Aiming For The High Road

Government's policies can either enable or limit our prosperity.

Shyam Ponappa  May 4, 2023

There are very divergent views about India’s economic prospects.  Some perceive great promise, while others see big government and unclear strategy.
 

The upbeat take is that investors who put substantial capital into China in its early growth phase are finding patterns mirrored in India that encourage their investment (An updated perspective on India, Business Standard, April 17, 2023). These investors are looking to limit or reduce new investments in China, and, among emerging markets, India is promising with the capacity to absorb large investments. Factors such as Apple’s exports of $5 billion in its first year support this, as does recent enthusiasm about India’s building logistics and effecting a digital transformation. The expectation is that annual growth will be over 6 per cent, and that gross domestic product/capita may grow from $2,500 to $5,000 in six to seven years.
 

A more downbeat view is that India has lost opportunities and made misplaced choices with growth coming from government spending and seat-of-the-pants strategies (Rolling the dice on growth, Business Standard, May 3, 2023). This has led to a constrained, uncompetitive private sector hobbled by disabling regulations, inadequate and unreliable infrastructure (notwithstanding high investment, on which more later), limited capital access, tariff barriers, an inappropriate and ineffective educational approach for employability and improving skills, and impoverishment through electoral handouts to much of the population. Instead of structural changes to provide lower cost infrastructure and efficient governance, the government chose corporate tax cuts to spur growth.
 

The fact is that while India is still in a sweet spot because of its economic resilience, momentum, favourable demographics (although largely unutilised), and improving productivity (1), growth in this decade is likely to average under 6 per cent annually. (See chart).

 

India will continue to outpace global average growth rates of real GDP and real per capita GDP from 2023 to 2030
                                                                                                                     (% change y/y)

 

Some data support this view, such as skewed consumer demand and delayed projects. Consumer demand is stronger at the high end, but weak at the lower end. Infrastructure project delays in March 2023 were reportedly the highest since 2004. These include nearly 57 per cent of projects over Rs 150 crore, resulting in cost escalation of over 20 per cent, amounting to half this year’s capital expenditure budget. 

Presumably this problem is reflected in the Gati Shakti National Master Plan. When public access is permitted, it will be interesting to know about the project management and coordination processes for timely execution, given its roots in a Project Management Institute report.

Higher growth of 8 per cent or above requires more structural change. These begin with policies that (a) provide reliable infrastructure that is affordable, (b) improve capital access, and (c) eliminate “tax terrorism”. Facilitating productivity through infrastructure everywhere would enable more people, including more women and young people, to participate and contribute. 

The next level of productivity improvement requires much deeper change. These extend to assuring a sense of security with law and order, access to meaningful education and skill building, deep changes away from “extensive” agriculture to an intensive, informed approach that is productive and sustainable. A critical prerequisite is cohesive, unifying leadership that inspires cooperation and inclusion.  Regarding better infrastructure, the following observations indicate possible ways to improve: 
 

Road Construction: New roads are being built at a furious pace.  However, two problems hamper our logistics despite the enormous sums spent. One is project delays. The other, more serious issue is the rapid deterioration of roads. While heavy rains do aggravate the problem, the underlying reasons are the quality of construction and lack of timely maintenance, made worse by undue emphasis on the value of contracts and quick implementation. Countries with equally severe weather variations build and maintain better roads. An expert with experience in America and India asserts that the reason is not enforcing requisite standards, quoting John F Kennedy that it is the roads that built America’s wealth. (2) This need for adherence to standards extends to many areas, and would transform our quality and competitiveness. It does not, however, lend itself to big targets and bragging rights for electoral purposes.
 

Communications – 4G, 5G and Beyond: If there were fast, reliable 4G-level connectivity countrywide, and if most people got access to these services, there would likely be a productivity revolution.  It would take much more than just connectivity: Development of content, technology choices and organisation are required to increase beneficial use exponentially. For example, content is needed for agricultural transformation to intensive cultivation, workplace skills and manuals, or K-12 education.
 

For the middle-mile and second-last mile, until the current blitz for BSNL 4G wireless, our policies emphasised fibre.  Widespread fibre-to-the-home is unrealistic in India because of the cost. The way out is high-speed wireless for middle-mile and second-last mile (backhaul), and for last-mile (Wi-Fi and cellular). We need enabling policies for these.
 

