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The Case For Staying With Ethanol 10

Ethanol blending over 10 per cent may be desirable but a full understanding of its environmental and economic impacts is crucial.

Shyam Ponappa  August 3, 2023

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Shyam Ponappa on ResearchGate

Comprehensive, Integrated Strategy & Execution

India has been coasting along on a post-feudal-colonial mélange of currents and tides, with the brigandage of opportunistic politics fed by our (the voters’) greed for short-term benefits. The result is grotesque populism and corruption, in lieu of the deferred gratification of pleasing cities and countryside with the appurtenances of proper governance: sidewalks and drains, toilets, transport, administration and order, hospitals and schools.

We have to organize and manage ourselves, “engineer” our way ahead, taking steps to build and develop our solutions, building systems and processes, and not just wait for things to happen. We need a comprehensive and integrated, systemic, silo-busting, problem-solving approach.

This applies across the board in the broadest “spatial planning” sense that integrates housing and land use at all levels with commercial, industrial, cultural, scientific and educational activity, transportation, and all governance and infrastructure: water, sewerage, energy, communications, basic health and education. Infrastructure being the first level of enablement is the essential starting point.

Previously, India’s leaders acknowledged that infrastructure is India’s great need. Yet, they took no steps [exception: NTP-2011 in October, 2011] to marshal forces to draw up a credible strategy and execution plan. This is what needed and needs doing. Only good intentions and/or money won’t do, because delivery systems and processes have to be developed, i.e., planned, and built from scratch.

It looks like the NDA II will seriously address the development of enabling infrastructure.  A beginning on a long way ahead.  The next few months will demonstrate the resolve of the NDA II to really break the mould and get the job done.

- July 2014

And it got worse for Digital India with another spectrum auction [March 2015] and the attendant deprivation of network rollout and service delivery. 

...And worse: another auction with Rs. 109,000 crore (~$17.6 billion). - April 2015

... And yet worse, as another auction reduced investment by over Rs. 65,000  crore  (~$10 billion). - October 2016

... And annual auctions threatened from 2017! - March 2017

Lack of integrated systems and controls led to the worst bank fraud in India - PNB $2 billion - February 2018  And IL&FS - September 2018

The National Digital Communications Policy 2018 is only an aspirational statement - October 4, 2018

Big bang for Wi-Fi!  5 GHz regulations similar to the US FCC. - October 2018

As the sector stalls, government talks 5G spectrum auction, wanting more cash while the industry drowns in debt. - January 2021  

The Supreme Court reverses previous rulings in favour of telecom operators on retroactive charges for spectrum based on an all-inclusive definition of Adjusted Gross Revenues continues...

Another ill-advised auction - March 2021.  And another monumental failure, neither serving the government's cash needs (too much left on the table), nor the consumers (too much spectrum left untouched).

A reversal (FINALLY!) of the retroactive tax amendment affecting Vodafone, Cairn, and others - August 5, 2021.

Spectrum Usage Charge zeroed; past due demands being reconsidered? - October 7, 2021

5G Spectrum Auction July 2022 nets Rs. 1.5 lakh crore (about $19 billion), making that amount of capital unavailable for investment in networks.  Allocation of an even larger amount to reviving BSNL and MTNL increases uncertainty of outcomes.

Two Steps To Boost Broadband Usage

 

The first, fixing technology gaps, should be easy. The second warrants consideration for better services and to avoid undue disruption

Shyam Ponappa   |    January 7, 2021

Last month, the Cabinet announced a radical policy to expand Wi-Fi coverage across the country and to increase broadband internet access and usage. It sets out how anyone can establish public Wi-Fi hotspot networks in accordance with specified protocols, and resell broadband internet to users.¹

Media reports have been largely enthusiastic, though sometimes confusing, despite strong opposition by telecom operators and Internet service providers (ISPs), who may consider this an infringement of their licensed rights. The argument that they too can set up Wi-Fi hotspots on similar terms is specious, because it ignores their having paid huge sums already for these licensed, contractual rights.

The new policy enables any individual or enterprise to set up public Wi-Fi networks without a licence, and without any fees to the government. Until now only licensed telcos and ISPs could do so, after paying for licences, and in the case of telcos, for spectrum as well. This is why Wi-Fi without government charges seems cheaper. Some aspects of the policy are not clear, such as whether existing laws allow for reselling Internet services by subscribers (equivalent to subletting, which was prohibited), or how it will be commercially feasible and viable for small businesses. In other words, who will pay, and why, if they already have access to inexpensive cellular services. There is also the question of whether transnationals such as Google, Facebook, Amazon and so on would be permitted if they were interested in considering investment in connectivity, especially in corporate and dense commercial centres, and whether Indian corporations would have similar interests. But all of these are likely to need additional enablers as described below.

