Making The Most Of The Cash Flow Crisis

                       

     

                                        Humankind cannot bear very much reality - T.S. Eliot

The government needs to design incentives for greater cooperation, with disincentives to discourage defection.

Shyam Ponappa  |   December 1, 2016  

The economic arguments apart, some observers see the demonetisation/currency replacement initiative as a political strategy, similar to the United Progressive Alliance (UPA)-I’s instituting the National Rural Employment Guarantee Act (NREGA, later renamed Mahatma Gandhi NREGA). MGNREGA was famously successful in reinstating the UPA in 2009, although having beggared the treasury and wrought many unintended consequences through unthinking or even intentional mismanagement. It’s too soon to tell what the election effect of the currency replacement exercise will be despite local election results from Maharashtra and Gujarat. The drastic reduction of cash will induce severe constraints in economic activity for months together with the attendant consequences, unless the need for cash is alleviated.  For now, three weeks later, there seems to be reasonable popular support for the move.

The social and economic aspects of these policies lend themselves to analysis through the frame of Evolutionary Game Theory (EGT). EGT studies how patterns of strategies associated with groups affect competition for resources through repetition. Originating in biology, it is applied to many fields. Its focus is the frequency or spread of strategies in a population in competition and natural selection, and not only the nature of the strategies. EGT explains altruism in life forms as a benefit for a species, whereas survival of the fittest at the individual level leaves little room for altruism.  This explains why people act for the common good despite competition and natural selection, when selfish alternatives offer greater gains.

EGT models help us understand the motivation for group affiliation and altruism affecting behaviour that results in our living conditions and environs.  Of particular interest in our context is a basic assumption that strategies that lead to high pay-offs are transmitted within a population either through a learning process (culture) or through evolution. EGT helps to identify such strategies, as also to understand how additional aspects, such as population structure, affect the emergence of such strategies.

From a public-interest perspective, demonetisation and the MGNREGA are social engineering initiatives aimed at changing the structure and processes in society. In other words, apart from redistributing income, their purpose is to develop a culture that supports cooperative processes for a well-functioning society, e.g., with clean environs and sound infrastructure as well as clean money. A problem with the approach in both has been that they are perceived not so much as strategies crafted for the common good, as gamesmanship for political gain. In the process, the public interest objectives of social stability, productivity and well-being appear to have been sacrificed for partisan gains.

While political aims may be the unstated primary motivation and an unavoidable aspect of reality, both involve major structural changes to influence processes affecting large populations. EGT tells us that while human societies rely on mechanisms that promote cooperation, natural selection in unstructured populations favours defection over cooperation through higher pay-offs to defectors. However, with appropriate corrective mechanisms, natural selection can favour cooperation. But without special incentives for cooperation and compliance, combined with deterrents against defection/non-compliance, natural selection increases the dominance of defectors, driving co-operators to extinction. It follows that the benefits from cooperation and compliance must be attractive (high) so as to result in a virtuous circle leading to dominance by co-operators in a population, while the costs must be kept relatively low.¹ Urgent attention is therefore needed to design such benefits and reduce costs.

Apart from the financial effects of these policies, their aim is, presumably, or should be, to engender behaviour in a virtuous circle to help create a preponderance of co-operators in society. EGT shows that direct reciprocity (A helps B when B helps A) is an effective way of inducing cooperation in repeated interactions. However, researchers working together from Harvard, the University of Amsterdam, and the Max Planck Institute have found that it takes a combination of two factors, namely, direct reciprocity together with a degree of population structure such that it leads to greater interactions between co-operators than between co-operators and defectors, to work synergistically in creating high levels of cooperation.² They report that this combination yields much higher levels of cooperation than achievable through reciprocity alone in unstructured populations. They observe that this combination of reciprocity and some structure is very similar to actual human interactions, which are typically repeated, and occur in not very rigid yet not entirely unstructured populations. They conclude that if reciprocity in behaviour is combined with only a small amount of assortment (e.g., so that altruists interact more often with altruists than with defectors), then natural selection favours the behaviour typically observed among humans (in well-functioning societies): High levels of cooperation implemented using conditional strategies.

To make the most of the demonetisation “stick”, the government needs to design the right combination of incentives to induce greater cooperation, with disincentives to discourage defection. These are needed to help accelerate the adoption of cashless transactions to the extent feasible, given our levels of connectivity. It is also desirable to train change agents to seed co-operator populations, and to design supportive processes, including efforts to induce a degree of structured interaction that clusters co-operators to increase their number in sub-populations. This would be akin to the commercial equivalent of good agricultural extension.

Two aspects need resolution for cooperation to have a reasonable chance of success:

One is improving connectivity for communications for cashless transactions. This needs new approaches to resolve rural, semi-urban and urban communications problems, with government working with industry and experts to bring about genuine breakthroughs.  Otherwise, cashless transactions remain an urban phenomenon, and the hinterland is left out.

The second, and most urgent, is the restoration of economic activity flows. This requires resolution of the induced cash flow problems.  It is not clear how, but without that, there is a risk of a cash flow crisis overwhelming the rest. 

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Shyam (no-space) Ponappa at gmail dot com

1. “A simple rule for the evolution of cooperation on graphs and social networks”, Ohtsuki et al, February 10, 2006, Nature:

http://www.nature.com/nature/journal/v441/n7092/full/nature04605.html

2. “Direct reciprocity in structured populations”, Van Veelen et al, May 3, 2012, Proceedings of the Natural Academy of Sciences:

http://www.pnas.org/content/109/25/9929.full.pdf

Essential Services as Industrial Policy

Get the basics right, then support all the way through to market.

