in power, the communication minister (Dayanidhi Maran) announced a major change in policy on long distance and internet telephony without even seeking the mandatory TRAI recommendation; the TRAI’s recommendations on 3G policy have been kept hanging for over a year, and the government has not been able to provide spectrum as promised by the TRAI and assumed in its major recommendations. That is, various governments of the day have not believed that a TRAI recommendation has to automatically be accepted.

When compared with regulation in other industries, however, India’s telecom regulatory regime stands out. Apart from the obvious longer tenure (the telecom regulatory history is more than a decade old), the telecom regulatory regime (with more than a little prodding from the country’s courts) has introduced competition in most areas of telecom (some notable exceptions remain) while the power regulatory regime, for instance, struggles to do this.

Growth of industry

The telecom industry remains one of the fastest growing in the country, with around 5-6 million new customers getting added to the mobile users club every month – this is up from around 3 million a month just a year ago. Growth in the number of fixed line users, by contrast, has been much slower, with the number of fixed line phones actually declining, from 41.3 million in May 2006 to 40.3 million in May 2007. While still small in number, broadband growth appears to be picking up at last, with the total broadband connections in the country finally reaching the 2.5 million mark – in March 2006, there were 1.4 million broadband connections in the country. The total number of internet users, including dial ups, is around 8 million.

With this growth in mobile phones signaling huge potential, valuations of telecom firms continue to rise, and UK giant Vodafone has just taken over Hutch’s India operations after valuing the company at around $20 billion.

Despite the large growth, market shares have been relatively stable, the only change in recent times being Hutch replacing the public sector BSNL at the second slot, with the latter facing a severe capacity crunch with a tender for 45.5 million lines (half of which would be 3G ones) getting put on hold for over six months now, and with the prospects of getting delayed indefinitely – as this piece is written, the BSNL unions are on strike protesting against this.

Despite the dramatically increased private competition, BSNL has managed to hold its own, and has retained the number two slot for a long time, a tribute to both how it has managed to re-focus to take on the competition as well as to the regulator’s inability to force the company to open up (even today CHECK, BSNL does not allow others to roam on its network, necessitating expensive rollouts by private firms if they wish to remain connected in the smaller cities/towns) – it helps that a large part of BSNL’s expansion has been funded by private sector dole (more on that later). Over 80 per cent of mobile phones in the country are provided by private sector firms, while over 90 per cent of fixed lines belong to the two public sector firms, MTNL and BSNL.

Total Wireless Net-additons analysis
(in numbers)
Operators Q305 Q405 Q106 Q206 Q306 Q406 Q107 2007 Apr
%of net addition %of net addition %of net addition %of net addition %of net addition %of net addition %of net addition %of net addition
Bharti 22% 18% 22% 26% 23% 26% 37% 34%
BSNL 22% 24% 19% 14% 16% 12% 33% 6%
MTNL 2% 2% 3% 2% 0% 1% 3% -5%
Hutch 62% 15% 16% 10% 14% 16% 22% 25%
Reliance 18% 17% 23% 19% 20% 21% -27% 15%
Idea 4% 5% 6% 10% 10% 11% 10% 11%
TATA 14% 17% 7% 15% 12% 9% 11% 4%
Aircel/Dishnet,Spice,HFCL & Shyam -43% 3% 4% 5% 4% 5% 10% 10%
TOTAL WIRELESS net additions 5,934,448 8,581,221 10,201,144 9,151,533 11,964,453 13,109,947 9,102,178 5,138,374

As a result, most targets set, and which seemed ambitious at the time, have been met long before they were due. By 2005, the government estimated that seven per cent of Indians would own (as opposed to the earlier ‘have access to’, usually through a PCO) a phone – this was achieved in March 2004. The new target, by the end of 2008, is that teledensity will rise to 22.5 – we were at 19.3 in May 2007. Indeed, India’s achievements in telecom in the last few years have been higher than they were in the first 50 years of the country’s independence. As can be seen from the chart, much of this has been achieved by the private sector.

While the TRAI has, in the past, taken credit for this growth by bringing in new players (till 2001, there were only two mobile phone licensees in most circles), this is partially true. Real growth happened when telecom rates fell, and this happened not just as a result of increased competition, but got triggered in May 2001 by the introduction of what is called Calling Party Pays since this allowed mobile phone companies to make incoming calls free (in a sense, this halved tariffs).

Though the overall teledensity target is set to be surpassed easily, the same cannot be said for rural teledensity – against the 2010 target of 4, the current levels are around half. While the initial plan was to make it mandatory for private phone firms to lay a certain number of rural lines as part of their license conditions, this was observed more in the breach and, to the companies’ delight, the government removed the obligation some years ago. A Universal Service Obligation (USO) fund was set up, with a part of the license fees going straight to this fund, and the idea was that anyone could use this fund to subsidise rural phones. This didn’t really take off either and, at one, point, the fund disbursed just around a third of the monies it collected.

The TRAI then came up with two radical proposals and it is likely this will jumpstart rural telephony. One, it decided that since mobile phone costs were reducing faster than fixed line costs, it would be a better idea to allow the USO fund to subsidise mobile phone operations in rural areas. Second, it decided that instead of calling for subsidy bids on each line (the firm wanting the lowest subsidy won), it would subsidise mobile phone towers instead. This, a policy to allow sharing of towers, and the near saturation in large cities/towns should ensure that rural telephony will get a boost.

Regulatory regime

The telecom regulatory regime has had a mixed record, with some great successes and some equally stunning failures. The biggest success, also the first and very often the most difficult, was to fashion interconnection rules and regulations. Since, when the private sector was allowed into the telecom sector in 1994, public sector telecom firms provided all the telephony in the country, getting them to behave was critical. If BSNL decided, for instance, that it would not allow Airtel cellphone users to either call BSNL subscribers, or the other way around, the telecom revolution would have died prematurely. Similarly, if BSNL decided that it would charge very high interconnection fees from Airtel each time an Airtel user wanted to converse with someone on the Bharti network, this would have had much the same impact.

The first few years of India’s private telecom experience saw precisely such battles taking place. But, by 1999, the principle of interconnection being automatic was established and enforced, and in January 2003, an Interconnection Usage Charge (IUC) order laid down just how this pricing was to be done, including the cost of carriage of calls over various distances. Thanks to regulatory intervention, tariffs on leased lines have also crashed, another factor making long distance telephony cheaper.

A look at some of the major regulatory issues in telecom:

i) Incumbents take all, mostly:

India’s top private telecom firms would not be here if the government had insisted that only incumbents would be allowed to expand networks and bid for new services. Yet, this is precisely what is happening in major areas.

a) First, as already mentioned, the TRAI has not been able to force BSNL to allow private operators to roam on its network. So, if you’re an Airtel user, and want to travel to an area where only BSNL has a network, your phone will not work. In contrast, if an Airtel customer travels to a place where there is, say, only a Hutch network, chances are the two companies will have an agreement which allows roaming. It can be argued that such arrangements are commercial ones, and the regulator has no say in them, yet it is equally true that the lack of such arrangements pushes up the cost of telephony in the country and acts as a barrier.

Indeed, some years ago, the biggest reason for the poor quality of services offered by private operators was also due to BSNL. At that point, private operators were not allowed to exchange signals directly, like say from Idea to Spice, but had to do it through BSNL. In July 2005, the TRAI’s Quality of Service monitoring showed that there were 86 Points of Interconnection (a POI is the junction where, for instance, a Hutch phone connects to a BSNL one) where the congestion levels were as high as 10 per cent, a figure that is itself 20 times as bad as the benchmark ideal. This, however, rose to 122 POIs the next month itself. The TRAI had cited 918 cases of pending demands by private operators and of these 367 have been pending for more than a year. The TRAI had ordered that such interconnection, which is the life blood of the telecom industry, be provided within 90 days, but BSNL challenged the TRAI’s jurisdiction at the Telecom Dispute Settlement Appellate Tribunal (TDSAT) which ruled in BSNL’s favour.

b) The country’s ISP policy, similarly, has been held hostage to the rights of the incumbent wireline players, in this case, BSNL and MTNL primarily. In most countries, and even in India initially, ISPs paid nothing to register, and began services immediately after registration. The latest ISP policy, however, asks ISPs to pay Rs 10 lakh to begin services, to lower FDI limits from 100 right not to 74 per cent, to disallow provision of IP TV, and that their revenue shares be raised to 6 per cent. And ISPs are still not allowed to offer two-way telephony despite knowing this will boost their business and that existing telcos are not offering this service which will lower costs for consumers.

And while the TRAI was spectacularly unsuccessful in forcing the incumbents who have copper wire going into 40 million homes to make these available, for a fee, to ISPs, the ISP business still survived. ISPs managed to somehow negotiate leased lines from wireline players and then offered superior Virtual Private Network (VPN) services on them. So, while BSNL decided to stop offering leased lines to anyone who dealt with private firms, the government chipped in by declaring that VPN services were not part of the original ISP licenses

c) While the country’s 3G rules were first recommended by the TRAI around two years ago, they are yet to be notified by the government. While valuable 3G spectrum which allows wireless operators to offer much better quality and value-added services than the current 2G one does is unlikely to be handed out free (as the TRAI had first recommended), it is expected that entry into the club will be restricted. It will be restricted to the existing licensed players – so, while there will be some bidding since the number of players who can be given spectrum are more than the spectrum that is available, no new player will be allowed to bid for the spectrum.

This has two impacts. One, it ensures that the valuation of existing players increases. If Vodafone could have bid for 3G spectrum, it would have perhaps paid a different price for Hutch. What complicates matters further is that some players have been granted 2G licenses even though there is no spectrum available for them – so, in effect, these players are now eligible to bid for 3G spectrum! Others that did not apply for, or get, a license on the grounds that there was no spectrum, will now not be allowed to bid for 3G spectrum.

d) When a host of firms wanted to set up domestic and international long distance operations, the TRAI came out with rules that effectively barred the entry of new players, presumably because it felt the existing players had not recovered their investments! It kept and entry fee of Rs 107 crore in Year 1, going down to Rs 30 lakh in Year 5, effectively providing a few years of extra protection. In this case, however, when he was minister, Dayanidhi Maran overruled the TRAI and slashed entry fee while also removing rollout obligations for all players – a host of new players have now firmed up plans to enter the market.

ii) Private dole:
The fact that, despite all the problems that government ownership brings with it, BSNL has been able to retain its number two slot (except in the last few months due to a severe capacity crunch) is the stuff of story books. But it must be acknowledged that a significant part of this was made possible through private sector dole. While BSNL, and the government, argue this money has been spent by BSNL to set up uneconomic village lines, it’s useful to put it in perspective. In 2006, BSNL was slated to get Rs 3,000 crore via the Access Deficit Charge (ADC) regime, and this went straight to its bottomline – to get this kind of a push to bottomline, BSNL would need to increase topline by around Rs 14,000 crore, or a figure that was around 40 per cent of its turnover at that point. It’s topline, in that period, grew by around 6-7 per cent.

In May 2003, the TRAI ordered that BSNL be paid Rs 13,000 crore by levying an ADC on all phone calls, in order to meet its costs of setting up rural phones. Private firms who had to shell out a large part of this argued that BSNL did not need Rs 13,000 crore – within four to five months, the TRAI revised this figure down to around half!

Industry continued to protest, so a year later, the TRAI came up with a range of ADC payments depending upon what rentals BSNL charged its customers – if the rental was Rs 200 per month, the ADC had to be Rs 1,402 crore and this would go up to Rs 3,436 crore if the rentals was Rs 156. In January 2005, however, the TRAI went back to the earlier figure of Rs 5,300 crore. Till date, the TRAI has not conducted a test to see if BSNL really needs the money. Industry has been told, but now shown figures, that, now that the TRAI has insisted that BSNL file separate accounts for different parts of its business, it cannot use the ADC money to subsidise its wireless business (something BSNL’s private competitors have generally held).

iii) Roaming rip-off:

Despite the large number of players in the industry, as the TRAI itself recognized (see its January 24, 2007 tariff order), “there appears to be a coordinated arrangement in pricing of roaming services among the private GSM service operators”. So, the TRAI pointed out, while the government reduced carriage costs which form an important part of the telco costs, the wireless firms did not pass this on to customers; nor did it pass on the sharp reduction in license fees when the government reduced its revenue share takeaway from 15 per cent to 6 per cent.
Surprisingly, however, the TRAI gave the operators a huge cushion while determining tariffs. It determined the cost of servicing customers ranged between 7 paise to Rs 1.09 per minute, and decided to use a cost of 75 paise per minute in its calculations (only two of the 17 firms it got data for had costs above 75 paise); the TRAI then arrived at a total cost of Rs 2.05 a minute – yet, it allowed the firms to charge a minimum of Rs 2.4. The TRAI said the firms incurred no extra costs when subscribers sent SMSes while roaming, yet it allowed firms to charge Rs 3.45 for an outgoing SMS, a figure that’s higher than even the cost of a phone call while roaming.

iv) Reliance Infocomm

On at least two occasions, the country’s telecom policy was changed to accommodate Reliance Infocomm.

a) When the government decided to allow wireline players to offer limited mobility (Wireless in Local Loop, or WLL, in jargon), several firms began doing this. When cellular mobile firms protested saying that they had paid large license fees for a right that was now being encroached upon by firms which had not paid similar fees, the government justified this by arguing WLL was only limited mobility – within city limits, at most.

But since, thanks to the march of technology, it was now becoming possible for WiLL phones to offer full-blooded mobility as well, the TRAI figured out that the only way to offer restricted mobility would be through the use of a switching system called V5.2, and so it recommended that this clause be inserted in the licenses of the WiLL players. Reliance Infocomm, however, used a Mobile Switching Centre which is what the cellular firms used and could hence offer full mobility. When TRAI chief MS Verma wrote to the telecom secretary Shyamal Ghosh on the matter, he was asked to mind his own business. Verma’s letter to Ghosh, in January 2001, was good 26 months before Reliance commercially launched its services, so its very obvious the government was turning a blind eye to it and was telling the TRAI to do the same.

When matters came to a boil in the appellate tribunal, there was a split verdict in August 2003. While the head of the TDSAT ruled that the WLL service be stopped, the other two members ruled that while the services should not be stopped, a method should be found to ensure that the mobility offered was restricted – interestingly, at that point in time, the Tatas, were offering only restricted mobility.

Arun Shourie, the telecom minister, chose not to implement the TRAI order and, after a quick recommendation from the TRAI, came up with a new Unified Access Service License (UASL) which now allowed this after paying a fee equal to that paid by the fourth cellular licensee a few years prior to this. While that penalty plus license fee added up to around Rs 2,000 crore, Reliance had built up a subscriber base that was worth many times this by virtue of the fact that it offered (till then, illegal) mobile services while rivals like the Tatas didn’t.

b) Towards the end of 2004, there was enough evidence to show that Reliance was changing the Calling Line Identification (CLI) on international calls received by its network, and replacing these with local numbers. This helped Reliance avoid paying the ADC of Rs 4.25 per minute on every international call either received or made from its network. Apart from helping the company save at least Rs 1,000 crore, it allowed it to get more business since its ILD calls were cheaper than those offered by the competition which paid ADC on each call.

When the DoT’s investigation wing first confronted Reliance with this, the company denied it; later when numbers on which this was happening were given to Reliance, the company admitted it had reserved 30,000 numbers in Mumbai, Chennai and Kolkata for the purposes of this CLI change. Yet, the regulator refused to investigate the matter, saying it had no staff to do so. While this was probably true, it shouldn’t have needed too many people to conduct the investigation. Reliance was offering US-to-India calls for 11.9 cents (Rs 5.47 a minute) when it had to pay Rs 4.25 for the ADC, a costs of Rs 1.15 (2-3 cents) for carrying the calls to India and another 30 paise to the telephone firm in India on whose lines the calls terminated!

Interestingly, while small offenders running callback facilities (which also robbed the government-owned VSNL’s revenues) were always jailed, the government refused to even cancel Reliance’s international license, and the period of investigation was also limited to keep the penalties down.

v) Calling Party Pays
This was introduced in May 2003, and single-handedly changed the fortunes of the cellular mobile industry as it allowed incoming calls to become free, and almost halved mobile costs for subscribers – the wireless firms didn’t lost much money as they could now charge from the operator from whose network someone was accessing their network.

Till then, when a mobile phone user called up someone on a BSNL/MTNL network, the wireless phone firm would have to pay a charge to BSNL. But when the reverse happened, BSNL/MTNL did not pay the wireless phone company.

The cellular industry had been clamouring for this since 1994, and it was in 1999 that the TRAI first put out a consultation paper on the subject. Yet, nothing happened and things got worse when WLL mobile phone firms got paid when a cellular phone customer called them (since WLL were essentially wireline players) but the reverse did not hold true. This allowed the WLL firms to allow free incoming calls to their subscribers and gave them an advantage over the cellular wireless players.

Since no one did anything about it, neither the government nor the regulator, the cellular firms took the law in their own hands and cut off all connections to/from WLL firms. A crisis of sorts took place; telecom minister Pramod Mahajan gave the firms an earful, but they retorted with full-page ads showing favouritism to the WLL firms like Reliance. Within a few weeks of this, the TRAI ushered in calling party pays for the cellular firms as well.

vi) Spectrum goof up

This section could have just as well been the first in the list of regulatory goof ups considering just how critical this is. It’s been listed last, however, because, while some of the others have been resolved over the years, the spectrum problem hasn’t. Some of the earlier issues have got worse, and this has become a serious bottleneck.

Indeed, in retrospect at least, it can be argued the current spectrum shortage is a creation of the government/regulator. Ironically, it is the current shortage that is being used as an excuse for not opening up the 3G auction to new players – since existing players have a spectrum shortage, and 3G spectrum will help alleviate this, it is being argued, it is only fair to allow only them to bid for 3G spectrum.

When the TRAI regularized the WLL-mobile phone firms, the cellular firms argued against it, citing a spectrum shortage if new players were to be brought in. At that point, the TRAI argued that there was enough spectrum to go around, and used this to bring in new players when WiLL-mobiles were being regularized.

Later, however, the TRAI turned around and said there was a huge spectrum shortage, and this was the genesis of its recommendation (this was later changed again, when the TRAI had a new chief) that 3G spectrum be treated as an extension of 2G and be given to existing players as and when they exhausted their allocation of spectrum.

Indeed, having brought in the WiLL-mobile players on the basis of their so-called spectral efficiency (the claim was that they used the scarce spectrum resources five times as efficiently as the cellular players), the TRAI also did another volte face and said equal spectrum should be granted to both technologies (neither recommendation was accepted by the government).

The road ahead

While the present ADC structure is set to expire next year, presumably the ADC will be given a decent burial. Also, by now, most regulatory issues have been settled and, through the appellate process, the system has become a lot more robust – companies routinely challenge decisions and this has served the industry and consumers quite well.

The real challenges lie in getting more telephones in rural areas, to stimulate internet telephony, and to sort out the spectrum problem. While the TRAI has got a good solution in place for sharing infrastructure like towers, and the USO fund now willing to be more flexible, things look a lot better as far as rural telephones are concerned.

Getting internet availability to grow rapidly will require the TRAI/government to take on existing wireline companies and getting them to allow ISPs to access their last mile networks; in addition, the government will have to come up with an ISP-friendly internet policy instead of one that really favours big wireline companies setting up internet facilities. This would include allowing ISPs to offer IP TV and two-way telephony.

On spectrum, eventually the TRAI/government will have to come up with a solution that involves pricing of all spectrum. Then, as in other parts of the world, wannabe wireless firms would just register with the government, but would be able to start operations only after they bought/hired spectrum.

Finally, in order to further stimulate competition, the TRAI/government has to implement Carrier Access Code (CAC). So, for instance, you could have an Airtel phone, but you find that Reliance Infocomm is offering a lower-cost long distance call to Mumbai from Delhi. So, if you had CAC, and Reliance’s CAC was 9876 say, all you would need to do would be to dial 9876 from your Airtel phone, get on to the Reliance network, and then dial the Mumbai STD code and phone number. That’s how competition unfolds in the sector – right now, you just have to accept the rates offered by your access provider, in this case Airtel, and that’s why long distance tariffs are so high in the country. So far, this has been kept in abeyance, but once done, it will really usher in competition in the long distance business. Number portability, which allows subscribers to move to different wireless providers while retaining their original number, is another move which will stimulate competition. Both have been kept in abeyance thanks to the lobbying by existing operators.

ends

The war for the regulator’s heart

2009-07-20T20:02:00.000-07:00

Abstract

The telecom industry in the country continues to be one of the best performing ones in the country, far outstripping most conventional industries, let alone infrastructure ones. Naturally, then, one would assume that telecom regulation in the country is well-developed, impartial and fully functional. Nothing could be further from the truth. India’s telecom regulation continues to remain patchy and is largely held ransom to the government of the day’s whims and fancies – that remains as true today as it did when, as telecom minister in the previous government, Arun Shourie rammed home the controversial legalizing of Reliance Infocomm’s WiLL-mobile services. Indeed, over the past year or so, there has been a virtual stalemate between the Telecom Regulatory Authority of India (TRAI) and the Department of Telecommunication (DoT) which is the policy making wing of the government. So much so that Communications Minister Dayanidhi Maran recently announced a major change in policy for long distance and internet telephony without even seeking the mandatory TRAI recommendation. Major recommendations given by the TRAI over the last year have also not been acted upon.

This is not to say that there is no credible regulatory regime, but that it’s record has been quite patchy. And to the extent there have been major regulatory breakthroughs, many have been the result of long court battles initiated by the operators themselves. The ability of the regulator to rein in unfair practices by the incumbent has also been quite poor, though it must be said part of this has to do with the fact that the government itself has played no mean role in this.

Growth of industry

The telecom industry remains one of the fastest growing in the country, with around 2.5 million new customers getting added to the mobile users club every month – between 1997-98 and 2004-05, the average growth of the mobile phone business was around 80 per cent annually. Growth in the number of fixed line users, by contrast, has been much slower at around 12 per cent per annum over the same period. To put these numbers in perspective, the total number of fresh mobile phone entrants alone spend around Rs 16,200 crore in the first year of their entry, assuming a monthly telephone bill of Rs 200 and a basic handset cost of Rs 3,000 at the entry level. This sum equals around 60-70 per cent of the market for four wheelers in the country today.

As a result, most of the targets of the New Telecom Policy (NTP) 1999 have been achieved before time. The teledensity target for the year 2005 was 7, and it was 15 for 2010 – the 7 per cent target was achieved in March 2004 itself and we should be able to achieve 15 by 2006. By 2008, the TRAI’s projection is that teledensity will be 22.5, or nearly a fourth of all citizens will have a phone. Put another way, over the past few years, the annual growth in teledensity has been higher than that seen in the first 50 years of the country’s independence.

The growth, it should be mentioned, has primarily been driven by mobile phones (between 1998 and 2005, a total of over 51 million mobile subscribers were added on) while the fixed line growth has been much slower. There were 18 million fixed lines in 1998 and this grew to around 46 million by 2005. The larger share of this overall growth of fixed and mobile phone lines was achieved by private operators who put together around 45 million lines.

Growth in mobile telephony really started picking up in 2001 when the third and fourth cellular operators were allowed in, and then skyrocketed in May when Calling Party Pays was introduced and that allowed cellular phone firms to provide incoming calls free. Bringing in Reliance and Tatas at the same time also increased competition and lowered rates further.

As a result, revenues earned by the government from the sector have shot up. The exchequer earned Rs 6,236 crore from the sector in 2002-03 from license fees and service tax and this will be around Rs 17,850 crore in 2005-06 and is projected to rise to Rs 30,856 crore in 2007-08.

The rural teledensity target, however, looks like it won’t be achieved – it was 4 for the year 2010 and is currently 1.74 – since few companies are planning network expansion here and the current system of funding every line through the USO (Universal Service Obligation) fund is proving to be very slow and expensive. Till April 2005, the USO fund had collected Rs 7,254 crore but had disbursed only Rs 1,815 crore.

The government clearly needs to come out with a new policy initiative to jumpstart rural telephony. The TRAI has made a recommendation on how the USO fund could be used to subsidise mobile phone towers as opposed to the current policy of calling for bids for each phone line established. While this has the potential for misuse in the sense operators could take the subsidy for urban phones as well (since a large number of villages are located near urban agglomerations and so could theoretically be served by the same mobile towers), if properly implemented through inspections by third parties, it has the potential to create a lot more phone connections than the current system, and at a much lower cost. Unfortunately, the stalemate between the TRAI and the DoT has meant that this recommendation too has been put on ice.

The growth of the internet, especially broadband, has been quite poor, especially in comparison with other countries. The number of internet users per hundred people in the country rose from 0.4 in March 2003, for instance, to just 0.53 in June 2005; the same figures were just 0.02 and 0.04 respectively in the case of broadband usage.

Regulatory regime

While the spread of telephony and the dramatic fall in prices is an indirect testimony to the efficacy of regulatory policy, the biggest achievement by far stems from the principles of interconnection (the act of a user of one phone service, say Reliance, being able to talk to, or receive calls from, users of, say BSNL) first announced by Justice Sodhi, the country’s very first TRAI chief, in 1999 itself. This was then followed up by later TRAIs, and the first comprehensive Interconnection Usage Charge (IUC) order was announced on January 24, 2003 which lay down, on the basis of costs, the exact charges to be paid when a call originated from some network, the cost to be paid for carrying that call over different distances, and the charges to be paid while terminating the call on another network. These principles also stipulated that a certain maximum time frame had to be set for all interconnections to take place as, without rule and time-based interconnection, no telephony is possible.

It is this use of the cost-based principle, for instance, that saw the regulator argue that tariffs of leased lines in the country were around 70 per cent higher than they should be based on their costs as well as international benchmarks. And though it took over a year for the TRAI to finally get service providers to fall in line (the case was dismissed by the TDSAT once when VSNL argued that the TRAI had not shared its data on the matter), the sharp reduction in leased line costs that is currently taking place is owed entirely to the TRAI.

i) Incumbent’s abuse of power

While the good news on Indian telecom is that around 2.5 million customers are getting added on each year in the mobile space, the congestion on the networks has multiplied manifold. Indeed, in July 2005, the TRAI’s Quality of Service monitoring showed that there were 86 Points of Interconnection (a POI is the junction where, for instance, a Hutch phone connects to a BSNL one) where the congestion levels were as high as 10 per cent, a figure that is itself 20 times as bad as the benchmark ideal. This, however, rose to 122 POIs the next month itself.

This, in a sense, is the most evocative illustration of the problems with the country’s telecom regulatory environment – the problems are mainly with the government-owned BSNL (which controls 79 per cent of the country’s fixed lines) refusing to provide POIs and the TRAI is powerless to do anything about it. The TRAI has cited 918 cases of pending demands by private operators and of these 367 have been pending for more than a year. The TRAI had ordered that such interconnection, which is the life blood of the telecom industry, be provided within 90 days, but BSNL challenged the TRAI’s jurisdiction at the Telecom Dispute Settlement Appellate Tribunal (TDSAT) which ruled in BSNL’s favour. The TRAI has challenged this in the Supreme Court, but no date has been fixed as yet for the hearing. It appears, according to experts, that there is some ambiguity in the TRAI law, and the whole dispute can be fixed in no time if the government decides to amend the law, as they did in double quick time in the case of allowing reservations in unaided government institutions. The government, however, has not seen it fit to move on the matter and is content to let the judicial process take its time.

This, sadly, is not the only case of abuse of power by BSNL. Since there is a huge slippage in the broadband targets, the TRAI recommended that the incumbent players be forced to make available to other players their last-mile fibre going into consumers houses – this would then jumpstart the availability of broadband. While finalizing the broadband recommendations, however, the DoT simply ignored this, as a result of which, if any private player wants to lay a broadband network, he has to lay a fresh cable into people’s homes and offices. Naturally, the progress is tardy – BSNL got just 0.17 million broadband connections by September this year against the target of 1 million by December.

