Aim Long Term For A Strong Currency

 

Strong currencies reflect strong economies.

Shyam Ponappa   |   December 3, 2020

Is a strong currency not desirable for India? There seems to be broad acceptance that a declining rupee is essential for exports. Is this true long term that it is in India’s interest to have a currency that is consistently losing value? Consider this in the context of our long-term interests.

As exports become more expensive with a stronger currency, sectors relying on wage-rate arbitrage, such as Information Technology Enabled Services and labour-intensive manufacturing, will suffer reduced margins, or may even become unviable. Such activities ideally need policy support for transition where feasible to more productive alternatives over a reasonable period. These could be for improvements of process and product design, with automation or computer aided processes, as in jewellery, or skills for a different activity. For high-value products, enhanced quality may be needed to deliver perceived value.

The Indian rupee has depreciated against the US Dollar continuously on average from 1980, except for 1992-95 when it traded between Rs 30-33 to the dollar, and 2003-2011 when it was Rs 44-48. This reflects the relative strength of the economies and market sentiments, with the US having been a more productive economy, with lower inflation.

Excluding countries dependent entirely on natural resource endowments, such as oil, or attributes such as being a tax haven, strong currencies reflect strong economies. Examples are the US dollar, euro, British pound, Japanese yen, Swiss franc, Chinese yuan, and Singapore dollar. The relative weakness of economies is likewise reflected in weak and depreciating currencies. High inflation or internal contention and turmoil undermine the strength of an economy, and the currency usually depreciates.

The advantages of a strong and stable currency are that buying power for imports is protected. For India, this is important for containing expenditure for oil and other energy imports, defence procurement, gold, electronics, withdrawals by foreign portfolio investors, external borrowing repayments, imports of raw materials and intermediates used in manufacturing for domestic markets and exports, and for travel. For a given set of items of expenditure, a strong currency gives consumers more disposable income because of reduced costs, and enterprises have higher surpluses from better profit margins.

In the short run, constraints on movement and economic activity during the Covid-19 pandemic led to increasing inflation in food, gold, transport (including higher taxes on petrol, diesel and alcohol), and com­munication.¹ Some analysts suggest an overweight food component may overestimate inflation. The problem arises if there is a stock policy response of raising interest rates now, whereas our circumstances require a facilitation of flows, and not restraints. This also applies to the level of contention through all government action, as against focus on the economy and security/defence to get us through these times. We need our government to focus on facilitation, not contention. Contention reduces productivity, as do all impediments and shortcomings in infrastructure.

Higher Productivity = Higher Growth = Stronger Currency

Longer term, after recovery, is the declining rupee a foregone conclusion? Yes, if we continue with business as usual. Instead, if we work systematically towards focussed changes for growth through productivity, while dealing with emerging market realities of agricultural shocks and wage-push inflation, this could help build a solid recovery and better long-term prospects. Radical improvement in infrastructure will probably enable breakthroughs in productivity. Equally radical changes in organising human resources, and markets (i.e. second-order infrastructure) could further accelerate growth. However, these require choosing appropriate objectives, disciplined teamwork in design and execution, and no disruptive political developments. If we are successful, we will grow faster and the rupee will strengthen.

Infrastructure And The Currency

The rupee will continue to depreciate unless we become more productive and grow faster. India is lagging so badly even among emerging markets that we have to think of doing things differently. 

Krishna Kant, 2020:

https://www.business-standard.com/article/economy-policy/india-s-10-year-growth-one-of-the-biggest-laggards-in-asia-em-peers-120113001325_1.html). 

Impro­ved infrastructure is a way to achieve better productivity and higher productivity and growth.Some of our difficulties stem from efforts to contain the pandemic, but the obstacles of poor logistics, power, communications, water and sanitation, have to be surmounted for growth. These services will also enable pursuing higher standards and skills for manufacturing, processes, and emissions control. Poor services and standards are major deterrents to transnationals looking to set up in India or to relocate here.² For pharmaceuticals, the government has announced a policy for bulk drug parks and for domestic manufacturing of import-dependent APIs. While additional steps such as anti-dumping duties and targeted manufacturing incentives may be needed, similar systemic initiatives are required for industries such as chemicals, machinery, automotive components, and electronics. All of them need smooth inward and outward logistics for good results.

