A Great Start on Wi-Fi Reforms

The 5 GHz regulations are exactly what we needed for a start. But we need a lot more, and not only from the DoT.

Shyam Ponappa    |   November 1, 2018

This item of detail is almost like magic. The MoC has done something splendid regarding Wi-Fi. Its 5 GHz spectrum regulations have everything we could wish for. But it’s a first step — only the first. Much more is needed to reap the benefits.

To put it in context, we now have a policy that enables effective broadband Wi-Fi hotspots, and profound changes in connectivity are feasible for the last mile in India, as in other countries. A high proportion of smartphone traffic abroad is over Wi-Fi. In the recent past, in the US it was around 70-75 per cent, while Japan was around 83 per cent, and Germany about 87 per cent.1 Traffic is offloaded from licensed spectrum, freeing it up for re-use. We have 605 MHz added in the 5 GHz band to the existing 380 MHz for Wi-Fi, and a removal of restrictions on external usage as in the US, so Wi-Fi will have much greater capacity.

The ramifications, however, are ironic. These regulations could lead to a surge in economic activity, and consequent benefits from connectivity. But this will increase imports, which are already overboard on account of oil prices and technology imports, an aspect discussed later in this article.

The increased activities in network installation and ensuing benefits will vary depending on supporting ecosystems of policies and practices. This applies within the communications sector as also at points of interface with other sectors, such as electricity and finance. To illustrate, in communications, consider an unlicensed band in most markets including the US, the UK, and Europe, namely the 60 GHz V-band. Whereas the Federal Communications Commission (FCC) in the US delicensed 14 GHz in this band for “wireless fibre” called WiGig, India hasn’t done so. Instead, another WPC2 notification in October delicensed only 500 MHz (61-61.5 GHz) at very low power. Devices abroad that use this band for 400-metre and 700-metre connections have channels of 2,000-2,500 MHz acting as wireless fibre links over short distances. These can’t be used here. Short-distance connections to Wi-Fi and wired networks in offices and residential, commercial and industrial complexes will need fibre or cable.

This policy link is missing, perhaps because operators oppose it. The user network traffic bypasses operators to the extent that Wireless Internet Service Providers (ISPs) and other entrepreneurs set them up and collect charges, whereas operators have paid huge premiums for the spectrum required earlier. A solution that enables commercial deployment by licensed operators would solve this problem, although ISPs would have to go through operators as before. Another alternative could be to have unlicensed access to public wireless networks owned and operated by BSNL/BharatNet/CSC, or by operator consortiums, on payment of service charges by operators and users.

Equally essential are aspects of ecosystems that are adjuncts from sectors such as power supplies, finances, and local manufacturing, for substantial and stable growth. So for convergence resulting in significant benefits, these are the kinds of problems that will have to be resolved:

• The power situation, with a conscious shift towards more distributed, renewable (solar and, in some areas, wind) energy, with changes comparable to Wi-Fi/5 GHz in policies and practices. 
• The financial system and non-performing assets (NPAs), including the steady revival of infrastructure projects. While dealing resolutely with malfeasance and fraud, nursing and reviving good infrastructure underlying the NPAs is crucial. A sorry plight, but if revivable infrastructure projects are allowed to fail, they end up as unproductive, wasted assets (a repeat of Dabhol), with negative multiplier effects. 
• The imperative for the domestic manufacture of equipment to reduce imports. This is going to be an escalating compulsion because of our market size, unless we develop solutions that help balance imports, such as a compelling tourism strategy (but just think of the complexity of the ecosystem elements that need improvement) or communications equipment exports (equally complex).

Meanwhile, we are on a path committed to curbing demand to contain the deficit: Battening the hatches, tightening belts, and waiting for oil prices to fall /exports to rise, keeping a wary eye on the current account deficit (CAD) because of imports, and inflation. This pressure may persist for months, possibly even years, restricting growth. Aren’t there feasible, growth-oriented initiatives, tempered by not exceeding reasonable bounds, including the CAD?

The data on the CAD, capital formation, FPI inflows, and FDI are in the chart below.

CA: https://rbi.org.in/scripts/PublicationsView.aspx?id=18603 

GFCF: https://data.gov.in/sites/default/files/datafile/Table3.10.xls

FPI Inflows: https://rbi.org.in/scripts/PublicationsView.aspx?id=13729

https://rbi.org.in/scripts/PublicationsView.aspx?id=18599

FDI Equity Inflows: http://dipp.nic.in/sites/default/files/FDI_FactSheet_29June2018.pdf

A study of data from 2001 to 2016 of how the capital account and its components, the current account, and gross fixed capital formation affect each other concluded that sustained capital formation requires more foreign direct investment (FDI) relative to other flows.3 FDI was found to have an indirect effect on capital formation, which was found to affect the current account. Debt portfolio flows and nonresident deposits financed the current account, but did not contribute directly to capital formation.