Another recent instance of how the government continues to play favourites is that of Virtual Private Network (VPN) services that various ISPs provide. Till recently, these were part of the normal ISP license, but when it became obvious that this was a lucrative area of business, BSNL started creating problems and refused to give leased line access to ISPs for the service despite the TRAI ruling that provision of such lines was mandatory and even laying down what the tariffs should be. Indeed, in certain cases, the incumbent operators even issued circulars instructing regional heads not to provide leased lines to customers who were using VPN services offered by rivals. The government then changed the rules overnight and declared, incorrectly, that VPN services were not part of the original ISP licenses which were free, and fixed a very high entry fee (Rs 10 crore) for such services. When the matter came to the TRAI over a year ago, it said that much lower entry fees (Rs 30 lakh) needed to be set on VPN services. The government, however, refused to move on the TRAI recommendation!

Indeed, till very recently, the TRAI was not able to get BSNL to provide details on its different services separately (account separation) which was required to ensure that BSNL was not using monopoly profits from one segment (such as fixed lines) to subsidise another area (such as mobile lines). The accounts separation was also very important in the context that the cellular industry argued (more on this later) that the Access Deficit Charge that they were contributing to BSNL’s coffers was way higher than was actually needed, and that BSNL was using this to subsidise its new cellular business. The first paper on the need to get BSNL to separate its accounts was put out in 2000.

ii) Reliance WiLL:

During the days of the WLL controversy in 2001, when fixed line license companies like Reliance began offering their customers full-blooded roaming facilities (essentially, they were offering mobile services without having paid the license fees), this was done through the use of Wireless in Local Loop (WiLL) technology. Initially, the WiLL companies said they would offer mobility only within a small area and since this was very different from the full-mobility offered by cellular companies, no license fee was charged. But since, thanks to the march of technology, it was now becoming possible for WiLL phones to offer full-blooded mobility as well, the TRAI figured out that the only way to offer restricted mobility would be through the use of a switching system called V5.2, and so it recommended that this clause be inserted in the licenses of the WiLL players.

This, however, was honoured more in the breach and Reliance Infocomm instead used a Mobile Switching Centre which is what the cellular firms used and could hence offer full mobility. The then TRAI chief MS Verma wrote to the telecom secretary Shyamal Ghosh on the matter, and was rudely snubbed for his efforts. Verma’s letter to Ghosh, in January 2001, was good 26 months before Reliance commercially launched its services, so its very obvious the government was turning a blind eye to it and was telling the TRAI to do the same.

When matters came to a boil in the appellate tribunal, there was a split verdict in August 2003. While the head of the TDSAT, the only judicial member by the way, ruled that the WiLL service should be stopped, the other two members ruled that while the services should not be stopped, a method should be found to ensure that the mobility offered was restricted – interestingly, at that point in time, the Tatas, were offering only restricted mobility. At that time, when Arun Shourie was the telecom minister, the government had to implement the order, but chose not to do so and bought time on one pretext or the other. Finally, the TRAI was petitioned on the matter and, in October, it came up with a new policy recommending Unified Access which allowed the WiLL mobile players to offer full mobility after paying a license fee equal to that paid by the fourth cellular licensee a few years prior to this. While that penalty plus license fee added up to around Rs 2,000 crore, Reliance had built up a subscriber base that was many times this by virtue of the fact that it offered (till then, illegal) mobile services while rivals like the Tatas didn’t.

iii) Calling Party Pays:

When finally introduced from May 1, 2003, this single-handedly changed the face of the mobile industry as incoming calls suddenly became free, and this caused a huge surge in sales of mobile handsets. Till then, each time a fixed line phone got called, the operator who was calling paid a certain charge for terminating the call – so, if a mobile phone user called a BSNL line, the mobile customer paid a certain charge to BSNL (calling party pays). Problem was, however, that when a fixed line user called a mobile phone, he did not make any payments to the cellular phone company. Which is why cellular phone firms charged their subscribers even for incoming calls while the new WiLL-mobile phone firms didn’t since they were seen as just an extension of the earlier fixed line phones.

It was as early as 1999, that the TRAI first put out a consultation paper on CPP, but for one reason or the other, the mobile phone firms never got CPP. By 2003, when the WiLL-mobile phones began stealing a march over the cellular ones since they offered incoming calls free, the cellular firms decided to take things in their hands and cut off all points of interconnection with the WiLL phones. A national crisis followed, and when Communications Minister Pramod Mahajan read the riot act to the cellular firms, they put out full page ads in the papers exposing the policy-induced favouritism shown to WiLL-mobile firms –within a week of this, on January 24, 2003, CPP was brought in for the cellular firms as well! It’s a different matter that the new TRAI chief then delayed the launch of CPP for another few months.

iv) The ADC regime:

In May 2003, the TRAI fixed that a sum of Rs 13,000 crore was what needed to be paid to BSNL to compensate it for installing below-cost phones, and this money was sought to be recovered through a cess of sorts on all phone calls. The industry, however, pointed out that the calculations were incorrect, and within four to five months, the TRAI revised this figure down to around half. Detailed rates were then fixed of the ADC to be paid on both national and international long distance calls. With the industry continuing to protest, saying that BSNL did not deserve the subsidy, in June 2004, in another consultation paper, the TRAI came up with a range of ADC payments depending upon what rentals BSNL charged its customers – if the rental was Rs 200 per month, the ADC had to be Rs 1,402 crore and this would go up to Rs 3,436 crore if the rentals was Rs 156. In January 2005, however, the TRAI went back to the earlier figure of Rs 5,300 crore. While the TRAI now claims to have got BSNL to file separate accounts, these figures have not been made public, so there is still no way of knowing if the monies are being used to cross subsidise other BSNL businesses.

v) Reliance again

If the government and the regulator helped legalise Reliance Infocomm’s WiLL-mobile service in 2003, it did it another favour in 2004. In September or October, there was enough evidence to show that Reliance was changing the Calling Line Identification (CLI) on international calls received by its network, and replacing this with local numbers – since an ADC of Rs 4.25 per minute had to be paid on every international call either received on a network or made from it, this changing CLI had the potential of saving more than Rs 1,000 crore. When the DoT’s investigation wing first confronted Reliance with this, the company denied it; later when numbers on which this was happening were given to Reliance, the company admitted it had reserved 30,000 numbers in Mumbai, Chennai and Kolkata for the purposes of this CLI change.

Yet, the regulator refused to investigate the matter, saying it had no staff to do so – apart from the theft angle, allowing Reliance to get away with the theft meant the firm could, and was, offering cheaper long distance telephony to its subscribers and this gave it an unfair advantage over the competition and so this was clearly a matter for the regulator to take action on. While it is true, the TRAI didn’t have the requisite staff strength to do a full-fledged investigation, it never even asked Reliance how it was offering US-to-India calls for 11.9 cents (Rs 5.47 a minute) when it had to pay Rs 4.25 for the ADC, a costs of Rs 1.15 (2-3 cents) for carrying the calls to India and another 30 paise to the telephone firm in India on whose lines the calls terminated.

And while the government had jailed all small offenders who’d offered callback facilities in the past to avoid paying the high official long distance rates, it repeatedly refused to take strong action against Reliance. Even the suggestion of canceling its license was struck down, and the period of investigation limited to keep the penalties down – Reliance was not even asked to come forth with details of the accounts of its US subsidiaries/affiliates that sold the Reliance calling cards that were used for the ADC-avoidance game.

vi) Soft on cartels

While the TRAI was quick to act in the matter of leased line tariffs, it has been very slow to react to the same degree of cartelisation taking place in the long distance traffic business, leaving it to the telecom minister to publicly lash out against these companies and then finally come out with his own policy to fix things since the TRAI clearly didn’t see any problem. Right now, for instance, the tariff on a New Delhi to New York call on a mobile phone is around Rs 14 a minute whereas the costs on this are just around Rs 4-5 – Rs 2.5 for the Access Deficit Charge (ADC) and a maximum of Rs 1.5 that needs to be paid to the operator for carrying it overseas. In June, BSNL invited bids from companies to take its calls overseas and Reliance bid 74 paise for it.

On a Delhi-Mumbai call, the costs are around 1.3 a minute (30 paise ADC, 70 paise for the carriage cost, and another 30 paise for termination fees that have to be paid to the operator on whose network the call is made to) but the tariff is around double this.

Indeed, when the regulator was formulating the rules for a new Universal Service License (USL) which would allow users to do any kind of service with just one license, it’s curious that it invoked a principle it had never invoked before – that the existing long distance players had invested good money and so needed to be given more time before new players came in! In the event, the TRAI decided that a new USL license would cost Rs 107 crore in year one (a national long distance one today costs Rs 100 crore while and international one costs Rs 25 crore) and going down progressively to Rs 102 crore in year 2, Rs 92 crore in year 3, Rs 72 crore in year 4, Rs 32 core in year 5 and Rs 30 lakh after that – so, it wouldn’t be before a few years that there would have been real competition in the sector according to the original TRAI plan.

vii) Spectrum screw up

The two most important things in the telephony business, anyone will tell you, are the interconnection regime and availability of spectrum, or the frequency on which the phone companies transmit their signals (the latter applies not just to mobile telephony, but also to fixed line telephony where the last mile connectivity is being done spectrally). In the case of the first, as we’ve seen, the TRAI’s ability to rein in the incumbent is poor thanks to the government continuing to protect BSNL. On spectrum issues, the TRAI’s track record is one of having worsened matters.

While the TRAI first said there was enough spectrum to go around, and used this to bring in new players when WiLL-mobiles were being regularized and allocated them fresh spectrum (India is perhaps the only country in the world that has 6-7 players in each telecom circle), the TRAI’s current view is that there is a huge spectrum shortage. The regulator rebuts this charge of having created the spectrum shortage on two counts. First, it says that when the new players were brought in, in 2003, it didn’t look as if the growth of mobile phones, and hence the need for spectrum, would be as high as it is today. Second, the spectrum that the new players (like Reliance) used could not have been used by the existing players who used GSM cellular technology – so whatever else, the TRAI’s actions didn’t reduce the spectrum available for the existing operators.

The TRAI recommendations on Unified Licensing in October 2003, which is what brought Reliance and the Tatas in, however, say something quite different. For one, it says mobile phone growth ‘has accelerated from around 3 lakhs (sic) subscribers per month in May 2002 to almost 2.26 million subscribers per month in May 2003 … In March 2003, the wireless subscriber base was 13 million, which has almost doubled in last seven months … the expected wireless subscriber base by December, 2005 will be 100 million.’ As a matter of fact, the mobile subscriber base will be around 65 million by the end of the year, but surely this makes a mockery of the current claim that, two years ago when it brought in more players, the TRAI didn’t expect this kind of explosive growth – indeed, the TRAI’s projections two years ago showed the spectrum shortage in 2005 was going to be pretty serious and yet it got in more players. The claim that the WiLL-mobile firms use a completely different spectrum from the GSM lot is also incorrect as WiLL-mobile companies were allotted additional spectrum in the 880 MHz to 889 MHz frequency in which GSM equipment also works.

Curiously, the same paper says ‘additional spectrum is now being made available by Ministry of Defence and the existing contractual commitments to existing cellular and WLL players can easily be met, leaving out a balance for more players.’ Today, the TRAI’s stance is that there isn’t anymore spectrum to give since the Ministry of Defence is not vacating the spectrum!

Indeed, having brought in the WiLL-mobile players on the basis of their so-called spectral efficiency (the claim was that they used the scarce spectrum resources five times as efficiently as the cellular players), the TRAI has now done another volte face and says equal spectrum should be granted to both technologies. The TRAI also wants this spectrum to be allocated free. This has two problems. First, if WiLL is genuinely more spectrally efficient, given the WiLL firms more spectrum will make them better off vis a vis the cellular firms since the expansion of mobile networks is getting held up due to a serious spectrum shortage – since the debate about which technology uses spectrum more efficiently will never get resolved satisfactorily, perhaps a better solution would be to auction the spectrum. Two, while more spectrum can be allocated to the WiLL firms immediately, this will allow them to begin offering the next generation of mobile services, called 3G, which essentially allow much higher data transfer speeds (it’s like the difference between a dial up and broadband internet speeds), the spectrum needed to allow the cellular firms to offer 3G services is still not available as the defence services are yet to vacate it.

The road ahead

Apart from the issue of ensuring discipline in the interconnection regime and getting BSNL to fall in line, to fix the ADC mess which unfairly subsidises the public sector BSNL, and coming up with a solution to get more phones in rural India, another critical competition issue that the TRAI needs to move on is that of the carrier access code – again, this is an area where the successive governments have played foul and have not allowed the TRAI to instill discipline in the market. In markets like the US, for instance, subscribers are free to choose which long distance carriers they want their calls to be carried on through the use of a Carrier Access Code (CAC). So, for instance, you could have an Airtel phone, but you find that Reliance Infocomm is offering a lower-cost long distance call to Mumbai from Delhi. So, if you had CAC, and Reliance’s CAC was 9876 say, all you would need to do would be to dial 9876 from your Airtel phone, get on to the Reliance network, and then dial the Mumbai STD code and phone number. That’s how competition unfolds in the sector – right now, you just have to accept the rates offered by your access provider, in this case Airtel, and that’s why long distance tariffs are so high in the country.

On July 24, 2002, it appears, the TRAI had first issued instructions that CAC be implemented, but BSNL said it was not ready at that time, and it was given an extension by the government. The TRAI recently set a new deadline for the end of November, but that too has passed without CAC getting implemented. CAC is critical, for while the new long distance policy announced by Minister Maran will dramatically lower entry fees in the long distance market (an international and domestic long distance license will cost just Rs 2.5 crore apiece and various rollout obligations for both have also been done away with), no newcomer can offer such services unless he has access to the ultimate consumer, and unless consumers can access the new service provider through CAC, their existing service providers will never let them do this.

The other big change that is required to be legislated is in connection with what is known as Unified Licensing that would allow anyone to provide any service. A cable TV provider, for instance, could provide fixed line telephone services. This is what the TRAI in fact recommended in its USL paper, but the government has still to act upon it. The problem here, however, is that the TRAI kept the cost of a USL very high, at around Rs 1,600 crore for an all-India license, so even if the government accepts the principle, the cost will keep most people out.

Along with the long distance policy, Minister Maran, for instance, also announced that genuine internet telephony would be allowed in the country as opposed to the restricted PC-to-PC telephony that is currently permitted – so, you can call up your cousin in Mumbai on his phone using internet telephony using services such as those offered by companies such as Vonage and AT&T in the US – it is because internet telephony is becoming so hot that auction site eBay paid $2.6 bn for Skype and promised another $1.5 bn if it grew to certain levels by 2009. The problem, however, is that internet telephony has been allowed only for access providers – if a new company, say Sify, wants to provide such telephony, it will first have to pay Rs 1,600 crore to get an access license! Clearly the government needs to fix this. Since the cost of an access license has really been determined by the cost of a mobile phone license, what the government needs to do is to offer the license for free, but auction the spectrum. So, if someone wants to offer fixed lines through laying of cable through the ground, he can get the license for free. If, however, he wants spectrum for mobile telephony, he will just have to bid for it. It’s a simple solution, but no one in either the government or the TRAI appears to be doing much about it.

ends

Servicing India’s GDP growth

2009-07-20T19:57:00.000-07:00

Chapter for Montek festschrift by Sunil Jain and TN Ninan

1. Introduction

The standard development model, from the time of Simon Kuznets (1901-85), has involved seeing the share of agriculture going down and that of industry going up in terms of both GDP and employment; and, after a fairly long period in which per capita incomes climb to upper-middle income levels, the share of the services sector rises while that of industry falls – agriculture, by now, has a share of between 5 and 10 per cent. The Indian growth model, it is often argued, appears to have skipped the intermediate stage, giving rise to debate about whether a growth model based heavily on services sector growth is sustainable. Will India be able to ‘service’ its GDP growth, as it were?

A related question pertains to manpower. Services growth, as seen from the experience of the developed world, has typically gone hand in hand with a better educated work force, the kind that is not to be seen in India as yet (secondary school enrolment still totals only a third of the eligible population). The result is a lack of depth in the job market, and a scarcity of people to do even basic jobs. The annual pay hikes recorded in Asia-wide salary surveys routinely show the highest increases in India (usually about 15 per cent), and not just in the cutting-edge information technology (or IT) sector. As manpower costs have climbed, one result is that labour has ceased to be a competitive advantage for many Indian companies. Does India have what it takes to keep up the momentum of services-led growth, when it does not have the required educated manpower?

After examining the nature of India’s GDP growth, this chapter outlines the contribution of the services sector to that growth; it examines whether India is indeed an outlier when it comes to the sectoral break-up of growth; and then attempts to explain what is behind the growth, in order to answer the question as to whether the growth is sustainable.

Traditional explanations for the boom in the services sector include theories which say that the splintering of industrial capacities (in part, because of industrial and tax policies) resulted in services’ units coming up; others suggest that since the industrial sector was tied up in the red tape of the ‘licence-permit raj’, relatively unregulated service sector activities became a natural outlet for Indian entrepreneurs. We look at these arguments, including the thesis that the services sector is simply playing catch-up – decades of repressed demand have created a huge market for services, ranging from telecoms to financial services, from education to health services, and even transport. While doing so, the chapter looks at the major services sectors and examines their growth prospects, including the problems arising from an opaque regulatory system. Finally, we look at some of the issues raised vis-à-vis the quality of the data on the sector.

2. Growth structure

One of the noteworthy features of India’s economic growth over the past few decades has been the faster growth of the services sector, in comparison with industry. But, on further study, it would appear that this is an overblown issue. First, it was not always the case that services were growing faster than industry. Between 1950-51 and 1980-81, while industry grew by an annual average of 5.3 per cent, services grew by a slower 4.4 per cent. This began to change some time in the 1970s. In the decade from 1980-81, for instance, services sector growth (at 6.5 per cent) outpaced industry (6.0 per cent). The maximum divergence, which is when the subject became a matter of analytical debate, was between 1991 and 2000, when services rapidly outgrew industry, with the latter’s share of GDP declining marginally as a consequence. But that aberrant pattern has not been sustained. In the current decade, industrial growth has revived as industrial companies have become more competitive, and the gap between the growth rates of the two sectors has shrunk. Indeed, the share of industry in GDP stagnated or fell in only one decade out of the past six, ie 1991-2001 (see Table 1).

Table 1. Sectoral share of GDP, in per cent
At constant 1999-00 prices
1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
Agriculture 55.11 50.62 44.26 37.92 31.37 23.89 18.51
Industry 15.03 18.68 22.07 24.04 25.92 25.8 26.75
Services 29.55 30.32 33.55 38.04 42.71 50.31 54.74
Note: Construction has been included under ‘industry’ and not under ‘services’
Source: CSO, Crisil

Still, many observers have argued that India’s faster growth in services, and its 55 per cent share of GDP, is unnatural in a low-income economy. It is in this sense that India is perceived to be an outlier; therefore, it has been argued, the skewed structure should be expected eventually to swing toward the mean.

But this thesis too seems not to be grounded in fact. Jim Gordon and Poonam Gupta argue that India may not be such an outlier when it comes to the sectoral composition of its economy. Using cross-country data, they plot the rise in the share of services as per capita income rises; in 1990, India was very much on the trend line. It moved above the trend by 2001, following the decade in which services significantly outpaced industry; but even that, the variation was less than in many other economies, so that the outlier thesis does not hold.

Perceptions of the ‘distorted’ nature of Indian growth could be a result in part of China’s well-known success in manufacturing. The industry-services mismatch seems particularly sharp when India-China comparisons are made. But the outlier, as Gordon and Gupta show, is not India but China, whose preponderance of manufacturing is what is truly unusual.

Source: Understanding India’s Services Revolution – Jim Gordon and Poonam Gupta, IMF, November 2003

India’s industrial sector suffers in comparison with China because of the latter’s obvious successes in low-cost manufacture of items like shoes and toys for export—areas in which it has established its mastery of volume play—and then in a broader range of industrial products as its domestic market grew. India, with its policy emphasis for many decades on controlling size and encouraging small-scale industry, simply missed this particular bus. But then, India was not doing particularly well in the services sector either during this period—telecom services were scarce; the transport network was rudimentary; and financial services for the most part were confined to a narrow urban elite. Hence the faster growth of industry over services in the initial decades after Independence.

The shift in growth patterns became obvious with the birth of a sizeable middle class in the 1980s, and the growing demand for a whole range of services. The somewhat belated provision of these saw rapid growth in the decade of the 1990s, especially in telecom, the sustained growth of IT services (mostly for export markets), the recent spurt in aviation, and the like. The rapid growth in sectors like telecom and IT meant that around a fifth of the growth impulse in the economy in 2006-07 came from these two sectors alone. But manufacturing did not slow down; it accelerated, while services accelerated even more.

It has taken time for the manufacturing sector to adjust to the new policy environment that was ushered in, in 1991, marked by the removal of curbs on investment, open imports, the encouragement of scale economics, the consolidation of capacities as sector leaders established themselves, and improved efficiencies that made export markets accessible. The result is that in a couple of years of the current decade, industry has in fact outpaced services, though in general services have continued to grow faster.

It should be mentioned, though, that some of the services sectors that have got enthusiastic endorsement in the business press remain relatively insignificant in a macro-economic context. Whether it is the now noticeable presence of organized retailing in the cities and large towns, or the sharp spurt in civil aviation until 2007-08, the wider user of credit cards or the broader interest in the stock market and mutual funds, all or most of these remain very much upper crust activities. It is the sectors that have become relevant closer to the base of the income pyramid (and telecommunications provide the best example, with a tele-density of 25 per cent) that are significant when assessing GDP trends. In the case of IT, the sustained conquest of external markets has added significantly to the country’s trade in goods and services, with IT exports now accounting for up to 20 per cent of the total.

The growth in the last two sectors mentioned is driven by factors that make them sustainable in the medium term. Telecom density has grown by leaps and bounds because prices have been cut to the bone, with local and long distance calls costing a tiny fraction of what they used to; the result is that the industry is able to make a profit even when the average revenue per user has dropped to a couple of hundred rupees per month. A supporting role has been played by the steady drop in handset prices. As for IT and IT-enabled services, the labour cost arbitrage and satellite connectivity that drove the initial business successes have been supplemented by movement up the value chain for the delivery of more sophisticated services, including business consulting that then ties in with re-engineering of business processes and their eventual outsourcing/offshoring. These have proved to be sustainable business models, driven by focused companies that have demonstrated entrepreneurial drive and ingenuity.

In an India-China comparison, it is worth noting that China has been an even bigger market for telephony, while India is now playing catch-up in the domestic manufacture of mobile handsets. In IT, the poor command of English on the part of the average Chinese citizen has meant that it is that country that is now playing catch-up with India.

There are other service sectors that will see accelerated growth in the coming years. The rapidly expanding road network, with a proper system of national highways, has speeded up truck movement by 50 per cent and more. Simultaneously, the improved traffic and operating ratios achieved by the railways, and the large investments planned in expanding the system (like the dedicated freight corridors from the north to ports in the west and east) mean that there will be active competition between road and rail. Civil aviation, meanwhile, could get back on to the growth track if oil prices drop to reasonable levels. It is interesting that some of the largest investments in physical infrastructure are now being made in the transport sector—new airport terminals in all the major cities, the investment in highways and railway lines, a new port at Krishnapatnam (Andhra Pradesh) that is touted as potentially India’s largest port, and a large container handling facility at Vizinjam (Kerala), taken together promise a greater role for transport in over-all GDP. Given the heavy commodity-orientation that is likely to mark India’s rapid economic growth, the related emphasis on transport promises to further raise the share of services in GDP.

Finally, the banking system still serves only the top 40 per cent of the population. Life insurance penetration is low, and capital market risks are taken only by a small minority. All this will change, aided by the advent of aggressive players in the private sector, like ICICI Bank, which are grabbing market share from the legacy public sector giants. Greater domestic inclusion at one end (one of the key issues addressed in the report of the Raghuram Rajan committee) and operating at the other in the international world of finance (an area of opportunity, as spelt out by the Percy Mistry committee on making Mumbai an international financial centre), are the two broad thrusts required to raise the share of financial services’ contribution to GDP.

The media and entertainment industry has also emerged as a rapid growth sector – the growing corporatisation of the Mumbai film industry, the financial muscle of the entertainment TV business (born in 1992 with the advent of satellite TV) and ambitious plans like the Anil Dhirubhai Ambani Group’s proposed investment of $1bn to make movies with Steven Spielberg, are all symptomatic of this changing reality. Modern retail is in its early stages, but is set to capture 16 per cent of the total retail market by 2013, and 25 per cent by 2018, compared to just 3 per cent today (in the urban areas, it already accounts for 8 per cent of retail spending). By way of interest, the consulting firm McKinsey found that improvements in retail trade contributed nearly a fourth of the US productivity jump between 1987-95 and 1995-99; in general merchandise, it found that Wal-Mart directly and indirectly caused much of the productivity growth .

A comparison between the sectoral share of GDP (Table 1) and the sectoral contribution to growth (Table 2) makes it clear that the value addition in the services sector has increased significantly since the reforms that began in 1990-91; most of this is probably due to the rise of the modern services sector, including sub-sectors like IT and communications. Also, it is only after 1990-91 that the contribution to GDP growth by the services sector begins to outpace its sectoral share.

Table 2. Contribution to GDP growth
In per cent 1951-52 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
Services 29.61 22.62 32.68 14.63 40.96 63.49 62.09
Industry 35.48 29.23 4.71 17.21 35.21 37.88 30.68
Agriculture 34.91 48.15 62.61 68.16 23.83 -1.37 7.24
Note: Construction has been included under ‘industry’ and not under ‘services’
Source: CSO, Crisil

The share of services in overall employment, however, continues to be very low, less than a fourth of the total, while its share in GDP is well over a half. This is an area of concern from the point of view of equity and employment creation, and could be a source of political tension . Some argue that as the share of organized retail increases, this imbalance between employment share and GDP share will change significantly , for the better. That is counter-intuitive since, if organized retail’s share has to increase, the share of kirana stores (significantly more labour-intensive) has to fall. To provide perspective, the world’s largest retailer Wal-Mart, now in India in partnership with the Bharti Group, has a global turnover which is about the same as that of the entire retail sector in India, but has far fewer employees than the numbers involved in India. As organized retail’s share in the overall pie increases, however, the value addition in the sector will rise further. That is, the impetus to services and GDP growth coming from the retail sector will rise, though the share in overall employment will not, and may even fall.

To come back to the outlier thesis, India’s share of GDP accounted for by services is not unusual. But at 27 per cent, the share of industry in GDP is typically that in a high-income country with a per capita income that’s 5 to 10 times that of India. However, the operative question is not with regard to the outlier thesis, but whether the present pattern is sustainable. As we shall argue in a later section, this is indeed the case. Indeed, as new service sectors get onto the growth turnpike, more services will be added to the list of rapidly growing sectors in the economy.

3. What explains rapid services growth?

Among the early explanations offered for services growth was ‘splintering’--that, in order to keep costs down, manufacturers outsourced non-core functions (security guards, drivers, canteen staff) to other firms and, voila, the services industry got a fresh impetus. Others include the great opportunity afforded by global trade (IT/ITeS), and change in government policy combined with severe demand-repression (telecom). Also, for many entrepreneurs, services were an easier segment to enter because they usually required less physical infrastructure than industry, and were subject to fewer controls. Which of these theories hold the key to understanding why India’s service sector has done well?

3.1 Splintering

Jagdish Bhagwati, now of Columbia University, argued that ‘splintering’ (in their drive to becoming more competitive, manufacturing units increasingly outsource some of their functions like, say, accounting and payroll management, which gives rise to a flourishing services industry) was a possible explanation for why the services sector grew the way it did.

On the basis of admittedly limited data, Gordon and Gupta argue that the impact of splintering is probably overstated. They use input-output coefficients to measure the increase in the use of outsourced services. Such data, available only till 1993-94, suggest that the use of service inputs into industry rose rapidly, by around 40 per cent, in the decade to 1989-90, but did not rise as rapidly in the 1990s. Thus, while splintering added around a half percentage point to growth in the 1980s, it was not significant in the 1990s and probably added an additional 0.25 percentage points to services growth. In the absence of data, it is not known whether this trend changed after the mid-1990s.