Illustration: Binay Sinha

In addition, another serious deterrent for transnationals is the unpredictability of policies, and the hurdles encountered by large international investors in India, for example, Vodafone, Amazon, Walmart, Cairn, major automobile manufacturers, and so on, including in resolving contracts and disputes.

Targetted steps are required on the lines suggested in the previous citation and in the next,³ such as global anchor investors for priority industries, in the way that Suzuki was to automobile manufacturing, with nodal government coordination, not harassed and impeded, but nurtured to ensure success. Such initiatives need to be explored and evaluated, and if feasible implemented for select industries. Exports cannot be successful without imports at low tariffs, because of global value chains. There is also the issue of finance including scale, and finally, purchase orders, especially for manufactured products. Government’s enthusiasm for start-ups is not sustained at the next phase with purchase orders and funding for commercial scale, once start-ups are past venture rounds. This leaves promising manufacturing enterprises floundering, and unable to scale up.

Export capabilities need to be developed and built on scale, adapting policies in other emerging economies such as Bangladesh and Vietnam. While Vietnam has the advantage of proximity to China, its steps to build capacity need study and consideration, as also for Bangladesh. We should aim to build India’s export capabilities over time, to contribute to a strong economy and more stable currency.

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Shyam dot Ponappa at gmail dot com

1: a) Remya Nair, 2020: https://theprint.in/economy/its-not-just-food-prices-covid-pandemic-has-also-helped-push-inflation-to-7-6-in-india/546473/

b): Dharmakirti Joshi & Adish Varma, 2020: https://www.crisil.com/content/dam/crisil/our-analysis/views-and-commentaries/quickonomics/counterintuit­ive-inflation.pdf

2: Hetal Gandhi & Isha Chaudhary, 2020: https://timesofindia.indiatimes.com/blogs/toi-edit-page/factory-of-the-world-how-india-can-be-a-plus-one-destination-while-reducing-dependence-on-china/

3: Ajay Srivastava, 2020: https://timesofindia.indiatimes.com/blogs/toi-edit-page/from-start-to-port-a-nine-steps-framework-for-making-india-a-great-investment-destination/

List of Articles with Hyperlinks

1 FX Reserves & Infrastructure

[Finance/Economics]

2 The Rewards of Excess: Benefits of Growth Exceed Costs
[Finance/Economics]

3 Learning from Our Champions
[Goals, Tasks & Project Management

4 Organizing Aviation (Competition, Open Skies ...and Bust?)
[System (Re)building: Organization & Systems] 

5 Organizing: Biofuels (More Energy for Ethanol and Biodiesel!)
[System (Re)building: Organization & Systems] 

6 Thinking Big - Scale, Ownership & Results
[System (Re)building: Organization & Systems]

7 Organize - by the Judiciary? (Dispute Resolution & India's Body Politic)
[System (Re)building:Organization & Systems]

8 A Tale of Two States (Gurgaon vs Bangalore)

[System (Re)building: Organization & Systems]

9 Organizing PSU's: Performance is the Key
[System (Re)building: Organization & Systems]

10 Organizing Ourselves - 1: Systematic Reforms (It Can Be Done Here)
[Goals, Tasks & Project Management]

11 Safeguarding India's Capital
[Finance/Economics]

12 India’s Growth Engines: Services + Manufacturing (Breaking the Mould)
[Goals, Tasks & Project Management]

13 Prioritization & Planning: A ‘Ballooning’ Approach (A Wish List for India's Dream Team)
[Goals, Tasks & Project Management