In Indonesia, a study of how the CAD affects exchange rates found that when it exceeds about 2 per cent of the GDP, the exchange rate depreciates over 12 per cent after a four-month lag.4 Tracking such relationships in India would be useful for policy making.

Meanwhile, India’s large growth sectors are plagued by unsustainable economics. For sustained growth, they have to be organised more rationally, to generate profits for productive enterprises. Promising domestic sectors include electricity, communications, and aviation. Bypass strategies as in software and IT-enabled services won’t work, because these services are for domestic markets. They must generate profits without labour arbitrage, while balancing imports and exports, unless growth continues to attract foreign capital. Genuine reform as for Wi-Fi and 5 GHz spectrum with collaboration involving the private sector and governments modelled on the automotive sector are a possible way forward.

Shyam (no space) Ponappa at gmail dot com

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1: Claus Hetting, October 2018: https://wifinowevents.com/news-and-blog/japan-83-of-smartphone-traffic-runs-on-wi-fi/; https://wifinowevents.com/news-and-blog/germany-wi-fi-carries-87-of-smartphone-traffic/

2. WPC: Wireless Planning and Coordination Wing, Department of Telecommunications

https://dot.gov.in/sites/default/files/License%20Exemption%20in%205%20GHz%20G_S_R_1048%28E%29%20dated%2022nd%20October%2C%202018_0.pdf?download=1

3. Ashima Goyal & Vaishnavi Sharma, September 2017: http://www.igidr.ac.in/pdf/publication/WP-2017-016.pdf

4. Nugroho et al, January 2014: http://bmeb-bi.org/index.php/BEMP/article/download/445/420/

Policies & the Public Interest

The public interest calls for real reforms for equitable growth.

Shyam Ponappa    |    October 4, 2018

Everyone understands that users need high-speed broadband links for a countrywide transformation, through access to education, healthcare, and much else including opportunity. The lofty aspirations of the New Digital Communications Policy 2018 (NDCP) are 50 Mbps “to every citizen”, 5G, and so on, whereas the reality is a plan for two Wi-Fi hotspots per village. Surely, mere aspirational statements after inordinate delays cannot help attain high-speed “broadband for all”. Nor can a gutted market bereft of policies to induce the required capital for connectivity and network efficiencies. The NDCP epitomises overstatement juxtaposed with the realities of poor services. Key reforms have been consigned to a future imperfect limbo: reducing additional taxes (from an exorbitant 32 per cent), achieving more efficient spectrum use, and the like. Our needs are staggering, but what we have so far are statements of intent without real policy changes in the public interest.

A similar approach has played out in the manufacture of electronics and solar power. India’s mobile revolution depended entirely on imports of network equipment, software, and handsets.1 Likewise for solar power, India has relied on imports. Recent efforts to elicit interest in manufacturing solar equipment locally received lacklustre response, because of perceived inadequacies in policies and incentives.

The crux of the matter is how public interest, which many of our politicians, administrators and analysts claim as their motivation, is construed. An additional wrinkle is of being “pro-poor”. What does the “public interest” mean, and how does “pro-poor” fit in other than by perpetuating poverty? Some proponents regard the “aam aadmi” as being synonymous with the public interest, and others “the masses”, or “the poor”, or farmers. There is also segmentation by exclusion, such as “not those who own vehicles”. Exclusions also apply to manufacturing, such as cars or two-wheelers, because they add to pollution and congestion on roads. So also to air conditioners, refrigerators, and so on, perhaps from the confusion of conflating market principles with socialist ideas of “luxury goods” having a pejorative taint, whereas our need is for engines of growth, except in sin goods and services. In fact, the automotive sector provides a model for coordinated policies (except for fuel pricing).2

Our fuel pricing is puzzling, because while it affects the majority, it is treated as affecting only the affluent (many of whom are also likely to be very productive). Affluent consumers comprised around 27 per cent of India’s population in 2016, and may grow to 40 per cent by 2025.3 Constraining productivity and output is surely not beneficial except in containing imports, especially when productivity is declining (see Chart). Yet, this is the effect of high taxes on inputs. This is why there’s a genuine need for the evaluation of alternatives to demand compression and high taxes.

Labour Productivity in India - January 2010 to November 2017

Source: https://www.ceicdata.com/en/indicator/india/labour-productivity-growth

What, indeed, is the definition of public interest?  Here is a version:

It is the welfare or well-being of the general public, by which the whole society has a stake that warrants recognition, promotion and protection of the government and its agencies.

The overall public interest is about society as a whole, unalloyed by divisive or fractious special interests. It is not the welfare of any individual, group or company. In seeking to maximise overall welfare, however, there need to be trade-offs and selective regulations for justifiable subsets, such as the underprivileged, or in spatial planning for town and country, or sectoral regulations for energy, exports, or automotive products. Yet, while the criterion should be public welfare, the arguments we encounter are mostly for special interest groups. Rarely is there a consideration for the welfare of society as a whole.