Table 3. Input Output Coefficients in India
Agriculture Industry Services
1979-80
Agriculture 0.06 0.13 0.04
Industry 0.07 0.35 0.11
Services 0.02 0.15 0.1
1989-90
Agriculture 0.17 0.04 0.04
Industry 0.14 0.37 0.17
0.05 0.19 0.19
1993-94
Agriculture 0.15 0.04 0.03
Industry 0.14 0.37 0.15
Services 0.05 0.21 0.2

Source: Understanding India’s Services Revolution – Jim Gordon and Poonam Gupta, IMF, November 2003

In any case, the biggest rise in services after 2000 was in sectors like communications and IT (for exports), neither of which is related to industries in India outsourcing their work to independent service units (splintering). Even so, more detailed analysis using up-to-date data is called for.

3.2 Regulation

In a nutshell, the argument here is that the IT/ITeS sector grew rapidly because it was not constrained by the shackles imposed on manufacturing activity—like licensed capacity limits, technology denial in the name of self-reliance, location policy directives, and foreign exchange constraints (since the sector was earning its own dollars). At a time of rapid growth for companies in the field, the government’s restrictive labour policies (relevant in the context of plant closure, forced termination and the like) were also not a constraint. However, even here, the IT sector would not have realized its potential if the government had not changed rules that made computer imports expensive and time-consuming, or not facilitated direct satellite links from Bangalore to Houston (for a start).

In some cases, it was a case of subversive entrepreneurship—as with the cable TV industry, which mushroomed in a grey legal area and was considered too small and fragmented to merit government attention until the point was reached when as much as 60 per cent of all TV households were hooked on to cable. At that stage, even the industry wanted some clear rules—among other things, to facilitate access to capital.

The argument has been extended to include other constraints to the manufacturing sector that, in a sense, also emanate from government regulations. The World Bank’s Doing Business index seeks to show how countries fare on various parameters relating to the ease of doing business, from the time taken to start a business to that taken to wind it down and pay creditors and equity holders. Others have looked at the cost of credit and the difficulty in obtaining it, to explain why some firms grow and others don’t – service sector firms, with their lower capital requirements, are at a relative advantage to manufacturing industry (though manufacturing companies find it easier to offer collateral). Besley and Burgess classify states as pro- and anti- labour and examine the impact of this on growth – states that have laws considered friendly to industry (or ‘anti-labour’) have seen faster industrial and employment growth and greater investment.

Poonam Gupta, Rana Hasan and Utsav Kumar use data from the Annual Survey of Industries (ASI) to compare the growth of industries that are more dependent upon infrastructure, have greater financial needs and are more labour-intensive – all three characteristics are dependent upon government policy.

They find that, in the post-delicensing period, companies that were above the median in terms of infrastructure intensiveness grew 10 per cent less than those which were below the median; those which were above the median in terms of labour intensiveness grew 19 per cent less than those which were below the median; those more dependent on markets for finance grew 18 per cent less. That is, the costs of poor infrastructure, poorly developed financial markets and rigid labour laws were significant differentiators. To the extent that services firms have lower infrastructure dependence, and restrictive labour laws don’t apply to them , they have been in a better position to grow than their counterparts in the industrial sector.

It also helped, of course, that the profitability of sunrise sectors like IT/ITeS and telecommunications was vastly greater than older manufacturing industries like textiles or steel. The cost arbitrage between India and the markets that offered offshoring contracts was massive, and it was routine for IT firms to enjoy a 30 per cent profit margin on sales—a level unthinkable for manufacturing companies. In telecommunications, too, even though the policy challenges were substantive and repetitive, the arrival of mobile telephony, vast untapped demand and a sharp reduction in costs as economies of scale kicked in, allowed a profitability that made access to capital easy, especially after policy changes in 1999 and 2003. It is worth noting that a standard call charge of Rs 16 per minute in the mid-1990s had dropped to less than a rupee by 2007.

3.3 Role of liberalization

A corollary to the role of restrictive government policy is the role of liberalization, or market-oriented reforms and opening up more areas of activity to the private sector. A look at the fast-growth sub-sectors of the services industry makes this clear – the fast-growth areas are those where there has been significant liberalization. Even in technology-driven sectors like IT and communications, the removal of government-imposed constraints was important, if not vital, for growth.

‘Transport, storage and communications’ has seen the highest rise in GDP share, from less than 4 per cent in 1960-61 to over 6 per cent in 1990-91 and then a sharp rise to nearly 11.5 per cent in 2006-07. While there has been a hike in ‘transport by other means’, the real jump has been in communication services whose share of GDP rose from 0.7 per cent in 1991 (telecoms liberalization began in 1994, when the private sector was allowed entry) to 4.9 per cent in 2006-07. The communications sector’s growth rate quadrupled, from 7.3 per cent in 1990-91 to 28 per cent in 2006-07, and its contribution to GDP growth rose from just under 1 per cent in 1990-91 to over 14 per cent in 2006-07.

Not surprisingly, the real growth in telecom took place after the mid-1990s, when the private sector was first allowed to offer telecom services. From a total of around 10 million subscribers (of fixed, landline phones) in 1991, this has risen to 300 million today – and just a little over a fourth of these are phones provided by the public sector today. In terms of the industry’s 2007-08 revenue of Rs 1,29,083 crore, however, the public sector share is higher, at 34 per cent, owing to the higher share commanded by the state-owned Bharat Sanchar Nigam Ltd in the long-distance traffic. The increased share of GDP is despite a drop in tariff levels by over 90 per cent over the past decade, for both local mobile and long-distance calls. The revenue growth, therefore, has been primarily from growth in subscribers and increased usage.

‘Financing, insurance, real estate and business services’ is the other area where there has been a sharp hike in growth rates and hence GDP share. While real estate’s share in GDP has grown marginally, the real growth here has been in banking and insurance, whose GDP share rose from 1.3 per cent in 1960-61 to 6.7 per cent in 2006-07, and contribution to growth from 0.18 per cent to 13.7 per cent over the same period. Within this, the share of banks nearly doubled from 2.2 per cent of GDP in 1999-2000 to 4.1 in 2006-07, and the share of insurance from 0.65 per cent to 1.1 per cent. In terms of contribution to GDP growth in this period, the share of the entire banking sector (including post office savings, non-banking financial companies and cooperative credit societies) rose from -2.4 per cent in 2000-01 to 10 per cent in 2006-07, and in the case of the insurance sector from -0.12 per cent in 2000-01 to 3.9 per cent in 2006-07.

Within this, the growth of private sector players has been noteworthy. While private banks accounted for just over 5 per cent of all bank incomes in 1995, their share rose to nearly 25 per cent in 2007; in terms of share of the net profits of the banking sector, the number rose from 20 per cent to 25 per cent .

In insurance, within just seven years of the sector opening up, there were 24 private sector firms in 2006-07 who brought in Rs 9,625 crore as capital. The share of these firms in the total life insurance market rose from 14 per cent in 2005-06 to 18 per cent in 2006-07; in the non-life segment, the share of the private sector rose from 26 per cent in 2005-06 to 35 per cent just a year later .

‘Computer related services’, broadly the IT/ITeS sector, saw its share in GDP rise from 0.96 per cent in 1999-2000 to 3.04 per cent in 2006-07, while its contribution to growth was around 7 per cent. By way of comparison, the contribution of the real estate/housing sector to GDP growth was a mere 1 per cent.

Table 4. Services sub-sectoral performance (at 1999-2000 prices)
1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
Trade, hotels & restaurants
GDP share 9.23 10.24 11.44 12.06 14.34 15.39
Growth p.a. 9.15 5.37 5.21 5.24 5.19 8.49
Contributn to GDP growth 11.92 10.98 8.31 11.95 17.09 13.57
Transport, storage & communication
GDP share 3.77 4.48 6 6.28 7.96 11.42
Growth p.a. 6.88 3.54 6.71 4.97 11.21 16.64
Contribtn to GDP growth 3.67 3.17 5.62 5.91 20.49 19.75
Financing, insurance, real estate & business services
GDP share 7 6.82 7.49 10.58 13.04 14.32
Growth p.a. 2.07 4.18 1.92 6.21 4.07 13.92
Contributn to GDP growth 2.04 5.68 2 12.44 12.18 20.7
Community, social & personal services
GDP share 10.31 12.01 13.1 13.78 14.98 13.62
Growth p.a. 4.91 5.51 4.09 4.36 4.7 6.89
Contributn to GDP growth 7.15 13.2 7.47 11.37 16.17 9.75
Source: CSO, Crisil

4 Limitations of liberalization

Although it is established that the spurt in the services sector is in part a function of liberalization, that should not lead anyone to the conclusion that everything is hunky dory with the sector. Foreign banks complain about the Reserve Bank of India’s restrictive policy on opening new branches as fast as they would like, an issue which the RBI sees through the prism of reciprocity—how many branches do other countries permit Indian banks? After sustained campaigning and many protests, the US has recently allowed a new branch to ICICI Bank, now India’s second-largest bank.

In insurance, the 26 per cent cap on foreign investment has likewise been a complaint voiced by global financial firms, with constant pressure to raise the limit to 51 per cent. The government has indeed been wanting to allow more foreign shareholding, but was held back till mid-2008 by opposition from the Left parties. With the UPA government no longer dependent for its survival on the Left parties, it remains to be seen whether the government will open the investment window a little more.

But when it comes to regulatory uncertainty and indeed waywardness, there is nothing to match what has been going on in telecommunications. More than once, it would seem that the government/regulator has played favourites on everything from allocation of scarce spectrum, (which carries the signals from mobile phones) to allowing market entry, to determining the fees to be paid. In the early 2000s, for instance, the government asked the regulator if firms (like Reliance Infocomm) that had fixed line licences should be allowed to offer mobile phones as well, since the technology they used [Wireless in Local Loop, or Code Division Multiple Access, (CDMA)] allowed this. The regulator agreed and Reliance Infocomm, which till then had been a marginal player in the booming mobile market, got back-door entry under the garb of “limited mobility” and lower-cost services, both of which from the beginning were bogus arguments.

More recently, when CDMA-mobile players like the now re-christened Reliance Communications wanted to get into the faster-growing GSM end of the mobile business, the government changed the rules again. The regulator has allowed a host of new firms to offer 2G-GSM mobile phone services, though there is a shortage of spectrum.

Now the government is playing favourites on who should have access to the next generation (3G, or third generation) mobile telephony, where data upload/download speeds on mobile can be as fast at the current broadband available on fixed line phones. First, there was a recommendation, by the telecom regulator--which the government accepted--to reserve one 3G slot for Reliance Communication in the CDMA-space. After a public furore, the government appears to have decided this will also be auctioned like the 3G GSM slots. Meanwhile, to ensure that the market remains virtually closed to other newcomers, the government has announced its policy for 3G auctions with enough riders to make it difficult for new players to bid in the auctions.

5 Is the growth in services sustainable?

5.1 Changing consumption patterns

Till the liberalization of the early 1990s, the trend in private final consumption expenditure was a straightforward one – the share of services in the total consumption basket (at 1999-00 prices) rose by around 3 percentage points each decade, from around 8 per cent in 1950-51 to 11 per cent in 1960-61, 14 per cent in 1970-71, 17 per cent in 1980-81 and 21 per cent in 1990-91. However, this trend changed dramatically and, by 2000-01, the share of services in private consumption was up by 10 percentage points, to 31 per cent. By 2006-07, it was up another 8 percentage points, indicating that the pace quickened further in the 2000s. A shift in the consumption pattern of this nature indicates that the demand-side impetus to services growth will continue, indeed will get stronger.

Private expenditure on education, for instance, rose from Rs 1,558 crore in 1980-81 to Rs 6,313 crore in 1990-91, and to Rs 26,883 crore in 2000-01, before climbing to Rs 55,145 crore in 2006-07 (all at current prices). In terms of constant 1999-00 prices, such expenditure rose from Rs 8,196 crore to Rs 13,976 crore and then to Rs 48,052 crore from 1990-91 to 2006-07. The rising demand for education, including among the poor, will ensure that this remains a driver of GDP growth in the future.

Private expenditure on communications, in current prices, similarly, rose from a mere Rs 522 crore in 1980-81 to Rs 3,402 crore in 1990-91, Rs 17,162 crore in 2000-01 and finally to Rs 61,655 crore in 2006-07 (expenditure on communications understates the spread of the sector due to the sharp reduction in prices in the segment during this period – the share of expenditure on communication in private final consumption expenditure was 14 per cent higher than that on medicine in 2006-07 if you use constant prices; but at current prices, expenditure on medicine was much higher than that on communication).

Expenditure on medical care and health services rose from Rs 3,434 crore in 1980-81 to Rs 9,552 crore in 1990-91, jumped to Rs 64,777 crore in 2000-01 and then to Rs 102,422 crore in 2006-07.

Not surprisingly, there is close correlation between the demand and the supply sides. Communications, as already seen, has been one of the growth industries of the decade – its share in GDP growth shot up to nearly 5 per cent in 2006-07 and contribution to GDP growth around 14 per cent. Between 1950-51 and 1990-91, there was nothing dramatic in the share of expenditure on communications, though it grew steadily. Between 1990-91 and 2000-01, however, the share nearly trebled; in the next six years, it rose still further.

Table 5. Total expenditure as % of PFCE
1999-2000 prices 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07
1 Food, beverages and tobacco 68.83 68.12 65.29 61.4 56.67 48.06 42.13
2 Clothing & footwear 2.64 3.36 4.12 5.42 6.03 5.95 5.09
3 Rent, fuel & power 18.29 14.81 13.56 13.82 12.78 11.35 10.02
3.1 Gross rent & water charges 13.01 11.14 9.92 10.28 9.49 7.84 6.87
3.2 Fuel & power 5.09 3.69 3.6 3.54 3.3 3.52 3.15
3.2.1 Electricity 0.32 0.23 0.23 0.22 0.51 0.79 0.8
3.2.2 Liquefied petrol'm gas 0.1 0.07 0.07 0.07 0.27 0.5 0.55
3.2.3 Kerosene 0.41 0.3 0.29 0.28 0.38 0.29 0.18
3.2.4 Other fuel 4.26 3.09 3.01 2.96 2.14 1.93 1.62
4 Furniture, furnishing, appliances & services 2.06 2.68 2.98 2.58 3.07 3.38 3.96
Sub-total 91.82 88.97 85.94 83.22 78.55 68.74 61.19
5 Medical care & health services 1.67 2.02 3.13 3.94 3.24 4.71 4.4
6 Transport & communication 2.84 3.06 4.07 5.7 9.83 14.46 18.37
6.1 Personal tpt. Equipment 0.11 0.14 0.24 0.23 0.46 0.7 0.9
6.2 Operation of tpt. eqpts. 0.11 0.15 0.47 0.95 2.75 4.21 4.18
6.3 Purchase of tpt. Serv. 2.69 2.77 3.09 4.1 6.13 8.06 8.27
6.4 Communication 0.09 0.12 0.32 0.41 0.49 1.48 5.02
7 Recreation, education & cultural services 1.43 1.33 2.34 2.18 2.75 3.68 4.86
7.1 Eqpt., paper & stationery 0.52 0.37 0.68 0.53 0.92 1.48 2.13
7.2 Recreation & cul.services 0.19 0.14 0.25 0.2 0.17 0.18 0.11
7.3 Education 0.6 0.82 1.41 1.46 1.66 2.01 2.62
8 Misc. good & services 5.43 5.08 4.61 4.96 5.63 8.42 11.18
8.1 Personal care & effect 3.38 3.17 2.87 3.09 2.79 2.95 2.72
8.2 Personal goods n.e.c. 0.89 0.83 0.75 0.81 1.25 2.22 2.55
8.3 Other misc. services 1.16 1.09 0.98 1.06 1.59 3.25 5.9
Services sub-total 8.18 11.03 14.06 16.78 21.45 31.26 38.81
9 PFCE in domestic market 100 100 100 100 100 100 100

5.2 Exports

Since liberalization began, India’s services exports have increased 15-fold, from $5bn in 1990 to $74 bn in 2006. Exports of business services, mostly IT/ITeS, have increased at over 25 per cent per year in the past decade, an unmatched record anywhere in the world. As a result, while India’s share in global trade is approaching 1 per cent (up from 0.4 per cent in 1990-91), its share in the global services trade is double that.

Much of this is related to the increased share of global services that have now become tradeable and, on India’s part, to liberalization which has made many sectors more efficient. Between 1965 and 2000, India’s exports of business services rose by 43 per cent a year, this was followed by Israel’s 28 per cent. Even the US grew by just 11 per cent, though from a much higher base . As a result, by 2005, services exports accounted for 35 per cent of India’s total exports of goods and services, compared to a mere 9 per cent for China. The figure was 28 per cent for the US and 35 per cent for the UK.

For developing countries as a whole, the share in global services trade rose from 14 per cent in 1986 to nearly 20 per cent by 2002, while for goods, it rose from 18 per cent to 28 per cent in the same period. According to Mattoo and Stern, India would gain as much as 1.6 per cent of GDP if the tariff equivalents of protection were cut by a third in all countries, again a pointer to the growth possibilities in the services sector.

Source: India, trade in services and the Doha agenda, Aditya Mattoo, January 2007

According to the National Association of Software Services Companies (or Nasscom), the total software and services business has gone up from $17bn in 2003-04 to $52bn in 2007-08, and of this, exports grew from $13bn to $40 bn. It is expected that by 2009-10, exports will rise to $60bn and the total market to $75bn.

Since the global BPO market alone stands at around $150bn, Nasscom estimates that the addressable market is large enough to leave enough headroom for growth for several years. According to a study done by McKinsey & Company for Nasscom, the total market for what is called Remote Infrastructure Management is around $100 bn currently, and around three-fourths of this can be offshored. According to McKinsey, India is well positioned to capture around $15bn of this business in the next five years, ie by 2013.

Over time, a host of new service areas are also likely to grow. The US, for instance, stands to save over $1.5 bn annually if just 10 per cent of US patients choose to undergo medical treatment overseas for just 15 low-risk procedures – for this, insurance would have to be portable . Harpal Singh, till recently chairman of Fortis (the health care group) has calculated that the scope for providing medical services in India for nationals of other can be compared to what has been achieved in software services.

Table 6. India's IT industry
$bn FY2004 FY2005 FY2006 FY2007 FY2008 E
IT Services 10.4 13.5 17.8 23.5 31
-Exports 7.3 10.0 13.3 18.0 23.1
-Domestic 3.1 3.5 4.5 5.5 7.9
ITES-BPO 3.4 5.2 7.2 9.5 12.5
-Exports 3.1 4.6 6.3 8.4 10.9
-Domestic 0.3 0.6 0.9 1.1 1.6
Engineering Services etc 2.9 3.8 5.3 6.5 8.5
-Exports 2.5 3.1 4.0 4.9 6.3
-Domestic 0.4 0.7 1.3 1.6 2.2
Total Software/Services 16.7 22.5 30.3 39.5 52.0
Of which, exports are 12.9 17.7 23.6 31.3 40.3
Hardware 5.0 5.6 7.1 8.5 12.0
-Exports 0.5 0.5 0.6 0.5 0.5
-Domestic 4.4 5.1 6.5 8.0 11.5
Total IT Industry 21.6 28.2 37.4 48.0 64.0

Source: Nasscom

5.3 Retail Sector

Organised retailing has grown from tiny beginnings, as India’s middle class has grown in both size and proportion. According to a study by the Indian Council for Research in International Economic Relations (Icrier) on the retail sector, around $35bn will be invested in organized retailing over the next 5-7 years, by homegrown Indian firms as well as by joint ventures with well-known international retailers like Wal-Mart and Carrefour. Icrier estimates that while the total retail business (including mom and pop stores) in the country will grow 13 per cent annually, between 2006-07 and 2011-12, the organized retail sector will grow 45-50 per cent per annum and will increase its market share to 16 per cent by 2011-12. By 2017-18, according to the consulting firm Technopak, which did the projections for Icrier, this will rise further, to 25 per cent.

It is hard to tell whether these ambitious numbers will materialize. From a situation where retailers were willing to pay exorbitant rates for space in the shopping malls that have sprouted in every major city, the economic slowdown in 2008 has meant that mall stalls are going empty and mall owners are offering sweeteners to be able to rent out stall space.

Icrier says the organized retailing sector will employ roughly 2 million persons by 2011-12. That is small, when the unorganized retail sector employs around 35 million persons. It would seem obvious that any reduction in the latter’s share will cause changes in the job market, but in a rapidly growing economy that is under-served because of the relative shortage of shelf space, growth itself would take care of the displacement problem and therefore the changes would almost certainly be for the better. The upstream benefits in terms of volume production to meet large orders, effective supply chain management to drive efficiencies, and the possibility that between the two more exports will develop, are matched by the downstream benefits that will accrue through lower prices for consumers, and (arguably) better prices for at least some producers.

But several policy issues remain to be sorted out. Should organized retailing be thrown open to foreign investment, and if so with what ownership limits stipulated? Should the opening up be only for single-brand stores, or for multi-brand chains as well? With the Left parties having walked away, the government has been toying with proposals to take some of these steps.

7. Size of Indian Retail Industry
$bn Total Organised
2008 410 15
2009 445 22
2010 483 33
2011 524 50
2012 568 74
2013 615 110
2018 860 215
Source: Technopak

5.4 Entertainment

Over the past 3-4 years, the entertainment and media sector has grown by around 19 per cent per annum, and according to the Federation of Indian Chambers of Commerce and Industry (Ficci) and PricewaterhouseCoopers , the industry will continue to grow at around the same rate, to touch annual revenue of $28bn by 2012. Within this, animation and gaming are a new phenomenon, emerging as a serious business just a couple of years ago. The Bollywood film industry is likely to nearly double in size over the next five years including, if the ADAG group foray is anything to go by, tie-ups with Hollywood involving the co-production of films.

8. Size of Indian Media Business (Rs mn)
2004 2005 2006 2007 2012 F CAGR %
TV 128,700 158,500 191,200 225,900 600,000 21.2
Print 97,800 109,500 127,900 149,000 281,000 14.1
Films 59,900 68,100 84,500 96,000 176,000 14.4
Radio 2,400 3,200 5,000 6,200 18,000 28.6
Music 6,700 7,000 7,200 7,300 8,000 2.2
Animation, Gaming - - 10,500 13,000 40,000
Outdoor Advt 8,500 9,000 10,000 12,500 21,500 12.3
Internet Advt 600 1,000 1,600 2,700 11,000 43.8
Total 306,604 358,305 439,906 514,607 1,155,500 18
Source: FICCI Frames

5.5 International Financial Services

With India integrating with the global economy, the two-way flow of money has involved not just payment for trade but also money being invested in physical capital as well as in stocks and bonds. And with Indian firms having started to buy firms in other countries, there is also an outflow of capital as well as substantial fees paid for a variety of financial services. According to the Report of the High Powered Expert Committee on Making Mumbai an International Financial Centre, the best way to look at this transition, and its impact, is to look at the trade-to-GDP ratio to begin with. This fell from 16.6 per cent in 1952 when India was still an open economy, to 7.5 per cent in the 1970-73 period of intense socialism, and has now risen to around 36 per cent – the period of increase can almost directly be correlated to changes in policy that have created a realistic market for the rupee, dropped tariffs sharply and removed virtually all physical controls on international trade.

As a result, the gross flows have risen from around $15bn a quarter in the early 1990s to over $150 bn today. In terms of share of GDP, too, this represents a sharp increase.

Based on the projected size of exports/imports, FII and FDI inflows, the fees paid by Indian firms to investment bankers overseas, and so on, the MIFC projects the total external flows over the next decade. It then works out what this means in terms of brokerage fees, currently paid to financial firms located outside the country. Based on a weighted average paid to merchant bankers for different services, MIFC calculates the total fees that India stands to gain if Mumbai is to become an international financial centre. The estimate for 2015 is $48 bn, based on the medium-low projections of overall flows; a higher degree of integration would mean that this figure would increase substantially.

9. Demand for International Financial Services in India
$bn
1992-93 2001-02 2003-04 2004-05 2005-06
External Flow 101.3 237.5 360.5 480 657
(% of GDP) 47.1 53.9 65.1 74 90.6
External Flows 2006 2010 2015
Low 657 962 1549
Medium 657 1362 3390
High 657 2524 13575
Projected Fees 2006 2010 2015
At 1 per cent 6.57 11.81 23.9
At 2 per cent 13.14 23.62 47.8
At 3 per cent 19.71 35.43 71.7
Fee projections based on less than medium flows

5.6 Inclusive banking

The impact of the spread of banking on GDP growth is well established – the banking sector’s contribution to GDP rose from 7.5 per cent in 2001-02 to 10 per cent in 2006-07. This contribution, it should be kept in mind, took place when the vast majority of Indians remained unbanked; National Sample Survey data reveal, for instance, that over half the 45 million farmers in the country have no access to credit, either informal or formal. And of these, just around half have access to formal credit – all told, around three-quarters of farmers have no access to formal credit. The exclusion is worst in the central, eastern and north-eastern parts of the country – less than a fifth of the indebtedness in this region is to formal sources of credit .

The Invest India Savings Survey of 2007 revealed similar trends, with just 14 per cent of agricultural farm labour having bank accounts. The figure was better, but not much, for non-agricultural wage labour, at 25 per cent .

These numbers indicate that the problem is not just with the geographical spread of the banking sector which, it is well known, is still poor in the rural areas. As much is also borne out by the fact that, even in the case of the top-most income quartile, less than half of those who take loans take them from the banking sector. This suggests that bank formalities may be too cumbersome, or credit risk assessments too stringent. Given that around half the loans taken by those in the lowest income quartile are at interest rates of over 36 per cent per year, the scope for growth in the banking sector is clearly large.

10. Sources of loans by income group
% of persons who've taken loans in last two years
Loan Sources Quartile 1 Quartile2 Quartile 3 Quartile 4
Relatives/Friends 39.2 34.4 33.2 32
Moneylenders 39.8 33.2 25.8 14.8
Banks 9.6 20.7 33.3 45.8
SHGs 9.7 8.4 3.3 3.4
Coop Societies 5.4 4.9 6.5 7.4
Chit Funds/NBFC 1.6 1.9 1.5 1.2
MFIs 1.1 1.4 1.2 0.9
Others 1 0.9 0.8 1.4

Though the banking sector has grown rapidly over the past decade (the ratio of bank loans to GDP rose from 22.7 per cent in 2000 to 46 per cent in 2007), this share is small relative to many countries. Not surprisingly, then, even the largest Indian banks are quite small when compared on a global scale – just one bank, the State Bank of India, figures in the top 100 global banks in terms of assets. It is ranked 80th.

In recent times, the government has got C Rangarajan, till recently the chairman of the Prime Minister’s Economic Advisory Council, to write a report on financial inclusion. The Planning Commission also got a panel headed by Raghuram Rajan to write a report on financial sector reforms. Both have suggested a variety of ways to improve financial inclusion and reform the financial sector. Without going into the merits and demerits of these reports, it can be asserted quite safely that if greater financial inclusion is to be achieved, the growth of the banking sector, and its contribution to GDP, will have to increase manifold.

6. Manning the jobs

No economy, and more so one looking at rapid growth in its services sector, can grow beyond a point if its population is largely illiterate, or semi-literate. Yet, this seems precisely what India is managing to do. Despite very high primary school enrolment ratios, the level of functional literacy achieved is quite low because of very high drop-out rates, and the poor standards achieved in most primary schools. According to one study, as much as 80 per cent of the population in the 18-22 age group is illiterate . While that figure may seem high to many, India’s track record when it comes to higher education, especially in science and technology, is even worse. The way out so far has been to privatize even the largely-privatised education system. So, India’s largest IT/ITeS firms virtually run their own universities, places where graduates of Indian schools and universities are once again trained to meet the requirements of their current jobs. Such firm-level and even industry-level solutions, however, are at best stop-gap measures. If a more permanent solution is not found, it could well slow India’s progress on the services front. As the skills shortage grows, salaries will keep rising to the point where business becomes globally uncompetitive.

Figures cited in the India Labour Report 2007, prepared by India’s largest temping company TeamLease Services, show that under a third of India’s IT graduates are employable in the IT sector and, as a result of this, there will be a shortage of 500,000 IT professionals in the sector by next year. Another set of figures, this time relating to employability in multinational companies that have slightly higher standards, say that just a fourth of India’s engineering graduates are employable – the figure for finance and accounting professionals is even lower, at 15 per cent.

Annual surveys by the NGO, Pratham, show the quality of learning in schools in rural India is abysmal. As many as a fifth of those in Class V cannot read a single paragraph and as many as half cannot read a simple story. A fifth cannot perform simple operations in maths like division and subtraction.