14 Governance Successes (Bull's Eye for Governance)

[Goals, Tasks & Project Management]

15 Organizing Renewables- Next Steps for Biofuels)
[System (Re)building: Organization & Systems]

16 An Investment Fund for India
[Finance/Economics]

17 Integrated Area Planning (Spatial Planning) [Infrastructure: Rural & Urban]
[Goals, Tasks & Project Management]

18 Tata's Corus Buy-A Game Theory Analysis
[Game Theory: Collaborative Gains]

19 Productivity Reforms: Government from Ruler to Facilitator (Beyond India's Tipping Point)
[System (Re)building: Framework & Principles]

20 Productivity & Regulatory Constraints (Opportunities for the Left)
[System (Re)building: Framework & Principles]

Using Spectrum for the Common Good

 

Shyam Ponappa   |   November 5, 2020

Service delivery is lost in pursuing auctions.

“There is nothing either good or bad, but thinking makes it so.” Individual profiling by marketers, for instance, epitomised by internet platforms such as Google, Amazon, Facebook, WhatsApp, Netflix and so on. But tread carefully, O Reader, because whether we think about it or not, what we do has real consequences.

Here is a cautionary tale about auctions, more particularly, spectrum auctions. Recently, the Nobel for economics, the Sveriges Riksbank prize, was awarded to Paul Milgrom and Robert Wilson for auction design. In the words of the award committee, “for improvements to auction theory and inventions of new auction formats”. And it is widely touted that auctions are the best way of allocating spectrum and other public resources for the common good. What remains unstated are all the assumptions necessary for good outcomes, especially service delivery.

When these auction designs for wireless spectrum or telecom licences were applied in many countries, two things happened. One, an enormous amount of money was collected by governments from auctions, as in the US (1994) and India (for licences, not spectrum), the UK (2000), and countries across Europe (2001). Two, and a devastating consequence, was that several “successful” bidders declared bankruptcy — in the US, the UK, and Europe; in India, some reneged on their bids. Those that survived were so debt-laden that they struggled to invest in building networks to use their hard-won spectrum/licences. The welfare loss from service deprivation was incalculable.

This combination of successful government collections and ruinous debt for bidders and industry, together with deprivation for consumers/society, was repeated in the US in 1995-96, and in India in 2010 onwards. Meanwhile, following the dotcom boom and bust in 2000, the telecommunications sector collapsed worldwide, compounded by overreaching auction bids. This was 10 times larger than the dotcom collapse1, and the sector remained crippled by unserviceable debt in high-bid countries for nearly a decade. India was an exception because of the change to revenue-sharing in 1999. Auction mavens wrote disparagingly of countries with low bids such as Switzerland and Sweden, and countries that did not auction spectrum, such as South Korea, Japan and Finland (until 2009). Unsurprisingly, these countries achieved the best services, as they were not burdened by investments sunk in spectrum auctions. They built networks instead. Yet until now, the Indian government, among others, is reluctant to apprehend what should be obvious from an objective analysis. The alternative of getting stakeholders to cooperate for resolution is indeed difficult, but not having countrywide high-quality broadband is a severe impediment that we ignore at our peril. We cannot hope to build real strengths without changing this, no matter what governments proclaim.

A number of reasons have combined to perpetuate the idea that sunk costs are irrelevant among theoreticians, policy makers, the judiciary, and lay people. There is the classical economics sunk-cost argument for ignoring past investments, premised on the assumption that future investment decisions are unaffected by past investments. Only theoretical academics can sustain such assumptions, as also that economic decisions are entirely rational, or that there are zero transaction costs. Anyone with responsibility for costs and profits understands the reality that constrained resources affect investment capacity, and therefore investment and pricing decisions.

For years, a preponderance of research appeared to support the belief of sunk costs being irrelevant by theoreticians and especially policy-makers believing in free-markets, ignoring the collapse of the markets. The expectation that high costs affect investment capacity, and therefore must have significant consequences, was dismissed as erroneous. Apart from occasional contradictory publications, it is only more recently that some evidence from financial and behavioural economics is being adduced to counter the notion that sunk costs do not affect future decisions, and to support the reality of how constraints on resources affect behaviour.