Another technology issue is 4G and 5G.  South Korea, leading in 5G, is the exemplar of the “5G fallacy” of getting five-fold speeds after $20 billion in network upgrades, instead of the desired 20 times speeds.  South Korea has nine cities of more than a million people, 42 between 100,000 to 1 million, and 77 between 10,000 to 100,000. They have 215,000 base stations of which only 2 per cent are 28 GHz, covering 45 per cent of their population. India has 48 cities of over 1 million, 405 with 100,000 to 1 million people, and 2,500 with 10,000 to 100,000 people.  We have 102,000 base stations compared to South Korea’s 215,000, and would need many more at unaffordable cost for blanket coverage. What we need instead is high-speed 4G or Wi-Fi, using wireless 60 GHz and 70-80 GHz for the middle-mile, with 6 GHz Wi-Fi for the last mile (in addition to existing Wi-Fi at 2.4 and 5 GHz).
 

One more requirement is technology organisation: Shared networks versus single-operator networks.  Shared neutral host networks (NHNs) are the most efficient, while active sharing by operators costs 70 per cent less per user in an Indian case study. (3) 

It is the government’s choice of policies that can help us on the high road.

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Shyam (no space) Ponappa at gmail dot com

1: For details, see: “Productivity Growth in India: An Empirical Assessment”, RBI Bulletin January 2023.

https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/02ART19012023C2BCA396B632479BBDD5485D89FDEEF4.PDF

and

Page 10: https://www.imf.org/-/media/Files/Publications/WP/2023/English/WPIEA2023082.ashx

 

2: https://www.nbmcw.com/article-report/infrastructure-construction/roads-and-pavements/why-do-many-roads-constructed-in-india-fail-prematurely.html  

Prof. Prithvi Singh Kandhal has drafted standards for the Indian Roads Congress, and was formerly at the National Centre for Asphalt Technology at Auburn University in Alabama.

 

3. https://www.researchgate.net/publication/368772499_Techno-Economic_Assessment_of_5G_Infrastructure_Sharing_Business_Models_in_Rural_Areas

Shruthi K.A. Kumar and Edward J. Oughton

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. 

5G Aspirations and Realities

What the government can do for 5G and Digital India with a Systems Approach.

Shyam Ponappa    |    June 6, 2019

Ah, 5G! The very thought seems to excite so many. What is it? It is a mix of telecom technologies¹ delivering much higher data speeds on more extensive connectivity, using much lower power, with extended battery life, and emitting less radiation, for ways to connect and operate most of the conveniences people use regularly. From smartphones and computers for communications, study, work, research, entertainment, to other devices and machines, such as for managing utilities (electricity and water) at home and the workplace, refrigerators and cooking devices, industrial equipment, transport, and more, so that daily activities are eased considerably. The catch is that 5G is at an early stage in a long process — perhaps a couple of years to manifest in large trials in India, and several more years to be widely available, needing huge investment ($100 billion in India).

Yet, there are compelling reasons for developing India’s capabilities. There is the sheer necessity for India to partially meet its requirements, instead of relying entirely on imports. The big draw is the size of the Indian market and prospective demand, the global market, and the possibility of innovation at this early stage. Domestic capabilities are a prerequisite to afford deployment at a level that would otherwise exceed petroleum imports, with unsustainable effects on our balance of payments. Without domestic capacity, energy imports would limit electronics imports. (This highlights India’s need for solar power development, a separate and equally high priority.)

However, the sobering financial condition of India’s communications industry gives pause. Financial capacity — revenue generation and access to capital, both equity and debt at favourable terms — is required to develop capabilities. After the telecom price wars, even Reliance Jio is reportedly cutting staff. Airtel, meanwhile, having invested heavily in 4G infrastructure, has stated its unwillingness to bid for 5G pectrum unless prices are lower.

The government set up a committee for 5G in September 2017 with a steering group chaired by emeritus professor at Stanford Arogyaswami Paulraj, a pioneer in wireless communications. This committee recommended network deployment as the immediate priority, i.e., rolling out early, efficient and pervasive 5G networks. Technology design and manufacturing capacity were recommended for later phases.

Network deployment needs policy support driven by a Systems Approach, especially for a debt-encumbered sector faced with declining revenues per user, and unused, inaccessible spectrum, even as other countries enhance their lead. This is ironic, because India has real strengths in this sector and a large market, with the potential to catapult productivity and prospects. Yet, government policies have not succeeded in coordinating our reservoir of human resources and potential.

India lags in 5G despite the government’s stated interest in establishing a lead. Spectrum allocation and large trials were scheduled towards the end of 2019, and auctions in 2020. However, government statements this week target 5G trials by September, and auctions by the end of 2019. As spectrum band choices and allocations for trials have yet to be made, this appears overambitious without radical improvement in resolving many such issues.