How might a holistic approach to public interest alter the stance to policy making, administration, analysis and advocacy? Consider this example from Brazil after the global financial crisis of 2008.

Brazil suffered decreasing exports, lower investment, and a credit crunch with deleveraging, resulting in lower incomes and tax collections, and higher unemployment. The government’s response in 2008-09 was a selective reduction in taxes, together with increased liquidity, and reduced interest rates to the most affected sectors.4

These policy changes reduced a tax component, initially in the automotive sector for a quarter, later continued for about a year. This was extended to consumer durables/electrical appliances, and to building materials, the latter for about 15 months. For some products such as stoves and small washing machines, this tax was reduced to zero. Meanwhile, taxes on cigarettes were increased. The result was an increase in tax revenues from higher production and consumption, after an initial fall in tax collections.

Simulation is a useful way of evaluating alternative scenarios. Converted to cash flows, these inputs can be used to shape policies, because cash flows are an essential measure of reality.

A compelling reason for scenario planning is that coordinated policies could yield higher growth than foreign borrowings without systematic policy support. A policy framework with lower interest rates and good infrastructure (energy, logistics and communications) could accelerate growth, thereby attracting capital despite current account imbalances. Such alternatives deserve to be evaluated against the approach of higher interest rates to attract, then struggle to retain foreign capital (when there is a flight to quality, raising interest rates in emerging markets is usually ineffective), with lower growth.  Lower rates would also facilitate redeeming NPAs, as banks could profit from rising bond prices.

It is in the public interest to analyse alternative approaches, including input costs and taxes. Areas such as the allocation and management of coal, automotive fuel pricing and automotive manufacturing, and spectrum allocation and management need such analyses. In finance, the alternatives are of inflation targeting, taxes to reduce the fiscal deficit, high interest rates to attract/retain foreign capital, and managing imports, against scenarios with lower taxes, interest rates, and coordinated policies as in the automotive sector for manufacturing and logistics in sectors such as electronics and solar power equipment.

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Shyam Ponappa at gmail dot com

1: Sanjib Purohit, NCAER, March 14, 2018

2: http://www.siamindia.com/uploads/filemanager/47AUTOMOTIVEMISSIONPLAN.pdf

3: https://www.bcg.com/en-in/publications/2017/marketing-sales-globalization-new-indian-changing-consumer.aspx

4: [Input-Output Matrix study of tax reductions-Brazil-2014]

Power Sector NPAs: A Crisis Too Near

The NPA crisis extends far beyond banks.

Shyam Ponappa   |   September 6, 2018

The impact of non-performing assets (NPAs) of Indian banks extends far beyond the financial sector and poses a serious threat to our political economy and to society. Resources are indeed being channelled to address the issue, but our apparent inability to resolve the problem is a massive drag on the economy. The reasons appear to be inherent contradictions, poor understanding or incompetence, and piecemeal, not cohesive, decisions. The latest turn concerns the power producers’ petition for extending repayment deadlines.

Recall that NPAs rose from 2011 when they were 2.5 per cent of loans, because of overleveraging after a high growth period (2004-05 to 2007-08). Corporate debt invested in [long-gestation] infrastructure projects encouraged by the government (power, mines, auctions for spectrum and coal) resulted in investments as a percentage of gross domestic product (GDP) rising from 27 per cent in 2004-05 to 38 per cent in 2007-08. Bank credit doubled during this period.

Then two things happened: The price of oil and other imports increased 2.4 times between 2010 and 2014. The rupee dropped sharply against the dollar, increasing foreign borrowing costs. Domestic borrowing costs also rose by as much as eight per cent by mid-2016. Additional problems surfaced in project implementation such as in land acquisition, environmental and other government clearances, and fuel supply.

By 2013, nearly a third of Indian companies had interest cover less than one (ICR1), with annual earnings before interest and tax less than interest expense. By 2015, this had risen to almost 40 per cent. Overall, there was insufficient cash flow generated to service debt from 2014, and NPAs rose from 2.5 to 11.6 per cent by March 2018, and could be 12.2 per cent by March 2019.

When the RBI initiated a hard line on NPA classification in 2016, the evergreening of loans stopped abruptly. However, chronic delays in payments by state distribution companies, problems with fuel availability, and lags in tariff changes continued. In addition, the slowing economy with a number of power projects coming on stream resulted in an apparent oversupply.

The Allahabad High Court (AHC) order on the power producers’ petition1 reflects many contradictions, perhaps arising from inadequate presentation of the financial aspects. The order denies the petition, but allows that the petitioners may “apply for urgent interim relief if need so arises” (paragraph 135). It instructs the government to consider intervention under Section 7 of the RBI Act (instructing the RBI to extend repayment time) within 15 days. Separately, a committee set up by the power ministry as recommended by the Standing Committee of Parliament on Energy (SCOPE) is to submit its report within two months from the date of constitution.