There have been occasional experts who disagreed with the emphasis on auctions, such as the MIT Media Labs Director Nicholas Negroponte, and publications to the contrary, such as, “Do Sunk Costs Matter?”2, “What Really Matters in Spectrum Allocation Design”3, and the GSMA report in 2017, “Effective Spectrum Pricing” by NERA Economic Consulting4, on high spectrum costs holding up network investments and resulting in higher consumer prices. For the most part, one-sided academic research, uninformed bureaucracy, auditors, and judiciary treat the amounts bid in auctions as the measure of success.

One explanation for research missing out on this aspect may be the problem of “unknown unknowns”, that is, the infeasibility of evaluating the consequences of actions not taken, because the data are not there for the paths not taken. In Donald Rumsfeld’s other inimitable phrase, the absence of evidence is not evidence of absence. Meanwhile, the reality of India’s unused spectrum juxtaposed with the state of its telecommunications reflect the lost possibilities for us, but there are no data to support what is not there.

Good, countrywide broadband in India is likely to give rise to vast benefits from greater inclusion, healthcare and education for economic activity, productivity, and better living. This requires far better connectivity, and for that, we need a much more constructive approach to the use of spectrum and networks. Spectrum is a public good that is beneficial only when used fully, and connectivity and communications are its primary uses. For providing an essential service, India’s approach is hugely flawed for a developing economy. It requires capital upfront to pay for the right to use spectrum, then using more capital to deploy networks to provide services, generate cash to run the business, as well as service the debt for spectrum and equipment. There is something very wrong when we have so much spectrum available, and considerable unmet demand, yet are unable to formulate practicable spectrum- and network-sharing or other policies to provide broadband services to everyone. Our policies appear to be ignorant of the need for sustainable cash flows for the sector, and this obviously needs to be remedied.

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Shyam dot Ponappa at gmail dot com

1: The Economist, 2002: https://www.economist.com/­leaders/2002/­07/18/the-great-telecoms-crash

2: R. Preston McAfee et al, 2007: https://www.mcafee.ccPapers/PDF/SunkCostFolly.pdf

3: Thomas W. Hazlett et al, 2011: https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1961225_code410506.pdf

4: Richard Marsden et al, 2017: https://www.gsma.com/­spectrum­/wp-content/uploads/­2017­/02­/Effective-Spectrum-Pricing-Full-Web.pdf

How to Revive Auto and Telecom Sectors

Illustrative action in key economic areas. 

Shyam Ponappa    |    October 1, 2020

The government can take some immediate steps to assist economic recovery. This involves: (a) Policies for citizens to benefit from public resources (land, minerals, spectrum, water), not exploiting them for any government, person, or special interest (b) Systematic, end-to-end design and execution to completion (c) Cooperation and participation in organisation. The examples below are for automotive manufacturing and communications.

The Automotive Sector

The drop in automotive sales from over two years ago indicates considerable loss of momentum. Figures for vehicle registrations from FY2018 demonstrate this. (See table).

The Covid lockdowns constrained sales even further. Vehicle registrations in August 2020 were 1,188,087, a reduction of 27 per cent from August 2019 (1,623,218). Meanwhile, Harley-Davidson announced the closure of its plant in India, and Toyota expressed concerns about high taxes. A year ago, Ford moved most of its manufacturing into a joint venture with Mahindra. Even in a business-as-usual cycle, because of this sector’s contribution to manufacturing and across sectors, there are legitimate expectations of government support. This is to mitigate negative effects cascading through the economy, the aim being to prevent job losses and reduced employment prospects.