Shyam Ponappa    |   November 3, 2016

Looking for a compressor-driven tyre pump in New Delhi, the sort that plugs into a car’s 12-volt socket, there were many choices. There were products by Michelin and Goodyear, mid-range products from Taiwan and Korea, and low-end products from China. None were made in India. 

Why is an engineered product like this not made here? Is the market not large enough, or is there too much competition? Or does this epitomise India’s manufacturing problem?  This set one wondering about the factors and impediments that producers and suppliers contend with, whether for products from the manufacturing or farm sectors, or for delivering services.

There are the taxes, the slowness in clearances that makes for difficulties and delays while increasing costs, the shortages, as in unreliable essential services of electricity supply, water, sewerage and waste handling, communications and logistics. Then, there are the issues of access to funds, their cost, the lack of skilled people, and access to markets. What corrective steps are needed most? 

Our fundamental need is for industrial policy to focus on providing essential services, through both policy facilitation and effective delivery. These essential services are critical for product or service delivery.  In addition, manufacturing also requires skills, discipline, financing, and access to markets including government buying.

A basic question is the legitimacy of any industrial policy, even before addressing sectors, products or methods of organisation.  In this context, there are the ideological biases that skew perceptions, influenced by what is topical or accepted as customary at a given time, such as the socialistic preoccupations of the 1950s, the market supremacists until the financial collapse of 2008, and the partial correction thereafter, recognising the role of governments in setting enabling policies.

Do industrial policies really work, or do they merely serve to create more problems?  For example, an article by the chief economist of the World Bank for Middle East and North Africa, Shanta Devarajan, offers three reasons why industrial policies fail:

- Distortions such as labour regulations, energy subsidies, or tax breaks, as for example in India that resulted in resource allocation to IT services and away from manufacturing, or in aggravating problems of pollution because of cheap diesel.

- Political capture by lobbies or crony capitalism.

- Efforts to provide a comparative advantage to sectors, and not to individual entities (picking winners), which can fail because every sector can have both successes and failures.  

While the first two are valid, the third is not necessarily true. While firms can fail despite incentives, sector initiatives are perhaps precisely what are required. This is because conducive policies do not guarantee success, but can provide preferential conditions, which is presumably the aim of sector- specific industrial policy. What India needs more of in this is support to market.

A compelling financial consideration for all manufacturing is the short-term profitability of service activities, or of trading with minimal manufacturing.  Typically, these give quicker returns, because of the lead time for product development and commercialisation in manufacturing. The latter requires scale, access to capital, and an ecosystem of complementary producers. These are difficult to come by, effectively skewing resources towards trading and limited manufacturing with a reliance on imports.

Yet, domestic manufacturing’s declining share is unsettling for a large, growing market with high energy imports. Other unsettling factors include the influence of prevailing sentiments and political philosophies, e.g. minimum governance, and how they affect developments and their trajectories in these areas.

Open questions

Some government initiatives leave one wondering how they advance the public interest. Examples are:

- Ignoring support for early-stage and upcoming entities, their order books and delivery capability, while organising start-up initiatives as “events” for college students. India has early-stage capital for service-oriented start-ups such as software and IT-enabled services, aggregators, and so on, but not for  product development or manufacturing. Likewise, there’s scant long-term funding available for manufacturing or getting local R&D to market. The most difficult stage is transforming successful R&D in the laboratory to field applications and commercialisation. This is where support is not available, and is  sorely needed.

- Attempts to attract foreign direct investment (FDI) in manufacturing, despite the record of FDI.  According to a study by the Institute for Studies in Industrial Development (ISID) of 309 companies in five sectors with FDI of at least 10 per cent from 1993 to 2013, net earnings from manufacturing were  negative for most of the period (see chart).

Source: “Foreign Exchange Use Pattern of Manufacturing”, Swati Verma, ISID, August 2015:

http://111.93.33.222/pdf/WP183.pdf

- In electronics and information technology, despite supportive policies on paper, local manufacturers show little traction in domestic sales. A recent negative development is the reported consideration of foreign-owned entities that assure FDI of $1 billion over the next five years as “Deemed Domestic Manufacturers” regardless of their imports. This negates the very principle of domestic manufacturing and reliance on local IPR.  More important, it jeopardises the prospects of network investments, because of high import requirements in contention with energy.

Essential services and select sectors

All governments adopt industrial policies, some with a focus on infrastructure and regulations, with a lesser degree of market intervention, and others with more of the latter. Picking any sector or activity for constructive attention automatically favours it against others, whether it is cleaning the Ganga, start-ups, favouring IT services or high-technology manufacturing, or providing electricity, communications, and other essential services. This highlights the importance of essential services delivery as the most basic and critical need, because it provides an enabling platform. However, achieving essential services delivery requires action cutting across departmental boundaries, contrary to prevailing practice, in the central government, followed by all government agencies including in the states.  A separate step is to pick areas like high technology and defence manufacturing for special promotion through to market.

These distinct thrusts, essential services, and backing select areas all the way to market, will likely improve outcomes premised on policy intent.

