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

Unmet Needs In Wireless Regulations

1. Telecommunications need priority as the primary enabler for growth, climate mitigation, and living conditions.  This holds for primary infrastructure as well in energy, transportation, water and sanitation, and for secondary infrastructure such as healthcare, education, and financial services. 

2. In the last decade, governments in India have taken out more than they have put into telecommunications by way of funding and/or enabling policy formulation. 

3. Given the high costs and impracticality of installing ubiquitous fibre, policies for wireless middle- and last-mile telecom connectivity are urgently required.

 Shyam Ponappa    |    February 14, 2023

Setting aside the uproar in financial markets and politics for a moment, consider just some mundane facts on a deficient aspect of infrastructure. The urgent present and future need is to address the missing links in our connectivity chain with appropriate, enabling regulations.

One would think that in this era, governance in India would focus on digitisation and digital connectivity. It is one of our critical infrastructure needs in a set that includes transport and energy. One might even assume from the schemes and announcements about digitisation that the government accords priority to these areas. So what is it that gives one pause?

India touts its resolve in this sector. Yet, in the ground realities of its expenditure on the sector, policies and actual reforms, this resolve is lacking. Moreover, many urgent requirements are actually for appropriate, timely policy responses, not for government funding, as discussed below.

The table (Spending Plan) shows budgeted expenditure (revised figures for 2022) for roads, railways, and communications in the last three years.

The expenditure on roads and railways is twice the amount on communications, for which there is also a lower increment for next year. Of the Rs 1.23 trillion, BSNL gets Rs 52,937 crore, the rest of telecommunications gets Rs 44,642 crore, and postal projects get Rs 25,814 crore.

If emphasis on digitisation and connectivity is really critical, is the budgeted amount disproportionately low? Considering that efficiency and productivity drive growth, climate mitigation, and living conditions, and gain from these enablers regardless of the mix of technology, capital, land, and human resources, digital effectiveness and efficiency need prioritisation as multipliers. It is as though we simply do not recognise that communications is the leading enabler.

What Can Be Done About This?

The way the following instances were dealt with over the last several years show how policy deficiencies may be more purposefully addressed. 

The Vodafone Saga

The handling of the Vodafone saga by both the United Progressive Alliance and the National Democratic Alliance exemplifies one type of problem. Briefly, Vodafone was saddled with arbitrarily imposed retrospective taxes in 2007, which the Supreme Court set aside in 2012. Then Finance Minister Pranab Mukherjee piloted legislation whereby retrospective policy changes justified tax claims on offshore stake acquisitions of Indian companies. Vodafone and other operators were also battling licence fees claimed on non-telecom revenues included in “aggregate gross revenues” (AGR) since 2003, with mounting interest dues. In August 2021, the government finally gave in on retrospective taxes on Vodafone (and Cairn Energy) after arbitration awards against it. In September 2021, a telecom relief package offered a four-year moratorium for the beleaguered operators’ debt repayments, while finally excluding non-telecom revenues for licence fee calculations.

The relief was temporary, with interest accruing on all outstanding dues. There was much more that needed to be done to prevent prolonged attrition with high opportunity costs, because of the non-availability of services severely constraining India’s capacity and productivity. Examples include revenue sharing for spectrum as for licence fees, and active network sharing through open access to operators on payment (see https://organizing-india.blogspot.com/2021/10/telecom-reforms-relief-with-hope.html).

Vodafone Idea and India’s users suffered the cost and deprivation of services until the government decided on February 3 to convert Vodafone’s dues of Rs 16,133 crore into government-held equity. Meanwhile, Vodafone Idea was down to under 244 million subscribers by the end of November 2022, having lost 21 million users. Its debt rose because the government dithered with the afterthought that Vodafone Idea should invest more before the government fulfilled its conversion of dues to government-owned equity. Clearly, future policies need to be stable and well-thought-out in the public interest, without whimsical changes or arbitrary conditions.

The irony is that in the UK and Europe, Vodafone competes with Orange, BT, Telefonica, and Deutsche Telekom with state-of-the-art services, and runs Europe’s largest 5G network in 12 countries. In partnership with the Kumar Mangalam Birla group, it is the sole surviving international telecom operator in India.

What if governments had acted quickly to correct anomalies such as retrospective taxes and defined AGR rationally? Imagine what the opportunity gains might have been with three strong operators in a well-regulated market of over a billion.

The Elusive Goal Of Optical Fibre For All 

A second instance of inappropriate policies is that of wireless policies and the use of optical fibre. Ratings firm ICRA recently stated that full-scale 5G deployments across India would require expenditure of about Rs 3 trillion for densification, because nearly two-thirds of the towers lack fibre connectivity. Heavy investment appears unlikely given the telcos’ expected debt of Rs 6.3 trillion by March 2023 (see https://www.business-standard.com/article/economy-policy/5g-infra-to-cost-rs-3-trn-in-next-4-5-yrs-amid-elevated-debt-levels-icra-123013001026_1.html).