If it isn’t bad enough that nearly 80 per cent of the 18-22 year old work force is illiterate, of all 15-60 year olds, just 0.3 per cent have had a technical education of any kind, and just 7 per cent of those in the 15-29 age group receive even vocational training. Within this last group, less than a third receives it through formal training. According to TeamLease, more than half of India’s youth suffers from some degree of unemployability. Nearly two thirds of them, to use TeamLease’s term, need ‘structural repair’ (one to two years’ training) at a whopping cost of Rs 490,000 crore over the next two years. Certainly, India’s education budgets are nowhere near what is needed, but the problem goes beyond money. At the end of the day, 90 per cent of employment opportunities require vocational skills, but 90 per cent of India’s college/school output is bookish knowledge.

Apart from the levels of education, what also matters for the economy that is trying to develop on the basis of the services sector, is the extent of use of information technology and R&D spending. The World Bank captures most of these parameters in its Knowledge Economy Index (KEI) – this takes into account levels of education, information technology and the economic incentives regime in a country and then normalizes them keeping in mind the country’s population. To no one’s surprise, India’s absolute scores lag behind those of peer group countries.

Country KEI Economic Incentive and Institutional Regime Innovation Education ICT
recent 1995 recent 1995 recent 1995 recent 1995 recent 1995
United States 9.1 9.51 9.16 9.2 9.45 9.58 8.79 9.42 9.02 9.83
Korea, Rep. 7.67 7.85 5.57 6.75 8.47 8.16 7.89 8.3 8.74 8.2
Malaysia 6.16 6.04 6.18 7.21 6.82 6.2 4.35 4.17 7.3 6.57
Russian Federation 5.58 5.53 1.55 2.43 6.88 5.61 7.62 8.04 6.26 6.05
Brazil 5.5 5.03 4.3 4.81 6.06 5.88 5.78 3.95 5.87 5.5
China 4.36 3.48 4.01 3.31 5.1 4.26 4.06 3.63 4.28 2.74
Indonesia 3.27 3.46 3.36 4.02 3.31 2.4 3.45 3.92 2.94 3.5
India 3.04 3.13 3.67 3.48 3.95 3.61 2.11 2.56 2.45 2.87
Source: World Bank

The government has now set its mind on increasing public spending on education. There is also a greater willingness to allow the private sector an expanded role, especially when it comes to technical education, and for public private partnerships. All of this will improve supply, as also (one hopes) quality. The demand for education, in turn, will be driven by the higher salaries that an educated person gets – the median multiple being 7 when you look at salary levels for illiterate and those with post-graduate degrees.

7. Is the data dodgy?

As with most other statistics in India, there is no shortage of people who question the veracity of the data on services too. This goes beyond the larger issue of whether India has a robust statistical system to capture reality – price datafor some sectors, for instance, are not updated for months, and consumption data as reported by the National Sample Survey Organisation capture less and less of the consumption revealed by the National Accounts. Bosworth, Collins and Virmani (BCV) argue that the kind of productivity growth that the Indian services data have been reflecting since the early 1980s is something never seen in any other country at a similar stage of development. While that, in itself, is not sufficient to damn the data, what BCV point out as worrying are the productivity surges in sectors which typically don’t see such sharp hikes – such as in trade, transportation and education. The crux of the problem, BCV argue, lies in the unorganized sector where data capture is simply not a robust exercise – and, nearly half the services sector happens to be ‘unorganized’. As a result, the revisions in GDP data that take place are often quite sharp. As BCV put it, ‘The extent that this is concentrated in TFP (total factor productivity) and not employment does give us pause…Though difficult to verify, we are concerned that output growth in services has been over-stated, perhaps due to an under-estimate of services price inflation, particularly in the more traditional sectors.’

As a result of the underlying annual survey data for the unorganized portion of the economy, according to BCV, the data get revised quite sharply. The 1993-94 GDP data, for instance, was revised upwards by nearly a tenth, but while the revisions for industry were under 1 percentage point, those for services were over 15 percentage points; within this, the revision for ‘real estate and business services’ was over 100 percentage points. While the overall revision came down to just 1.7 percentage points for the 1999-00 GDP data, that in ‘real estate and business services’ was still as high as a fourth. For the services sector as a whole, the revision was around 4.5 percentage points, a figure that added dramatically to the GDP growth number.

According to BCV, while nearly all the output growth in the 1960-80 period took place due to increased factor inputs, the post-1980 growth is very largely influenced by an increase in factor productivity – output per worker surged from an annual rate of 1.8 per cent in 1973-83 to 2.4 per cent in 1983-87 and further to 5.8 per cent in 1993-99.

So, is the data dodgy enough to call off all analysis on the services sector, (which would then mean the entire economy, since services account for more than a half of GDP), or should economists be like the drunk who looks for a lost key under the lamp-post because that is the only place where there is light? Given the need for analysis, there can be only one answer. But equally, there can be little doubt that the data isn’t as robust as researchers and analysts would like. Indeed, while BCV point to the sharp surge in TFP to 5.8 per cent per annum in 1993-99 as evidence of the data being dodgy, the sharp fall in TFP growth in the 1999-2004 period to 3.2 per cent per cent seems to confirm this, but also indicates that the bias is not in just one direction. Indeed, Goldar also shows, with respect to manufacturing, that total TFP growth has actually fallen in the post-reforms period (ie since 1991). Perhaps the explanation lies in the fact that, as a concept, factor productivity is tricky to measure since it is almost always simply a residual factor. India’s investment-to-GDP numbers, for instance, have gone up sharply in recent years. And any small increase in capital levels or even in the labour force can affect factor productivity calculations. It is also inconceivable that changes, like those in telecommunications, where the number of those with phones has risen almost eight-fold in the first seven years of this decade, have not led to a sharp surge in productivity.

The view that productivity numbers are dodgy is supported by the data on investment. BCV appear to have few doubts on the authenticity of India’s data on savings and investment. But then, as Surjit Bhalla argues, the increase in capital and labour in the post-2002 period is in itself sufficient to explain the stepped-up GDP growth that India has witnessed. If the growth did therefore take place and had to be divided between the three sectors, are BCV saying agricultural and industrial growth are understated? Or is it that the productivity numbers may not be robust?

8. Conclusion

Given the nature of the global financial crisis and the likelihood that this will result in near-zero growth in the US and much of the Euro Area for the next 12-15 months, it is very likely India’s services exports will take a hit, indeed most other macro numbers will also take a hit. So, while Nasscom has put on a brave face saying the current crisis offers greater potential, IT/ITeS leaders like Infosys have already lowered their earnings guidance.

What’s important is how long this slowing of growth will last and whether it will be restricted to just the exports sector. To take the second question first, it is unlikely any further liberalization of trade in goods, and especially services, can take place in an environment of near-recession in advanced economies. In which case, the chances of the services sector increasing exports through greater liberalization of world trade (like, say, relaxing of rules allowing insurance firms to pay for medical treatment in India) look bleak over the next few years.

To the extent financial services growth is predicated on global markets, they too will take a beating. For the next year or so, as financial markets in the OECD struggle to get back on their feet, it is unlikely the GDR/ADR market will have much action; to the extent Indian companies slow their acquisitions in the face of a slow real world economy, all the fee-based income of the type envisaged in the MIFC report (assuming India does the necessary reforms) will also take a backseat.

As for IT/ITeS, it must be said the sector has consistently reinvented itself, moving from pure voice work to more sophisticated value addition – indeed, the last time there was a slowdown in the US, the sector increased its revenues as it offered US firms a more cost-effective substitute. So, over the medium term of 2-3 years, it seems likely the sector will increase its penetration in the US markets.

The overall impact of course will depend on how the Indian economy is impacted. As this paper has argued, it is changes in GDP growth that have driven changes in demand patterns and it is that demand that has driven service sector growth (health, communication and education expenditures are three very clear areas where there have been significant increases in consumption share). As economic growth slows, as it will for the next couple of years, this too will slow, but the secular trend is an upward one. Indeed, since it is well-established that every 1 per cent change in GDP results in a higher in growth in the number of upper-income households, it is likely that a slight slowing in GDP growth rates may not significantly lower demand for areas like telecom, education or health. Sharp shortages in infrastructure will also ensure the demand for transportation will not slow either.

As with the overall economy, there will be a dip in growth in the immediate term, but the overall direction of growth is clear.
ends

Books/Chapters

2009-07-20T19:41:00.001-07:00

Services chapter for Montek volume
Telecom for NCAER Margin
Telecom CUTS
Transport CUTS
Regulatory Roulette

Business Standard Blog

2009-07-20T18:01:00.001-07:00

Does Kapil get it?
Good for you, Dr Singh
The long and winding road
Caste discrimination and other bogus concepts
Jai ho!

No carbon copies

2009-07-20T17:37:00.001-07:00

US Secretary of State Hillary Clinton made the usual case for India accepting limits on its carbon emissions — the bulk of future carbon emissions, she said, would emanate from high-growth developing countries such as India and China and, therefore, the only way to avoid an environmental catastrophe was for them to follow a low-carbon development path. Despite its apparent logic, the argument has a critical flaw, which is that the rich countries have been environmental free riders all along and seek to continue to be free riders. The environment minister Jairam Ramesh did well, therefore, to make it clear that India would not accept any legally binding restrictions. If India is to move its millions from poverty to an acceptable living standard, it has to adopt industrialisation models, which are energy-intensive. So, if the world has to survive and countries like India and China have to develop, the extra carbon space, as it were, has to come from the developed world reducing its emissions — which is what it committed to doing more than a decade ago, at Kyoto. The commitments have not been kept. The other option is for India to adopt expensive, new, low-carbon industrialisation models — but that would need funding by the developed countries. This has been India’s perfectly logical negotiating stance and, despite what happened at the Major Economies Forum in Italy, Indian negotiators say there has been no dilution in the position.

In other words, the debate has not moved forward. However, since India will be one of the countries that will suffer quite severely from any global warming, and since the poor will pay the biggest price, it needs to look at what it can do. A few examples should suffice to make the point. India subsidises fuel like kerosene, supposedly to benefit the poor. Yet, it is well known that such kerosene does not reach the poor, instead it is used to adulterate diesel. Not only does this destroy the engines of cars and trucks, it increases pollution levels which, eventually, lead to higher health costs. Not pricing electricity and water correctly means that, in the rural areas, there is excessive drawing down of groundwater — the resulting fall in the water table and increased soil salinity hurts farmers. Taxing personal motor vehicles at rates lower than buses, and not giving special tax concessions to mass transport vehicles, ensures that the country’s carbon footprint grows — at the same time, it ensures that the transport which the poor use continues to remain poorly developed. In short, people are paying a price for India’s business-as-usual approach when it comes to carbon emissions. Imposing carbon taxes, or at least rationalising certain types of pricing, will not only earn India brownie points in the global environment debate, it will also help India’s poor. In other words, negotiate as hard as you can so that the rich countries do not continue to be environmental free riders on the poor nations, but do what needs to be done at home.

Jobless growth, ha'ah!

2009-07-20T04:20:00.001-07:00

Given the announcements from the National Sample Survey's (NSS's) latest results from its large sample round in 2004-05, all those who've been talking about how reforms have led to jobless growth, especially those within the United Progressive Alliance [ Images ], are in a serious bind.
They have to either accept that there was some problem with the data that suggested employment growth fell sharply in the post-reform years, from 2.6 per cent per annum in 1983 to 1993-94, to 1.2 per cent in the 1993-94 to 1999-00 period. Or that, industry, and the economy in general, shed labour while becoming more efficient, and now that this phase of trimming is over, the economy's creating jobs at more than twice the earlier pace -- latest NSS data show employment growth during 1999-00 and 2004-05 was 2.7 per cent per annum as compared to the population growth of around 1.7per cent.
Indeed, for the 2000-01 to 2004-05 period, the growth has been even faster, at 3.8 per cent. This should put paid to the theory that the common man voted against the National Democratic Alliance since he was not finding a job as it is clear the upturn in employment had begun virtually mid-way through the NDA's tenure -- that it hasn't though is evident from the Prime Minister's speech at the HT Leadership Summit about how just half of India is shining!
If you accept the second point of view, the next problem that arises relates to poverty reduction. In 1993-94, we're told India's poverty level was around 36 per cent, and this fell to around 26 per cent in 1999-00.
That is, it fell by around 1.7 percentage points per annum (it fell 0.9 per cent per annum between 1983 and 1993-94). In 2004-05, however, the NSS data suggest two poverty estimates, 22 or 28 per cent. Why there are two estimates is a long story related to how two types of questions were used for different samples, but suffice it to say the 22 per cent figure of 2004-05 poverty levels correlates with the 1999-00 levels of 26 per cent. That is, poverty levels fell by just 0.8 per cent per annum in a period when jobs growth rose anywhere between two and three times!
It is true, the country's poverty experts will tell you, poverty estimates are not calculated on the basis of wages, but from consumption data. But eventually, the two have to give the same results -- if wages go up, consumption will logically go up since the poor are too poor to save, and consumption cannot go up unless wages do, right?
Which corroborates the point economist Surjit Bhalla has been making all these years, that the NSS data capture less and less of the country's actual consumption. Consumption levels in the country can be got in two ways, from the National Sample Survey type of consumption surveys or from the National Accounts, which is where the GDP numbers come from, by aggregating value added in various sectors.
In the perfect world, the total national consumption should be the same from both methods. But, in India, the share of total consumption that you get from the NSS figures is consistently getting smaller -- in the latest round, the NSS consumption figure is less than half got from the national accounts.
Indeed, the wage data from the latest NSS round also throw up some really wonky stuff. In a period when employment was growing at a snail's pace between 1993-94 and 1999-00, male wages in urban areas for those who were graduates or more rose 13.2 per cent per annum.
When the pace of jobs doubled, however, this wage hike fell nearly 60 per cent, to 5.3 per cent between 1999-00 and 2004-05!
Wage growth for men in urban areas for those who'd passed at least secondary school, according to NSS data, was supposed to be 12.3 per cent per annum in the 1993-94 to 1999-00 period and this crashed to a mere 1.6 per cent in the subsequent period. In real terms, this means salaries actually declined for all categories of male urban workers except for graduates -- in the case of urban women, real salaries fell even for graduates.
Anyone familiar with the market for jobs in the country, either as an employer or as an employee, would know that this simply isn't true. It also doesn't square with the country's consumption boom.
All of which points to a very serious problem in the manner in which data are collected/analysed in the country. Since such data not only affect specific policies (the Employment Guarantee Act being the best example of this since it assumes there is little employment growth), but also affects the government's overall policy stance (hence, the aam aadmi 20-point programme humbug), it is vital this be tackled on a war footing.
Till then, it's best to forget expert poverty estimates and just go out into the countryside and get a first look, just like the agriculture experts in the Planning Commission used to estimate crop production by looking at the monsoon clouds outside their windows!

Railways

2009-07-20T02:44:00.000-07:00

Happy not to be at IIM (A)

Air India's troubled flight

2009-07-19T20:18:00.000-07:00

Reviving Air India is a task that has a certain amount of irony for all those involved. Civil Aviation Minister Praful Patel, Air India’s sleeping board and the airline’s management have all presided over decisions to cripple the airline, and now they have to revive it in near-impossible conditions. Media attention has focused on Mr Patel’s decision to generously give away bilateral rights to airlines from Singapore and countries in West Asia, none of which have a domestic “home” market and which therefore managed to make India their home market — to Air India’s detriment. This decision can be defended on the ground that Air India was providing poor service to the migrant workers in West Asia, and exploiting its market dominance to extract high fares. In other words, the pay-off from an “open skies” policy was the benefit to the travelling public.

However, the logic of this situation was not carried through into capacity planning, as reflected in the decision to buy Rs 55,000 crore worth of new aircraft. Neither Air India’s management nor its board chose to question this decision, which is said to have been influenced by the government to the extent that options on new aircraft were converted into firm orders. It should have been obvious that no company with total revenue of Rs 16,000 crore could service the debt acquired to finance capital investment on such a scale, especially when the airline was losing market share in its most lucrative sector.

The management is also squarely to blame for the questionable pay-out of around Rs 1,500 crore each year as a ‘productivity-linked-incentive’ bonus where base performance levels have been kept below the average performance levels already achieved. Similarly, while it may have been the minister who pushed the thoroughly ill-advised merger of Air India and Indian Airlines, the managements and boards of both airlines went along without a plan to achieve synergies from the merger. Two years later, the two parts of the merged airline don’t have an integrated IT system, and they fly on the same routes.

In his public comments, the minister has been panning the airline management, and warning that heads will roll. But his plan to appoint a more professional board has so far come to nought. In any case, it is odd that most of the chief executives in recent years have been from the civil service, a good number being people who went across from the parent ministry of civil aviation. Why didn’t Mr Patel think earlier of inducting people who knew the aviation business? Privately, airline staffers have been saying that no one could stand up to an assertive minister, and point out that the chief executive who opposed the terms of the joint venture with Singapore for ground handling was promptly replaced. That is of course a telling case, but at the end of the day the fact is that Air India has not often enough been the airline of choice for the paying passenger, except when the primary consideration is low fares or lack of seats elsewhere. The minister has to bear his part of the blame, but so does the airline management.

Infrastructure

2009-07-19T20:14:00.000-07:00

Time to go Mr sreedharan

Time to go, Mr Sreedharan

2009-07-19T19:59:00.001-07:00

Till even a few days ago, if you took a poll, despite the recent string of disasters in the Delhi Metro’s construction, most Delhi-ites would want Delhi Metro Rail Corporation (DMRC) chief E Sreedharan to stay on. Accidents happen in all big projects, the argument goes, but Sreedharan is one of the few people who accepted moral responsibility, he has always delivered on time, he’s honest, he had to speed up things to meet the Commonwealth Games’ deadline, and so on. So much so that India’s crown prince Rahul Gandhi called him up to say, “Please don’t quit, we are all behind you.” This view of him being indispensable is shared by Sreedharan who, all along, has opposed private sector metros and has recommended his model be replicated — in cities like Kolkata and Chennai, DMRC is even the prime consultant in projects which, like the DMRC, are 50:50 partnerships between the state and central governments. Others have recommended the model be extended to other infrastructure projects.

These worthies would do well to read the Comptroller and Auditor General’s stunning indictment of how DMRC is run (http://www.cag.gov.in/html/reports/commercial/2008_PA17com/contents.htm). For one, it points to the novel 50:50 management structure to mean that neither of the governments is in charge, so the company is pretty much run by the management, namely Sreedharan. The company’s board doesn’t even have the token independent director. There appears no standard procedure for evaluating contracts and several changes have taken place in contracts after they have been won. The CAG talks of testing standards being watered down to meet deadline, of tests being conducted in non-accredited laboratories, of these being done without DMRC staffers being present, and so on. To top it all, DMRC hasn’t kept any records of test reports since it ‘would involve additional expenditure’!

Apart from what it tells you about how arrogant DMRC has become, it points to the impossibility of the Sreedharan model being replicable anywhere. For one, how do you see any politician-bureaucrat ceding all powers to someone else, and not changing the head for over 14 years — the NHAI, by way of contrast, has had three chairmen in three years. It is to the credit of Sreedharan’s integrity that no allegations of corruption have been levelled against DMRC — but how do you ensure that the heads of his 50:50 JV model will be as honest as he and shouldn’t there be some public oversight when the Rs 10,600 crore spent on the project is all public money?

Interestingly, when Sreedharan and others talk of the Delhi Metro’s success, vis-à-vis the Bus Rapid Transport corridor for instance, none talk of the huge concessions given to it by the government. Sreedharan was quick to shoot off a letter when the Hyderabad Metro project was given land for development and said the model could ‘lead to a big political scandal’. Well, DMRC’s loan base of Rs 6,648 crore, for instance, is highly subsidised by the Government of India and no dividend has been paid on the government equity of Rs 3,702 crore either — this alone implies an annual subsidy of more than Rs 1,000 crore (read http://www.business-standard.com/336473/ for a fuller explanation). Another Rs 240 crore a year or thereabouts comes from the various tax concessions given to it. And while the Hyderabad Metro got 269 acres of land, DMRC has got several times this. Indeed, DMRC is not even willing to pay Rs 452 crore of property tax that the Municipal Corporation of Delhi has levied on it, citing the chief secretary of Delhi’s decision saying it would not be levied. Had the BRT project been given even a fraction of the autonomy Sreedharan has been given, and an even tinier subsidy (if the Metro has 10 lakh users, that’s an annual subsidy of Rs 12,400 per passenger), there is little doubt it would have revolutionised Delhi’s traffic.

So the next time someone asks ‘after Sreedharan who’, let’s understand that his model is not replicable. More important, it is not desirable. If you want private sector efficiency and accountability, which is what the Sreedharan model was supposed to achieve, why not let the private sector do it? Like all other models, the private sector will perform only under strict supervision — in DMRC’s case, however, the 50:50 model ensures that, apart from Sreedharan, no one is keeping tabs on a Rs 10,600 crore project built from public money. And even he is not infallible.

July StatsGuru

2009-07-06T20:27:00.000-07:00

Does Kapil get it?

2009-06-28T18:03:00.000-07:00

That’s the question most are asking of new Human Resources Development Minister Kapil Sibal. Getting rid of the 10th class board exams has gone down very well with the kids (my 12-year old says he loves ‘Kapil-uncle’ even though he’s never seen him, even on TV!), but it’s not necessarily a good thing. The 10th Board may have added to pressure, but it also gave kids a fairly good idea of just where their skills lay (or didn’t lie, more accurately)… with the Boards abolished, I bet schools will be pressured by parents to allow their children to study ‘science’ till the 12th, even though it’s obvious they don’t have the aptitude for it. And I don’t see how it helps if, as Kapil Sibal wants eventually, even the 12th Board is abolished and, instead, kids just give an entrance examination for university, much the same way those wanting to do an MBA sit for the CAT. One exam is being replaced by another, that’s all. And what happened to the vocational studies after the 10th which was the original reason for the 10 + 2 system … basically those who wanted to study beyond the 10th would do so, the rest would do vocational stuff … secretarial courses, windows, carpentry and so on. Since the vocational training never happened, why not just go back to the old 11 years in school?

There are a million other such questions being asked of Kapil Sibal and his enthusiasm to implement the Professor Yashpal report – if someone like Kaushik Basu should dissent from the other members of the committee, it has to be for a good reason (Disclosure: Kaushik was one of the best teachers we had in DSchool back in the mid-80s). Plus, it’s still not clear, even after having gone through all Sibal’s interviews and press conferences, how he plans to deal with the issue of getting better quality teachers, higher salaries for them, genuine autonomy for colleges/schools. Is he saying the government, and his ministry in particular, will not appoint the next chief of the IIM Ahmedabad, or that the next vice chancellor of Delhi University will be decided by the university itself?

Maybe Kapil Sibal doesn’t get it in quite the same manner that educationists like Kaushik Basu or people like Pratap Bhanu Mehta (he’s the head of the Centre for Policy Research and resigned from the National Knowledge Commission) who’ve spent a lifetime looking at such issues. But no one person agrees with everyone else (think Kaushik and Prof Yashpal), so why hold this against Kapil Sibal? The minister’s understood a few basic things, and he’s got them absolutely right.

One, since you can’t resolve everything, focus on just a few things. Two, most of the problems we’re seeing today are related to poor quality of supply. So, Sibal’s solution is to create more supply! Once you do away with the UGC granting clearances for universities and come up with some basic criterion which people who want to set up universities must meet, the supply response will be great – by way of example, most of the big software companies, like TCS or Wipro, run mini-universities anyway even today for their staffers, so if one of them wants to set up a full-fledged university, it shouldn’t be too difficult.

In an ideal world, Sibal should give Delhi University autonomy and concentrate on getting it back to shape. But that’s like attempting for the moon. Why not create another university, or a group of classy colleges, that will give Delhi University a run for its money? To understand this, let’s use the telecom example, since that’s an area I understand.

In the mid-1990s, BSNL was your only choice if you lived outside of Delhi and Mumbai. So, if you wanted top quality phones, you’d ask the same questions you’re asking about Delhi University. Will the government ever free up BSNL, allow it to hire top-class professionals at market-salaries and so on? The government didn’t do it then, and it won’t do it now, or if the UPA has its way (as you can see, I’m an NDA fan!), ever. But what happened? Bharti came up and took up that space! And now it is really irrelevant whether BSNL survives or not. Of course it’s a tragedy that BSNL is being suffocated the way it is, but we can either spend the rest of our lives trying to fix it and run up against all manner of obstacles or simply circumvent the problem – it’s a bit like a bypass surgery. By the way, that’s precisely what Dr Manmohan Singh tried to do in the early 1990s – to create more supply. Of course there will be problems, but just the presence/threat of new supply will also fix a lot of things.

Will the new accreditation system Sibal has in mind for universities help? Basically, much like in the US, you’ll be able to choose your universities on the basis of scores some independent evaluating agencies give. You have to be naïve to think it’ll work flawlessly – arre, the financial mess we’re in is largely the result of ‘independent’ credit rating agencies colluding with financial institutions. But it’s not as if the current evaluation system is flawless and doesn’t throw up charlatans. So, we’ll have to come up with ways to ensure the raters don’t get captured by those they’re rating.

Short point is that there is no final solution to anything, at least if you’re not like Hitler, or Sanjay Gandhi. So, give Sibal’s plan a chance. He’ll get a lot of things wrong, and won’t be allowed to go ahead with a lot considering education is a concurrent subject, and he hasn’t thought through a lot of things… how do you square the demand for reservation with institutions of excellence, for instance? And, as we’ve learnt to our horror, if you don’t get the detail right, the whole plan goes for a toss… the best-laid plans of men and mice, and all that. But anyone whose plans centre around creating more schools/colleges has clearly grasped the main point.

Good for you, Dr Singh

2009-05-22T18:08:00.000-07:00

A confession first: I wasn’t a great admirer of Dr Manmohan Singh, Mark 2 (in his first avatar as the country’s finance minister, he was a completely different person). He did precisely nothing for the economy in terms of reforms and if growth picked up during his tenure, it was largely driven by the global upsurge. Indeed, he constantly tried to paper over the fault lines in the government and was quite content to allow the most brazen of corruption to flourish under his stewardship – and yet claim moral superiority. So, to start with, my expectations of Dr Singh Mark 3 are somewhat on the low side.

Which is why it comes as a really, really pleasant surprise to see Dr Singh stand up and tell the DMK to go take a walk. Of course, it’s always possible, even likely, that Dr Singh, or Sonia Gandhi, will come around and will make some concessions to the DMK, but it’s a positive sign.

There can be little doubt that Dr Singh’s last tenure was marred with charges of corruption and rampant favouritism. While this applied to many ministers/ministries, there were three or four that stood out quite distinctively. There was Praful Patel in the aviation ministry who was pretty much able to hand out as much largesse as he wanted to airport developers; there were the DMK lot led by A Raja (Raja alone, in one deal, gave away $10 bn, or Rs 50,000 crore, to a handful of favoured firms while Dr Singh consoled himself saying nothing could stop an idea whose time had come!); and there was Murli Deora who bent over backwards to help Reliance Industries. Since Deora is a Congressman, and a very loyal one at that, it’s fair to say there is nothing he did that was not sanctioned by either Dr Singh or by Sonia Gandhi.

So, if Dr Singh is even remotely interested in providing a less-blemished government this time around, Sonia Gandhi has to allow him some room for manoeuvre. This is precisely what she has done, at least so far.

What if they patch up, and the DMK gets its pound, several pounds, of flesh? And, we should make it clear, this has little to do with the actual ministers – it is no one’s case that Raja was not doing what his party chief in Chennai wanted. So, it may be an Azhagiri or a Kanimozhi who becomes the telecom minister, the net result will probably be the same. If the DMK gets its choice of ministries, and telecom is seen as the bellwether one here, it will signal that Dr Singh’s ready to play the compromise game to the fullest.

But even if the DMK is given the ministries it wants, this doesn’t necessarily mean the same thing it did the last time around. Last time, the DMK could do pretty much as it chose, so could Praful Patel. This time, with 200+ seats of its own, and another 100 pledged in letters of support with the President, Dr Singh can afford to tell a DMK minister just where to get off. So, he can let the party play its little games here and there (like the type the BJP alleged Raja had done with the BSNL Wimax contract), but stop it when it decides to hand over $10bn at will.