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Shyam (no-space) Ponappa at gmail dot com

1: https://www.brookings.edu/blog/future-development/2016/01/14/three-reasons-why-industrial-policy-fails/

A Market Structure for Digital India

If delivery is priced below cost, communications services will be unsustainable and ineffective.

Shyam Ponappa   |   October 6, 2016

The stress in the telecom sector is evident from the data. The market capitalisation of listed telecom operators has been stagnant since the 3G auction in 2010, while the government collected Rs 2.83 lakh crore of non-tax charges from them.1 In March 2010 before the auction, the capitalisation was Rs 1.84 lakh crore; in March 2016, it was Rs 1.71 lakh crore, with the BSE Sensex up nearly 60 per cent. A larger share of earnings has gone to government rather than shareholders, and also to banks as interest (Rs 2.08 lakh crore). The irony is that no operator has bid so far for the most useful spectrum bands on auction, 700 and 900 MHz. Uncertainties abound, and there are several questions.

Reliance Jio's entry, although expected, is a jolt. Will voice calls priced below mandatory interconnect charges be treated as being predatory or anticompetitive? The technicality is that Jio doesn't have high market share, apparently a criterion under competition law. Will this hold, given that Jio's entry has reduced total market capitalisation? Will delivery capability in terms of network size and/or market power from associated businesses be relevant criteria for dominance? What happens when Jio does have sizeable market share?

• On the face of it, lower prices seem better for users. Look more closely and it's not so simple, especially when you consider other services in India offered for free or at highly subsidised rates. One issue is the structure of a market that supports delivery below cost, and its quality of services/products. Another is the criterion that maximises social welfare that should drive government's policies. Is consumer surplus in the short term a reasonable criterion? As it happens, we have experienced markets with constrained consumer surplus for years. For example, in the category of infrastructure and essential inputs/utilities, we've had this approach towards fertilisers, electricity, petroleum products like kerosene, cooking gas and diesel until recently, water, and sewerage. We've also experienced this in our entire range of manufactured products earlier, when we had exorbitant import barriers. These experiences have been less than sanguine. The misuse of kerosene and gas, and the effects of diesel subsidies are prominent examples. The distortions that have set in, such as overuse of ground water and fertilisers, and the vicious circle with electricity and diesel generators, will be difficult to correct.
   
• Aren't there similar deleterious effects in communications from spectrum auctions and government charges that inflate input costs, and price wars that degrade investment capacity for network extension and delivery? As it is, the quality of services for voice and data is very poor. An essential resource for better connectivity is spectrum, yet government's approach to its management has been and remains inimical to its stated objective of achieving ubiquitous access of good quality. Governments make it difficult for operators to extend networks simply by not setting the right administrative policies. To quote Google Vice-President Caesar Sengupta: India is "a very large country with very little spectrum". It does not seem clear to our governments that broadband access through fixed lines for everyone is infeasible in the foreseeable future. Also, that unless radical changes are made, it is inconceivable that broadband services can be made available at prices and quality comparable to TV.

The Triad of Interests

Even if the criterion for public welfare is user benefits/consumer surplus, judging by price alone is simplistic, because it misses other aspects of service delivery that contribute to the cost-benefit package. One essential aspect is ubiquitous access. Another is effective, consistent service delivery, which requires quality, and stability. A third is the period or life cycle. It doesn't help if you have an inexpensive product or service today, and nothing tomorrow. The definition of long term also varies, depending on one's perception of the life-cycle cost of the product/service. For a user, it may be several years, or his/her life cycle. For a society, it may mean generations.

In addition to consumer benefits, other factors need to be considered from the perspectives of pragmatism and realpolitik. Realistically, a triad of stakeholder interests has to be balanced for a sustainable beneficial outcome. These are: consumer and producer surplus, and what might be termed "government interests" in the broadest sense defined below. The latter has been manifest in many global spectrum auctions, and although detrimental to the sector, is an aspect of reality that cannot be wished away. For example, our governments preferred rationing and auctions to more constructive approaches such as sharing infrastructure, and when the Supreme Court ruled that resources need not be auctioned, spectrum was excluded, which seems logically indefensible. For sustainable, consistent services, champions of all three criteria must partner to adopt mutually acceptable solutions.


Assumptions About Enabling Policies

Certain basic amenities comprise the essential infrastructure that everyone needs to be productive and have reasonable well-being. To some extent, this is linked to reasonably high per capita income. Without it, broad access to good infrastructure is infeasible. It takes that level of organisation, institutions and investment, including its implications for developing and organising human capital, to build such capabilities, as in Organisation for Economic Cooperation and Development (OECD) countries. Emerging economies have to manage with lower order platforms, or a subset of higher order services combined with others of lower order. Prioritisation then becomes the key, and areas of emphasis have to be chosen. This is where the priority accorded to Digital India comes in. If digital systems are crucial facilitators for development and productivity, they need to be accorded that level of importance and effort, with substantive changes to policies.

The government sets the policies and incentives. Government here means not just the central government and the states' executives, but the gamut of regulatory and government agencies: the legislature, the regulators, and the judiciary. These agencies must converge and persuade public opinion to support action in the public interest. Ultimately, society has to pay. If delivery is priced below cost in communications, the services will be as unsustainable and ineffective as in other distorted sectors with freebies.

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Shyam [no-space] Ponappa at gmail dot com

1: Krishna Kant: http://www.business-standard.com/article/economy-policy/spectrum-fees-leave-no-money-in-shareholders-pockets-116092701398_1.html, Business Standard, September 28, 2016

Digital India Needs These Policy Changes

Appropriate policies will increase connectivity much more than spectrum auctions.