The loss or shift of focus from India to other manufacturing locations warrants urgent action. Tax cuts after shedding ideas such as treating small cars as luxury goods are necessary, but not sufficient. Reducing goods and services tax (GST) from 28 per cent to 12 or 5 per cent is just one step. The revenue deficits can be monetised by printing currency, to be extinguished over time through increased tax collections from higher sales. A vehicle scrappage policy at this time may not be opportune, as it may be ineffective, and can cause undue hardship.

Freeing Our (Manufacturing) Potential

Other measures can be taken besides tax cuts. Because there are so many, the emphasis here is on elements of industrial policy. It does not, however, minimise the most critical issue of social policy, which has been undermined as much as in 1975 during the Emergency, and desperately needs amends.

Reliable infrastructure is one requirement to drive manufacturing productivity and broader economic potential. Manufacturing and service enclaves must be made to work, with stable infrastructure and social conditions. This is essential for local companies to thrive, as well as to attract international investment, and to generate spillover effects.

Past experience suggests we should focus on fewer, well-conceived undertakings in the near term, while building for the longer term, like how telecommunications grew from 2004-2011, the national highways development projects from the late 1990s, and the earlier success of the Anand Cooperative.

Model SEZs

Take, for example, the over 200 special economic zones. Is it not in our interest to make a real success of two or three pilots as intermediate objectives, achieving a few that work, instead of many that do not, and then seek replication?¹ After unbiased selection of locations (the most difficult part), governments (Central, state and local), enterprises, and citizens have to be persuaded to get them to work right, to have them built up and serviced with stable infrastructure and governance, including competitive tax policies, not getting sidetracked by real estate speculation or assuaging political constituencies. Only then would it make sense to replicate them based on the experience and results.

While state and local regulations and practices affect these, the overarching laws and policies necessarily emanate from the Central government. Also, multiple government agencies are involved in any significant infrastructure policy, as with telecommunications, which requires national policies on spectrum allocation and assignment, rights of way and other regulations, standardisation, dispute resolution and penalties.

Additionally, the laws have to be made to work. The widely held fiction that making a statement is tantamount to achieving all that is stated simply has to be given up.

Taxes on Public Resources

The real issues here are stable policies, taxes, and contracts, resulting in investments that succeed. The recent arbitration award for Vodafone against the government’s claim of taxes with interest of over Rs 20,000 crore is, one hopes, an end to proceedings conceived by the United Progressive Alliance and pursued by the National Democratic Alliance. Allowing for retrospective changes means that any agreement can be changed. It is in our interest to accept this award as a lesson in upholding contracts, avoiding retrospective changes, and reviewing and modifying laws prospectively.

An equally unreasonable litigation pursued by successive governments since 2005 is the adjusted gross revenue (AGR) case for the government’s revenue share from telecom operators. The Supreme Court’s 2019 ruling upholding the previously overruled government claim is very damaging for overall economic prospects. Parliament needs to frame legislation that defines AGR as the TDSAT ruled in 2015. The government could then apprise the Supreme Court of the change in policy, and renounce its claims. Together with accepting the arbitration award, this will not only change the prospects for telecom and broadband, but for investments and prospects across the board, although the rest remains to be done to show that it pays to invest in India, by investments being profitable. Perhaps the government will consider acting on these steps.

Measures such as regulations for spectrum bands of 60GHz, 70-80GHz, and 6GHz, are easier to address for immediate results. The government can formulate the regulations as was done for 5GHz, using the US FCC model with some modifications. Then, there are the policies only the Central government can initiate, on issues such as consortiums for shared infrastructure and manufacturing, that need to be given shape and form to make them realities.

Above all, we need the powers-that-be to give up their durbar-style of operation, and start applying the principles of cooperative action and shared infrastructure with all stakeholders, to improve collective outcomes.²

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Shyam Ponappa at gmail dot com

1. SEZs failures: (a) Reuben Abraham: India needs to copy China's Special Economic Zones better 

(b) Meir Alkon, Princeton: Do SEZs Induce Developmental Spillovers? Evidence from India's States

2. Elinor Ostrom: Governing the Commons, Cambridge University Press, 1990. 

A Social Contract for Economic Recovery

The case for cooperation on GST.