As ubiquitous broadband internet is an end-to-end service, its foremost requirement is for high-capacity, reliable connectivity throughout the chain. Without the “plumbing” that enables access to data flow and repositories, as with water, it is limited in its availability and reach. The policy change focuses on the last-mile at the user end, whereas our problems extend from the user all the way back to the fibre core or subnetworks. It is this middle-mile from the fibre to the kerb, or to the home or a customer’s premises before the user link, or from a gram panchayat to the village, that is also missing, and difficult to fulfill. A report by the Telecommunications Standards Development Society, India suggests most villages would be within 5-10 km from gram panchayats.

Accepting the need to improve broadband access:

One step is to fix the gaps in the communications chain that this policy addresses, namely, distribution at the user end, and technology gaps. Consider the most fundamental element of digital communications, connectivity. There seem to be incomplete links in communications networks in the planning and execution of broadband Internet service delivery of what is required, and where. Perhaps some of it is because of an expectation of markets being self-organising systems, which does not hold universally. Wireless solutions for the middle-mile are tantalisingly close, because the spectrum is available but not permitted in India. This is partly because of contention on treating some bands as open Wi-Fi or restricted to licensed telcos, or to broadcasting, or only 4G (details in footnote).² Only licensed operators need unconstrained access to these bands, on the lines of the Department of Telecommunications’ (DoT’s) regulations for 5 GHz Wi-Fi, modelled on the US Federal Communications Commission regulations.

The second aspect, for consideration and consultation because it contradicts the new policy, calls for a radically different approach. Yet, it is critical, because maintaining stability is imperative in such a crucial infrastructure service that affects so many areas of living, working, education, entertainment, leisure, governance and security. Especially now, with a pandemic and the looming non-performing asset constraints. We need to expand usage with minimal disruption. Would it not be more effective to remove government charges from telcos and ISPs, as for new entrants, and permit licensed operators in the industry to grow? The straightforward reasons are that they have the established market presence, capacity and experience. Some requisite regulations are in place. This would help maintain stability when we need it most. Operators have the rights and are likely to act on opportunities to expand, if only they had the resources and incentives. The resources would be partly from the savings from not paying licence fees, in line with the waiver of fees for new entrants. Take away all government charges and licence fees, and the operators are not only likely to invest in hotspots for many urban clusters and aggregates of rural users, we may also have a resurgent communications services industry.

Viewing it objectively, operators have already paid licence fees and auction prices for spectrum, resulting in government charges being 30 per cent of revenues for telcos, excluding income tax, unlike in any other industry. In addition, the 2G scam stalled the sector as a whole, because penalties against some perpetrators upended the industry, penalising everyone. Spectrum was restricted and expensive, thereby escalating equipment costs while constraining revenues. As a consequence, users are deprived of enabling facilities, restricting productivity.

This would remove potential threats of litigation for breach of contract, because of arbitrary changes in licensing terms. Problems such as “retrospective taxes” would still remain to be scotched, while management of spectrum and 5G would need equally radical changes in approach and policy going forward.

A gap created by these changes, which the new policy covers, would need resolution: Enabling community Wi-Fi networks, especially in rural areas, because they may be less commercially attractive, and more difficult to build and operate until supportive ecosystems grow. Incentives for rural extension would round out the rational support.

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Shyam (no space) Ponappa at gmail dot com

1. For explanatory briefs, see: https://www.medianama.com/2018/07/223-coai-pmo-wifi and 

https://wifinowglobal.com/news-and-blog/all-you-need-to-know-about-indias-new-wani-public-wi-fi-scheme/

Announcements - Press Information Bureau; Details - Department of Telecommunications:

https://www.pib.gov.in/PressReleasePage.aspx?PRID=1679342

https://dot.gov.in/sites/default/files/202-_12_11%20Brief%20PM%20WANI_0_0.pdf

https://dot.gov.in/sites/default/files/2020_12_11%20WANI%20Framework%For 0Guidelines_0.pdf

https://dot.gov.in/sites/default/files/2020_12_29%20A%26S%20WANI.pdf

2. 60 GHz (V-band) for a few hundred metres at multi-gigabit speeds; 70-80 GHz (E-band) for 3-4 km; TV White Space in the 500-700 MHz bands for rural light licensing long hops (802.22), versus broadcasting for 500-600 MHz, versus 4G for 700 MHz.

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]

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

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/

NPAs & Structural Issues

To fix one you need to fix the others.

Shyam Ponappa 

  | October 5, 2017

An aspect of financial services often overlooked is that they serve as second-order infrastructure, essential for commerce, industry, and daily living. A disruption in the financial sector slows everything by cutting productivity. Other reasons for decline, such as structural issues in power supply, telecom/broadband, and in farming, are accepted as part of the landscape. That is why devising corrective measures is not so simple. Setting aside political considerations, misattribution does not help in problem-solving. Resolution needs root causes to be identified and addressed. 

Consider the example of the guillotine approach to non-performing assets (NPAs). Imagine if an inspection of water and sanitation in your locality were to result in the shutting off of the water supply because conditions are deemed unsanitary. There would be a scramble for sourcing water, while economic activity and productivity would tank. What if it were a metropolis, or the whole country?