Also, India’s reserve price for spectrum is seven times Korea’s. As sectoral cash flows are weak, there may be takers only at very low prices unless funding is from external sources as for Reliance. A monopolistic outcome would be undesirable in the public interest. Therefore, shared access with Wireless Resource Virtualisation and Network Function Virtualisation may be a much better solution for network deployment and market development.

Inexplicably, government and the public still view communications as a “government cash-cow” instead of as critical infrastructure, while complaining bitterly about poor delivery from low investment. It is obvious that exorbitant government charges (29-32 per cent of revenues plus corporate tax) crowd out investment. The government can change this, or give up on establishing a lead in communications and 5G. Worse, India will continue to lose out on leveraging communications for development.

Initiate a breakthrough - Apply Systems Thinking

The government can catalyse a breakthrough by doing the following:

a) Reduce borrowing costs and taxes for communications as infrastructure. This aim of the National Telecom Policy 2012 (NTP-2012) has been ignored.

b) Provide adequate spectrum aligned with global allocations. Given India’s low fibre penetration and need for digital technology, allow shared access to all spectrum and infrastructure, with charges for usage based on revenue sharing.

c) Clear administrative impasses through coordination and due process without delay. For example, allocate spectrum immediately for 12 months for trials.

Many countries have completed 5G spectrum assignments and are already deploying 5G. These include Korea, Switzerland, Finland, UK, USA, Canada, Australia, Germany, Russia, Italy, and Japan.²

There are nearly 300 5G deployments, as shown on an interactive map on Ookla’s site (Chart 1).

Chart 1: 5G Map – June 4, 2019

Source: https://www.speedtest.net/ookla-5g-map

In this context, Huawei’s role in India is contentious. One issue is of non-discriminatory trading terms, or fairness in competition.  If an entity such as Huawei achieves global dominance through government support, it competes on terms that cannot be matched because of cost of funds and scale advantages. Such entities can establish dominance in any country against competitors who do not enjoy similar support. Second, while Huawei may be doing nothing different from Nokia or Ericsson, the fact that it is supported by a neighbour with apparently hegemonic behaviour, China, suggests that dependence or entanglement are inadvisable.

To succeed with Digital India and 5G, government can begin by classifying communications as infrastructure, and adopting the approach taken for 5 GHz Wi-Fi.  Take pointers from the US FCC, ETSI, and so on; use spectrum and network sharing to leverage equipment and spectrum fully; support local technology champions such as a fabless chip design unit and a network equipment manufacturer in Bangalore, and a wireless equipment manufacturer in Delhi; and focus only on delivery with sustainable revenue generation.

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Shyam dot Ponappa at gmail dot com

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1: 5G technologies include Multi-User – MIMO (MU-MIMO) to improve reception, small cells for better performance and reduced radiation, WiGig and other high-speed wireless technologies, Software Defined Networks with Network Function Virtualisation, Wireless Resource Virtualisation, and a fibre backbone.

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2: Page 8: https://img.lightreading.com/5g/downloads/webinar-breaking-the-wireless-barriers-to-mobilize-5g-nr-mmwave.pdf

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/

A Systems Approach To Clean Air

It's best to start now on long-term solutions.

Shyam Ponappa   |   January 7, 2016

One might say that the conveniences of modern living are in the category of "never seen" (jamais vu) for broad reaches of our society. The conveniences of steady electricity, reliable communications services and so on are strangely unfamiliar. This epitomises our lack of infrastructure - let alone the inadequacy of second and third-order services, namely basic health and education, and financial services like banking and insurance, respectively. Even with regard to communications, the remarkable success story of the past decade, it turns out that we are poorly served not only by way of broadband but also voice services. It is in these disabling circumstances, our attention distracted by seemingly unconnected crises, that we must force ourselves to focus on our longer-term needs and objectives, and to the extent we can, especially of those who lead and administer this society. After losing so much time, at least now, we must act with resolve for the attributes that we know are essential for people to be productive and to live in reasonable comfort: stable law and order, electricity, communications, convenient transportation, water supply and sewerage, and higher-order services like health and education at a basic level.

It's obvious that business-as-usual is not going to bring order and convenience or clean air to our lives. Something's obviously wrong with our models. And they need to be reconfigured to deliver functional competence. Also, it's reasonably clear that many seemingly disparate matters are interconnected and have a combined effect that we have not acted on in our previous experience. The crisis in air quality in the capital and in much of the country is one example of this.