Two heads are better than one, right? Yes, if both work towards shared goals, and one’s gains are not the other’s losses. This is why businesses cooperate. So could the government, industry and consumers, if governments — Central and states — choose to do so. Prospects can improve provided there are overall gains, and all boats rise with the tide. Problems arise if the costs of cooperation are high, or if one participant makes net losses, or considers its share inequitable.

Economic reality and society’s economic contract (echoing Rousseau) have this triad of government, industry (products and services), and consumers, influenced by the media and the judiciary. A coordinated approach could help in resolving impediments to economic recovery. Consider as an example the goods and services tax (GST) rates on products and services. For any rate, government collections increase as product/service delivery increases. However, demand usually declines with increasing prices (including GST). The market equilibrium will be at some level of user-perceived value, at a price depending on supply and demand levels. Conversely, lower GST rates mean lower prices, and higher demand. For expensive products, the lower the rates, down to a reasonable level, the higher the government collections from GST, barring implementation problems. This is because as the tax rate increases, beyond some level sales revenues will decline, as will GST collections.

While government treasuries focus on tax collection, governments’ objective, aside from staying in power, is (or should be) to maximise public benefit. When taxes collected are (a) reasonable, and (b) contribute to the common good, they combine with the user’s perceived value of goods and services at the prices paid, as a component of public welfare flowing from government funds. There is conceivably an optimal GST rate for a product/service that maximises the public benefit for a society, given its circumstances and priorities. These tax rates influence key areas of manufacturing and essential services. Consider an example from each.

India’s capacity in manufacturing cars and automotive components has been built up systematically over many years. In 2018, exports amounted to a little over 5 per cent of total exports of $323 billion, of which components were about 2 per cent, with strong prospects. However, sales slowed for various reasons, some relating to the difficulties of transitioning to the GST system, including the technical challenges. Earlier, domestic taxes were higher, and GST on vehicles and components at 28 per cent was a reduction assumed to yield higher revenues. However, severe GST system design and implementation problems compounded by disruption because of new technologies (electric vehicles), stricter pollution controls (BSVI), confusion about diesel regulation, and a slowing economy, resulted in declining sales from July 2018 (see chart). Difficulties with the GST systems also affected exports.

There are three aspects to consider regarding GST rates:

• First, the likely effect on revenues if taxes are lowered from 28 to 12, or 5 per cent. a) The market leader Maruti Suzuki is unlikely to be affected by a high GST rate because of temporarily slowing sales, as it has installed capacity from prior investment. Major international manufacturers who have not yet established a solid manufacturing base for the domestic market and for exports, however, are likely to have different financial compulsions. Even if they expect that India will be a substantial market and a sound manufacturing base in 10 years or more, the fact that the interim period is fraught with regulatory uncertainty and infrastructural inadequacies may considerably dampen their enthusiasm, to the point of considering alternative manufacturing locations. India cannot assume that it is the alternative to China by default. Major manufacturing investments require stable policies, and low, stable tax rates help in building cash flows. b) India’s experience with telecom franchise fees after 2003-04 shows that a significant reduction in revenue share from operators, from 15 per cent to 8 per cent, along with other factors enabled explosive growth. These resulted in much higher government collections (compare Rs 20,000 crore foregone over eight years in auction fees until 2006-07, to nearly Rs 35,000 crore collected in five years from the rate reduction until 2006-07, which then increased to over Rs 1,65,000 crore by March 2015).
  
• Second, automotive exports need a sound domestic market. Slowing domestic sales and cash flows can affect export markets, compelling foreign buyers to seek alternative manufacturing sources. This can further constrain domestic parts manufacturers who rely on linkages with their customers to build their brands and order books.
  
• Third, the effect of lost sales on employment is devastating, because this sector provides direct and indirect jobs to many millions.