The onus for this, of course, doesn’t rest solely with Dr Singh. The opposition parties need to be alert and draw attention to this. Sadly, this is just not happening. The BJP made a huge noise over a small Wimax tender but kept painfully quiet when the $10bn was being handed out. This, of course, why no one buys its Bofors or Swiss money trails anymore, though my friend Tarun Vijay has passionately argued against this in today’s ET. Tarun’s view is that the BJP had all the right ideas/concerns, but just failed to communicate this to people. Tarun’s wrong, the BJP’s only got tired ideas and no one has time for tired ideas anymore. There’s a whole generation out there who go to Wikipedia each time they hear Bofors and Quattrocchi, so who’s the BJP appealing to?

To get back to Dr Singh, the concept of a clean government is an idea whose time has come. Has the real Dr Singh’s time come?

The long and winding road

2009-04-24T18:10:00.000-07:00

Now that five years of the UPA are over, what has it achieved? In terms of growth, we’re now worse off, though it’s unfair to blame the government for this since both the rise and fall were very largely driven by global developments, as well as our own business cycle. In terms of deficits, of course, it’s a sad story that can’t be blamed on global developments since the current cycle of fiscal profligacy began before global crisis started affecting us. But this blog is about infrastructure, what are the lasting achievements of the UPA on this front?

On the face of it, many. Two spanking new airports ready at Bangalore and Hyderabad, the ones at Delhi and Mumbai are in the middle of getting completed; we have four Ultra Mega Power Projects which have been bid out and which, over a period of time, will get commissioned; several intra-city metro projects along the lines of the one in Delhi are on their way to getting completed; the list goes on.

It can be no one’s case that infrastructure development is an easy task – recall that none of the so-called ‘fast-track’ power projects talked of in the early 1990s came to fruition despite the combined will of the central government behind them. So each one of the projects just cited is an important breakthrough. The problem, however, is that the UPA has not been able to put in place a mechanism that puts development on the automatic track.

Sorry, I need to amend that. The UPA put in place a mechanism for ensuring infrastructure development was on the automatic track, but it was equally quick to rescind it. So, to ensure that, for instance, only the best developers in the world developed infrastructure in India, and to ensure top-notch firms were not eliminated at the technical evaluation stage (which very often happens), it came up with an evaluation sheet which was an objective one – how many airports have you built before, what traffic did these airports have, how many highways have you built etc. (In the Delhi and Mumbai airports, you’d recall, the technical evaluation was rigged so that just two firms qualified – this new method was meant to stop this from continuing.) So what happened to this? In the case of the highways projects, for instance, it was junked. And, thanks to a minister of whom the less said the better, the great progress made during the NDA years has ground to a halt.

Similarly, when the Railways wanted to build some locomotive and coach factories on its own, it took a long battle to get the Railways to agree to get this done through the PPP route – 74 per cent private, and 26 per cent Railways. Initially, the contracts were completely loaded in favour of the private firms; they were then changed, and loaded in favour of the Railways! With great difficulty, and over a year, the contracts were rescued and brought back to being neutral. The bids were called for and, after a stormy Cabinet meeting, the Railways decided to reject the bid and go ahead and make the engines on its own!

A spanking new Electricity Act was brought into place. This promised a telecom-type revolution. Users like you and I would be allowed to buy electricity from whoever we wanted. So, while the electric wires coming into our houses may have been owned by Reliance Infrastructure, we could ask the Tatas to supply us power – so so many suppliers competing for our custom, as in telecom, prices were supposed to fall. What was the result? In the six years or so that the Act has been in place, there hasn’t been even one instance of a consumer being able to buy power from a third party using what’s called ‘open access’. If you’re a power plant with surplus capacity, and want to sell that power to a third party outside the state, the government doesn’t give you permission to do so – to prevent the electricity from going waste, you then sell the electricity to the government utility in the state, and that utility then sells it outside the state, and pockets the profit. Today, peak power shortages are higher than they’ve been in the past.

As for the airports and the new ports that have been privatised, there’s a new problem. They’re very high cost. In the four new airports, new user charges of around Rs 300 or so for domestic flights is what’s charged and it’s around Rs 1,200 for international flights. In the Nhava Sheva port, a study found users were being charged 80 per cent more! In short, the way the contracts were drawn up and implemented, we’ve got into a very high-cost structure which, in the long run, will kill the industry itself. In the airports, like Delhi, thousands of crore of land has been gifted away almost free to the developer – the Delhi airport has been a long-standing scandal and, if you like, I can give you the urls of some pieces I’ve written on it.

As for the regulators who’re supposed to look after the consumers’ interests, most of these bodies have been captured by bureaucrats and, with perhaps no exception, they’ve, by and large, worked to further the interests of private firms whom the government of the day is in favour of. The corruption is a separate story and, if you’re interested, I’d encourage you to pick up a copy of the latest annual BS Books issue – a chapter called Regulatory Roulette has many of the details.

In a nutshell, as the UPA departs, there’s little to show for the work it has done in the infrastructure space. Which is a real pity since this is one area where the Prime Minister’s closest aide Montek Singh Ahluwalia was personally involved in.

Caste discrimination and other bogus concepts

2009-03-27T18:12:00.000-07:00

Now that election season is upon us, we’re going to be subjected to the usual rhetoric on caste discrimination – we’ve already heard the great Varun Gandhi’s vitriol on the other religious kind of rhetoric (it’s a moot point whether the BJP which is desperately looking for allies would pushed into supporting Varun only because the Election Commission’s actions made him a national hero). So, while getting in her Brahmins, Mayawati will go on about how she will get the Dalits a better deal; Lalu Prasad will do the same for the OBCs; and so on.

But how real is the discrimination and, to that extent, how much has electoral representation helped alleviate this? That is, are the OBCs in Bihar any better for having had Lalu and family in charge of the state? There is the argument that Lalu being in power gave the OBCs a ‘voice’ – they can now go and report a crime against them in the police station, for instance – and ditto for the Dalits and Mayawati, but I’m not sure how far you can live on ‘voice’ if it doesn’t get followed up quickly enough with some income. If it did, Digvijay Singh would never have got voted out in Madhya Pradesh.

Unfortunately, the data on political representation is too scanty to arrive at a firm conclusion – we know, for instance, that Mayawati is a Dalit leader but if 50 per cent, say, of her MPs/MLAs are Brahmins, we can hardly put that down as Dalit representation, can we? Apart from the reserved SC/ST seats, there is no data on what proportion of MPs/MLAs are from different castes. That’s clearly the subject of a PhD thesis or two, given that it can’t be too difficult to figure out the castes of a few thousand MLAs/MPs based on their surnames. On the face of it, though, the evidence is likely to show that political representation doesn’t make more than an iota of a difference. The average income of OBC households across the country is around Rs 60,000 (I’ll come to how I know that in a minute) while that in Bihar is just two thirds of that at Rs 41,000. Assuming, and I’d appreciate it if political scientists gave me more information on this, that most of Lalu’s MLAs were OBCs, this is as clear a rejection of the political-representation-helps’ thesis.

Take the other argument made, while talking of the need for OBC reservations a few years ago – OBCs are 33 per cent of the population (in later NSS surveys, more castes were added to the OBC list and so the proportion of population shot up to over 40 per cent) but they’re just 24 per cent or so of what are called ‘professional’ jobs. Clear evidence of ‘discrimination’. Economist Surjit Bhalla looked at the data from the government’s own National Sample Survey (I wrote up the stories in this newspaper) and it turned out there was no discrimination. Here’s why: OBCs were 32 per cent of the population, but they were just 26 per cent of those who’d passed high school … the rest of the numbers pretty much flow from this one – the OBCs were 24 per cent of those who were enrolled in colleges and 24 per cent of those in professional jobs. So, if there’s a problem, it lies in the proportion of OBCs passing out of schools, it is not in reservation in colleges or in jobs.

My friend Rajesh Shukla who is the Chief Statistician of the National Council of Applied Economic Research (the only organisation in the country to do a large annual income survey) and I are, in fact, working on a data-based book on income/expenditure/savings patterns of various castes in the country – hopefully, we’ll be done in a couple of months. While it’s early days yet, what’s interesting is that for most areas – income/expenditure/etc – the caste factor is a lot less important than others.

A sneak-peak at one or two sub-heads in the book will give you some idea of what I’m saying. Take the income levels of those working in agriculture. SC/ST families here have income levels that are around half those of the upper-caste Hindus, but break this up into land-ownership, and you’ll find this is what accounts for much of the difference. If you’re still not convinced, look at the income levels of those employed in the modern services sector – the income levels of SC/STs is broadly similar to that of the upper castes! I could go on, but you get the picture – the SC/STs in modern services are as educated as the upper castes are, and this is what is primarily determining salary/income levels.

So, if you’re interested in reading about this kind of stuff, do write in, book your copy now, and that kind of stuff!

Jai ho!

2009-02-27T18:14:00.000-08:00

Two things have really bugged me over the week – the fact that the Mumbai airport also wants an Airport Development Fee (ADF) and that the Railways was allowed to go ahead and set up a diesel locomotive factory on its own despite getting a lower quote from a private sector firm. There’s no real link between them except that both make a mockery of the whole system of getting global bids, of transparency, and stuff like that.

Take the Railways case first. I’ve written about this earlier in my column “Getting PPP back on track”. Very briefly, the Railways wanted to set up two factories, one each for diesel and electric locomotives; the tenders moved from the extreme of being very favourable to the bidders to being extremely unfriendly, before they were fixed; there were no bids for the electric loco; there was one bid for the diesel one from General Electric of the US, a bid that was lower than what it would have cost the Railways if it were to build on its own, but the Cabinet allowed it to reject the bid and instead set up the loco factory on its own. In which case, you can expect the usual cost and time overruns that plague all PSU projects – a start has, of course, already been made since the Railway Minister has even decided where the plant is to be set up!

I met a very senior bureaucrat last night, and he put a totally different spin, one that’s even more worrying. He argued that turbines supplied by General Electric to the Dabhol power plant continue to malfunction, and GE is most reluctant to take responsibility for them. While the original Dabhol plant asked GE to give a performance guarantee, when the government entered into a renegotiation and restarted the plant after paying GE and Bechtel around $300 mn for their share of Dabhol’s equity, it did not insist upon a similar guarantee!

The government even brought this matter up with GE’s global chief, but clearly to no avail. So why aren’t we penalising GE, he argued, making it clear that it cannot expect more government business unless it takes responsibility? Why not indeed?

Relate this now to the agreement the US signed recently with Swiss bank UBS. The US has got UBS to agree to give it details of US citizens who’re dodging US taxes using UBS. Why doesn’t our government do something similar, given how Indians are supposed to have stashed away more than a trillion dollars (that’s India’s entire GDP by the way!) in Swiss banks. I mentioned this to another senior bureaucrat, from the finance ministry, at the same party. Since there were other guests around, he loftily told me that the government got all the details it wanted, only these were not publicised the way the US did! If that’s true, how come there’s been no sign of this wealth being taxed? Certainly the tax numbers don’t show this. Once again, a sign that the government just continues to pander to corporate interests.

The best, or worst, example of this of course is what’s happening on the Delhi airport and how this is now to be extended to other airports. The GMR Group won the bid for the Delhi airport by promising to share 49 per cent of topline revenue with the Airports Authority of India (AAI). It was obvious this was going to fail since you can’t share 49 per cent of your topline and still hope to make money, but anyway. Soon enough, GMR redefined what topline was, and came up with a proposal to take deposits which were not going to be shared with the government – to the government’s shame, it okayed this. As a result, the AAI share of revenues fell by 20-50 per cent, depending on what real estate values are. Anyway, given the real estate slump, GMR couldn’t raise enough deposits, so the government has allowed it to charge an Airport Development Fee by charging a few hundred rupees to everyone who flies.

Now other airports, like the one in Mumbai want to levy a similar fee.

Why bother to have agreements if you can just flout them in this manner? Indeed, it’s best to offer to share 99 per cent of revenue, win the contract, and then renegotiate it the way GMR has. After all, if the airport has to be completed, or a road has to be completed, the government will agree to anything.

By the way, this is not some fanciful stuff from the top of my head. In some cases, the Tariff Authority of Major Ports (TAMP) was actually allowing companies to charge their revenue shares as cost! So, let’s say a company’s costs were Rs 80 and if, say a 25 per cent return was to be allowed to it, it would need to earn Rs 100. So, 100 units of cargo were being despatched from the port, it would be allowed to charge Re 1 per unit. Now let’s say it promised to share half of its earning with the government – so, it has to give Rs 50. TAMP, in several cases, assumed the company’s costs were Rs 130, and so allowed it to charge Rs 1.3 per unit of cargo! The company, if it had wanted, could have offered to share 99 per cent of its revenue with government and still not have been out of pocket.

The story’s the same in all cases – the government appears to be run solely/largely by what corporate interests dictate.

Jai ho!

Working the numbers

2006-12-29T01:21:00.000-08:00

Looking at the sharp increase in trade union membership between 1989 and 2002 (the figures for the second date have just been released), it would seem that trade union membership has been soaring. The total membership of the four big umbrella unions, all affiliated with political parties, has nominally grown from 8.3 million in 1989 to 15.7 million—which translates into growth of 90 per cent in 13 years. Such growth would ordinarily suggest either growing insecurity in the labour force, encouraging them to flock to the unions, or increased industrial strife. The membership of 15.7 million is particularly striking because it represents about half of the total workforce in the organised sector.

The fact, though, is that these numbers do not jell with the evidence of a sustained drop in the number of mandays lost because of industrial strife. Nor is it on all fours with the visual evidence which suggests that the bulk of new employees in many sectors are non-unionised; and the numbers employed in the traditionally unionised sectors have been falling because of various retirement schemes, greater automation and plain attrition. Deeper scrutiny therefore reveals the secret of the numbers: the umbrella trade unions have included this time the people whom they have enrolled from the agricultural workforce—a disparate and spread-out group that is hard to enumerate and verify on the basis of surveys. If these agricultural members are excluded from the umbrella unions' total membership numbers, the figure for 2002 drops from 15.7 million to 11.3 million. In other words, agricultural workers account for more than half the reported increase in membership; the growth of trade union membership that is non-agricultural is only about 35 per cent over 13 years, or an annual growth rate of barely 2 per cent—a more credible figure, given the overall context.

It is worth noting that one of the four umbrella unions, the Centre of Indian Trade Unions (affiliated to the CPI-M), has not tried to boost its membership numbers in this fashion. The other three—the Bharatiya Mazdoor Sangh of the BJP, the All-India Trade Union Congress of the CPI and the Indian National Trade Union Congress of the Congress party—have all fallen to the temptation. The question is what incentives the umbrella trade unions see in doing this. Other than an ego boost, there is little to be gained from puffing out one's chest; certainly, there are none of the incentives that were available to the accountants at Enron, in terms of boosting the bottom line, or raising market expectations and share prices. It turns out that one prize may be the benefits associated with being among the top few, such as representation on various delegations to the International Labour Organisation. For instance, Aituc has reported the greatest growth in membership, from 0.9 million to 3.3 million—which helps it overtake Citu at 2.6 million.

That is not to argue that membership among agricultural labour should be neither sought nor counted—it is an entirely valid and indeed necessary task to gather key data of this nature. However, it is important to segment this data and use it correctly for purposes of any kind of analysis. Comparing one set of numbers in 1989, comprising industrial workers, with another set of numbers in 2002, which includes a new category of workers, is like comparing apples and oranges.

It's a small world

2006-12-28T02:02:00.000-08:00

The big hope that many have for global growth not slowing too much is that, while the US will slow, the slack will be picked up by both the Eurozone as well as Japan. A presentation at ICRIER by Joshua Felman, the IMF’s senior resident representative in India, suggests this may not be true. For one, says Felman, industrial output has been falling in the Euro area and Germany will be raising VAT levels next year as well. As for Japan, consumption growth there is also very weak, which is why third quarter GDP growth there has fallen somewhat – while consumption grew 1.5 per cent in Q2 2006, it fell 1.75 per cent in Q3 – and recent economic growth is primarily driven by net exports. Besides, since there is a strong correlation between GDP growth and exports in both areas, and the US is a big driver of these exports, a US slowdown would automatically hit both the Eurozone and Japan. The 2001 US slowdown, in fact, reflected just this – while US growth fell from 3.7 per cent in 2000 to 0.8 per cent in 2001, Eurozone growth fell from 3.9 per cent to 1.9 per cent, and Japan from 2.9 per cent to a mere 0.4 per cent.

Unlocking an open door

2006-12-28T01:34:00.000-08:00

The government’s official view, articulated as recently as two days ago by Commerce and Industry Minister Kamal Nath, is that allowing foreign investment in multi-brand retailing, of the Wal-Mart and Carrefour type, will hit the millions of small mom and pop (kirana) stores in India. Hence the circuitous and limiting freedoms given so far: allowing foreign direct investment (FDI) for only single-brand retail stores (such as Mont Blanc and Louis Vuitton) or in the cash-and-carry business which does not affect the kiranas since it is aimed at eliminating the wholesaler. Indeed, Mr Nath had said that even if the Left parties, who have been opposed to FDI in retail, were to change their stance, he did not think multi-brand retailing should be opened up to foreign investment. Well, imagine the surprise now that Mr Nath is talking of opening this FDI window just that much more, while ensuring that the kirana is under no threat. The areas which are being thought of for this include electronics, sports goods, building equipment, stationery and possibly furniture. The argument is that since these items are not really stocked by the neighbourhood kirana, the latter will not be hit.

The question is whether this is akin to unlocking a door that has already been opened by someone else. FDI in organised, multi-brand retailing is already here; to persist therefore with the fiction that India allows FDI in only single-brand retail or in the wholesale cash-and-carry type of business is to fool no one. The policy as it already exists allows FDI in the cash-and-carry business and it also allows foreign retailers to operate in the country through franchisees. It is using a combination of precisely these two elements of the package that Sunil Mittal of Bharti is planning a huge retail empire in partnership with Wal-Mart. If Wal-Mart is going to be here anyway, why keep up the pretence of not allowing multi-brand retail FDI? And since Bharti-Wal-Mart can stock any manner of sports goods or electronic items, why talk of allowing multi-brand retail in just these limited areas?

The reason why this subterfuge continues has little to do with the Left parties that Mr Nath chose to speak of the other day; it has more to do with the government’s own lack of firm conviction and the possibility that it has not fully studied the impact of FDI in retail. Since Indians spend 40 per cent of their annual expenditure on groceries, if a Wal-Mart type of multi-brand retailer lowers prices by (say) 20 per cent through better supply chain management, the impact on saving and spending patterns will be substantial, given that 60 per cent of GDP is accounted for by household consumption. As for the impact of the cash-and-carry business on kiranas—there is an obvious complementarity between the two since cash-and-carry is a wholesale business which offers lower prices for clients like kiranas due to superior logistics. Indeed, when Metro AG first began operations in Bangalore, one of the arguments made was that there was a large swathe of kiranas that did not get serviced by the existing distribution network of large consumer product firms like Hindustan Lever, and that it was going to benefit them—cash-and-carry did not offer credit like Lever did, but it sold goods at a lower price. Perhaps the government needs to educate itself on these issues.

Opportunity not landed

2006-12-26T01:51:00.000-08:00

The biggest constraint facing industrial development may no longer be poor infrastructure, it may be land. According to the series of reports being carried in this newspaper, just four state governments have to acquire 100,000 acres of land (to put this in perspective, the country's leading real estate developers have land banks of 5,000-10,000 acres each, which have been acquired over decades) for projects ranging from simple industrial ones to more complex special economic zones and integrated townships. As should be obvious from recent headlines, the process is not going well. The West Bengal government has failed to get 1,600 acres for the Tata small car project. The state government has to get another 34,000 acres for projects like the Salim township near Haldia. In Orissa, similarly, despite Posco changing its plans for its proposed 12-million tonne steel plant so as to reduce the land requirement from 5,000 acres to 4,000 now, the government is still not able to deliver. Just 450 families have managed to stall the project.

To a large extent, governments are to blame for this state of affairs. In Orissa, much of the land promised to Posco had been acquired by the government a long time ago, but since it didn't fence off the land, encroachers took over. If Posco decides to walk out because of these 450 families, the state stands to lose 48,000 permanent jobs in the plant and 467,000 jobs during the construction years, apart from significant tax revenues of more than Rs 1,000 crore annually. Even for individual families, it should be obvious that if rural incomes are to be increased, people have to be moved off the land—and Tata Motors has promised jobs to the families of those displaced. There should be an acquisition hierarchy—barren land over fertile land, single cropped land over double cropped land—but at the end of the day, land has to be made available or no industrialisation is possible.

Part of the problem comes from the state taking on the responsibility for acquiring land on behalf of industrial promoters. It is time industry learnt to negotiate with farmers and bought land directly—as some promoters of SEZs have been asked to do. If Reliance can be expected to acquire 15,000 acres of contiguous land in the open market, there is no reason why someone else cannot buy 1,500 or 5,000 acres. The state's responsibility should be restricted to stipulating zoning, so as to allow land to be converted to industrial/commercial use, and to saying that once (say) 75 per cent of land-owners in an area agree to sell, the rest should be required to do so at the market-clearing price. For the rest, the state's job should only be to ensure that there is no coercion in the acquisition process. This will de-politicise the issue and get the country away from protest fasts; once the question becomes not politics but price, matters will get sorted out between buyers and sellers.

A tragedy, a farce, and then what?

2006-12-25T00:15:00.000-08:00

Even by the standards of vacillation of the government, the policy on increasing foreign investment levels in telecom has got to take the cake. Foreign investment levels were first raised, from 49 per cent to 74 (the 74 per cent was to include all types of foreign investment including portfolio investments), in November last year, and a press note to this effect was issued on November 3, 2005. Since then, however, due to sharp disagreements within it, the government has been forced to extend the effective date of implementing the policy on four occasions! In between, there have been suggestions to come out with two policies, one for companies where FDI levels are below 49 per cent and one for those above this; and when the Cabinet met in September, Communications Minister Dayanidhi Maran was so upset he said the government might as well scrap the entire policy of increased FDI.

What’s really interesting, however, is not just the fact that the policies being advocated on security grounds are unique to India (even security-paranoid countries like the US, China, and Israel don’t follow the kind of policies being advocated), but that the majority of the differences between various arms of the government have been ironed out, and the policy still hasn’t been cleared! Equally curious, of course, is the kind of objections being raised and the fact that the ministries raising them don’t have any locus standi on the matter.

One set of proposals in the original policy of November 2005, for instance, related to Indian nationals being in control. So, the policy said the CEO, CFO, CTO, essentially the top brass, had to be Indian nationals—this seemed a bit paranoid considering Indians are seeking to head more and more foreign firms, but it wasn’t a sticking point for most investors. Related to this was the concept of a “serious” Indian investor, defined as someone who held at least 10 per cent of the company. This “serious” investor was to be consulted on any important appointments—since this gave a stranglehold to a minority shareholder, most people objected to it and so, at the November 2006 inter-ministerial meeting, it got dropped. The only ministry that still wanted the “serious” Indian investor clause was the defence ministry—now what interest the defence ministry can have in this matter is unclear.

The other substantive part of the 2005 policy related to what’s called Remote Access, or the ability of a firm to oversee its network from a remote location. So, for instance, if VSNL has a client to whom it provides a service in the US (through a leased line it has from Sprint, for instance), Remote Access is what would allow VSNL to monitor this, to see if the client’s network is functioning well or if it is getting clogged, to fix it if need be, and so on. While Remote Access was allowed till November 2005, the new policy sought to restrict it. It was then pointed out, by international telecom majors as well as Indian software and other firms, that Remote Access is allowed by even the US and Israel, which are among the most security-conscious countries in the world—indeed, as you read this piece, there are 38 Indian firms that have operations in the US which can be remotely accessed from India, and companies like Nokia are moving their Network Operations Centre to India to remotely access their global networks sitting here. What’s sauce for the goose ought to be sauce for the gander.

But this piece is not about whether Remote Access should be allowed or not. It is about the fact that on November 29, there was an inter-ministerial meeting which included all those ministries that could possibly have something to say about Remote Access, from the home ministry, which houses the Intelligence Bureau, to the defence ministry, the ministry of external affairs, the finance ministry, even the National Security Council Secretariat and, of course, the telecom ministry. Prior to the meeting, each ministry had given its comments on each section of the proposed policy.

At the meeting, changes got made in the policy to accommodate the objections from the Intelligence Bureau and the defence ministry, primarily. So, for instance, while the telecom ministry was in favour of continuing with the unlimited Remote Access facility, this was narrowed down. So, while Sprint, for instance, can remotely access its Indian network and see if Microsoft’s communications are running smoothly, it cannot allow Microsoft’s US operations to monitor this unless the Department of Telecommunications in India specifically authorises this. Similarly, Sprint is prohibited from monitoring any content (read tapping of phones) and it has to provide in India a “mirror image” of the information that is available for Remote Access, apart from keeping, at any point in time, a complete audit trail of Remote Access activities for the past six months.

That is, with the exception of the special powers for the “serious” Indian investor, the new Cabinet note on foreign investment took into account every possible objection by various ministries. An annexure to the note details all this. And yet, at the Cabinet meeting on the issue, the matter gets deferred once again, for the fourth time.

Marx told us, while correcting Hegel, that history repeated itself, first as tragedy and the second time as farce. Wonder how he’d have described a fourth repetition?

Blessing monopolies

2006-12-24T02:09:00.000-08:00

Sometimes, it would seem that governments are even fonder of monopolies than private businessmen. The latest piece of evidence in support of such a thesis comes in the shape of the new city gas distribution policy, which makes all the right noises about competition but ends up proposing city-wide monopolies for gas supply to homes. This is of a piece with the power distribution monopolies that have been handed out in Delhi and Orissa (again, in the name of competition), and with the stipulation that those who win the right to run the Delhi and Mumbai airports will be given the right of first refusal when it comes to building a second airport for each metropolis—whereas a competition policy would have said that the same company cannot run both airports. Competition, it would seem, has no godfathers, monopolies do.

The city gas distribution policy now talks of throwing the field open to multiple players, and of open access. It specifies that any operator building a gas pipeline will have to create capacity that is a third greater than that required for its own use, so as to allow others to use the pipeline on the basis of the common carrier principle. And a regulator is to be in place next month, to fix pricing and other related policies. Having said all this, the policy relapses into creating monopolies, though it says that exclusive contracts for cities will be for a limited period of 3-5 years, with the size of investment and the population of a city to determine the exact period.

The only argument in defence of this approach is that, if a limited period of monopoly profits is not allowed, no one will come forward to develop the city gas market. But there were several operators, such as the Ambani brothers, who were in favour of non-exclusive licences; so it cannot be that no one was interested in a competitive scenario. The level of interest also shows that the market is lucrative enough for firms to want to build pipeline capacity and then supply the gas. Second, the very limited spread of city gas in areas where there are already monopolies, such as in Delhi and Mumbai, is evidence that monopolies in themselves don't generate development. While there could still have been a case for allowing an exclusive period for the pipeline so as to allow recouping of costs, the same cannot be said for the distribution of gas which is a totally different business and does not involve fixed/sunk costs in the same way. In other areas such as television (both direct-to-home via satellite, and the conditional access service through cable), which have also been opened up recently and are fairly capital-intensive as well, it's interesting that no such monopolies have been considered.

A policy of limited-period monopoly naturally brings with it the question of choosing the monopolist. How is this to be done? Bids cannot be on the price at which the gas is supplied to consumers, since there are too many variables involved that are outside the control of the firm which is supplying gas—international energy prices being one example. Will it depend upon committed gas supplies that the bidder already has—in which case, those with their own gas supplies have a natural advantage over the others? If the monopolist is to be chosen on the basis of the revenue to be shared with the government, does it imply that others will have to match this share once the exclusive period is over?