Shyam Ponappa    |    September 1, 2016

There's a "List of 10 Things" for realising India's potential that Prime Minister Narendra Modi received as the chief minister of Gujarat from Jim O'Neill, the originator of the "BRIC" concept. Many items on that list are greatly facilitated by information and communications technology (ICT): effective governance; primary, secondary, and tertiary education; improved infrastructure; and sustainable approaches that minimise negative environmental impact. While there's agreement on ICT's importance for India, there's difficulty getting it in place to best effect. This is because policy changes are needed to make Digital India a reality. These are the kinds of decisions that will turn the rhetoric about connectivity into reality.

Some changes are relatively easy, such as enabling 60 GHz Wi-Fi, while others require more effort, as explained below. These include better terms for satellite communications, enabling broadband on the 500-600 MHz bands, and spectrum and network sharing.

In our land of such range and contradictions, so much needs improvement that everything clamours for immediate attention. Attempts to address them all together are misplaced, however, because achieving results requires goal orientation, prioritisation and systematic action, to direct a convergent investment of time, effort and capital. Also, projects must be done with the realisation that the acid test is end-to-end delivery, even if it is initially to a small segment of the market. Only then can the rest of the iceberg be addressed: consistent, ongoing operation and maintenance, and scaling up. Think of the years of effort, capital and human resources invested without that first delivery in the National Optic Fibre Network. While defining objectives appropriately and setting priorities are difficult, both are imperative.

A recent report on The Networked Society City Index for 2016 by Ericsson reaffirms ICT's critical role in productivity and living standards.1 The report also shows that better-developed cities are on more sustainable paths to the goal of the desirable triple bottom line (TBL) of social, economic and environmental betterment. ICT facilitates not only sustainable development of cities and often their surroundings, but extends through the networked society far beyond their geographical environs. Even our metros need attention, with Mumbai and Delhi ranking at 36 and 38 out of 41.

The Wireless Imperative

Efforts at setting up Digital India have to contend with the reality that most non-urban communications have to be wireless, as does a significant proportion of urban access. This is because the cost and practical difficulties in laying and maintaining fibre everywhere is far greater than building wireless networks. The accompanying chart, showing the spread of broadband in India at the end of March 2016, illustrates this point.




The clusters are around major cities, with broadband penetration in Delhi/NCR highest at 58.2 per cent. Except along their major connecting links, the spaces between clusters are more difficult to connect and aggregate, as habitations are not densely clustered. Also, potential revenues are generally lower in less dense areas. Such areas urgently need lower-cost wireless coverage.
 
Policy Changes Required - from Easy to Difficult

Of the many constraints to building more accessible ICT in India, a major set lies within the control of government and stakeholders, provided they act together and are not adversarial about policies governing access technologies:

• There are unused frequencies in the 60 GHz band for which inexpensive equipment is available abroad with a capacity of several gigabits. Press reports years ago mentioned the de-licensing of this band in India. Last November, the Telecom Regulatory Authority of India (TRAI) recommended de-licensing Wi-Fi use, and light licensing backhaul with minimal charges. Yet, this asset is wasted because there's no policy permitting its use. It costs nothing to de-license in line with global norms. Apart from additional Wi-Fi capacity, service providers could use it for backhaul from small cells. Revenues are likely to rise, and the government would collect increased taxes. Domestic manufacturers could possibly develop products for what should be a huge market.
   
• Another proven technology is satellite communications. This is priced too high in India, as explained in "Satellite communications can drive the broadband revolution", Business Standard, 23 April 2016.2 Satcom tariffs are apparently nearly 300 times higher than in the US, while private sector applications for manufacturing satellites are languishing. Also, there is considerable potential for manufacturing associated equipment, such as VSATs, end-user terminals, and so on.
   
• A third area is unused or underutilised government spectrum. The most-useful and least-controversial, except for turf considerations, is unused broadcast spectrum in the sub-700 MHz bands. Government departments, namely, the Department of Telecommunications (DoT), the Ministry of Information and Broadcasting (I&B), the Department of Electronics and Information Technology (DeitY, now the Ministry of ... or MeitY), and the TRAI, could coordinate their approach, so that I&B and Doordarshan retain the spectrum, while allowing common access to shared spectrum and infrastructure for paid use by service providers. Doordarshan could increase its reach by providing programming and content over these links.
  These frequencies would be most effective in extending rural broadband, because of the distances that could be covered inexpensively. There is an issue with equipment, as there are no large, established markets anywhere yet for TV White Space devices, and there is insufficient support for local manufacturing even with Indian intellectual property rights. In fact, we have a Catch-22 situation here: such devices are likely to have massive deployment in India, but we don't have policies that allow these frequencies for broadband. The irony is that developers who manufacture prototypes in India have no access to spectrum even for testing their products, and will have to rely on markets abroad for testing as well as sales.
  
  
  Other Frequencies

•          Rules restricting usage of other frequencies could also be amended through a coordinated process.  The result could be policies that treat spectrum usage as part of a shared infrastructure solution for Digital India.  Using a shared access for payment approach with secondary sharing, primary holders of spectrum can retain usage rights, while government revenues accrue from swathes of spectrum that now remain unused, and holders of spectrum earn from common access.