Notably, except for a brief section in the 124-page order, the elephant in the room, cash flows and their effects, are entirely absent from the presentation and the judgment. The section begins: “It is expected that the banks will have sufficient avenues to raise additional capital so as not to face any capital constraints”. If only that were true!

The AHC appears unaware of the magnitude of our financial predicament, of an immediate and pressing need for relief, and of the extent of damage to the power sector, the banking system and the economy as a whole from the lapses in control and performance over many years (not only in power), because of blundering and wrangling. The latter began with the RBI applying a guillotine in classifying NPAs, and extends to the minutiae of administrative and regulatory procedures (such as the government seeking a repayment extension for the producers from the court, while remaining adamant that bankruptcy procedures be applied rigorously across the board).

One observation in the judgment defines the unresolved contradictory circumstances: “These NPAs were always there. We are now recognizing them.”The judgment acknowledges the validity of arguments against the application of the RBI directive on NPAs, such as the report of the SCOPE and testimony of the Ministry of Power, as also that extraneous reasons such as flawed implementation of regulations, a fuel supply crisis, inadequate power evacuation systems, and delinquent payments eroded the financial stability of the power sector.

Despite the Additional Solicitor General seeking another 180 days for the petitioners to repay, and the chairman of the State Bank of India and of the Rural Electrification Corporation opining that the RBI’s stipulation of 180 days is insufficient, the judgment cites three compelling reasons for denying the petition:

a) The contradictory stand of the government in seeking time for the petitioners while supporting the RBI's directive on NPAs, noting that the government "must no longer remain ambivalent or inert".

b) The AHC’s interpretation that the RBI's directive under Section 5 (b)(i) requires all lenders to approve a Restructuring Process (RP), whereas under the Indian Bankruptcy Code, approval is needed from only 66 per cent of lenders. The RBI could demonstrate that this interpretation is incorrect, or explain why all lenders need to approve.

c) The delay in the RBI’s notification of credit rating agencies (CRA) (May 21, 2018), whereas the 180-day deadline for the RBI directive began on March 1, 2018 (Rs 80 days earlier). [An RP requires an independent credit evaluation by an authorised CRA]

The order states: "Ultimately what has weighed while arriving at this conclusion is the absence of lenders before the Court, their individual views not being known and the serious issue of the health of the financial sector of the country and its overall impact on public debt. Measures adopted to address such complex economical issues must at present, be left to the wisdom of experts."

While many areas in India are chronically short of power, there is apparently excess overall capacity. Meanwhile, states renege on power purchase agreements for cheaper electricity on spot markets, resulting from aggressive bids for solar and wind projects. This results in sound projects run below capacity because of the inability of distribution companies to pay, while financial gambits disrupt the generation market through low bids. Besides the banks, a number of large projects are in jeopardy. There is no substitute for cohesive, end-to-end policies and the resolution of internal contradictions.

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Shyam (no space) Ponappa at gmail dot com

1: WRIT - C No. 18170 of 2018

Independent Power Producers Association of India Vs. Union of India & 5 Ors.

WITH

WRIT - C No. 23181 of 2018

Association of Power Producers & 2 Ors. Vs. Union of India & 5 Ors.

WITH

WRIT - C No. 23183 of 2018

Prayagraj Power Generation Company Limited Vs. Union of India & 4 Ors

August 27, 2018

http://elegalix.allahabadhighcourt.in/elegalix/WebShowJudgment.do

The Problems That Should Occupy Our Electioneers

The prize in the elections next year could be a winner's curse.

Shyam Ponappa    |   July 5, 2018

The preoccupation with state and Parliamentary elections that is now manifest may take away attention from the economy. Despite some encouraging developments, major structural problems such as the non-performing assets (NPAs) in banks and stalled projects await resolution. They need urgent attention beyond the din of politics.

First, the good news

• Gross fixed capital formation improved to an all-time high of Rs 111.85 billion in the last quarter of 2017-18 from Rs 102.40 billion in the previous quarter.
• There was some credit growth, with non-food credit increasing 11.1 per cent in May 2018, compared to 4.1 per cent a year ago. Credit to the services sector also increased by 21.9 per cent compared to 4.0 per cent in May 2017, and personal loans grew 18.6 per cent compared to 13.7 per cent in May 2017. However, areas such as infrastructure, basic metals and metal products, construction, gems and jewellery, and vehicles and transport actually declined.
• The Insolvency and Bankruptcy Code (IBC) is apparently being implemented more effectively than it might appear. A Brookings Institution report of a conference of financial experts, including a former Deputy Governor of the Reserve Bank of India, in Mumbai in February states: “50 per cent of all NPAs are currently being resolved through the Code, another 25 per cent will soon be. The judiciary has been following the (very tight) timelines prescribed by the Code.”¹
• This week, a public sector bankers’ committee recommended potential solutions for NPAs to the finance ministry. These include an asset management company for stressed assets run by the banks, an asset trading platform for loans, an inter-creditor agreement between banks with the lead bank authorised to implement time-bound resolution, and finally, the IBC and sell off. Sceptics may mistrust these as being too cosy. Realistically, however, we have to accept that functioning together for mutual benefit requires trust, built around good organisation with checks and balances, and validation (observed in the breach in the complicit NPAs). In Ronald Reagan’s phrase (actually a Russian proverb), “Trust, but verify”.