Similar reasoning applies to government charges on digital infrastructure for telecom services, considering these charges amount to more than the investment in networks. Misplaced policies for resource allocation and pricing, misplaced zeal in enforcing questionable interpretations of the law, as well as selective preferential/unfair treatment, have crippled these essential services. Ill-conceived litigation by successive governments have seriously constrained India’s productive capacity, and will continue to do so if pursued. Instead, well-formulated policies, and pricing in the public interest, could lead to a vibrant sector, with a more effective digital broadband network for countrywide productivity and better living conditions.

Our governments can choose to work with industry and users for better outcomes, instead of contending on the basis of outmoded mindsets, laws, and regulations. It requires a far more constructive attitude than has prevailed so far, and an honest recognition of what we lack: Institutional support for organisation and management, including a systems approach, disciplined, end-to-end processes (starting with timely government payments), professional facilitation, legal rigour,1 expert financial modelling and simulation as decision support, and so on, over considerable time.

Administrative authorities and the political leadership need to exert themselves to pull all this together systematically, with the logic of cooperation as the basis of an economic contract.

Tailpiece - added September 15, 2020

For proof of this reasoning, see "Toyota Halts India Growth, Blaming ‘We Don’t Want You’ Taxes", by Anurag Kotoky in the Bloomberg, September 15, 2020: 

https://www.bloomberg.com/news/articles/2020-09-14/toyota-halts-india-expansion-blaming-we-don-t-want-you-taxes

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Shyam (no space) Ponappa at gmail dot com

1. Details at: https://organizing-india.blogspot.com/ 2020/02/why-india-functions-way-it-does.html

Configuring India's Digital Ecosystem

Policies must favour consortiums of local players - for operators with a government stake, and for manufacturers/system integrators with market access conforming to WTO rules.

Shyam Ponappa    |   August 6, 2020 

Two developments highlight the need for government to sponsor consortiums to build India’s digital ecosystem:

• Facebook’s announcement in April to invest $5.7 billion in Reliance Jio was momentous. In a slowing economy, Reliance Industries raised an incredible $20 billion with a cascade of foreign investments combined with a rights issue. This “consortium” makes Reliance debt-free, besides providing the capital and capacity to dominate communications in India.
• India’s digital ecosystem’s dependence on China and on increasing imports underlines the imperative for corporate India to come together in a national endeavour that must succeed.

The Jio factor

Overwhelming dominance rarely benefits the public interest, even if the pricing starts incredibly low. Developed markets frown on monopolistic dominance, despite there being giants such as Microsoft, Google, Apple, Amazon, and Facebook.1

Discounting tall talk, India’s communications sector now has these upbeat expectations, along with a slew of old negatives, particularly the debt- and tax-burdened, fragmented other operators together with recalcitrant policies. Government-imposed charges and tax battles burden our operators, rendering them unable to compete.

How have Jio’s moves affected the public interest? With both benefits and detriments. The negative fallout from sectoral debt from auctions and crippling government levies, and a price war, has been unsustainably low tariffs. A positive effect is that data traffic increased greatly because of the low tariffs. Yet, the results are damaging: For service providers because of insufficient profits, for the market because it constrains quality and growth, and, therefore, for consumers in the short and long run. Service levels are compromised by resource constraints (dropped calls, slow speeds), and because of under-served customers — both in existing and the unserved markets in India. Data traffic may have increased simply because more people watch more rubbish in video form, whereas service providers need the wherewithal to invest, to improve and extend coverage, as well as to design constructive educational, skill-building, medical services, and other enhanced interactive services for users’ genuine benefit. In that sense, traffic as a measure of user benefits can cut both ways.

Apart from data, two other aspects merit consideration: Operator revenues, and government collections (licence fees, auction charges, and taxes). Operator revenues grew strongly from mid-2003 through FY2012, flattened for five years (FY2013-17), then declined after FY2017 (see Chart 1).