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Shyam (no space) Ponappa at gmail dot com


1. "Networked Society City Index 2016", www.ericsson.com
2. T V Ramachandran. "Satellite communication can drive the broadband revolution", Business Standard, 23 April 2016

GST Needs Infrastructure to Succeed

But that is just the starting point. India needs to think strategically about how its large market can be served.

A recent article on the spate of reminiscences about economic reforms since 1991 characterises them as manifestations of the Blind-Men-and-the-Elephant paradigm or the Rashomon Effect.1 Both address the difference between perception and reality, and how each player’s experience of the same events is from his/her unique perspective, which can be different from everyone else’s. So, even if the reminiscing is accurate, no single tale captures all of reality. This is the story of India’s infrastructure. It is as though diverse descriptions lack the organising principle of a systems perspective, an overview of the totality of interrelated circumstances and events.  

There are two resulting insights for future reforms: the need for a conscious integrated-systems approach, and getting the fundamentals of infrastructure right for a solid foundation. A third, unrelated, insight arises from our balance-of-payments situation: the need to strategise for India’s domestic market because of the prohibitive cost of imports in a large and growing economy which relies on energy imports. 

The need for infrastructure was an early refrain, acknowledged episodically, and repeated at intervals. Given the vast scope of our requirements, and the ways we have gone about it, this is simply not enough. Our approach itself remains a work in progress, not effectively addressed so far. We can’t have a burgeoning services sector without good infrastructure. The recent flooding and gridlock in the service hubs of Bengaluru and Gurgaon demonstrate what’s wrong. Manufacturing can’t flourish either, nor can any other activity. They all need access to good infrastructure. 

Some advocate the primacy of services for growth, questioning the manufacturing initiative. No doubt services will remain the major growth engine for the foreseeable future, enabling considerable employment, provided the infrastructure supports training and competent, efficient functioning. We’ll need commensurate improvements in security, and law-and-order, difficult as that may be, to capitalise on the potential for tourism and travel. But uncertainties about the desirability of manufacturing in India are misplaced, because without more effective domestic product development and manufacturing, the services potential will be held to ransom by the increasingly high imports, especially of high-technology products required to support that growth. A market with this level of demand and growth has tremendous scope for domestic production for many products, provided (a) the policies and (b) the infrastructure facilitate production and supply.  

Even sweeping changes in policies such as the single goods and services tax (GST) will have their full impact only when infrastructure supports and facilitates its application. For instance, without adequate communications and logistics, much of the large and growing Indian market will still not be effectively served. This applies across all areas of economic activity, for demand as well as for supply, whether for health, education, entertainment, production and delivery, products and services through e-tailing or brick-and-mortar, tourism and travel, financial services, or IT-enabled services for domestic and external markets. It also applies irrespective of whether the mode of organisation is large scale, or small and entrepreneurial. 

Digital connectivity greatly facilitates efficient deployment of other forms of infrastructure as well. All connectivity does not need to be broadband because apart from the present benefits that accrue from voice links, many smart applications are possible with narrow-band connections in the evolving arena of the Internet of Things (IoT).2 The IoT often involves relatively small amounts of data going both ways, usually from machine-to-machine, over extended periods, using limited bandwidth and power with various technologies, and in places that may be hard to reach. In India, we’ve seen tremendous growth in voice with restricted data capacity, with more limited access to broadband for high-speed data. We’re also familiar with the constraints this imposes, starting with the limitations for education and health care services, and hence the need for broadband for these and much else. This despite the statistics on Internet use, which show India as being second globally as of June 30, 2016, with over 462 million users, with China being the first with over 721 million, and the US third with nearly 287 million.3 These figures seem to mask the inadequacy of our services; in network readiness, India has slipped from 89 (out of 143 countries) in 2015 to 91 in 2016. Instead of focusing on figures about assets that may not function, the Digital India initiative needs to emphasise the delivery of high-quality services to users through changes to administrative policies (i.e. where technology is not the constraint, but the rules and market structures are), and to double penetration from the present 36.5 per cent to cover 920 million users. 

Even 25 years on, the crucial insights of (a) a coherent overview and objectives, (b) a foundation of infrastructure, and (c) strategies to develop local sourcing for domestic markets, aren’t sufficiently emphasised in our reforms. Many key players act as though they are in a bubble or silo, apparently unaware of interlinked realities. One aim of the reforms was – and needs to be – to establish effective infrastructure and institutions. While beginnings are made, these are not carried through to completion, to become fully functional.  

Apart from establishing a solid base of infrastructure through synergistic and path-breaking steps in changing our rules and removing constraints, we have to think strategically about our large market and how it can be served, instead of being suborned by simplistic assumptions of comparative advantage, of being able to buy what we need from wherever it’s produced, or allowing 100 per cent foreign direct investment (FDI). Of course we must import and allow FDI on reasonable terms, but while trying to consciously develop and sustain an approach such as China has done in building Huawei, or Brazil in building Embraer. This is highly desirable for our communications and aviation sectors, despite all the cons of industrial planning. Not that this approach is without risk, considering what happened to Bell Labs and Lucent, now taken over by Nokia Networks. But, the consequences of not planning and acting on such initiatives are likely to be much worse.