This is what happened with the abrupt change in booking NPAs. From around 2.5 per cent between 2006 until 2011, they began to rise in 2012 (see Chart 1). 

Chart 1: NPAs as a Percentage of Gross Advances

Source: RBI - dbie.rbi.org.in

Public sector banks in particular responded to the government’s accommodative efforts after the 2008 crisis. As growth fell, NPAs rose, especially for long-gestation, regulation-dependent infrastructure loans. In 2015, the Reserve Bank of India (RBI) adopted a hard line as the economy was gaining momentum after slumping in 2014 to 6 per cent. Earlier, the RBI was faulted for allowing the ever-greening of loans. An abrupt change without a gradual coming to terms to manage cash flows resulted in a crisis.

Leaving aside malpractice/fraud, NPAs resulted from factors such as aggressive, unsustainable lending, regulatory delays, the domestic and global slowdown, and commodity price shocks, as when export duties were imposed in Australia and Indonesia on coal. Cash flows drive demand, and a weak economy can make or break a business. 

Apart from crippling banking and financial services, the consequences of the NPA shock were enormous, especially for sectors such as iron and steel, construction, power, telecom, transport, and agriculture, with knock-on effects on MSMEs across sectors. Could a phased, more gradual, differentiated approach have yielded better results? Probably, just as when water supply fails, interim arrangements involving pipes, equipment and tankers have to be made to tide over the crisis.  For stressed loans, the requirements were for a differentiated approach to the category of wrongdoing, including overreach, and support for stressed sectors undergoing a downturn.   The need was and is to prevent disruption in cash flows from a systemic perspective, conserving employment and assets in untainted enterprises with the potential for recovery.  This also retains momentum and market sentiment to the extent possible.

Ways Out?

1. NPAs in the mid-90s were outrageously high. Yet, what followed especially after 2003 was high growth until the global financial crisis of 2008. The NPAs were reduced and ceased to be a problem (see Chart 1). One explanation is that banks did significant NPA provisioning from profits in bond trading, as interest rates on 10-year government bonds fell 8.1 per cent from 1997 to 2003. A booming economy from 2003 did the rest, although there were no changes in the underlying causes that led to the NPAs. Hence, bond trading could be a way out provided interest rates fall, and so could economic growth. 

2. Regarding interest rates, the dilemma is of high rates for domestic savings because people save with banks in India, and for foreign investors in bonds, against low rates for consumer demand and for capital investment. Given our acute need for growth and misaligned real interest rates, this needs rectification (see Chart 2). 

Chart 2: Real Interest Rates-India, China, Indonesia, Thailand , South Korea – August 2017

Source: https://www.bloomberg.com/news/articles/2017-08-02/india-s-real-interest-rates-compared-with-other-asia-economies

3. There’s a need to insulate banking from political influence, while ensuring rigorous procedures for evaluation and monitoring. Any system can be gamed, however, and to work well, players need competence, integrity, and the freedom to exercise both. Banks are not well suited for funding long-gestation infrastructure because their deposits are more short-term. This is an institutional and market deficiency that needs to be bridged through developing bond markets, and channeling long-duration funding from pensions and insurance.

4. There are compounding effects from imposing the Aadhaar/UID without the requisite connectivity, processes and safeguards, likewise the hasty imposition of the goods and service tax (GST). There is little doubt of benefits when properly applied, but that needs time and support for thorough implementation; meanwhile, the immediate need is for relief. Rescue measures are needed to lighten the burden of the GST and its reporting requirements on MSMEs (up to a higher ceiling?) over a long period. Interim solutions could be flat rates for a larger set, augmented by support for implementation.

5. Meanwhile, structural issues resulting in NPAs need to be fixed. Three obvious areas:

a) Farming, with its large population, small holdings, outmoded practices, low productivity, and the issues around pricing. Pricing is an essential aspect, as are direct benefits, for example, subsidies through cash transfers depending on income. But simply increasing farm prices addresses only one aspect of a multifaceted problem. What’s needed is to change the way production and marketing are organised. Practicable strategies are needed for produce, perhaps like the approach in dairy farming for milk production and marketing. Systems need be designed (worked out) and implemented properly, with design elements to promote and safeguard honest, competent, disciplined behaviour.

b) Telecom and broadband services need policies based on a complete change of mindset and market structure, such as shared networks and equipment including spectrum, protection from anti-competitive action, and revenue sharing instead of auctions.

c) Electricity supply: Power generation and distribution are both stressed by low economic activity, while many states continue with lax practices of under-recoveries for electioneering.This cannot be resolved as long as profligacy and indiscipline continue.

Fixing NPAs alone won’t do. Changes are required in key sectors for genuine resolution.1

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Shyam (no-space) Ponappa at gmail dot com 

1. “Indian Banks – Perception and Reality”, Ashima Goyal: www.epw.in
http://www.epw.in/system/files/pdf/2017_52/12/SA_LII_12_25032017_M_and_B_Ashima_Goyal.pdf