A complicating aspect in dealing with air pollution or any such issue is that a number of factors affect each other. Solutions, therefore, require coordinated action at many levels across broad geographies, because the response has to be systemic. Institutionally, this is difficult in India because of the absence of a broadly collaborative approach to systems. It is especially acute in the absence of clear leadership on convergence and coordination. However, this is an obstacle that we and our government agencies will have to work out if we are to get results.

Dealing With Air Pollution – A Systems Approach

The present crisis with atmospheric pollution cannot be resolved with one-off actions in Delhi, because a number of distinct elements need to be addressed. One is widespread burning of agricultural residue and other waste in other states. Other major causes of fine particulates include these activities in Delhi: burning of wood and coal, use of diesel generators, and construction and road dust. While vehicular traffic also contributes to air pollution, two-wheelers with two-stroke engines can be as bad as or worse than cars with efficient Bharat Stage-IV engines and fuel.

So, the first critical requirement is for the lawyers representing Delhi and those representing automobile manufacturers to adduce and present comprehensive evidence to help the judges reach a proper understanding of the situation and enable them to arrive at informed conclusions. If expert witnesses who have knowledge of these domains with excellent presentation skills haven't been mobilised, this is the immediate need. Otherwise, the analysis could be biased because of inadequate knowledge and/or data, and could lead to erroneous conclusions and outcomes. And, if decisions are based on just a handful of collection centres, another critical requirement is data from a sufficiently broad network of sources.

The next requirement is more difficult: Formulating workable solutions for each major factor, which must then be implemented. For instance, burning agricultural stubble is a widespread practice, despite regulatory measures by central, state and local governments. A number of studies report that this is a major contributor to atmospheric pollution, in particular to volatile organic compounds.¹ In the vicinity of Delhi, the practice is widespread not only in Punjab and Haryana, but also in Uttar Pradesh. Many small, medium and large farms do this to quickly clear the land and prepare it for the next crop, despite the negative effects on nutrients, soil structure, and smoke and other emissions.

This practice has low direct costs, as society bears the major indirect costs. Therefore, a strategy to reduce pollution by stopping the burning of crop residue must enable a quick turnaround to prepare the land for planting, as well as be affordable. Perhaps domain experts have solutions. These need to be collated and popularised by government agencies and the media as part of an integrated incentives-and-penalties approach. Effective extension work to achieve this in the field may be difficult, but there may be no easier alternative.

Another instance is the widespread use of diesel generators because of the unreliable power supply. This leads to the bigger question of how to set up reliable long-term power supply, whereas the reality in Delhi is the adversarial stance between the present government and power suppliers. This situation is untenable in the long run, and some form of coordinated solution has to necessarily be worked out for stable power. Otherwise, imagine the hardship if there's a sudden ban on the use of diesel generators.

Solutions in the same vein need to be devised and implemented for each major source of pollutants, such as construction dust, road dust, and brick kilns - not least being the phased resolution of low-emissions fuel and engines over a period. The monumental task of righting the communications systems to reduce pollution also remains, in that the more effective our communications services, the more feasible it will be to use telecommuting for a wide variety of purposes.

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                                                                          shyam (no-space) ponappa at gmail dot com

1: "Spatio-temporal characterization of agriculture residue burning…", Kiran Chand Thumaty et al, ISRO, 2015: http://www.currentscience.ac.in/Volumes/109/10/1850.pdf

"Emission of Air Pollutants from Crop Residue Burning in India", Niveta Jain et al, IARI, 2014: 

http://aaqr.org/VOL14_No1_February2014/40_AAQR-13-01-OA-0031_422-430.pdf

"Massive emissions of carcinogenic benzenoids from paddy residue burning in North India", Chinmoy Sarkar et al, IISc, 2012: 

http://www.currentscience.ac.in/Volumes/104/12/1703.pdf

The Centrality of Cash Flows

Dealing with the inexorable force of cash flows.

Shyam Ponappa  |  July 2, 2015


Greece's experience tells us that cash flows are crucial to economic outcomes. No matter how far-reaching the vision, ambition, and slogans, the effects of cash flows are profound and inevitable. Many of our politicians and bureaucrats and a large proportion of the public seem oblivious to how cash flows affect our political economy. This apparent absence of understanding (or flouting of fundamentals by opportunists who understand them but act in their own interests) shows up in many ways among all political parties in their approach to the basics: the provision and pricing of essential services such as security and law-and-order, electricity, broadband communications, transport, water, sanitation, and waste disposal. Without an understanding and acceptance of how essential cash flows are for providing these services, we can't realistically aspire to better living conditions. No matter how well or wealthy you may be, you still have to pick your way gingerly through the mess and the stench of your environs when you step out.