Barring additional charges, government revenues reflect this decline, leaving these lingering questions:

• Does the declining trend serve the public interest?
• What is the opportunity cost of disruption and deprivation of services?

A third issue requires action: How do we improve our digital prospects? Note that government collections from licence fees and spectrum charges rose steadily from FY2004, so that cumulative revenues far exceeded auction fees foregone (Chart 2). Corporate taxes were in addition to this.

Thereafter, government collections flattened, then declined (barring retrospective charges), as did taxes. This calls for policy intervention to enhance services, thereby increasing revenues and government collections. Straightforward adoption of global norms for wireless in 60GHz, 70-80GHz (V-band and E-band) and unused UHF (500-700MHz) restricted to operator use will help.2 So will giving up the farce of reviving BSNL/MTNL, including the hopelessly snaggled VRS, and the botched tenders (‘Most of it to Huawei?’ ‘No, Ericsson and Nokia.’ ‘Alright, 10 per cent to domestic suppliers.’ ‘No, all of it to domestic suppliers…’).

Competition for Services

A way to nurture balanced competition in services is for the government to create a consortium with a minority anchor, bringing financial, technological, and delivery capability to compete with Jio’s dominant platform.

Reliance Industries Chairman Mukesh Ambani calls for doing away with 2G; Airtel Chairman Sunil Mittal calls for supportive policies, and repudiating old battles such as contention over the adjusted gross revenue (a 15-year battle won in lower courts, lost in the Supreme Court), and reducing exorbitant charges. The government can change policies to achieve these. It can stop predatory practices, and facilitate this consortium. BSNL/MTNL can be genuinely supported to be the government anchor in the consortium with a minority stake, with golden-share national security, public- and minority-interest responsibilities through appropriate legislation. Airtel could be the lead, with others participating, including foreign players.

Equipment Consortium

Fragmented suppliers and system integrators also need a consortium for collaboration. While multinational vendors dominate, dependence on imports and China is untenable for our increasing and strategic requirements. Absent enabling policies, Indian manufacturers have to succeed offshore to sell within the country. Why do such things happen? Many reasons, starting with the holdover of colonial mindsets even of those who want to rewrite history, which treat the government — whoever is in power — as the colonial/feudal overlord, and the people as serfs with a vote, whose weaknesses can be pandered to for electoral victory. This imposes a zero-sum framework—the government versus the rest (Us versus Them).

In reality, the situation need not be zero-sum, as evidenced by past service growth and government collections through revenue sharing, compared with what might have been if auction fees were enforced: Bankruptcies and no services.

The prerequisites are (a) policies framed to provide access to local manufacturers and service providers conforming to WTO requirements; (b) their market access through continuing orders; (c) their collaboration to supply, install, and facilitate operations and maintenance of requisite equipment.

If these were made possible, domestic suppliers could meet a significant share of India’s communications needs. This requires emulating the Huawei model — easier said than done!3

The Union and state governments need to understand these components, and execute them from a national perspective, without bombastic rhetoric, politicking, fund-raising for elections, and so on. Policies must incentivise coordinated action; orders have to be winnable by including criteria for development of domestic capacity to conform to the World Trade Organization rules; and execution has to be first rate (on time, high quality). Digital communications will drive many aspects of all sectors. Our policy-makers must stop dithering and help us prepare effectively.

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Shyam (no space) Ponappa at gmail dot com

1. For issues about competition laws in India, see: Amber Sinha & Arindrajit Basu, April 30, 2020:
"Analysis: Reliance Jio-Facebook deal highlights India’s need to revisit competition regulations"

https://scroll.in/article/960676/analysis-reliance-jio-facebook-deal-highlights-indias-need-to-revisit-competition-regulations

2. https://organizing-india.blogspot.com/2020/03/indias-self-goal-in-telecom.html

3. http://organizing-india.blogspot.com/2018/05/the-huawei-­­pointer.html