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Shyam (no space) Ponappa at gmail dot com 

1: http://www.business-standard.com/article/opinion/t-nninan-the-fathers-of-success-116072901028_1.html 

2: https://en.wikipedia.org/wiki/Internet_of_things ; http://www.rsonline.com/designspark/electronics/knowledgeitem/eleven-internet-of-things-iot-protocols-you-need-toknow-about ; http://www.vscp.org/docs/vscpspec/doku.php 

3: http://www.internetworldstats.com/top20.htmhttp://www3.weforum.org/docs/GITR2016/WEF_GITR_Ful l_Report.pdf

Make By India

Make in India needs policy support for access to markets and much else.

Shyam Ponappa   |   July 7, 2016

It is a truism that Make in India requires the implementation of supportive policies for Indian manufacturers, especially when it comes to leading edge equipment. This raises the issue of what exactly our governments are doing for us, or to us, in the name of progress. It is “governments” in the plural, because the problems date from way back before the United Progressive Alliance-II, and carry through to the present. No doubt some of it arises from the genuine complexity of figuring out all the detailed steps in many domains, which are truly omnibus in character.

These are aspects beginning with the primary objectives and organisation in the context of public policy and practices, necessarily including market access, and extend to the formulation of primary and secondary laws that align with existing legal and customary requirements, followed by detailed regulations and procedures, economic and financial linkages, requisite institutional and process changes, and so on. Yet, all these have to be thought through and articulated, and ultimately made to happen, for robust development. Particularly in strategic sectors, policy support is essential in areas such as facilitating access to local markets for scale, to equity and debt finance, good logistics, and effective infrastructure. 

How does a domestic start-up in high-technology manufacturing break into the charmed circle of contract awards? The answer is that it doesn’t, unless it’s favoured by a government with foresight (for details of the predicament, see “Domestic High-Tech Manufacturing Needs Access to Markets”, Business Standard, August 1, 20131). Otherwise, Indian manufacturing companies with promising products have to actually succeed in markets abroad before they can compete for contracts in India.

Now consider the status of the long delayed and languishing Digital India initiative. After the radical changes introduced by the National Democratic Alliance-I and the tremendous growth of mobile telephony with limited broadband thereafter, little has changed in the policy space to bring about accelerated growth in broadband, especially not in rural India.

There is a known record of Indian manufacturing companies having to deal with the government’s non-adherence to its own policies on tenders. But that’s a separate discussion. The following case exemplifies another problem. There is a start-up manufacturing venture that has designed and built some really innovative wireless equipment from scratch. Its products are of the sort that are of critical importance in extending broadband communications access for TV, data and voice, especially in rural and semi-urban areas. Some of these products compete favourably with international products in early-stage trials that are under way. For such products to be even tested before deployment, however, new enabling policies have to be formulated, together with the associated rules and procedures — an aspect not handled well historically in India.

There are no major international vendors for these devices as yet, because there are no established external markets for such equipment. This is essentially because the developed world has extensive fibre and wired networks, and limited demand for such wireless products. The markets in developed countries may well open up once the devices are available in volume and prices drop, but it’s a chicken-and-egg situation. Yet, this Indian company has to rely on investors from abroad for most of its funding, and for such ventures, it’s a struggle to bring their products to the market. With supportive policies, these devices could be a force multiplier for broadband. Instead, this group of Indian entrepreneurs, who thought they were starting up a fabless chip design venture, has found out that there is no ecosystem to support such enterprises. 

That’s not all, because there are policy hurdles at every step. For instance, there are no designated frequencies available to such pioneers for testing their products. Each test has to be applied for in a slow process controlled by the Centre. While concern for spectrum allocations which could be easily misused in these troubled times is understandable, there appear to be no streamlined protocols in place for clearing applications from such high-tech manufacturing entities for testing their equipment, and the process takes an inordinate amount of time. Companies such as this should be feeding into and growing on the huge market that must be bridged in order to arrive at Digital India. Instead, our policies seem counterproductive, and on the market side, the government contends with the operators, who contend with each other unceasingly in factional wars of attrition. 

There are no promising developments regarding market structures or policies that could lead to orderly, rapid growth. These could include the permitting of unused frequencies for extending broadband access, common (unbundled) access to last-mile links, or shared network facilities. If unused spectrum were made available to operators in an orderly fashion, for last or intermediate-mile/backhaul to link up with fibre, rural users would get broadband access, operators would likely get better revenues from shared infrastructure — and the government’s revenue share would also increase.

The weight of legacy problems, together with inappropriate foreign models and unsupported local manufacturing appear to confuse analysts, academics, administrators and the legal community. Those in decision-making positions with good insight seem intimidated by the scope of the problem, which calls for complex financial restructuring together with other difficult organisational measures for change.

What’s to be done? Here’s where the government has to intervene and act cohesively with understanding and wisdom. Just as there is no way in which electricity supply can be successful without central initiative, coordination, and convergent action by stakeholders, so also broadband and communications networks cannot be provided without a problem-solving approach using collaborative solutions among this set of stakeholders and the government.

Only the Centre can provide a constructive lead on these issues, in a manner similar to what may be happening in cutting the Gordian Knot of electricity supply.2 The ministries and regulators should take the initiative to collaborate actively in pulling together all operators, suppliers and agencies to hammer out a solution that is practicable. Broadband coverage would improve, and India
could build a leadership position in last-mile access technologies.

______________________________________________________________________

Shyam Ponappa at gmail dot com

1 http://organizing-india.blogspot.in/2013/08/domestichigh-
tech-manufacturing-needs.html

2 http://organizing-india.blogspot.com/2016/06/theepiphany-
in-power-reforms.html

The Epiphany In Power Reforms

If this is real, get Digital India moving by extending this epiphany.