So, is the glass half-full or half-empty?

The bad news

Here are just two examples of the looming problems.

• Stalled projects: An RBI circular of February 12, 2018, was like a guillotine on a number of private power projects with inadequate cash flows because of circumstances beyond their control. The circular directed banks to begin the resolution (sell off) process for all delayed projects, including those where debt restructuring was under way. There’s a school of thought embodied in this directive that uniform criteria must be applied to all defaulters. Another approach advocated by the power ministry is that there can be problems outside the developers’ control for which they are not responsible, such as a shortage of fuel, denial of access to captive mines, financial weakness of distribution companies, or delays in government or regulatory clearances. Developers cannot control these, and therefore such projects should be excluded from the purview of the RBI Circular. A Parliamentary Committee also recommended this in March.² The Allahabad High Court, hearing a petition by the Independent Power Producers Association of India against insolvency proceedings, ordered that “no action be taken against the power sector under the revised framework, and directed the finance secretary to hold a meeting with his counterparts in the power and coal ministries, along with representatives of the RBI and the Insolvency and Bankruptcy Board of India in June to discuss ways to address the issues faced by stressed power plants.”³

While the RBI held firm at this meeting on June 21, 2018 (e.g., see: https://www.business-standard.com/article/opinion/why-ibc-must-be-sector-agnostic-118070100732_1.html), the finance secretary reportedly asked for written submissions by the stakeholders. A group of experts will review these to consider next steps. The Allahabad High Court may yet save us from the brink.

• Fettered policies: The Wi-Fi example

We have an odd juxtaposition, with the government eager to auction 5G spectrum for revenues, while making it available to operators. The industry wants the spectrum but is overburdened with debt, which it already has difficulty servicing because of hyper-competitive price cutting. In addition, there’s a vast, underserved rural and semi-urban market, which requires even more capital investment. Finally, there are the stressed banks, which have thus far been the major source of funding.

Meanwhile, our fettered approach to 5 GHz for Wi-Fi is an example of policies that need unleashing. India’s National Frequency Allocation Plan (NFAP) has delicensed 380 MHz in the 5 GHz band. This is 200 MHz less than required by the standard, so users have less spectrum. Second, India permits only 50 MHz for outdoor use, and the remaining 330 MHz for indoor use. This severely constrains the use of this band and available devices in India, making it ineffectual for Wi-Fi hotspots in both urban and rural areas. We need an amendment in India's 5G policy to conform to international standards. There need be no indoor/outdoor restrictions and less restrictive power limitations, as in the USA.

It could mean adopting policies in sync with global markets. For users, it means that any compatible device from any market can be used without customisation. This allows easier installation and maintenance because no customised set-up is required. For manufacturers, devices they make that conform to global or large-market standards can be used wherever these standards apply, which gives access to more markets. Both attributes facilitate higher volumes, which help result in lower prices, making devices more affordable. All users benefit from the full capacity of the device provided it is in a compatible system. Unfettering changes like this and for 60 GHz, as another example, will unleash Wi-Fi.

This is the kind of policy change that is required to unfetter ourselves. What’s needed is an attitude of thinking constructively, instead of meanly or restrictively. Without such constructive changes, the way ahead will be hard regardless of who wins the next elections.

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Shyam dot Ponappa at gmail dot com

1: https://www.brookings.edu/blog/up-front/2018/03/01/how-to-solve-issue-of-rising-non-performing-assets-in-indian-public-sector-banks/

2: 164.100.47.193/lsscommittee/Energy/16_Energy_37.pdf

3: https://powerline.net.in/2018/06/30/seeking-a-reprieve/

Petrol & Diesel Pricing

                                             

We need to rethink whether arbitrary levies that effectively double fuel prices improve public welfare.

Why do we pay so much for petrol and diesel in India?  Essentially, because of taxes and levies. The government seems to treat containing the fiscal deficit as the highest priority, with other public interest criteria being less important. Let’s explore this assumption to see if it is reasonable. The question is, what is the net effect on public welfare from arbitrary costs/levies that effectively double the price of fuel, compared with the benefits.

Rising petroleum prices in India are causing significant distress, both at the macro level in terms of slowing growth as well as in living conditions for most people, excepting those at the highest income levels. This is primarily because of India’s dependence on imported fuels without commensurate strength in exports. Additional factors are: The value of the rupee against the dollar, and the effect of the extent of taxes on petrol and diesel on living conditions.