Teacher power

2006-12-21T02:27:00.000-08:00

Various studies have made it pretty clear by now that teaching in government schools is generally not as good as it is in private schools. And, while the results in private schools are better, the teachers there get paid much less than their government counterparts, sometimes even less than half. So why doesn't the government just close down its schools and hand them over to private educationists? That way, you get better results and you even spend a lot less. While most suspect this is because teachers are unionised, Geeta Gandhi Kingdon of the University of Oxford has an even more amazing story to tell, that of the huge political power such teachers wield in states like Uttar Pradesh. Presenting her findings at a seminar organised by ICRIER, Kingdon found that, since the early 1950s, teachers have comprised around 12-13 per cent of members of the UP Legislative Council, the figure's been around 6-7 per cent for the Legislative Assembly, and about 10-12 per cent in the case of the state's Cabinet.

Two swallows...

2006-12-20T02:49:00.000-08:00

Judging by the bids received for the two ‘ultra mega’ power projects, India’s power sector has entered into a new zone of hope. While the state-owned NTPC’s cost of production from all its plants across the country (a large number of which are fully depreciated) is Rs 1.64 per unit, Lanco has bid a tariff of Rs 1.196 per unit over the 25-year life of the Sasan project—the initial tariffs for a year or two are expected to be under a rupee. For the other project, at Mundra in Gujarat, the winning bid from Tata Power is Rs 2.264 per unit. While it’s tempting to dismiss the Lanco bid as adventurous—and the relatively young company is certainly an aggressive bidder—what is important to note is that the bid is not out of line with what the others have quoted. Reliance Energy has quoted Rs 1.29 per unit and Tata Power Rs 1.41. What is surprising, of course, is the NTPC quote of Rs 2.126 per unit—does this point to lower efficiency levels in what has been seen as a very successful public sector enterprise? The fact that the bids for the Sasan project, based on a captive coal mine, are lower than for the Mundra project, based on imported coal, puts a question mark on the general belief that imported coal is more economical than Indian coal—it is in fact railway freight that makes Indian coal expensive when transported over a long distance. Captive mines improve project viability because of another factor—they do not have to pay for Coal India’s inefficiency. There are lessons in these for India’s power bureaucracy.

It would be a mistake, though, to judge the future of India’s power sector on the basis of these two bids. For one, the government has allotted the land, given captive mines and created special conditions for these projects, including working on making payment security more stringent—the generators are to be allowed freedom to sell to third parties if the state electricity boards are unable to make payments (i.e. the ‘open access’ that everyone has been clamouring for, is being offered to these projects). Since these terms are not being offered on all projects, it is likely that the others will be priced higher, to neutralise the greater risk and higher costs. Second, since the electricity boards are meeting their payment obligations today, they should be able to provide a payment guarantee to these two projects, and financial closure may not therefore be a problem. But this ability is a direct fallout of the securitisation package for the boards—if they continue to under-recover on new electricity supplies, however, they will start defaulting sooner or later, and that will mean the bankability of projects based on sales to them will suffer. Indeed, as the installed capacity in the country rose from 69,065 MW in 1991-92 to 112,682 MW in 2003-04, commercial losses of the boards rose from Rs 4,117 crore to Rs 20,379 crore (and further to Rs 22,013 crore last year). Given this, it is by no means certain that financiers will back more than a handful of mega or other power projects. In other words, there is no getting away from the old fashioned solutions of reducing theft and subsidies in the sector, and creating transmission corridors to wheel power in and out of deficit and surplus regions.

Countervailing power

2006-12-19T02:59:00.000-08:00

On the face of it, the formal mechanism established by five leading oil importers to try and get lower oil prices, is an effort to use countervailing power —when faced with suppliers who’re cartelising, buyers also cartelize and, if all goes according to plan, the stronger cartel (the buyers’ one!) wins. Given that much of the oil price hike some months ago was a result of speculation rather than a supply shock or a surge in demand, oil consumers are within their rights to form such a cartel. Yet, it will take more than such a body to get lower prices. Ram Naik, petroleum minister in the NDA government, used to talk of the Asian premium, essentially the practice of Opec countries charging Asian countries like India and China $1-2 more per barrel than they did to US and European buyers, but was unable to do much about it. His first successor in the UPA, Mani Shankar Aiyar, did talk to his Opec counterparts about the Asian premium, but also tried another tack, to get countries like China and India to collaborate instead of competing for oil fields abroad—the logic being that if countries bid lower prices for oil fields, the long-term costs of oil would automatically decline. Nothing much emerged from this initiative.

For such cooperation to succeed, the approach will have to be more sophisticated than just asking producers for an across-the-board price cut and threatening a boycott if one is not made available. A blunt attack of that sort will not work since producers know that buyers need the oil to keep their industrial fires burning; typically, producers have better staying power in that they can survive for a longer period without oil revenue, whereas an oil-dependent economy could be brought to its knees in a matter of weeks. A better tack therefore would be to play off the marginal producers against the larger ones—Reliance Industries, for instance, is able to buy Venezuelan crude at a substantial discount to West Asian prices, since its refinery can process a larger range of crudes. It is not certain, however, whether such an approach works for countries who account for half the global oil demand today—that’s the share of the US, Japan, South Korea, China and India, the countries whose oil ministers have established the oil initiative. A more realistic bargaining mechanism would be one that involves sitting down with oil exporters and exploring alternative energy scenarios. For instance, oil importers need to explain to the oil-supplying countries that they will move to alternative sources of energy if oil prices move above pre-specified levels for any sustained period. Nor is this an entirely empty threat. One of the reasons why the global economy did not collapse when oil prices rose to historic highs some months ago was the decline in the energy-intensity of most developed economies. Once OPEC countries realise that future demand sources will dry up, either due to greater energy-saving technology or due to using of alternative energy sources, an organised group of buyers should be able to nudge prices downward. And since every dollar-per-barrel saving on the price amounts to billions of dollars, the effort is certainly worth it.

Poverty

2006-12-18T02:25:00.000-08:00

Is the Left right on China

Jobless growth, ha'ah!

Growth and development

Is the Left right on China?

2006-12-18T00:46:00.000-08:00

It is true, some of the charm’s worn off the Chinese miracle as it has become obvious the real miracle is not so much the economy’s productivity as it is the large amounts of capital virtually being thrown in to get growth. Indeed, as well-known China expert Nicholas Lardy pointed out at one of the various seminars organised by the NCAER as part of its Golden Jubilee celebrations, total factor productivity in China grew 3.8 per cent per annum in the 1978-93 period and this then fell to 2.7 per cent per annum in the 1994-2004 period. Even so, the sharp hike in its GDP growth (Chinese GDP grew four times in 1990-2003 while India’s grew just 1.9 times), the sharp reduction in poverty (6 per cent of China’s population is poor versus India’s 30 per cent or so), and its hire-and-fire model of export-oriented growth retain much of its allure even today.

Lardy’s talk at the NCAER was about the progress, or the lack of it, that China was making in its attempt to change its growth model enough to be driven more by domestic consumption than by investment growth, despite the fact that the central leadership favours this. One of the reasons why the central Chinese leadership wants this is that the productivity of investments is declining pretty rapidly and since much of this is being financed by loans from government-controlled banks, the financial system can once again come under a threat—over the past few years, the government has injected a whopping $500bn to help write off old bad loans. Second, employment growth has also fallen due to the hugely capital-intensive infrastructure development, from 2.5 per cent annually in 1978-1993 to just 1 per cent between 1993 and 2004. Third, the share of China’s GDP that is being consumed by households fell from 50 per cent in 1990 to around 40 per cent in 2003 and, according to Lardy, was around 38 per cent in 2005—in the UK, the consumption share was around 60 per cent and in India it was 61 per cent. Had China’s consumption proportion remained at the 1990 levels, personal consumption in China last year would have been 30 per cent higher than it actually was.

What’s interesting are the results you get when you marry these numbers with the distribution of population in both countries. At one level, the answer’s obvious since inequality levels in China are far higher than they are in India. According to the World Bank’s World Development Indicators (WDI), China’s Gini coefficient was 44.7 in 2001 versus India’s 32.5, so it is obvious the fruits of this development are a lot less evenly spread in China. According to the WDI, the bottom-most quintile of China’s population accounts for just 4.7 per cent of the country’s consumption—in India, the figure is 8.9 per cent. The quintile just above this consumes 9 per cent of the total consumption in China as compared to 12.3 per cent in India. The topmost quintile in China consumes half the country’s consumption versus a lower 43.3 per cent in the case of India.

Since China’s 2005 GDP was around $2.3 trillion, this means its consumption in that year was $847 bn. Divide that up into the various quintiles, and this means the population in the lowest quintile consumed just under $40 bn in that year; the next quintile consumed a little over $76 bn and so on, till the topmost quintile that consumed over $430 bn. Do the same exercise with India’s vastly lower GDP of a mere $785 bn (lower than even China’s consumption!), and you see that the bottom-most quintile consumed nearly $43 bn in that year! That is, the bottom fifth of India’s population is actually better off than the bottom fifth of China’s. Divide this consumption by the population in each quintile to take into account China’s larger numbers, and even the second quintile is only marginally better off than its Indian counterpart. Maybe India’s Left parties, which, while espousing the cause of China so dearly each time around and still refusing to buy into the Chinese growth model, are on to something after all.

The key here, obviously, is whether the distribution of each quintile is being described relative to the country’s income (in which case, China’s bottom-most quintile is a lot better off than India’s) or whether it’s relative to the consumption. The WDI, however, says very clearly that the data relate to expenditures and not income shares.

This is what the central leadership is trying to fix since, apart from the fact that greater consumption levels would help China move on to a more durable growth pattern and make it less dependent upon global demand, one presumes, at some point there is always the fear that the wretched of the earth may actually rise in revolt. Lardy’s view, however, is that things have only got worse with investment growing faster than GDP and the share of consumption falling even more in the first half of 2006.

Nobel cause

2006-12-15T03:10:00.000-08:00

With Grameen Bank’s founder, Muhammad Yunus, getting his Nobel Peace Prize a few days ago for his pioneering role in spreading micro-credit in Bangladesh, the entire movement has just got another push. At a time when banks, such as in India, are unable to push credit to distant villages and are yet to come up with a viable model to lend to the poor and disadvantaged, Mr Yunus’ Grameen Bank has shown how this is possible, and that too with recovery rates as high as 98.85 per cent. In India, Nabard figures show, the number of Self-Help Groups (who take micro-credit) has increased around 10-fold in the last 5 years, and the 2.2 million such groups today cover around 31 million households through women’s membership. Indeed, such is the potential that India’s leading and most dynamic private bank, ICICI Bank, has an active division working on ways in which to tap this market--this involves lending to NGOs familiar with an area and using their expertise to lend to the right sort of families/structures. But while there can be little doubt about the need for such financing, particularly when, as in India, very large parts of the population remain untouched by the formal banking network, it is important not to get carried away by the heartwarming stories of those used to paying 150 per cent interest rates now getting it at 18 per cent, and so on. Microfinance is very important, but is it, as is being increasingly thought, a substitute for good old job creation through the setting up of industrial units? The two, actually, are unrelated, and are best seen that way.

In India, a recent study shows, the average size of loans for first-time group members is Rs 2,684 and Rs 4,497 for repeat loans. This is probably enough just to buy a sewing machine or some such rudimentary piece of equipment, if you assume that the money is being taken only for business purposes and not for consumption. In other words, such units are family-run and probably suffer from the attendant problems of low productivity and low skills associated with poor scale. It is unclear how such units can possibly compete with output from modern industrial units and, now, very low-cost Chinese imports. While the model may work for small services, a barber shop or a small provisions store in the village/town, its competitiveness in other areas is not immediately obvious. Indeed, it is precisely this lack of competitiveness vis-à-vis the larger industrial sector and imports that ensured the demise of the SSI sector.

While it is important that enough studies be done to examine the longevity of units financed by micro-credit and the amounts of income they help generate for members, it does seem intuitively obvious that micro-credit cannot be a substitute for employment creation, whether in the services sector or the industrial one. The other issue to bear in mind is the cost of such money. It is intuitively obvious that if banks consider micro-loans more risky, the only way they will do such lending is if the returns are made higher. A 20-24 per cent lending rate would ordinarily be considered high, if not usurious, but when it is usually for short-term trade credit to someone who would ordinarily pay much more in the informal financial market, it works well. However, it is as well to recognise the limited framework in which such micro-credit works.

How many luxury condos?

2006-12-14T03:14:00.000-08:00

For most builders, that’s the most important question these days — how many luxury condominiums should they build? Brokerage house SSKI attempts to answer that after looking at the results of the NCAER’s income projections till the end of the decade and marrying that with the average size of the house people buy in various income groups. The result is an exercise that says a total of 15.9 bn square feet of additional residential space will be demanded between now and 2010. Around 1.5 per cent of this will be bought by the super rich, or those whose annual family income is more than Rs 1 crore (in 2001-02 prices) — this group, incidentally, forms just 0.06 per cent of the total population in the NCAER projections for 2009-10, but the bigger size of accommodation that crorepatis demand increases their share in residential space. All classes of rich, those earning more than Rs 10 lakh per year, will constitute 1.7 per cent of the 2009-10 population according to NCAER— in terms of accommodation, however, this group will comprise over 17 per cent of demand. So you know what type of houses to build now.

No dole to deliver

2006-12-12T06:55:00.000-08:00

Controversy has been generated by the issue of whether the Prime Minister said that Muslims should have the first claim on development resources or whether, as officials claim, he said this of all disadvantaged groups, whether they are from the Scheduled Castes and Tribes, Muslims or anyone else. Those who want to colour his statement will not agree that it was an unfortunate sentence construction that caused the problem; in any case, the substantive issue is what the Sachar report has pointed out with regard to the poor socio-economic status of Muslims, and who can blame the Prime Minister for reacting to that?

The debate, if it is to be productive, should go beyond what the Prime Minister said or did not say, and focus on the fact that Muslims in the country are, as a group, less educated and less well-off than not just upper caste Hindus but, to an extent, even the Scheduled Castes. In the event, there can be no doubt the state has a role to play, not in reserving jobs for them, but in ensuring that they get a good education, which, in today’s conditions, is the only way to get ahead in life—indeed, the Sachar report recognises that if Muslim children are able to complete primary and secondary schooling, they will fare much better. This approach will be opposed by those who see communal politics everywhere, but there is a Constitutional guarantee to provide such education. And to avoid the stigma of focusing on just one community, the state should offer this to everyone. The issue here would be the best means of providing such education; and the course of action that recommends itself is the provision of education vouchers that can be used at both private and government schools. The resulting competition for students will hopefully provide an incentive for government schools to improve the quality of education they provide.

The more important lesson, for the Muslim community as well as those who seek to garner their votes, is that even if the Prime Minister’s comments are interpreted to mean “Muslims first, others later”, he has precious little to give them “first”. In a country with a labour force of around 450 million, the total employment provided by the government and the rest of the state sector is a tiny fraction. After government salaries and interest payments have been accounted for, the government has little left over for genuine “development expenditure”. So, if the Muslim community is to do well, its only hope lies in being a part of mainstream India, as even a cursory glance at the Sachar report should make clear. Despite the massacre of the Muslims in Gujarat four years ago and the widely held perception that the state is anti-Muslim, Muslims in Gujarat are amongst the best off in the country, whether in terms of literacy (73.5 per cent versus the average of 59.1 per cent), the mean years of schooling (4.29 years versus the average of 3.26), and monthly per capita expenditure (Rs 875 versus Rs 804 for urban areas, and Rs 668 versus Rs 553 for rural areas). Essentially, if a state does well economically, everyone gets to share the pie. If a state does badly, everyone does badly—which is why the lot of Muslims in states like Uttar Pradesh and Bihar is the worst in the country. Politicians would be happy to make promises at election time, but the government’s ability to deliver on such promises is severely limited; the community should therefore realise where its best interests lie.

Ultra mega ambitions

2006-12-12T06:46:00.000-08:00

Power Secretary RV Shahi appears to have pulled a rabbit out of his hat at a time when his ministry has fallen hopelessly short of the capacity creation target for the current five-year plan, which ends in March. Compared to the original Tenth Plan target of adding 41,110 Mw of new capacity, later scaled down to 36,956 Mw, the current expectation is that only 28,000 Mw will come on stream—a shortfall of more than 30 per cent on the original target. While most observers had written off Mr Shahi’s ultra-mega power projects (of 4,000 Mw each) as castles in the air, the power secretary has managed to get 16 bids for two of nine such projects last week. Mr Shahi now expects an equally good, if not better, response when bids for the other such projects open next year. And while it is true that there was no foreign bidder for the first two projects, Mr Shahi believes they were looking for “proof-of-concept”; now that this has been demonstrated, the big international power firms will be back for the next around. While some observers will remain sceptical, the fact is that the bidders have submitted Rs 2,000 crore by way of bank guarantees, and this would suggest that Mr Shahi is batting on a good wicket.

There are downstream issues that must now be addressed; specifically, who will buy and pay for the power that these ambitious projects will generate. Most state electricity boards (SEBs) continue to have weak balance sheets and poor cash flow. If demand is to come from them, it will be difficult to find financiers for the new projects. Various states have indicated that they would be interested in buying power from the ultra-mega projects, but their capacity to pay remains in doubt because of the lack of progress in cutting subsidies. Power trading is an option, but it would be a brave investor and banker who invests Rs 20,000 crore in a project whose fortunes depend on such trading. The country’s total power trading today amounts to around 3,000 Mw worth of power generation.

“Open access”, which allows power suppliers to bypass SEBs or their successor entities and reach out directly to large consumers (eventually, to even smaller consumers such as apartment complexes), is the obvious way out since large suppliers, such as the ultra-mega power projects, could tie up creditworthy users with long-term contracts. By virtue of being situated on coal pitheads, the generation costs will be low (the Sasan project in Madhya Pradesh has been allocated a captive coal mine, while the one at Mundhra in Gujarat will use imported coal). The issue therefore boils down to the call that investors have to take, on the capacity of the system to reform itself in the five years that it will take for the projects to come on stream. Theoretically, the country should have “open access” in another five years even though regulators are dragging their feet on it right now. By then, the transmission lines that need to be developed and strengthened at a cost of Rs 15,000-16,000 crore, to be able to evacuate large amounts of power, will also have been built. If all goes well, the gamble is probably worth it.

BREAKFAST WITH BS: Sir Nicholas Stern

2006-12-12T06:34:00.000-08:00

Despite the enormity of the climate change problem, the author of this authoritative report is convinced the issue is not so tough it can't be tackled.

You’d expect the person who’s just written up a report which says that there’s a 50 per cent chance global temperatures will rise by five degrees centigrade by the end of the century to be a bit, well, stern, given that the current temperatures we’re living in are just five degrees warmer than they were in the last ice age. Sir Nicholas Stern, however, is anything but that, writes Sunil Jain.

We’re at breakfast at the UK High Commissioner, Sir Michael Arthur’s official residence in Delhi’s Rajaji Marg, bang opposite the ministry of defence — had we met later a little later in the day, I’m informed, we could have met in the fabulous lawns that were used for Prince Charles’ reception when he was here nine months ago, but with the winter just setting in, the mornings are a little cold, so indoors it is. We’re joined by Sir Michael, our host, and Siobhan Peters, Head of the Stern Review Team. Ordering breakfast is easy, and quick. We have fresh fruits put out in little goblets already, and it’s only the main course that we need to decide on. It’s poached eggs for Stern, and scrambled eggs and bacon for me.

Stern’s quite happy with his meetings with government officials the previous day, though one of the morning’s papers has reported he was told India would not commit to any cuts in emission levels. The reason why Stern’s not worried though is that he’s convinced the way forward lies in the kind of commitments made by developed countries — if their commitments are low, there’s no way anything can happen. Sure, it’s true that countries like China, and India as its growth picks up, will be huge emitters of greenhouse gases, which is what will lead to the global warming, but the current problem has been caused by the OECD countries and they have to pay to clean this up first.

But will the US join in, I ask Stern who had the previous day, at the invitation of local policy think tank ICRIER, given a presentation on his report and spoken of the ambitious emission cuts that countries like the UK have made. The US, I argue, isn’t convinced about the whole issue of global warming (and Gore says he’s not in the running for presidency!), so they’re clearly not going to be a part of any initiative. Look at what’s happening to the WTO process which is, in a sense, the kind of global cooperation Stern’s looking at to keep emission levels to a reasonable level.

Not true, says Stern. California’s emission standards are very strict and the state is looking at an 80 per cent cut in 1990 emission levels by 2050 — seven states of the US, he says, have taken on pretty serious emission targets. Over the past decade, Peters helps Stern with the data, US emission levels have risen only 1 per cent, and while this compares poorly with the UK’s reduction of 20 per cent (its 2050 target is 60 per cent), it shows the US is definitely coming on board in its own way. The cuts proposed by various EU countries, I ask, are way beyond those in the Kyoto Protocol, so is Kyoto redundant? They’re in the spirit of Kyoto, I’m told, they follow the same framework. Both depend very critically on the principle of carbon taxes and carbon trading as the means to pay this off — very simply, once the OECD countries make it prohibitive to pollute, firms either clean up their act or do this by buying carbon credits from countries like India where some other firm is, say, changing its production process to save on carbon emissions (ITC, for instance, says it is carbon positive and sells carbon credits that firms in the OECD buy).

But is simple trading good enough to tackle the huge problem, I ask Stern to elaborate on something he touched upon the previous day. Also, it is his view that it’s okay for countries like China and India to carry on polluting the atmosphere, and in some cases, if there is money in it, clean sufficiently enough to be able to sell carbon credits.

Even if the OECD countries cut their emission levels by 90 per cent by 2050 (and that’s a big if), Stern says his calculations show countries like China and India will have to stabilise their emission levels by 2030 (China’s emissions are growing by around 10 per cent annually). But, Stern says, the Chinese are beginning to stop deforestation and there’s a target for reducing energy intensity of production; renewable energy is a focus area in India as well. As for carbon trading, Stern insists, it is vital because that is the only way you arrive at a market price and a mechanism to fund cleaning-up projects. The world needs, the report suggests, to spend around 1 per cent of GDP each year in order to avoid losing anywhere between 5 and 20 per cent of GDP each year to global warming.

Stern’s categorical the current project-by-project approach is not going to work as it becomes very heavy to administer, once you look at the levels of emission cuts, and therefore projects, that need to be achieved. Countries need to look at large schemes such as, say, “carbon capturing storage” for coal (which allows you to capture back the carbon in coal that causes greenhouse gases) or look at huge reforestation and maybe look at a common fund that will finance it. Eventually, though, he says it is funding from the carbon trading mechanism which will ensure funds will flow seamlessly (from even private sector funds) to wherever they’re required.

Where does all this leave time for Palanpur, the tiny village between Moradabad and Chandausi in west UP, where Stern lived for eight months in 1974 to produce what many say was a virtual textbook for sociologists. As we speak of Palanpur, we hear the rain on the perspex roof and an excited Stern says it’s good for Palanpur’s productivity. He’s visited Palanpur every year between 1974 and 1993, so he’s seen how the village moved to more intensive agriculture, how it moved to bore wells once electricity arrived, and migration to other towns increased. Palanpur’s sort of Stern’s touchstone to measure the change in India — no, not the dramatic change the rest of the country’s seen, but change in the UP sort of way. Between 1994 and 1999, when he was chief economist for the European Bank for Reconstruction and Development, Stern just managed to visit once; the visits increased after this, but now, he plans to hook up with co-collaborator Jean Dreze and go back in 2007. Getting to talk to Dreze, he says, is a target he sets for each visit and while it’s tough to find him, given Dreze’s travel into the interiors of the country, he does manage eventually.

It’s not as if India’s concerns on climate change stop at not having to commit to emission targets. If Stern’s simulations are anywhere near correct, the country will have serious problems related to the spread of diseases like malaria, for instance, and there will be a lot more disasters related to flooding due to erratic rain and sea levels rising (the kind that saw Mumbai getting flooded two years in a row); the country needs to look at new irrigation and water storage models, different crops … all things that call for a completely new and responsive type of government, the type India hasn’t seen in the last 60 years. Stern’s met up with Environment Secretary Prodipto Ghosh and believes he’s sensitised to the problems. But will the government be able to deliver on the schedule required? Stern, after all, began working on VAT in India at the NIPFP in 1982 — this was introduced only in 2006, and at the level of only the states. Yes, it was a little delayed, Stern grins, but adds that we all know the pace of change has picked up in India. Is he serious, or is it just that he’s going back home to his daughter’s wedding that has him in such high spirits?

Shades of Jinnah

2006-12-11T03:01:00.000-08:00

The Sachar Committee on the status of Muslims, you’re told, is not asking for quotas but is asking for more education—one of the report’s annexure tables shows there were 147 representations to it that asked for more education versus 57 for reservations. This, however, is just clever packaging since the report asks for reservations very subtly (link UGC grants to “diversity”, have an equal opportunities commission, an online databank on the status of each community, its access to various types of jobs, bank credit, and so on). It even talks of the Kerala/Karnataka/Tamil Nadu models, where the majority of the Muslim population is covered by the OBC tag, reservations for whom Dr Manmohan Singh and his colleagues are batting for so solidly!

The report doesn’t ask for separate electorates for Muslims but talks of formulating and implementing nomination procedures to increase what it calls “corresponding representation in government structures” and “other methods to enhance political participation of the Community”. The report has, also, a sample list of some assembly constituencies reserved for Scheduled Castes and argues that since the population of Muslims in these constituencies is greater than the SC population, reserving them for SCs denies Muslims the chance of getting elected to democratic institutions. Imagine the furore if the government dereserves such constituencies. Good luck to Dr Singh as he tries to get off this new tiger he set upon the country—if he can’t, the Hindu vote bank is all set to consolidate in favour of the BJP.

What’s most interesting about the report is the manner in which it seeks to blow up all the perceived inequities—even if you haven’t read the report, the stories leaked to the Press give a clear enough picture. Muslims are not represented enough in the civil services, in banks, in PSUs, in the judiciary, in the national security agencies (thanks to the furore in the media, Sachar wasn’t allowed to get data for the Army, Navy and Air Force), the list is a long one. The problem with all such data, however, is that you need to “normalise” it for any meaningful conclusions to be made. Sachar does this only partially. So, we’re told, for instance, that while the Muslims are 13.4 per cent of the country’s population, they’re only 3 per cent of the country’s IAS population, 1.8 per cent of the IFS and 4 per cent of the IPS, and so on. But since all such jobs are manned by those who’re at least graduates, ideally the normalisation that is done has to be vis-à-vis this. The report, however, just cites a series of numbers, but refuses to put them in context. As can be seen from the table, in 2001, 42.5 per cent of those who passed high school were Hindus and a much lower 23.9 per cent were Muslims—in which case, it’s hardly discriminatory that a lot more Hindus are college graduates.

Another great example of such biased figures is the perceived low representation in the civil services. Just below the table that gives the Muslim representation in the civil services is another table which says that, in 2003 and 2004, 4.9 per cent of those who appeared for the civil services exams were Muslims and 4.8 per cent of those selected after the interviews were Muslims! So, there’s no bias, but only the first table was highlighted and the report still says the low number of Muslims appearing for the exam “is a cause for concern” and “there is a need to improve Muslim participation”. Just 1.3 per cent of those in the IIMs are Muslims, we’re told, but another figure in the table explains that of those who qualified for the interview and group discussion, just 1.4 per cent were Muslims!

The other constant refrain is that Muslims do badly because the villages where their population share is higher have poor education and other public facilities—“there is a clear and significant inverse association between the proportion of the Muslim population and the availability of educational infrastructure in small villages”. What the report doesn’t highlight, however, is that when it comes to medium- and large-sized villages, there is virtually no change in the amount of educational facilities for villages where the share of Muslim population rises (in any case, the fact that national-level Muslim enrolment rates are comparable with others should put this myth to rest). Ironically, the small villages where this sharp reduction takes place are primarily in West Bengal, Uttar Pradesh and Bihar, the states where the political class champions the cause of the Muslims! The lesson is clear: those who want to hold back the Muslims are those that advocate special relief/packages for them.

Taxing problems

2006-12-08T07:04:00.000-08:00

With tax collections growing at 40 per cent in April-November this year, and the finance ministry selecting 60,000 persons for detailed scrutiny, as the Annual Information Returns (AIR) data received from various shops and establishments showed their spending did not tally with their income tax returns, it is apparent the government’s drive for increasing tax collections is doing well. E-filing of returns is now possible, and there is also less talk of inverted duty structures each time the government lowers import duties.

