Friday, December 2, 2011

Healing Self-Inflicted Wounds

Let's use the smarts for making rational policies
Shyam Ponappa / December 1, 2011

A spate of dysfunctional actions and retrograde developments has led to an unimaginable mess for India. Can the damage to growth prospects be undone? Does it need to be? If so, how? Three areas are discussed below.

Some months ago, the spectre was of consoling ourselves with a reduction of two per cent in growth, from 9.5 to 7.5 per cent. That’s history. What looms ahead is a larger, more serious threat. This ominous tidal-wave-in-the-making comprises many separate currents converging to undermine India’s take-off yet again. The prospect is long-term growth hamstrung by policy stand-offs, foreign direct investment in retail being a case in point, and social tensions fuelled by high unemployment.

Those who think India has arrived should be aware that it will take another decade of eight to nine per cent growth to be able to fund reasonable basic infrastructure and necessities for everyone. Why should it matter if you live in a rich cocoon? At the very least, you’ll be able to go out without stepping into filth or smelling it, or seeing masses of people struggling to survive.

Instead of a high-growth trajectory, we may get six to seven per cent, with luck. These prospects are clouded by wasteful expenditure, such as the perpetuation of an ill-functioning public distribution system and its concomitant, ration-shop-mentality, instead of efficient direct retail subsidies through electronic transfers. The negativity is amplified by fractious social and political tensions, and shoddy infrastructure crippling productivity: power outages, low-speed communications and poor logistics. One can argue (ah, argument) that the tensions are justifiable as an antithesis to increasing levels of corruption from political, bureaucratic and corporate kleptocracy feeding off the land and people, or hardening sectarian interests competing for predatory control. But if there’s one thing we can learn from others’ experience, it is to work together for better outcomes, or suffer; in game theory parlance, collaborate to optimise, or settle for worse.

Undoing Sectarian Alignments

Undoing the fractious underpinnings of sectarian alignments of language, caste and religion is beyond the scope of this article. The unpleasant reality is that unless such structural social impediments are addressed, malfunctions will continue. So we have this reality where, at one level, India is wonderful in the way people stream and swirl together, and at another, it is horrible because our potential is not manifested in living standards, with people fed, clothed and housed properly, and clean streets.

To return to misapplied intelligence in the political economy, consider three areas: interest rates, airlines, and telecommunications.

Interest Rates

It seems only the Reserve Bank of India (RBI) was unaware that the consequences of interest rate hikes since February 2010 would (a) not control inflation (short of an economic collapse), and (b) lead to a severe curtailing of growth. To be fair, some economists aided and abetted with remarks that interest rates must be raised because of high inflation.
By contrast, the accompanying charts for China and Germany (euro zone) show their negative real interest rates.

What we have to do is reduce interest rates, with selective credit controls to ensure that credit for speculation is constrained and costs are high, e.g., in certain real estate, commodities, stocks and derivatives. Implementation, likewise, has to be “intelligent”, with online tracking by exception, and not cumbersome or voluminous weekly or fortnightly reports that are manually compiled and/or analysed, filtered and then presented to committees for decisions.


The structural anomalies in India’s taxes on aviation turbine fuel (ATF) and airport charges defy logic. For a decade, there has been talk of cuts in central and state taxes on ATF, but the problems continue. Consider the missed opportunity: India has a large domestic market and is well positioned for airlines to use this for establishing global leadership, as well as ubiquitous domestic services. Instead, the sector is bled for short-term government revenues, giving foreign airlines the advantage. ATF charges in India for international flights cost 16 per cent more than they do abroad, and local airlines pay over 50 per cent more because of taxes and additional charges. Consider the ludicrous stipulation that foreign airlines cannot invest in India, and the irrationality defies imagination. Add the illogic of a government-funded, loss-making airline undercutting private airlines, and we have the mess we are in.

Globally, airlines suffer from gratuitous free-market philosophies, the exceptions being airlines from strategically focused countries, e.g., in West Asia, Southeast Asia (Singapore, Malaysia, Thailand) and, of course, China. Wake up! Surely no one doubts that aviation is an integral aspect of logistics and transportation? The government needs to recognise this and build capacity, with policies like uniform, low state taxes. Also, as in telecommunications, aviation requires an oligopolistic structure with limited competition, which if ignored brings chaos and grief, because nothing else is sustainable.

Telecom & Broadband

The draft National Telecom Policy 2011 promises good things. Yet, like India’s potential, the promise will be realised only with convergent action. This iconic sector, which changed the way the country functions and is perceived, is on the verge of being ruined by dysfunctional intervention. For instance, the regulator and the government seem bent on applying retrospective charges for “excess spectrum”, taking the bottom out of the market. Worse, 3G services are hamstrung by government attempts to restrict services, while operators threaten litigation. Meanwhile, the bastions of “free markets”, the US and the UK, are initiating shared spectrum policies. What good are our brilliant objective statements about excellent, affordable services if the government acts to achieve the opposite? And is it beneficial for India to hound solid companies like Telenor and Qualcomm (unless they commit transgressions), instead of taking a problem-solving approach?

If the confused doublespeak – of punitive charges, restrictive practices, PSUs building state-of-the-art networks, auctions and spectrum sharing, all in the same breath – continues, we may lose a decade or more because of instability and irrational policies. It is time for decisions on pay-for-use, open-access spectrum and networks. Incumbent network companies can be compensated along a downward-sloping power curve to give up their competitive advantage. We must start being reasonable and do things that make sense.

shyamponappa at gmail dot com

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