To recap briefly, when the price of crude dropped from 2014, the government increased taxes nine times through January 2016. But when prices rose thereafter, taxes were not reduced. This has resulted in exorbitant retail prices, and much higher government revenues. Chart 1 shows the price of India’s crude basket in dollars per barrel, and petrol prices in rupees per litre.

For every additional rupee in tax, the government gets Rs 130 billion more revenue (as reported by PTI) while according to the Economic Survey 2017-18, for every $10 per barrel increase in crude prices, GDP growth is reduced by 0.2-0.3 per cent. It was estimated to be more than double that by the Institute of Energy Economics, Japan, in May 2012.

Chart 2 shows the effects of rising oil prices on importing nations. 

Source: https://eneken.ieej.or.jp/data/4338.pdf

Both producers and consumers suffer the ill effects of rising oil prices. In India’s present circumstances, these negative effects need to be set off against the positive effect of containing the deficit to some extent, which will presumably temper inflation and so on.

This set of factors reduces nominal GDP ($2.65 trillion in 2017) by an estimated 0.2 to 0.3 per cent at least ($5.3-7.95 billion, or if it is indeed nearer 0.7 per cent, by $18.55 billion). Another set of factors is the rationale that people who use vehicles must pay high taxes for these reasons:

• As a disincentive to restrict the use of petroleum products, to control pollution as well as the level of imports.
• As a source of revenue for other beneficial public use.

On the other hand, the rationale for passing on the benefits of lower taxes and prices to users is:

• To restrict inflation by keeping input costs low, which is presumably important in terms of lower financing, input and transportation costs for the economy.
• To boost consumer demand, thereby also contributing to growth.

Perhaps there needs to be a rethink from the ground up — an ab initio approach to define critical objectives in the public interest. Should higher taxes be imposed on inputs such as transportation fuel in the absence of public transport alternatives? Are there other effective ways of curtailing pollution and excessive consumption (apart from the necessary and systematic development of public transport), while retaining the enabling aspects of inputs such as transportation?

A study of the energy cost share of GDP in the US from 1950 to 2013 found that expensive energy was a drag on the economy.1  If the cost share was higher than a threshold (above 4 per cent of GDP for the US data), the economy was likely to do less well. In India, petrol and diesel costs as a percentage of GDP are far higher than in many other countries. While retail petrol is priced about the same in India, China and Brazil (see http://www.mytravelcost.com/petrol-prices/), a litre of petrol is nearly 20 per cent of daily per capita GDP in India, whereas in Brazil and China, it is only a fifth of that, at about 4 per cent.

From a completely different perspective, consider how keen political parties and candidates are in election mode to appease or cajole voters. This happened in the run-up to the Karnataka Assembly elections in April. Local newspapers ran headlines about petrol and diesel prices held steady for nearly three weeks until May 14 despite rising international prices. Only then were prices allowed to soar (Chart 3).  

Since keeping fuel prices in check is recognised as a palliative for elections, what could be the reason for avoiding a decrease in taxes and levies when the price of crude rises? Presumably, concern about the deficit. Perhaps what needs to be thought through is the benefits of reducing input costs to increase collections from higher growth.

The management and use of petroleum for energy is one dimension of our multifaceted requirements that has to be addressed. Other necessary dimensions include emphasis on the development of renewable fuels such as cellulosic ethanol for transportation2, of electric batteries for vehicular use, and apart from transportation, of solar power generation, and for large plants, integral solutions such as association with pumped storage power where possible.

Above all, rational pricing of inputs by reducing taxes is a desirable beginning that can be acted on immediately.

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Shyam (no space) Ponappa at gmail dot com

1. Michael Aucott and Charles Hall: www.mdpi.com/1996-1073/7/10/6558/pdf

2. Kirit Parekh: http://indianexpress.com/article/opinion/columns/fuel-for-thought-petrol-price-hike-tax-two-wheelers-5204001

Added later:

For related material, see:
Extractive Charges on Spectrum & Petroleum
Are government levies on these critical inputs beneficial or detrimental?
March 6, 2014
http://organizing-india.blogspot.com/2014/03/extractive-charges-on-spectrum-petroleum.html

Counter argument - added later:

Rathin Roy, BS June 8, 2018 - 'Oil price volatility: Policy options'
Given the random walk, changing oil prices impact short-term macroeconomic stabilization.
https://www.business-standard.com/article/opinion/oil-price-volatility-policy-options-118060701614_1.html

Oil industry forecasters and economists have been trying to predict future oil prices for over 70 years. The major analytical conclusion (see thisfor a summary) is that the best predictor of future oil prices is the present oil price. Technically, this means oil prices move akin to a random walk without drift.