Shyam Ponappa    |   June 2, 2016

My column last month faulted misrepresentation and hype about infrastructure.  There’s a positive side of the electricity supply story, however, apart from the valid criticism.  It is of a breakthrough in governance premised on a real epiphany, in the approach to reforms in electricity generation and distribution, an area plagued with seemingly insurmountable difficulties since economic reforms began 25 years ago.  If it’s true, a strategy based on abundance and organization instead of on scarcity, shortages and a ration mentality, is yielding net benefits. 

On a cautionary note, this article is based on anecdotal evidence from the public domain.  Therefore, the statements need independent validation to be accepted as facts.

                                        

What’s remarkable about the present initiatives is the enlightened approach to provide affordable electricity.  The emphasis is on systems and flows, and not just jiggering numbers on subsidies and rebates.  The focus is on increasing asset utilization in systems to get lower unit-costs from generation and distribution, and increasing volumes for gains from scale in manufactured products such as light bulbs, fans and water pumps.  There are additional benefits because these products are energy-efficient, leading to lower electricity demand for equivalent use, as well as lower emissions.  Using these gains to attract manufacturing investment by supplying inexpensive, assured electricity is likely to delight prospective investors, provided the other aspects of infrastructure and inputs are also available.

On the face of it, a number of factors are being improved in the electricity supply and demand ecosystem to make this possible.  This is one aspect of satisfaction: that a coordinated strategy was adopted to drive systemic changes across multiple domains and aspects, leading to these gains.  An approach desperately required in other sectors, but that hasn’t yet been attempted.

For electricity, the first step was to sort out coal supply for generation, as India relies on coal for about 55 percent of its generation.  Fortuitously, a fall in global prices reinforced the steps taken by the Coal Ministry working in concert with Indian Railways.  Second, a combination of solutions were formulated and introduced in the Ujjwal Discom Assurance Yojna (UDAY) scheme in November last year.  These included improving the operating efficiency of distribution companies (the State Electricity Boards) through measures to increase utilization, reducing the cost of power by lowering the price of coal and the interest burden, and eliciting financial discipline.  On the demand/user side, an initiative to introduce efficient Light Emitting Diode (LED) bulbs in January 2015 by state-owned Energy Efficiency Services Limited (EESL) was apparently very effective, with more than 100 million LED bulbs distributed by April 2016, resulting in a considerable reduction in electricity demand.  The sheer scale of procurement and distribution have reportedly led to reductions of about 75 percent in LED bulb prices.  

The financial innovations have been equally impressive, with imaginative structuring resulting in states being persuaded to take over part of the liabilities of the SEBs over three years, thereby reducing the interest cost, while also agreeing to share future losses if any.  As a consequence, SEBs have lower debt obligations, and states have strong incentives to maintain financial discipline.  Details on the UDAY scheme are available at: http://pib.nic.in/newsite/PrintRelease.aspx?relid=130261.

EESL has reportedly begun a similar effort to introduce energy efficient fans.  These fans use 30 watt-hours less on average than the 75-80 watt-hour rating of older fans, of which there are estimated to be 350 million.  Another initiative is being planned to replace over 20 million agricultural pumps with more efficient models. 

The approach to orchestrating these changes has apparently been exactly as one might script a good government process: through coordinating and facilitating meetings and consultations over many months between state and central officials.  The result is convergence on initiatives to reduce transmission and distribution (T&D) losses through steps such as upgrading transformers and equipment, introducing smart metering, and financial discipline.  T&D losses are inevitable up to a point depending on network conditions; the rest is inefficiency and theft.  Countries such as the USA and China report as low as 6 percent, while Canada has 9 percent.¹  India’s losses, however, have been at well over 20 percent, and the effort is to reduce these to 15 percent or less. 

While the solutions are not perfect -- for instance, the Supreme Court order to auction coal mining rights may result in higher life-cycle costs -- these may be the most comprehensive, integrated and well-coordinated efforts at policy reforms.

Extension To Other Sectors

Could the approach and methods applied to address electricity supply and demand management be applied to other sectors of the economy?  Obviously not in a one-size-fits-all manner, because the solutions have to address the specific problems or needs of each sector.  A consideration of the elements suggests a potentially transferable process:

•      An approach based on abundance instead of scarcity.
•      Central leadership in goal-directed coordination and facilitation with expert inputs, to converge on planning and execution.
  
  
•     Problem definition and analysis from a holistic perspective, with expert inputs from relevant domains, and inter-sectoral integration in solutions.
•      Emphasis on high utilization of “plant and equipment”, i.e., capital equipment and networks.
•      Scale and efficiency to reduce costs, combined with sophisticated financial structuring of solutions.
•     Central and state areas of responsibility well covered.
•     Distribution through markets and retail platforms.

These elements should be applicable, changing as necessary for specific attributes, domains, and expertise, to other sectors such as communications and broadband, primary health/water and sanitation, education, and transport.  Each of these would require addressing a complex set of questions and definitions with as much rigour, energy, expertise and panache as has been brought to bear in the electricity supply solutions.

Much depends on the veracity of these claims about process and results. If they’re true, this experience can be applied immediately to get the beached Digital India initiative going. If it is hype, both Digital India and Electricity for All are beached whales.