Cash flows are at the crux of the problems our governments face at the Centre and states, and that society is up against. They include all the legacy issues mentioned above of the inadequate infrastructure services that we endure, and extend even to problems such as the defence services pensions. While the National Democratic Alliance is not blameless, there are egregious instances among other political parties, such as the Aam Aadmi Party's (AAP's) actions on waste management and electricity supply in Delhi. The essential sticking points have been delayed (obstructed) cash flows, whether in paying sanitation workers or electricity distributors. These instances are mentioned only as indicative examples, as their processes hark back to the habitual practice of governments at the Centre and the states of delaying payments, whether it is fertiliser subsidies to manufacturers (a central government "habit" for decades), or setting realistic tariffs and making prompt payments to electricity distribution companies, as in the case of state governments running Delhi. Various parties - the Congress until 2014 and the AAP thereafter - have themselves been victims of the structural constraints of electricity generation plants with antiquated, inefficient equipment, as in the old coal-based plant at Badarpur, or efficient, modern plants using gas caught in an upward price spiral with domestic gas not being available, such as at Bawana.

In the communications sector,constrained cash flows limit services. One rough estimate is that cumulative charges for spectrum amount to about Rs 1.8 lakh-crore ($30 billion), roughly equal to the total amount invested in networks and equipment. In other words, operators could have invested double the amount in networks and equipment if it had not been paid in government charges. Operators had to take on significant debt for prior payments, thereby hampering their ability to invest in extending and upgrading their networks.The operators' financial constraints constitute one major reason that a market hungry for data services is starved. (Another major reason is the technology constraint of narrow, noncontiguous bands of spectrum, but that is another tale.)

The situation in electricity supply is much worse, because of the high and still growing level of stressed assets of the state electricity boards. Press reports estimate that as much as Rs 53,000 crore may possibly become non-performing assets (NPAs) by the end of September.

There is a view that stressed assets and NPAs need not be a problem, because they can be readily sold to new owners who could reorganise the undertakings, which could succeed or go out of business if they fail. While this is theoretically possible, in practice, this is quite difficult and impractical to carry out, especially in hard times. Banks typically are not equipped to take over a number of non-performing businesses and run them until they can dispose of them. Secondly, considering the problems of being profitable in bad times combined with generating cash for operations in downbeat markets, it is unlikely that there will be acceptable buyers willing to pay reasonable prices for loss-making assets.

One difficulty in addressing such issues is that the basic concepts - of cash flows, of numbers from operations in the profit-and-loss statement in tightly coupled lockstep with the balance sheet, which leads to the cash flow statement, require a level of effort to understand that many are unwilling to put in. Cash flows are measurements of flow, whereas profit-and-loss and balance-sheet items are accumulated over specified periods such as a month or quarter, i.e., statements of stock,with no easily discernable relationship to actual cash movements in those periods. There are additional complexities in delving deeper, e.g., in considering the similarities with the flow of liquids. As cash flows are in some ways comparable to liquid flows, there is research from the perspectives of fluid dynamics that requires an understanding of more complex mathematics, physics, or engineering. For those interested in exploring these aspects, further readings are suggested below.1

Put intuitively, the key is in setting up and/or taking corrective action to facilitate smooth flows, with the recognition that disruptions create turbulence. Smooth flows are laminar, as the layers or lamina of fluid move easily without mixing (see diagram). Once turbulence sets in, it takes time and often additional effort (resources) to revert to smooth flows, because the obstacles have to be removed or worked around, and the vortices and eddies created by disruptions have to be stabilised and smoothed out.

Flow - Laminar (Smooth) & Turbulent

The point is that if key decision makers have an appreciation of cash flows and simulation techniques, they can be better informed in making decisions to improve flows. This understanding needs to be visceral and at the top levels, and not just among financial and engineering experts. This is why it would be useful for the PM and his team to seek financial, organisational, management and technical inputs.

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                                                                                                       Shyam no-space Ponappa at gmail dot com

1. Measuring Financial Cash Flow and Term Structure Dynamics, Cornelis A Los, 30 November, 2001: http://econwpa.repec.org/eps/fin/papers/0409/0409046.pdf

Financial Market Risk: Measurement and Analysis, Cornelis A Los, Routledge, 2003; 2006.