In India, analysts in the private sector and media commentators appear ignorant of this. Like central planners, they read supply-demand forecasts to make predictions about future prices and use this as a basis to advocate government intervention. This leads to accusatory hysteria about government doing nothing to temper the effect of rising oil prices on purchasing power.

Given the random walk, changing oil prices impact short-term macroeconomic stabilisation. The only medium-term factor that needs to be kept in mind is that oil prices will fall as technology reduces demand for fossil fuels. A random walk, therefore, means that government policy must be to select a benchmark price for oil, and then devise policies that stabilise short term oil prices (or a derivative set of prices for petroleum products) around this price, consistent with macroeconomic stabilisation objectives.

The major macroeconomic policy implication of oil price fluctuations is on the balance of payments (BoP). In India, this is complicated by the fact that India imports crude oil and exports refined petroleum products. The difference between the two, net oil imports, halved between the first quarters of 2014 and 2015. That trend has reversed since the second quarter of 2017. In value terms, exports have stagnated while imports have increased by 39 per cent. Exports are now 36 per cent of imports compared to 32 per cent in Q2, 2017, in turn, down from 42 per cent in Q1, 2015. This is a structural trend and must be dealt with as such by petroleum experts, as it affects the impact of changes in oil prices, not price formation.

For BoP management, it is desirable that consumption growth is tempered when oil prices fall, but is constant, or falls, when prices rise. This would mean that, having set a benchmark oil price consistent with BoP management, government should tax oil (and its derivative products) when market prices are lower, (and do as little as possible when market prices are higher), than the benchmark price.

This government has so far (without explicitly saying so) done exactly this, for which it is to be commended. However, it has to be mindful of the impact of rising oil prices on the voiceless poor and vulnerable. But the political noise comes not from them, but from commentators whose clientele are an elite addicted to oil, that constantly needs to top up its fuel tanks to meet western lifestyle aspirations. For both these reasons, government may need to consider policies to limit the impact of rising oil prices on purchasing power.

There are four policy options. First, to hedge against future price rises. This is unfortunately costly, both in terms of capacity to hold and to store petroleum products, and because the cost of financial hedging instruments is high — precisely because oil prices are a random walk! Second, to tax when prices are low, save a part of the proceeds, and use these to balance the fiscal books and reduce taxes when prices rise. This is difficult to do in India where the central government has expensive development obligations, but is also in a long term fiscally constrained situation. Third, tax petroleum products, especially luxuries, so that consumption falls, and aggregate purchasing power is maintained by changing consumption patterns. This takes time and requires cooperation of the elites, which is not forthcoming. As long as automobile and FMCG sales growth is considered a leading indicator of economic health, this is off the table. Fourth, subsidise oil prices/reduce taxation of petroleum products until prices fall.

The first three options all have a positive impact in ameliorating the impact of rising oil prices on the BoP. The fourth has a negative impact as it leaves demand for petroleum products unchanged even as prices rise. Even the expectation that such an intervention will happen (reasonable considering India’s past record on petroleum subsidy), means that the value of oil imports continues to rise as prices rise. Clearly, this is undesirable.

Based on the above reasoning, my professional view is that the pressure on government to intervene to moderate domestic oil prices is unwarranted and not in the public interest. But I understand that government may be politically compelled to contemplate the undesirable fourth option. If this is inevitable, then I recommend that government announces a time- and price-bound policy intervention. Thus, government could commit to maintain oil prices at or below a specified level, until a specified future date. This would be an explicitly limited intervention, and would promote economy of consumption and temper expectations, as consumers and markets use the transition space to adjust to a higher oil price future. This would minimise fiscal costs, moderate the skittish reactions of our immature bond markets, and silence the garrulity of commentators pandering to middle-class sentiments in the name of the common man. The government could introduce simultaneous measures to protect the poor and vulnerable through income support using the Direct Benefit Transfer (DBT) modality (which can be done even if price subsidies / tax cuts are not executed).

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The writer is Director, National Institute of Public Finance and Policy. Views are personal

The Huawei Pointer

Taking a cue from Huawei.

Shyam Ponappa  |  May 3, 2018

Huawei has an awe-inspiring record of drive, perseverance, fortuitous circumstances, good strategy, execution, and success. A Chinese communications company founded in 1987 in Shenzhen by a former army engineer, Ren Zhengfei, Huawei is now a legend. By 2012, it overtook industry leader Ericsson in global revenues. In 2017, its revenues were over $90 billion, two-thirds from outside China.  It also has a significant and growing presence in India. How did they do it?

Part of Huawei’s mystique stems from its outstanding founder and its driven work culture. This may be unique and difficult to replicate, but it is a byword for hard-charging Chinese high-tech. A meme that epitomises the culture is “9-9-6” — that is, for 9:00 am to 9:00 pm, 6 days a week. Can factors driving its success be adopted at the policy level and in enterprises in a democracy?