But it would obviously be wrong to assume that all is well, since a large part of the buoyancy is likely to be related to the overall economic conditions. The fact that excise duties rose just 7 per cent shows some serious work needs to be done here. As the Kelkar FRBM task force said the sustained path to tax nirvana will depend on implementing structural changes like a combined Goods and Service Tax (GST), but implementing just the state-level VAT took years even after an empowered committee was set up, and this has not even been done yet for GST. In any case, the finance ministry needs to abolish Central Sales Tax and include more items in the VAT list before it can move on this. It is equally true that if the government continues to introduce new taxes, reduction in import duties is certain to give rise to loud protests. A Ficci paper estimates that indirect taxes add up to between 30 and 40 per cent of a product’s price even today. Thanks to FBT, dividend distribution tax, surcharge, education cess and so on, the corporate tax burden is over 40 per cent despite the government’s claim that it is 30 per cent. Perhaps what is needed is for the finance ministry to do a comprehensive calculation of the tax burden on industry and benchmark this globally.

The other issue relates to tax administration and the plethora of exemptions. In the case of customs, for instance, there are about 110 general exemptions, each of which is then sub-divided into various letter combinations and roman numerals. One of the exemptions, for example, had 431 individual sub-exemptions under it last year and this is now up to 458 this year. Since each exemption requires fulfilling various detailed criterion, it is simply impossible to expect the system to get cleaned up or simplified till these are eliminated. Hinges, metal locks and the back of photo frames can, for instance, be imported duty-free by a manufacturer of handicrafts if these are being exported provided that the value of the imports doesn’t “exceed 3 per cent of the FOB value of handicrafts exported during the preceding financial year”, and the exporter produced a certificate of the description and value of the exports from the export promotion council. And for all the talk of the taxman’s arbitrary powers of coercion reducing, it’s important to keep in mind that over 38 per cent of the direct tax demands made by the taxman between 1996-97 and 2004-05 were dismissed in appeal or through settlement. There are then the indirect tax cases like ITC where the government lost the case in the Supreme Court, but changed the law and got the company to pay up part of the amount. Apart from his usual provisions on tax rate changes, the finance minister needs to seriously concentrate on administrative changes in the coming Budget.

Stern warning

2006-12-05T07:08:00.000-08:00

While there will be those who disagree, the issues raised by the Stern Review on climate change are too serious to be ignored, more so since the impact of climate change is already visible—melting glaciers, unseasonal rains, floods, hurricanes, and so on. How such global warming will affect life depends on the increase in temperature levels—according to Stern, there is a 50 per cent chance of a five degree (Celsius) increase in temperatures by the end of the century in a business-as-usual scenario. While it is impossible to say what this will do, it is important to keep in mind that this is the difference in temperatures between now and the last ice age. Even if, the report says, the annual flow of emissions does not increase beyond today’s levels, it could increase temperatures by two degrees by 2035. And, what matters are not the averages but the marginal change in various places—warming may make certain parts of Russia more hospitable, but the impact on places like Bangladesh and India will be quite different. Some studies estimate that the loss of agricultural produce in India by that period could vary between 9 and 25 percentage points.

It is obvious, and this is the Indian stance, that since the developing countries are only marginally responsible for the current stock of carbon dioxide emissions, they should not by right be asked to take on internationally mandated targets for emission reduction. But it is also true, as the Stern report points out, that even if the OECD countries were to cut their 1990 emission levels by as much as 90 per cent by 2050, a sustainable growth path would require others (read China and India) to also control their emissions. The number of coal-fired boilers that China proposes to commission, for instance, is so huge that it will certainly impact global warming; India cannot be far behind. So there can be little doubt that these two large and rapidly growing countries will have to get down to emissions cutting sooner or later, not because the rest of the world is asking them to but because it is in their own self-interest. Indeed, it would be foolhardy for India to postpone taking serious action on this front until there is global agreement on a plan of action. Europe, which has a better emissions record than the United States, has not waited for the US to take the lead and is pressing ahead with corrective action on its own. India should do the same, unilaterally—without it being part of any international commitment (in the same way that it has done trade liberalisation without waiting for the WTO to get its act together).

Many steps are possible, including research (and then its propagation) on crops that would be more resistant to higher temperatures; on strengthening systems to deal with larger outbreaks of disease that are likely with higher temperatures; on crops that require less water; on dealing with disasters such as more frequent flooding—as the experience in Mumbai shows, the levels of preparedness are still inadequate. As the finance minister said at the recent India Economic Summit, what India should ask of the developed countries is technology that will help it reduce emissions—in the same way that help was given for reducing dependence on technologies that caused the ozone problem.

Cash 'n' carry

2006-12-04T03:09:00.000-08:00

The picture in most newspapers of Bharti Group chief Sunil Mittal talking to Reliance Industries chief Mukesh Ambani at the India Economic Summit in the Capital last week, just after he announced his complicated two-stage retail venture (partly with Wal-Mart), was particularly ironic. A few years ago, Mittal and Ambani confronted each other in the telecom business—while Mittal beat Ambani hands down, that time around, it was Ambani who was accused of exploiting grey areas in the law by offering full-blown mobile services on what was a limited mobility licence that his Reliance Infocomm possessed. This time the boot’s on the other leg!

Unlike in the Ambani case, when all rivals went public with their accusations, none of Mittal’s rivals has made much of a ruckus so far. Perhaps they’re waiting for the political parties to do their job but, except for the communists, no one’s particularly bothered, not even the BJP, which is supposed to be the party of the small shopkeepers. While no one is accusing Mittal of blatant violations of the type Ambani got fined several hundred crore for when things were regularised later, the logic here is pretty straightforward: if the law doesn’t allow you to do something directly, how can the law allow you to do it indirectly? FDI in retail is not allowed, so how can the two-stage process be allowed?

Mittal’s managers insist it can but, as in the Infocomm case, it is only when the actual rollout takes place that one will get to know whether the spirit of the no-FDI-in-retail law has been violated or not—if the spirit of the law is indeed violated, as in the Infocomm case, it will be too late, for then you will have what are called “facts on the ground”. In the Ambani case, one of the reasons given by the NDA government for regularising matters was that the company had nearly a million customers by then, who, poor souls, would be penalised for no fault of theirs if the company was now forced to restrict its offering to only the limited mobility their licence was for.

As everyone knows, Mittal has tied up with the world’s largest retailer, Wal-Mart, to set up a Cash ‘n’ Carry business, where FDI is allowed. This business (let’s call it Mittal-Mart) will set up supply chains, in India and abroad, and source all manner of goods and sell them in its outlets, at rates far below what the market charges. But, since the law doesn’t allow Mittal-Mart to sell to individual consumers like you and I (the view is that this will wipe out the millions of small kirana stores we have in the country), the company will function only as a wholesaler—the Cash ‘n’ Carry business allows sale to offices/hotels and retailers who become its members. German giant Metro AG has Cash ‘n’ Carry operations of precisely this sort in Bangalore.

This is where Mittal’s second, and innovative, step comes in. Bharti, on its own, will set up thousands of retail outlets (say, Bharti’s Baniyas!), and each will be a customer of Mittal-Mart! So, while Bharti Baniyas will be fully Indian, they will be able to take advantage of the tremendously low prices and technology advantages that Wal-Mart will bring to Mittal-Mart’s sourcing. But is a Cash ‘n’ Carry business allowed to just supply to one group of persons? That is, can Mittal-Mart supply only to Bharti Baniyas? If this was the case, it would be very obvious the law was being circumvented. What he’s said is that even others will be allowed to become members. Theoretically then, both Kishore Biyani and Mukesh Ambani can set up hundreds of stores across the country who will get their stocks only from Mittal-Mart.

Since Mittal’s no fool, he’s clearly figured out a way by which Bharti Baniyas will get some major advantage from Mittal-Mart that the Biyani and Ambani stores can’t. There are a million ways in which this could be done. The membership fees could be kept very high; since just-in-time replenishment of inventory is critical for retailers, while the Bharti Baniya shops could be linked to Mittal-Mart godowns on an online basis, the others may be asked to come in and replenish stock as and when they need it; there could be stockouts at Mittal-Mart when the others came in; the possibilities are enormous. It is not my case this is what will happen; indeed I am in favour of FDI in retail since this can result in a 15-20 per cent cut in household grocery budgets, but the point is that if it does happen, what will the government do? It’s not just the Infocomm case that comes to mind. There are a large number of foreign retailers who are in the country at the moment despite the law ostensibly not allowing it, and this goes back to even the 1980s, when India saw its first supermarkets in the form of the Nanz chain from the Nandas of Escorts.

The short point is that when the law allows several grey areas, and then winks when a coach and four is driven though this, you’re simply encouraging people to play around with it, to create their own “facts on the ground”, as it were. This is not about encouraging entrepreneurs. This is about encouraging only those who are confident that once they’ve invested enough, the grey areas in the law will get taken care of, as they did at Infocomm. If you abide by the letter and spirit of the law, be prepared for low returns.

Thin end of the wedge

2006-12-01T07:12:00.000-08:00

The group of ministers’ decision to allow foreign universities to set up campuses here is good news because the facilities for pursuing higher education in India are well short of demand. Rapidly escalating salaries are one indication of the shortage of educated people. The government-run institutions are not expanding capacity at the rate required, and the private institutions are of varying quality. As in other sectors of activity, one solution is to turn to foreign providers of quality service. And if some of the $4 billion that Indians spend abroad on getting educated gets diverted to the domestic market, that would be a bonus. Another positive spin-off would be in the global negotiations on trade in services.

The biggest benefit, though, will be the competition that such universities will provide to the established ones here, and the scaling up in quality that will result. For instance, though it is probably easier to get into some leading B-schools overseas than it is to get into the IIMs, most recognise the quality of the big international schools as being superior—a good way to measure this is the number of academic papers written by professors at Harvard, Manchester or Insead, versus those written by IIM professors. It is equally true, as the then HRD minister Murli Manohar Joshi was at pains to point out, that the faculty at the IIMs do not work as hard as their US counterparts. The faculty-student ratio at IIM-A, for instance, is only 1:8 while it is 1:19 at Wharton and 1:14 at Harvard Business School. Most US B-schools have classes for 12 hours a day, the IIMs have them mostly in the mornings.

But the proposal will not enjoy smooth sailing. The Left will almost certainly try to block foreign entry. One way round might be to invite some Chinese universities as well, since the CPI(M) finds the Chinese acceptable. But there are operational issues too: as long as universities have to have their course content and/or fee structure approved by the authorities, and have their admissions subject to caste-based reservations, the better names might choose to stay away. If they are to be exempted, what case will there be for imposing these controls on Indian universities? Then, since the best international universities have a market reputation, they do not need certification from Indian councils. Even though it is homegrown (with some international links), the Indian School of Business chose not to get itself registered with the All India Council for Technical Education, because it did want to bother with India’s education bureaucracy. It has done well regardless, and others will choose to follow the ISB example. Is the system ready for that? It would seem that some degree of government control over which universities enter the country and on what terms, is unavoidable. The question is how that control can be administered with a light touch, rather than with a heavy hand.

Finally, the international universities that pay top dollar will drive a coach and four through the UGC pay scale system; for fear of losing their best faculty to the new arrivals, the established universities will want to drive up their own salaries. That will mean raising student fees—another political hot potato. In short, the implications of what the group of ministers has decided to do are revolutionary. Handled properly, the end results could be beneficial to all concerned. But there will be many a political mine-field to cross to get from here to there.

This is progress?

2006-11-30T07:35:00.000-08:00

Poverty rates in the country have certainly come down, but it remains true the poverty levels defined are too low, and do not take into account other family needs such as education and health expenses. Poor public delivery of services has also meant that, when it comes to basic health, the improvement over the years is very slight. The results of the latest National Health and Family Statistics (NFHS3) survey show just marginal improvement in critical parameters such as vaccination of children or their nutrition levels over the past 13 years. More shocking, while states like Uttar Pradesh expectedly have poor health standards (data for Bihar has not yet been released), even richer states like Gujarat fare quite poorly — while the proportion of children being vaccinated has fallen, there has been only a marginal improvement in the nutritional levels of children.

Disappearing fig leaf

2006-11-28T07:47:00.000-08:00

It is difficult to see how much longer the government can continue with the fiction that it does not allow foreign direct investment in the retail sector, and for that matter even real estate, when established foreign firms are setting up shop in the country to get into these businesses, and doing so in broad daylight. The ban on foreign investment in the retailing business was imposed to protect the lakhs of small mom and pop shops (kiranas) that would get hit if chains like Wal-Mart came into the country. There was also the political angle, in that the small store-owners are believed to be a support base for the BJP, which led the NDA government; and the UPA is stymied by the Left’s opposition to foreign investment in as many sectors as it can make an issue of.

Now, Sunil Mittal of the Bharti group has ended months of speculation by announcing that Wal-Mart will be his partner in Bharti’s retail venture! While Wal-Mart will not be allowed to set up its own stores in the country, Mr Mittal will set these up, and (presumably) use the Wal-Mart name in return for a royalty. Wal-Mart may or may not run the back-end of the business, but it is certain that a large part of the technology and business know-how will be theirs. In which case, hasn’t Wal-Mart come into the country and into the retail business—whatever the law might say?

The fig leaf is that foreign firms such as Wal-Mart are not allowed to sell at the retail level; all they can gain is entry into what’s called the enterprise (“cash and carry”) segment, and into businesses associated with retailing. Honouring this distinction, Metro of Germany is able to sell to small businesses in Bangalore and may soon be doing so in Kolkata as well. But there is nothing in the FDI rules for the retail business that a smart lawyer cannot circumvent while structuring a joint venture, exactly as has been done in telecom. The political point to note is that Wal-Mart is no different from Bharti or Reliance in terms of whatever impact its chain stores will have on the kiranas. It’s difficult to argue that large Indian firms getting into retailing are harmless, and only foreign retail chains will hit the kiranas. Why not drop the pretence and let the investment come in openly?

The story in real estate is no different. On the opening day of the India Economic Summit in the Capital, the head of a global real estate giant was talking about his Indian presence, sitting right next to the finance minister—FDI is not allowed in apartment complexes or small plots of land, but is allowed in townships which, by the way, can have apartment complexes and individual plots of land! In which case, why the fiction of not allowing FDI in real estate? The justification given here is that allowing FDI in small parcels of land will drive up prices that are already artificially high. This is illogical since the real issue is poor supply, thanks to policies that don’t allow for quick conversion of agricultural land for industrial/commercial use. In any case, large foreign players, who have to go by governance rules framed by global boards, are unlikely to be able to deal in cash; so allowing them in might help clean up the property market.

Smaller, but unhealthy families

2006-11-27T07:54:00.000-08:00

The findings emerging from the latest National Health and Family Survey (NHFS) have good news on the population front, and mixed-to-bad news on the health front. The first element is that India’s demographic transition has probably been faster than previously estimated—female fertility in some key states has already reached net reproduction levels (two births per woman); the survey also shows that 75 per cent of women do not want more pregnancies after they have had two children. These dramatic numbers will be confirmed at the time of the next census, still more than four years away. But it is clear that a variety of factors have contributed to this very significant change.

On the health front, though, the picture is far from positive even as some hope is provided by specific points. So while the country’s poverty numbers continue to decline, thanks to faster economic growth, little of this appears to be getting reflected in the health of the country’s children and mothers. The Survey’s third round in 2005-06 is a sequel to the previous round, in 1998-99. That earlier Survey showed, for instance, that 74 per cent of children below the age of 3 years were anaemic, a figure that remains around the same level in the latest round. There is improvement in other areas, but the distance to be travelled is vast. The 1998-99 round showed, for instance, that 45 per cent of children were stunted—this is now down to 33 per cent. The proportion that is ‘wasted’, or too thin for their age, remains more or less the same, at around a sixth; the proportion of those who are underweight has gone down from 47 per cent to 40. All of this then reflects in other health statistics.

The public health programme shows up poorly. Though the NHFS data are still to be fully collated for all states, in eight states (which include not just the obvious Uttar Pradesh, but even Gujarat), less than half the children below the age of two years have been immunised. Uttar Pradesh has seen the proportion of those under two getting vaccinated rise from 20 to 23 per cent between 1998-99 and 2005-06, Orissa has seen this rise from 44 to 52 per cent, and West Bengal from 44 to 64 per cent, but Gujarat has seen this fall from 53 to 45 per cent. In the case of Kerala, also, the ratio has fallen from 80 to 75 per cent. While 47 per cent of children below the age of three are either stunted, wasted or underweight in Uttar Pradesh, the figure is the same in the case of Gujarat as well. The list goes on.

When such data are juxtaposed, as they will be, with data on the state of the country’s health delivery system—just 40 per cent of all primary health centres had adequate medical supplies and less than half have adequate staff—the traditional response will be that more money needs to be spent. That is of course true since India shows up as one of the countries with the highest proportion of private medical expenditure, in relation to state-provided care. And right now, whatever little is spent by cash-strapped state governments gets spent on salaries—which is not of much use because of poor control over doctors and other health staff, many of whom simply do not turn up at various primary and secondary health centres across the country. Several questions also need to be raised about the design of specific programmes, like the Integrated Child Development Scheme.

Dealing with Mr Sibal

2006-11-27T04:04:00.000-08:00

Fortunately, the empowered committee of secretaries decided to veto the suggestions of VK Sibal, the Director General of the Directorate General of Hydrocarbons (DGH), that the state-owned ONGC be denied 12 deepwater blocks it had won the exploration rights’ bid for, for if it had not, a slew of allegations of favouritism would have cropped up. The DGH had said that ONGC’s track record was very poor, so the government should get into a negotiation with global oil majors and award the blocks to them. But since there was no provision for such negotiations in the bid, debarring ONGC would have meant the blocks would have gone to Reliance Industries, the second-highest bidder.

Two issues arise. First, is the DGH right about ONGC’s track record? The second is the redress available to companies when such a difference of opinion arises. It’s not just ONGC, the Anil Dhirubhai Ambani Group recently alleged the DGH had used discretionary marking to deny it one coalbed methane block.

While there can be little doubt that private firms like Reliance and Cairn have done very well in the last few years, the regulator is being hasty pronouncing judgement on a company on the basis of just a few years’ results. In 2004-05, the DGH report shows ONGC found just 137 million tonnes of “initial in-place” reserves (jargon for total amount of oil/gas found) versus the private sector’s 180 million tonnes. In 2005-06, however, the DGH figures show, this changed completely with ONGC’s reserve addition being 137 million tonnes versus the private sector’s 66 million. The DGH is also selective in the data being put out. Most in the industry recall the DGH’s ad, placed on the very day of ONGC’s AGM last year, saying the PSU had zero success in finding oil/gas under the New Exploration Licensing Policy that began in 1999. The reason why the comparison is unfair is that it does not take into account the fact that ONGC has a significant acreage in non-NELP blocks and it has had good finds here.

Once you take this into account, ONGC’s success jumps dramatically. Between 2001-02 and 2005-06, ONGC drilled 638 wells, of which it found oil/gas in 269, taking its “success ratio” to 42 per cent, a figure comparable to what’s given in the DGH’s ad for private players—Reliance’s success ratio is put at 47 per cent and Cairn’s 37 per cent. But since wells differ in size, the right way to compare is to look at the reserve accretion, not the reserves that companies tout in their publicity releases, but the ones that the DGH itself certifies.

Here again, the private sector has fared magnificently, but ONGC’s done a better job (see table). Over the last five years, private firms have added 729 million tonnes of oil and gas “initial in-place” reserves. ONGC, however, according to DGH data, has added 786 million tonnes! Not bad for a company that the DGH blithely writes off. ONGC does worse than the private firms when it comes to what are called “ultimate” reserves or those parts of the reserves that can be brought up for use—it has 242 million tonnes here as compared to the private sector’s 398 million. But the reason for this is that the private sector has found a lot more gas while ONGC has found a lot more oil. While current technology allows you to bring up 65-70 per cent of “initial in-place” reserves of gas, only 30-35 per cent of oil can be brought up—that’s why ONGC’s ultimate reserve additions look lower. The reason why the DGH, however, continues to follow the international practice of asking for “ultimate” reserves also, is that with advances in technology, the recovery rates for oil are going up, so if ONGC keeps pace with technology as it has been doing, its ultimate reserves will go up from even the existing finds.

In such a situation where a company has a problem with the regulator (the DGH practically functions as one), as in the case of telecom and power, the solution lies in setting up an appellate tribunal. Apart from giving the company a fair shot at defending itself, a tribunal forces the regulator to actually prove its charges, and in writing. Right now, it is the ministry of petroleum that plays the arbiter. This, however, is not a satisfactory solution since the ministry can also take wrong decisions, as it did in the case of the dispute between the Ambani brothers on supply of gas (see “What Murli’s actions mean,” July 31).

Getting better

2006-11-23T08:01:00.000-08:00

For all the talk of interruptions in Parliament, our MPs appear to be getting better. According to analysis by PRS Legislative Research, during the monsoon session this year, MPs actually worked 97 per cent of the allotted time, that is, a total of 127 hours and 23 minutes for the Lok Sabha and 100 hours and 50 minutes for the Rajya Sabha. Yet, Indian MPs still work far less than those in other countries. In the last five years, the Lok Sabha worked for around 74 days as compared to double this for the US Senate. In the case of Australia, though the number of days worked is far lower than that for India, the hours worked per day are much longer. On an average, the US Senate works 1200 hours per year, versus around 1,000 for the UK House of Commons, 500 for the Australian Senate and around 400 hours for the Lok Sabha in India.

One way traffic, primarily

2006-11-22T08:08:00.000-08:00

A book on India and China that concentrates on financial sector reform in the two countries tends to be a bit one-sided since most recognize India’s the leader here, and is therefore certain to fail to deliver on its promise of ‘learning from each other’. So there’s nothing in this compilation of a seminar organised by the IMF, the China Society for Finance and Banking, and the Stanford Centre for International Development, which deals with, for instance, China’s stupendous success in the manufacturing sector or in creating infrastructure (did it follow industrial growth or did it lead it?).

But while the seminar didn’t focus on this, it has other valuable learnings. There is no doubt Chinese growth has consumed a lot more capital than the Indian one, and much of this capital has been vastly subsidised by the state, but one aspect brought out well in a paper by IMF staffers Steven Dunaway and Annalisa Fedelino is the nature of the Chinese deficit. One, fiscal policy in China, unlike in India so far, has been guided by a medium-term focus on fiscal consolidation aimed at making room for future expenditures such as those on, for instance, writing off the banking sector’s bad debts. While the emphasis today is on fiscal consolidation, in the aftermath of the Asian financial crisis, the emphasis was on running a deficit to stimulate demand.

For those who’re convinced India’s done a great job in avoiding any major financial crisis while liberalising gradually, ICICI Bank Executive Director Nachiket Mor’s paper (along with R Chandrasekar and Diviya Wahi) is an eye-opener. Mor argues that the reforms of the 1990s failed to address basic issues while removing some of the safeguards of the earlier system and so it is sheer luck we’re not in the middle of a major banking crisis. Mor shows, through a case study on the Indian steel industry, that most banks still lack the competence to evaluate projects (hence the huge overcapacity that was financed in the 1990s). The so-called health of the banking system, he and his co-authors aver, is largely due to treasury profits booked due to the sharp decline in interest rates. Mere privatisation of banks, is the conclusion, is not enough to fix the problem.

Other papers on China’s banking system record the sharp decline in NPAs due to the massive capital injection by the government, but the banks remain quite weak, and will remain so until the state stops guiding investment/loan decisions. This, of course, was also the reason why the government of China allowed strategic foreign investors to get into the sector—in 2005 alone, total foreign investment in China’s banking sector exceeded $10 bn. The Moody’s index of banking strength in 2004 put India at 24.2 in December 2004 versus China’s 10 and the US’ 77 in that year.

A convincing case is made out for why China will not suffer if it goes in for more exchange rate flexibility while pointing out at the same time that the world is divided on whether the renminbi is undervalued. Domestic banks, for instance, hardly have any great exposure to currency risk. The risk of exports faltering, similarly, is not seen as a major factor considering that more than half of Chinese exports are the final assembly of products made elsewhere—so these will get cheaper with an appreciating renminbi. One study quoted estimates a 10 per cent appreciation of the renminbi will increase the cost of China’s exports to the US by only 2 per cent.

RBI Deputy Governor Rakesh Mohan’s “apparent puzzles for contemporary monetary policy”— how can you have low consumer inflation in the presence of abundant liquidity and increasing asset prices, to cite one of them— remain as valid today as they were a year ago, when he delivered his dinner address at the seminar. One reason for the global decline in inflation levels, Mohan argues, apart from the productivity-linked decline in costs and the China factor, is that fiscal deficits in emerging market economies are less than half their levels in the 1970s and 1980s and that this alone has reduced inflation levels in these countries by 5-15 percentage points. Greater labour migration is also offered as an explanation for this, and the greater share of non-tradeables (service sector) in GDP is suggested as a reason for why, despite currency depreciations, inflation levels have remained low. This paper alone makes the book worth reading, though it must be said, this is not the only one.

One India policy

2006-11-22T08:05:00.000-08:00

Most people are familiar with the One India policy in telecom which aims at having a uniform tariff level for all calls, irrespective of the distance. The Appellate Tribunal for Electricity has brought in this concept for the power sector now, which could have very interesting consequences. The Grid Corporation of Orissa (Gridco) was buying power in the state at around Rs 1.1 per unit and sold it to the Power Trading Corporation (PTC) at around Rs 4.7 per unit. PTC in turn sold it to other users after adding its trading margin fixed at a maximum of four paise per unit by the Central Electricity Regulatory Commission (CERC). The petitioners argued that the CERC ceiling of four paise per unit on inter-state trading of electricity should apply to Gridco’s sales as well. Second, if Gridco was to charge a lower tariff for consumers in the state and a higher one for outsiders, it amounted to discrimination. For example, if other states were to follow this path with their produce (Punjab with its wheat, for instance), the very concept of a national market would disappear. The Appellate Tribunal accepted this argument, and has now asked the CERC to assess how much Gridco overcharged consumers in the rest of the country and to figure out a way of refunding this.

While this means a sizeable refund for state electricity boards, or their successor entities, the question is what impact this will have on the supply and generation of electricity in the country. Many argue that this judgement will kill the nascent trading business, and that investors will not set up power plants for trading purposes since superlative profits will no longer be available. Much of this is simply not true. For one, as the telecom experience shows, regulated markets can also do very well. Obviously, free market pricing is the best, but in a situation of limited supply and low consumer choice, there is little escape from such regulation.

Till some time back, the telecom regulator had fixed a ceiling on mobile and long-distance tariffs, but the market continued to grow exponentially and tariffs remained below this ceiling for so long that the regulator finally allowed forbearance on tariffs. If, on the other hand, the market is not regulated (either for power producers or for traders), it is almost certain tariffs will get jacked up in times of shortage, and that is precisely what India is going through right now. It is possible to argue the four paise margin fixed by the CERC is too low, but that is a different matter unrelated to the free-for-all that Gridco was indulging in. And, as the tribunal has pointed out, in such a situation, shortages are likely to be created by suppliers themselves. In this case, while Gridco said it was merely disposing of surplus power, the tribunal said this was not possible since around 80 per cent of rural households in Orissa were not electrified even today.

Second, there is no bar even today on investors setting up what are called “merchant power plants”—the tariffs here are not regulated and the ceiling here will obviously be what the market can bear. Such freedom, however, is not allowed to power plants which have a long-term power purchase agreement (PPA). This is because the PPA guarantees the investors a certain rate of return anyway. So investors can either go for a merchant power plant where returns can be very high but are not guaranteed, or go for one where returns are lower but guaranteed. It is, however, unfair to expect consumers to guarantee a minimum return (by way of tariffs) for these plants and then allow them to hike rates depending upon supply shortages. The judgement is a significant step forward in protecting consumer rights.

Jobless growth, ha'ah!

2006-11-20T04:20:00.002-08:00

Growth and development

2006-11-17T08:11:00.000-08:00

The debate on whether economic reforms and accelerated economic growth have led to faster reduction in poverty levels and employment growth continues to generate disagreement. Settling these big questions is important, because an economy that is accelerating further to 9 per cent annual growth has to ask itself whether it needs programmes like the National Rural Employment Guarantee Scheme, whether the pattern of growth is “inclusive” enough, and whether the money would be better spent in improving health and education levels (among all the other choices available).