_____________________________________________________________________

Shyam (no space) Ponappa at gmail dot com

1: http://data.worldbank.org/indicator/EG.ELC.LOSS.ZS

Ending Suboptimal Performance

Legacy approaches need to be reconsidered...

With growth being upbeat compared with much of the world, things must be going well with us. There are indeed a number of positive attributes that lend an upward trajectory to expectations. But, there's the difficulty of "living in interesting times", as in the apocryphal "Chinese curse", while we go through this period of transition, with uncomfortable but desirable transformations.

Setting aside the hype in claims and counter claims, there is a genuine upwelling of positive developments, resulting from economic activity in sheer numbers and scale. This leads to improvements in capacity and productivity, although more slowly than we want. The roads in many parts of the country, for example, are disrupted even as they're being improved. Also, roads everywhere are dug up to lay fibre-optic cables where possible. This makes the transition distressing, but the benefits after completion are likely to be substantial, as can be experienced, for example, in driving from New Delhi to Mumbai and beyond. Once Electronic Toll Collection begins countrywide, there will be even greater benefits through more efficient and less polluting freight carriage by road. But these gains come at a cost and take time, and those hurt.

Electricity supply, however, has been negatively affected by a number of factors apart from legacy issues, such as disruptions in fuel, high variations in costs, environmental concerns, and slower economic growth. The adoption of stricter environmental norms, while desirable, has added to costs in this difficult period. Legacy issues driven by political considerations have yet to be addressed, such as under-recoveries from agricultural and residential users, overpricing to industry, and delayed government payments. On the positive side, solar power is becoming more attractive compared with more fully-loaded costs for other sources. A move towards increased use of solar power is likely to be very beneficial in the longer term.

Market access and delivery, meanwhile, is being facilitated by digital platforms, so that many activities from commerce to government services are making the transition. For instance, even for reporting forest fires and fighting them, as in the hills of Uttarakhand just now. There are impediments, of course, such as limited rural access, especially to electricity and high-speed digital networks, or access to credit. But there is increasing capacity coming on-stream, alongside the negative reality of stalled projects and NPAs (non-performing assets, ie, bank loans in arrears). Barring unexpected disruptions, this economic momentum will continue to flow and build, despite a lack of effective strategies, or of planning and coordination. This in itself will improve the NPAs in banks, provided they can weather the interim period. Wilful defaulters need separate resolution.

There are also significant threats to the momentum. Apart from disruptions from social or political discord, the NPAs are a significant hazard, as also an obstacle to other activities whose access to funding is constrained. Other major threats include judicial or environmental actions that disrupt economic activity for whatever reason. Take the automotive industry, which employs millions directly, and perhaps over 19 million indirectly. While Delhi has no major manufacturing plants, actions taken by the Delhi government, or by the courts banning registration of large diesel cars, dampen prospects for all of them, and extend through ripple effects to the sectors that serve them, such as consumer durables, food and travel. It would help if the judges and environmentalists were informed by experts with understanding of the linkages, and of the financial impact, so as to calibrate phased action.

Despite these hazards, the momentum and flow is likely to result in improved productivity and living standards. But this will happen only to the extent that the developments are real. Unrealistic claims will not help, and this is something that needs to be internalised and made manifest in our data and reportage. The quality of data is crucial for analysis and action, as well as for influencing our perception and behaviour. In areas of essential infrastructure such as energy, communications and transport, good data quality will help drive sound decisions and action for future development.

The Opportunity Costs of Underperformance

What one rues is the difference between what happens with this uncoordinated approach, and the possibilities with better planning, prioritising, and coherent effort. There are several aspects to these losses. For example, there's the difference between actual versus potential access to electricity, broadband, or roads/transportation/logistics. Second, there's the loss of functioning at lower skill or delivery levels, instead of gearing to higher levels of professionalism for all skills, and at all levels. Third, and perhaps most damaging, there's the underutilisation of human resources, because of employment and productivity constraints.

Manipulative claims only help perpetuate problems. An example of this is the level of electricity access in the country. A survey of several hundred rural households in 2015 regarding access to electricity uncovered large discrepancies between claims of high access and quality compared with actual levels.¹ Aside from households with no access to the grid, some with access suffered poor quality with high variations in supply, many days without electricity, or with only a few hours of supply each day. Worse, the gaps between tariffs for agricultural versus domestic versus commercial/industrial supply have continued. Power companies not paid on time for subsidies owed are in turn unable to invest to the extent required in equipment because of delayed government payments. This perpetuates a vicious circle of under-recoveries, and underinvestment in generation and distribution systems, leading to insufficient power of poor quality, and so on.

Similar problems affect other areas such as food supply and communications. In food supply, issues such as poor warehousing lead to spoilage. In communications, the need is for policies that will help use resources in the delivery of services. Legacy approaches need to be reconsidered with the purpose of actually providing for our needs. A can-do, problem-solving approach is likely to help take us forward. Meanwhile, improving our performance within present constraints will help in coping during the transition.

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Shyam (no-space) Ponappa at gmail dot com

1: "Access to Clean Cooking Energy and Electricity," 
Abhishek Jain, Sudatta Ray, Karthik Ganesan, Michael Aklin, Chao-Yo Cheng, and Johannes Urpelainen
CEEW Report, September 2015
http://ceew.in/pdf/CEEW-ACCESS-Report-29Sep15.pdf