My previous column addressed the hollowing out of our manufacturing and other abilities. My suggestion is to replace obstructive policies with others that facilitate building infrastructure and local capacity, especially in growth areas. The example of Huawei provides a pointer. Perhaps some of what we learn can be applied at the governmental and the corporate levels.

Reports suggest these key factors in its success:

— Strong leadership with a sense of purpose: A customer-first attitude. There’s an anecdote of the founder being willing to meet any customer, but ignoring a potential investor by delegating to a colleague a meeting with a Morgan Stanley team, led by Chief Economist Stephen Roach.

— Broad employee ownership: In 2014, 84,000 employees out of 150,000 owned stock along with the founder, who owned only 1.4 per cent.2 They share an understanding that while an IPO would enrich some, the majority would lose their motivation. The essential requirements are hard work and dedication.

— Government support: Huawei grew revenues by building market share in China to become a national champion, then got support from the China Development Bank. Initially for $10 billion, it is now $30 billion.3 Building networks in Africa and Latin America, and low prices helped win deals in Europe. Mr Ren himself has said that without policy support, Huawei would not exist.

— Its unique culture and organisation: From inception, the founder was passionate about management, and about adapting methods and organisation. For instance, Huawei devised a top management model of a rotating CEO among three top executives, each of whom leads for six months, modelled on a flight of geese that change their order in arrowhead formation.4 Mr Ren is the mentor and coach. In March 2018 there was a change to a rotating Chairman position.

(The founder’s daughter, Meng Wanzhou (aka Sabrina Meng) is the Chief Financial Officer, and holds one of four vice-chair positions. His son Ren Ping works for a subsidiary providing reservations and trade show support.)

Another instance is Huawei’s Integrated Financial Services transformation program, which Ms Meng led since 2007. It was an eight-year partnership program between Huawei and IBM to develop data systems and resource allocation rules, operations, process optimisation, and internal controls.

— Huawei reportedly invests 10 per cent of annual revenues on Research & Development.

— Huawei also emphasises “the power of thinking”. Executives are urged to read beyond their domains, and books are everywhere.

These factors enable Huawei to solve problems for clients in diverse situations. Examples:

— In its early days, networks were at risk from rats gnawing through circuitry in desert and rural areas in China. Multinational vendors did not consider this their problem and left it to their customers. Huawei, by contrast, treated it as their own problem, and developed sturdier equipment and materials such as chew-proof wires. This experience later helped gain large accounts in the Middle East where customers faced similar problems.

— Other extreme environmental conditions have been addressed, such as base stations installed at high altitudes (at 6,500 metres on Mt Everest), or in the Arctic. These experiences helped a dedicated and committed workforce gain more clients. For instance, when expanding their 3G market in Europe, Huawei found that clients expected “base stations to be more compact, easier to install, greener, and more energy efficient, while offering wider coverage”. To cater to these needs, Huawei developed distributed base stations that could handle both large and small private networks, making them cheaper to deploy, which became popular with European carriers.

— The employee-ownership arrangement and associated dedication enable planning for the long term, as with the Chinese government. Huawei plans for 10 years, whereas competitors have to contend with quarterly financial considerations.1

Carriers buying Huawei network equipment get significant discounts in smartphones. Focusing on new technology not controlled by the giants of 3G such as Qualcomm, Ericsson, and Nokia, enabled Huawei to develop 4G, which is much faster and ideally suited for updating-apps, to the point that it competes with Samsung and Apple. Undercutting competitors has enabled it to sell to carriers, and its depth of products and technology has enabled it to meet customer needs, displacing competitors.

Huawei’s R&D Centre in Bangalore established in 1999 is its largest outside China, and it has offshore Global Network Operating Centres in Gurgaon and Bangalore, besides Romania and Nigeria. These GNOCs run networks not only in India but across the globe for a number of operators, offering managed network services integrating a range of equipment at low cost. With its market strength, depth of products, and access to funds, Huawei is likely to control network services in India and much of the world from now on through the 5G evolution cycle.

The only way for competition other than in-house NOCs in India is if the Government of India develops end-to-end supportive policies, transcends election cycles, and sponsors a consortium comprising a major transnational anchor, a system integrator, and local design and production wherever technological opportunities arise.

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Located within Huawei’s Research and Development (R&D) campus in Bengaluru, the GSC is currently home to over 1,000 engineers, network operations specialists and support staff.

Source: http://www.huawei.com/en/press-events/news/2016/8/Largest-Global-Service-Center-in-India

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Shyam.Ponappa@gmail.com

1. David De Cremer and Tian Tao: https://hbr.org/2015/06/huaweis-culture-is-the-key-to-its-success

2. Rebecca Blumenstein: https://www.wsj.com/articles/the-secret-of-huaweis-success-1414963782

3. Scott Sendrowski: http://fortune.com/huawei-china-smartphone/?iid=sr-link1

4. Belasco, James A. Stayer, Ralph C. (1993). Flight of the Buffalo. New York, NY: Warner Books.