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

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/

Guns or Butter, Both Need Investments

Our common interest requires building a consensus on cash flows.

"Money, money, money… makes the world go 'round...." This line from a musical set in 1930s' Berlin is inescapable in the commercial, economic, and often the political aspects of reality. While the show emphasised escaping through make-believe, the real-world actually follows closely along.

Take India’s economy: Despite growth, without commensurate profits, employment, and wellbeing, we are marking time. Analysts point out that corporate profits languished since 2008, trending down as a percentage of GDP from 2010, excluding a  minor improvement in 2017. In fact, profits have not grown in real terms despite annual GDP growth of about 7 per cent for 10 years as shown in Chart 1.

In the boom from 2003 to 2008, profits to GDP doubled from 2.8 per cent to 5.5 per cent. Growth was driven by investment and exports as well as by consumption. After the subprime crisis of 2008 and the recession, profits in India slumped, partly because of excess capacity, and the rising costs of additional debt caused by inflation targeting (the components being wages, taxes, corporate profits, interest payments and rents).

Although profits recovered somewhat, they trended downward, and by 2018 were 3 per cent, the same as in 2003. By comparison, US figures (after a low of 4.95 per cent in Q4 2008) ranged from 9 to 11.7 per cent. Gross profit to GDP in the US was 20 per cent in 2015, while in China (2014) it was nearly 30 per cent (Chart 2). Surpluses are essential for investment and development, because neither can happen without them. Only thereafter is a higher wage-share affordable.

Source: https://www.schroders.com/it/sysglobalassets/digital/insights/2017/pdf/em-growth-mirage/gdp-and-earnings-growth-thought-leadership.pdf

Of the decline in India from 2008 to 2018, about nine-tenths happened in four sectors: PSU banks (36 per cent), oil and gas (19), metals (18) and telecom (15). During this period, consumption replaced investment as the driver, with growth in sectors such as automobiles, consumer durables and retail. Some commentators expect these trends to continue, with some optimism on the revival of investment.

The counterfactual is that we haven’t had any required reforms of structure and organisation for surpluses to grow in PSU banks, utilities or telecom. For instance:

• In banking, the NPA crisis remains, but the focus has moved away to elections.

• Reliable electricity supply needs financial sustainability and stable pricing, and neither is available. Coal mine auctions haven’t resolved resource costs and availability, while financial gambits in the form of race-to-the-bottom bids to start projects and sell out early, instead of staying for profits from operations, aggravate problems in pricing and delivery for renewable energy as for conventional fuels. The financial incapacity of state electricity boards has created another set of problems, compounded by continued populism (unsustainable prices).

• In telecom there has been only one major reform for 5 GHz spectrum for WiFi, despite the new National Digital Communications Policy.

Meanwhile, electoral wrangling threatens to further deplete the treasury, whereas the problem is the opposite: Lack of surpluses (profits, and ultimately, cash). Profits have been stagnant for a decade starting from UPA-II, partly because of the excess capacity of the boom. This has constrained development spending, because low surpluses have kept investments down. By contrast, investments and exports were strong from 2003-2008.

Several other social forces add to the downdraft.

• One is a political system that encourages splintering and divergence. As large parties have established hierarchies, it’s easier to start anew to get and control funding for splinter parties around divergent special interest groups.

• Another is incomplete or dysfunctional design, whereas expenditure must produce surpluses. For example, a new metro service in one part of the National Capital Region does not connect with the Delhi Metro. What’s more, the interchange is separated by several kilometres, and is reportedly designed to end ultimately with a gap of 350 metres at street level. A ‘rapid transit’ system that slows you down? If this were designed by enemy action to tie up resources and make people unproductive, they could not have done better. Similar problems assail the design of communications systems that often don’t ‘connect the pipes’ all the way through, such as spectrum regulations that hinder communications, hastily applied GST regulations, or expressways with bottlenecks.

• A third is behavioural acts of omission or commission that increase costs and reduce surpluses. Ignoring laws, rules and regulations, whether it’s driving down the wrong side, lane indiscipline, jumping traffic lights, breaking queues, littering, polluting, and such other lapses, including government agencies not paying bills.

• Yet another is accepting mediocrity, ignoring standards and protocols required for quality outcomes, products or services.

If we are to achieve surpluses, we will have to build a consensus focused on cash flows. The building blocks are ‘trainable’ virtues, with appropriate structures, processes, and behaviour. Social disciplines such as a sense of responsibility for and a desire to maintain good order, working logically, cooperatively, to plan — an ‘objective oriented, project management approach’ for individual and group gain — needs to be taught, ideally from the cradle, and reinforced in our activities, provided the connectivity and content are built to support this. These values can also be introduced at any level. Playing for group stakes and open, direct communication can be habituated through practice, by educational, economic and political systems treating them as worthy of inculcation and reward.

A necessary adjunct is to embrace long-horizon plans and group gains through multipartisan activity. For example, export initiatives are needed using digital technologies that feed into a digitally informed foreign trade policy (DIFTP). Such initiatives require diligent collective effort, recognising that short cuts are at the cost of larger gains. Until we practice such convergent, national-gain behaviour, we are unlikely to generate the surpluses we wish for.

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Shyam (no space) Ponappa at gmail dot com

1: “Corporate profit to GDP: Analyzing growth across cycles - 2018 mirroring 2003 bottom”: https://www.motilaloswal.com/site/rreports/636840041276772228.pdf

2: https://thewire.in/political-economy/what-explains-india-incs-corporate-earnings-conundrum

3: https://www.researchgate.net/profile/RASHMI_BANGA/publication/330824656_Is_India_Digitally
_Prepared_for_International_Trade