Those cheering the reform programme and its results have got a shot in the arm because of the findings of the National Sample Survey’s (NSS’s) 2004-05 large-sample round, which came out earlier this month. Till then, the criticism had been that India was experiencing jobless growth. The small-sample, or thin rounds, of the NSS each year had already been suggesting that employment growth was picking up, but the critics dismissed these as being unrepresentative. In the event, the figure cited most often said that employment in the country grew by only 1 per cent per annum between 1993-94 and 1999-00, barely half that of previous decades and little more than half the rate of population growth. This belief provided the under-pinning for the UPA’s rural employment guarantee scheme. However, the latest NSS data now suggest that employment growth between 1993-94 and 2004-05 grew at an annual rate of 2.1 per cent. This is not only (marginally) higher than that in the past, it is also faster than the population growth rate, and so it knocks the statistical bottom out of the jobless growth theory. In short, it has to be accepted now that the post-reform period has been slightly better for employment growth.

What of the larger poverty question? While the NSS estimated the percentage of people living below the poverty line in 1993-94 at 37 per cent, the latest data place this at 22 or 28 per cent in 2004-05 (the two numbers are derived from two ways of asking the question!). That is, poverty in India has fallen by between 0.8 and 1.3 percentage points per year. At that rate, it will take up to two decades and more to eradicate absolute poverty—a scenario that most people will rightly find unacceptable. What complicates the debate is that the measurement of consumption, and therefore poverty, is fatally flawed. The optimists use the data in one way to argue that poverty levels are much less than the official figures aver; right or wrong, this is not the mainstream view, which is that rapid economic growth has not been accompanied by a fast enough decline in poverty levels.

It is important to go beyond the economists’ debate and focus on the kind of issues highlighted in the latest Human Development Report. Sanitation levels in India are among the worst in the world, and account for a substantial part of the health problem. Clean water supply is another scarce commodity. The standards of health and literacy are nothing to write home about, and governance standards in the key states have fallen to levels where the government’s programmes suffer from both poor effectiveness and extensive leakages. These issues need to be addressed because they affect the poor the most, and they are therefore more important for poverty removal than abstract debates about statistical methodology, patterns of development and inclusiveness. The challenges of development and poverty removal lie more in the area of devising effective delivery models and less in arcane debates about the changing patterns of demand and supply.

Incomplete justice

2006-11-13T02:16:00.000-08:00

With a two-judge Bench of the Supreme Court dismissing the Anil Dhirubhai Ambani Group (AGAG) firm Reliance Airport Developers Private Limited’s petition, the last hurdle in the privatisation of the Delhi and Mumbai airports is now over. While that’s a great relief, what is curious is that the government doesn’t seem particularly concerned about the role of those that very nearly got away with the brazen attempt to favour the ADAG group, not even the token departmental inquiry into individuals or blacklisting of firms involved has been ordered, that’s how low the system has fallen. And since this was not really the matter before it, the Court has not passed any strictures or asked for any investigation into their role.

As the primary judgement by Justice Arijit Pasayat points out, after the consultants (Airport Planning Ply Ltd, Amarchand Mangaldas & Suresh A Shroff & Co, and ABN Amro Asia) submitted their evaluation report, which ruled out all bidders on technical grounds except for the GMR Group and ADAG, the report was virtually rubber-stamped by the Government Review Committee (GRC) whose job it was to ensure the evaluation was a fair one—as the judgement puts it, “the majority members felt that the terms … had been adhered to and there had been sufficient transparency in the process … majority of the members … felt … it would not be necessary to go by the advice of the member of the Planning Commission …” That is, the consultants’ report, which was full of flaws (see “Getting favouritism to fly,” January 30, 2006), got passed, and then passed on to the Inter-Ministerial Group for its approval. Surely all the worthies in the GRC need to be asked to justify their decision? Or were these worthies just carrying out orders?

(Interestingly, the second judge, Justice SH Kapadia, gave a separate judgement where, while agreeing with Justice Pasayat, he said the basic controversy was whether the consultants—in their role as the Evaluation Committee, or EC—had exceeded their authority in the manner in which they allotted marks for various sub-criteria, and in his view, “EC had no business to expand or narrow down the scope of any of the … factors as it was beyond its authority and contrary to the scoring system”. Yet, none of the members of the EC has been blacklisted by the government.)

The GRC report came to the Inter-Ministerial Group (IMG), headed by Civil Aviation Secretary Ajay Prasad on December 1, 2005. There, the Planning Commission’s Gajendra Haldea gave a full note detailing how, after the bids had come in, the consultants decided to arbitrarily allot weightings given to some criteria in such a manner that this helped increase the score of the ADAG group—had this not been done, the group’s firm would not have got the minimum technical marks required in order to qualify it for the next round, that is the round in which its financial bid would have been opened. Despite this, the IMG didn’t stop to say there was a problem in the way the evaluation was done, it merely passed on the decision to the Empowered Group of Ministers (EGoM), headed by then Defence Minister Pranab Mukherjee on December 5, 2005.

This group, however, couldn’t take any decision, either, since, thanks to Haldea, the IMG-bureaucrats hadn’t been able to recommend a categorical course of action. In the event, the EGoM directed the IMG to do another evaluation and give a clear recommendation. This time, five or six meetings of the IMG were held and, finally, by the time the IMG wrote its report, five of its members were on the side that said the scoring was biased, two (members of the law and finance ministries) said there was nothing wrong, and the chairman decided not to give a view at all. Once again, no categorical statement was made despite the evidence being overwhelming and the majority’s view well-known.

The rest, as they say, is history. The EGoM recommended the matter to a Committee of Secretaries headed by the Cabinet Secretary, which, in turn, appointed a Group of Eminent Technical Experts headed by Delhi Metro chief E Sreedharan. Sreedharan examined the issues and then lowered the marks of the ADAG firm. Once this was done, only the GMR Group qualified on technical grounds (it had over the minimum 80 per cent marks). The government then reduced the minimum technical marks criterion to get more bidders. GMR and GVK then emerged as the top financial bids and Reliance went to court questioning the Sreedharan Committee’s locus standi and saying the reduction of the minimum technical marks was not permissible. This is the petition that has now been thrown out by the Court.

It is true that in this case, the system did deliver, even if after a long and tortuous period. But this was just a stroke of luck, and largely due to the doggedness of one official. A slightly more thin-skinned person, and he would quickly have fallen in line. Not taking action is not just a travesty of justice, it simply encourages others to try and do similar things in the future. Surely that is not an impression the Manmohan Singh government wishes to have spread about itself? Especially when it is desperately trying to woo big infrastructure investment.

Yechury bats for the BJP

2006-11-06T02:34:00.000-08:00

If BJP President Rajnath Singh can just persuade his cadre and colleagues to keep quiet while the CPI (M) ups the ante on getting a sub-plan to allot government expenditure for Muslims, and the Prime Minister makes a few more statements on how Muslims need to be given their “fair share” of jobs, he can virtually count on the Hindu vote bank getting consolidated once again. If, on the other hand, the party gets very shrill right now, there is the danger the UPA will just back off the matter.

The fact is that despite the high-decibel campaign launched by the media on leaks from the Sachar Committee Report, as in the case of the OBCs, there is no sign of any systemic discrimination against the Muslims when it comes to jobs; the problem lies in the enrolment levels of Muslims in schools. The 1999-2000 NSS data show, for instance, that while Muslims comprised 12.2 per cent of the country’s population, their share in those who had passed school was just 7.2 per cent. The rest then follows from this number—so, the Muslims formed just 6.5 per cent of the proportion of those enrolled in college, though they still managed to get 9.7 per cent of the total number of “professional, technical and managerial” jobs in the country.

Yet, the Sachar Committee chose to highlight the fact that the only place where Muslims bat above their population share is in the country’s prisons (they were 9.1 per cent of the population in Gujarat, for instance, but comprised 26.1 per cent of those convicted and under trial in the state), while in government jobs, or PSU jobs, or even the judiciary (possibly, the implicit argument here is that Hindu judges are more likely to convict Muslim undertrials!), the Muslims are woefully under-represented (see The Indian Express’ “Missing Muslim” series beginning October 27).

This then became the basis of the PM’s statement that Muslims should get their fair share of jobs in the state and central governments as well as in the private sector. While, it is true, the PM said that access to schooling was the main reason for the Muslim backwardness, the fact that he spoke of their “fair share” in top jobs shows his bias—if you relate “fair share” to education, as you must, there is no evidence of a bias. Indeed, it is surprising that while the Sachar committee also speaks of the educational backwardness of Muslims (it managed to get the NSSO to give it some data from its latest survey, which has not yet been released to the public), it doesn’t see this as the fundamental cause that needs fixing. Or is it that the media distorted the Sachar conclusions?!

In any case, fixing things is easier said than done. For one, other social groups that are also educationally backward have done better than the Muslims. In 1999-2000, the average Muslim had 2.9 years of education, which was higher than the 2.5 years of the SC/STs. In 1983, the average SC/ST had just 1.4 years of education, versus the Muslims’ 1.9. That is, in 1983, the average SC/ST had 73 per cent of the schooling the average Muslim had, but this rose to 86 per cent by 1999-2000. Indeed, while the average number of years of education for all castes/communities rose 45 per cent (from 2.4 years to 3.5 years), that for the SC/ST rose 79 per cent.

To the extent, Muslims and SC/ST coexist in similar geographical locations, the problem can’t be of access, unless it is being said schools are keeping Muslim children away—since even Muslim politicians have not said this, it may not be the case. The more likely reason is the concentration of Muslims in states like Uttar Pradesh and Bihar (which is also why the “secular” politicians paying lip-sympathy to their cause, like Mulayam Singh and Lalu Prasad, are from these states), where the levels of education are poor for everyone. While 18.5 per cent of the population in Uttar Pradesh is Muslim, according to the Sachar report, the figure is 16.5 per cent for Bihar. Both states have the lowest levels of literacy in the country—while that for Bihar is 47 per cent, it is 56 per cent for Uttar Pradesh (the national average is 65 per cent).

How the government hopes to increase education here is unclear since it is clear the state machinery is not working—the per capita spend on education by the government in Bihar was only Rs 44 per year in 2000-01, while it was Rs 387 in Uttar Pradesh (it was Rs 812 in Gujarat and Rs 1,070 in Maharashtra).

To some extent, the lower government spending is compensated for by higher private spending, but that too is constrained by the overall levels of prosperity in the state. The Muslims are at a double disadvantage here. While their lower education levels mean lower incomes—on average, the NSS data show every extra year of education raises wage rates by around 11 per cent—the fact that Muslim women participate less in the workforce also lowers family incomes, thereby completing the vicious cycle. On average, in 1999-2000, just 21 per cent of Muslim women were working outside their homes, as compared to 47 per cent for SC/ST and 39 per cent for OBCs. It is doubtful, of course, that with the UP elections coming up, the rhetoric will be on anything apart from providing more jobs for Muslims.

'Marks not proof of proficiency'

2006-10-30T02:52:00.001-08:00

While the Supreme Court looks like it is now going to throw open most issues relating to reservations, whether for SC/STs or OBCs, under its review of the Ninth Schedule of the Constitution, it’s important to keep in mind that the country’s courts have been as responsible for where we are today, not just the politicians, whose role in the matter has been thoroughly exposed anyway—my previous column gives some instances of the Constitution being amended each time the courts gave a judgement the government didn’t like. So, while it begins hearings today on the Ninth Schedule that allows legislators to keep certain bits of legislation such as on land acquisition and even reservations away from judicial scrutiny, the Court would do well to keep in mind the strange judgements given by fellow judges as well—anyone interested in more details than this column can possibly summarise should read Arun Shourie’s Falling Over Backwards.

In MR Balaji versus the State of Mysore, in 1963, the Supreme Court said all reservations in educational institutions should be capped at 50 per cent, but “how much less than 50 per cent would depend upon the relevant prevailing circumstances in each case.” Over time, this 50 per cent became the norm for reservation in even existing government jobs, not just for fresh recruitments. In 1976, in NM Thomas versus the State of Kerala, the Court even justified relaxation of standards—while Justice VR Krishna Iyer said that only clerical posts were being considered anyway, Justice KK Mathew said that standards should not lead to “exclusion on grounds other than those appropriate” for the posts in question. We’re on the slippery slope already, and politicians haven’t even got into the act.

Other judges have taken this forward by saying the 50 per cent number was either not binding or was arbitrary since it was not based on any scientific data which showed higher reservation levels would hurt efficiency; others said the length of the leap (the amount of reservation) depended upon the gap that had to be covered; and some scoffed that the furore over reservations in government jobs would make one think “the civil service is a Heavenly Paradise into which … the very best may enter”. All of this, presumably, should have been put to rest in Indra Sawhney versus Union of India in 1992, given this was a nine-member bench.

Yet, in 1995, in RK Sabharwal versus State of Punjab, the question before the Court was whether those SC/STs who had got into government jobs or had been promoted on their own merit were to be counted in the quota. The Court said they were not, that is, the quota existed only for those candidates who could not make it on their own merit!

In 1994, to carry on with this tale of the role of the courts, in Ajay Kumar Singh versus the State of Bihar, the Court was asked to rule on reservations at higher levels of education, something in which the Indra Sawhney ruling clearly said was not to be allowed. So, in this case, the Court said “(in Indra Sawhney), the Court was speaking of posts in research and development organizations, in specialities and super-specialities in medicines, engineering and other such courses. The Court was not speaking of admission to specialities and super-specialities. Moreover, M.S. or M.D. are not super-specialities.”

A similar issue came up in 1997 in Post-Graduate Institute of Medical Education and Research versus KL Narasimhan. The Court was even more sophisticated in its argument this time. In Ajay Kumar Singh, it was argued that neither MS nor MD were super-specialities. In this case, the Court said that even if a reserved category candidate was applying for a super-speciality and the qualifying marks were lowered (from, let’s say, 80 per cent in the general category to 70 per cent for the reserved category), it didn’t really matter since the reserved category doctor had passed the same graduate or post-graduate exam anyway. In case the import of the judgement is not clear, here’s a quote which should clarify things: “Securing marks is not the sure proof of higher proficiency, efficiency or excellence … In that behalf, it is common knowledge that marks would be secured in diverse modes … They are awarded in internal examination on the basis of caste, creed, colour, religion, etc.” And no one’s protested at this sweeping condemnation of the county’s top educational institutions.

The three-member bench that decided on this case then went on to enunciate the larger principle of reservations. “It is the constitutional imperative of the executive to provide opportunities and facilities to the handicapped to acquire the degree in specialities, super-specialities or technical posts. Denial thereof is a total denial of rights to enjoy equality. It is well-settled legal position that fundamental rights are to be interpreted broadly to enable the citizens to enjoy the rights enshrined in Parts III and IV of the Constitution.” The move to allow reservations in specialised courses, which was proscribed in Indra Sawhney, was partially allowed in Ajay Kumar Singh and fully legalised in Post-Graduate Institute of Medical Education and Research.

So where does this leave us if the courts are as much liable to make mistakes? Ironically, back with the courts since, as former RBI Governor and Rajya Sabha MP Bimal Jalan pointed out in his third Nani Palkhiwala memorial lecture earlier this year, court judgements are always subject to review while this is not the case with legislation—when they’re tucked away under the Ninth Schedule, it gets even more difficult. Since, in all such cases, it is usually argued that Parliament represents the will of the people while the courts don’t, Jalan ended with a lovely Palkhiwala quote which asked if the Emergency that was approved by Parliament also represented the will of the people!

What have data got to do with it?

2006-10-23T03:07:00.000-07:00

Those who’ve opposed the government’s decision to impose quotas for OBCs in higher education are obviously ecstatic over the manner in which the Supreme Court (SC) has slammed the government. The Court wanted to know how the government came up with a 27 per cent reservation figure when it didn’t even know how many OBCs there were in the country, or whether they’d even been discriminated against in higher education and/or jobs. It wanted to know why the government had decided not to exclude the “creamy layer” OBCs from reservations since they would take away the cream, so to speak, of these reservations.

All these questions, and more, have been dealt with by this newspaper over the past few months, and the answers are unequivocal. OBCs constitute about 36 per cent of the country’s population, not 52 per cent as reported by the Mandal Commission. There is also no evidence of the OBCs being discriminated against. While their share in higher education is lower than their share in population, it is commensurate with their share in those passing high school, which is the correct figure to look at. If the OBC share in top jobs is lower than their share in the population, and indeed this is the case, it is only because the share of OBCs in the country’s college-pass population is low.

Similarly, there is not too much of a difference in the years of schooling across various castes in different income groups—a poor OBC has virtually the same number of years of schooling as a poor upper-caste Hindu. The difference in education years, however, is quite stark across income groups—that is, a rich OBC has many times more years of education than a poor one. Several of these articles/stories can be found at http://thesuniljain.blogspot.com/2005/01/affirmative-action.html . To that extent, the Supreme Court’s questions are valid ones.

That said, there are a few problems with the Supreme Court’s stand on the matter. For one, the 27 per cent figure clearly comes from the Supreme Court’s own ruling in the famous Indra Sawhney case, where the Court capped the reservation at 50 per cent—subtract the SC/ST reservation from this, and you get the 27 per cent figure! The point is that the Court never gave any justification for the 50 per cent figure either; it was a purely arbitrary number. And much the same issues that have cropped up in the case of the OBCs crop up in the case of the SC/STs as well—it is the low proportion of SC/STs in schools that explains their low share in college and their consequent low share in top jobs. So how come the Court has not asked for data on this?

Of course, the larger problem (from the politicians’ point of view) with the Court’s arguments is what this could mean for the future of lawmaking as we know it. After all, if legislators are asked to back each piece of legislation with facts, a large number will simply not happen. To take the most recent case of special economic zones, when the finance ministry has quantified the huge tax losses that will result once this happens, how could the government pass an SEZ Act?

Or take the National Rural Employment Guarantee Act, which was enacted to provide employment to the poor for 100 days a year. Well, as Surjit Bhalla has documented (http://www.oxusresearch.com/downloads/cep111204.PDF ), the poorest in rural areas have an unemployment rate of just 1.3 per cent and they work around 5.5 days a week—that is, if they are to use the NREGA, they will do so by giving up work elsewhere!

The renewed emphasis on throwing good money after social sector programmes such as the Sarva Shiksha Abhiyan is another good example of a law that wouldn’t get past the drawing board if data were to be asked for first. The Pratham Survey makes it clear just how poorly public money is being used, given that almost two-thirds of children in government primary schools cannot read a simple story and half of them cannot solve simple numerical problems.

None of this, however, should make anyone in government nervous since the Supreme Court can say whatever it wants, but the country’s politicians will still have their way. You just have to read Arun Shourie’s Falling over Backwards to know this. On each occasion when the courts questioned the legislators, they amended the Constitution! Justice Kuldip Singh, for instance, said Mandal’s “so-called ‘socio-educational field survey’ was an eye-wash” and that the report was “constitutionally invalid and cannot be acted upon”. But it is being acted upon.

In another case, when the Supreme Court said it was illegal [under Article 29(2)] to deny someone admission while an SC student who had fared worse was given admission, the Constitution was amended and a new clause added to Article 15 which allowed the state to take measures to help the advancement of any socially or educationally backward class or for SC/STs! In the famous Indra Sawhney case, when the Court said the 69 per cent reservation was illegal, the Tamil Nadu Assembly unanimously passed a resolution asking the Centre to amend the Constitution and in 1994, this was done! Shakespeare would have described the Court’s efforts as words full of sound and fury, signifying nothing.

PPP and other disasters

2006-10-16T03:20:00.000-07:00

Given the enormous funding required to meet the country’s infrastructure needs (the PM spoke of $150 bn over 10 years at the New York Stock Exchange), it’s obvious the government is in no position to meet this. So, the renewed emphasis on what’s called Public-Private Partnership, or PPP, is a good thing. At the Planning Commission’s recent infrastructure conference, the list of projects already put out for PPP across the country adds up to around Rs 140,000 crore.

Apart from the capital cost, there’s also the issue of the recurring costs. In the case of the Delhi Vidyut Board (DVB), the government spent Rs 1,500 crore a year to subsidise it prior to its privatisation—this is down to around Rs 200 crore today. Naturally then, there was no question of investing to improve the DVB’s network—over the past four years, BSES and NDPL, which took over the DVB’s power distribution operations, have invested Rs 3,200 crore.

But handing over projects, either solely to the private sector or to PPP-type partnerships, has to be done in a transparent manner. Just because the government spent Rs 1,500 crore a year on the DVB doesn’t mean it can be handed over to a private firm for free, or even paying the firm Rs 1,499 crore for taking the DVB over—after all, the government would still be a net gainer! So far, however, India’s experience with PPP suggests the levels of transparency have been low. Apart from the fact that this creates an anti-PPP backlash, it also puts off prospective bidders, partly because they know there will be a backlash against them. The DVB privatisation, in fact, is a good example of how PPP projects go wrong. Ironically, in this particular project, all those concerned—the companies themselves; the Delhi government, which privatised the DVB; and the capital’s citizenry—felt cheated!

One of the problems with the process was that, when there were just two bidders left, the conditions of the deal were changed and, according to the Comptroller and Auditor General, around Rs 4,500 crore of post-bid sweeteners were added. Now it’s possible, as both the Delhi government and the two companies have argued, there was no option but to relax the bid conditions since it was obvious the original ones were too onerous to attract enough players. But the fact that the companies which had walked out were not called back to re-bid under the new conditions did create the impression that all was not above board.

As for BSES and NDPL, they felt cheated since, under the terms of the contract, they were to be allowed annual hikes of 10, 10, 10, 5 and 3 per cent—as compared to this approximately 40 per cent hike in tariffs, the regulator allowed a hike of only 11 per cent over the first four years! The companies were also not provided the special police and courts promised to reduce the 50 per cent theft levels four years ago.

And the capital’s citizens felt cheated since the Delhi government’s consultants completely misread the investments required—they said Rs 1,019 crore was required to fix the system while, in just the first four years, the two companies have invested Rs 3,200 crore! Given the guaranteed rates of return for BSES/NDPL, each Rs 100 crore of extra investment requires a tariff hike of around 0.5 per cent. Naturally then, while the citizens protest each tariff hike, the companies too have a legitimate grouse since the Delhi government’s consultants painted a completely different picture, on the basis of which the bids took place.

The DVB, sadly, is not the only such instance of poorly designed and executed PPP. In the case of the national highways programme, for instance, no company was given the land in accordance with the schedule promised, nor did the obstructions that the government was supposed to clear get cleared in time—in some cases, the delays have run into several years, so if any company chooses to go to court asking for damages, don’t be too surprised. In the case of telecom, it was precisely this inability to deliver on promises that ensured that, when private sector firms began defaulting on their licence fees, the government never cancelled their licences but chose to come up with a more liberal new policy instead of exposing itself to lawsuits!

In the case of the Delhi and Mumbai airports, which have just been privatised, similarly, the process was replete with various instances of favouritism. Top-notch airport firms walked out even before the actual bids were submitted, for instance, because the government decided to change the rules on financial guarantees. There was then the issue of excess land being given to the privatised airports—this was finally withdrawn only after a hotly-contested dispute among various arms of the government. And if this wasn’t bad enough, the whole process was vitiated by the fact that the marking criterion for bids was set (after the financial bids were made) in such a manner that it appeared to favour particular bidders. While the Reliance ADAG group, which was the firm supposed to have been favoured by the new marking scheme, has now gone to the court against this, fortunately the court has not stayed the process.

While the country’s citizens are unlikely to allow PPP projects to go ahead if they’re seen as crony capitalism, it’s also an open question as to whether bidders who feel shortchanged would wish to bid for the next PPP project that comes their way.

Second thoughts on 3G

2006-10-09T03:45:00.000-07:00

This is the ultimate irony. The country’s cellular mobile operators who’re arguing that 3G licences are not a new service, and therefore cannot be auctioned, are essentially relying upon a change in their licence conditions made at the time when Reliance and the Tatas gained a backdoor entry into the mobile telephony market in 2003. Something they objected to at that point of time! Under the original licence, the only mobile telephony that could be provided was a 2G one. It was only when the government decided to allow the fixed-line telecom providers to provide full-blown mobility using CDMA technology that the Unified Access Services Licence (UASL) dropped the term 2G and the scope got broadened to “provision of all types of access services”, which, you could argue, includes 3G services as well.

Which is probably why when the Prime Minister’s Office asked the Department of Telecommunications (DoT) for its view in December 2004, the DoT said that under the UASL, 3G services were part of 2G licences, and that the only issues that needed to be addressed related to the allocation of this 3G spectrum and the criterion for this.

In other words, had the GSM cellular players (Hutch/Airtel, etc) got their way and stopped the CDMA-based Reliance/Tatas’ back-door entry in full-blown mobility, they wouldn’t have had a case for opposing the telecom regulator’s (Trai’s) recommendation that 3G services be considered a new service!

But whether you agree that 3G spectrum needs to be bid for or that it should be given free like the 2G one, what’s troubling is that in a sector where most agree the regulatory system is the best, the regulator should do a complete U-turn on 3G policy. In May last year, the regulator was very clear that 3G was simply an extension of 2G and that it could not be priced. Today, the same regulator, with a new chief though, has no hesitation in saying 3G is a separate service, that while 2G is essentially about voice traffic, 3G is really about data. Trai has tried to justify this by saying there was a serious spectrum crunch in 2005 and, since it didn’t look as if any more 2G spectrum would be available soon, the 2005 recommendation on 3G was a response to this.

That’s a feeble excuse since there has been little change in the spectrum position since May 2005. The proposal to get the defence forces to vacate an additional 25 MHz of 2G spectrum—this is enough to service around 50-60 mn new subscribers—in the 1,800 MHz frequency band, which is going to happen now, was first agreed to by a Group of Ministers in September 2003. And, in May 2005, Trai reiterated that this was to be made available by December of that year.

It is equally unclear how Trai justifies its changed view on 2G spectrum. In May 2005, it said spectrum vacated by the defence should be given to the GSM firms; the current view is that GSM firms should vacate some spectrum in the 900 MHz band and this be given to the CDMA lot! Though this loss is to be made up in the 1,800 MHz spectrum, this will cut into the GSM lot’s fresh allocation since only 25 MHz is available.

In other words, it will take a while before a genuinely robust regulatory mechanism that’s independent of personalities develops. That’s good or bad news, depending upon where you stand.

Though sensible on the whole, Trai’s latest 3G recommendations still have some inconsistencies. First, the rollout obligations specified is a bad idea since the DoT has rolled these back in the past in other services like fixed-line and long-distance telephony. Second, the suggestion that CDMA players who want spectrum in the 800 MHz frequency match the bid of the second-bidder in the 2,100 MHz is unfair. If Reliance/Tata, the CDMA lot, want to offer 3G services in the 800MHz band why should they pay less than what Airtel/Hutch (the GSM lot) pay when they bid for spectrum in the 2,100 MHz band?

The argument given is that, to do 3G services in the 800 MHz band, the CDMA lot will have to dedicate 1.25 MHz (called a “carrier” in jargon) to only data communication and so, if there aren’t enough 3G customers, this is a dead loss—the GSM lot, in contrast, can use their 3G spectrum to provide voice services to existing 2G subscribers as well. True, but the CDMA lot needs to buy less spectrum than the GSM lot, so they save there.

While Trai has chosen not to disturb the existing practice of giving 2G spectrum free, it will have to apply its mind here eventually, since this prevents its proper utilisation. An example will make this clear. If Reliance or the Tatas want to do 3G CDMA services in the 800 MHz band, they have to buy one more “carrier” (by matching the second-bid in the 2,100 MHz band). They can, however, do this even today by releasing one of their existing “carriers” in this frequency band, but under the new 3G policy, they have to buy a new “carrier”. But if they buy a new “carrier” here, they cannot do 3G GSM (like Reliance is supposed to be inclined to do) in the 2,100 MHz band. This is illogical, but the reason for it is obvious—if the GSM firms have to pay for their 3G spectrum, why should the CDMA chaps get it for free?

A fair enough point, but it ensures the economy’s making sub-optimal choices. The sooner the pricing of 2G spectrum is discussed, the better.