With the high costs for fibre rights-of-way and the installation difficulties on the ground, it is baffling that our policymakers in the government including the Department of Telecommunications (DoT) have not engaged with the urgent need for enabling wireless policies even for towers, based on successful models in other countries.

The DoT did, in fact, model the enabling wireless regulations for 5 GHz in October 2018 on the FCC template for Wi-Fi (for access and for point-to-point with limited capacity: https://organizing-india.blogspot.com/2018/11/a-great-start-on-wi-fi-reforms.html). However, this was not followed up with regulations for middle-mile, high-capacity wireless for towers and small cells, as is only logical, that is, for 60 GHz V-band and 70-80 GHz E-band for longer distances. Without these, and with pricing for microwave being restrictive here, there are gaps between the user-access-end and the core-network-with-fibre-termination-points. These gaps would be too expensive to fill out entirely with fibre optic cables, as is evident from ICRA’s estimate above. Yet, many officials repeatedly talked about fibre connectivity to all, which after consideration should strike anyone as patently infeasible because of our size, population distribution, and cost-and-revenue structure.

Other critical wireless regulation required now is enabling 6GHz for Wi-Fi, allowing speeds of up to 10 Gbps, and support for local product development and production instead of relying on imports.

Considering how resources are channelled and regulations attended to, the communications sector needs far greater emphasis and action on well-thought-out, timely policy intervention as indicated above to better support our economy and society.

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 Shyam (no space) Ponappa at gmail dot com

Success Beyond Software & Services

 

India dominates the world market in motorcycles. What will it take to replicate this success in other industries?

Shyam Ponappa   |   March 4, 2021

Examples abound in software and services of how Indians can work systematically to solve challenges, build teams, institutional structures, and scale. But what of other areas? This is a take on aspects of manufacturing, and consideration of a change in approach.

Consider the example of a software unicorn such as Postman, a Bangalore-based Application Programming Interface platform that eases interoperability for apps. The founders are engineer managers with experience at Yahoo and other MNCs. Started in 2009, in six years it was valued at $2 billion. This is a high-value Software-as-a-Service enterprise. It is an area where India has deep skills, there is limited need for capital, and ready access to local and offshore markets in verticals such as banking and finance, and oil and gas. The team has thought through the customer-centric product rationally and deeply to design and deliver solutions, blessed with good timing, marketing with sound strategy, and executing with skill.

By contrast, manufacturing enterprises face many more problems. These include large capital requirements, an extended payback period, high costs for capital, infrastructure, and inputs, and a bias for soft-collar jobs. Inadequate logistics cause delays and high inventories, increasing costs. Small, fragmented suppliers do not have adequate scale to function efficiently, although they have access to natural resources such as iron ore, bauxite, cotton, and abundant sunshine, together with low-cost labour. There is potential to exploit these in skill-intensive value chains such as pharmaceuticals, capital goods and automotive components, because of large, proximate domestic markets. To realise this potential, these manufacturing value chains need considerable effort and investment to become global champions. An assessment of their status follows, with some possible ways forward, and instances of success despite the constraints.

Present State of Manufacturing

A McKinsey publication in October 2020 on manufacturing in India observed that while companies elsewhere had begun to reconfigure sourcing and manufacturing for better reliability after Covid, India was not moving to exploit these opportunities.¹ The report cites that manufacturing sector GDP from 2006 to 2012 grew by 9.5 per cent, but declined over the next six years to 7.4 per cent. Also, nearly 700 of the top 1,000 manufacturers showed returns below their cost of capital in 2018, whereas sectors with better returns showed increased investment from 2016 to 2020. The authors suggest India has the potential to become a manufacturing powerhouse if it can develop globally competitive manufacturing hubs. They outline the steps required in 11 sectors with strong potential, premised on India’s strengths in raw materials, manufacturing skills, and entrepreneurship, by obtaining and applying the requisite know-how and technology, increasing productivity, and attracting capital. They estimate that appropriate changes in industrial policy together with responsive manufacturers could more than double the value chains in seven years, with significantly increased employment.

Manufacturing Value Chains

The report classifies India’s high-potential manufacturing value chains into “mature”, “established but underweight”, and “emerging” categories (see chart).

 

Source: https://www.mckinsey.com/industries/advanced-electronics/our-insights/a-new-growth-formula-for-manufacturing-in-india.pdf

The mature value chains comprise sectors such as pharmaceuticals, automotive components and vehicles, and chemicals, that are ready to scale up for domestic markets and exports. Sectors in the second category have specific shortcomings that need rectification to compete in export markets. For instance, food processing companies are too small and need higher productivity to be competitive in quality and cost abroad. Another example cited here is inadequate technological sophistication in aerospace and defence. In the third category of emerging value chains, sectors such as semiconductors and solar technology trail Asian countries, but could be developed through investment and technology inputs. Potential target markets are low-carbon technologies, such as energy storage, hydrogen equipment, carbon capture and sequestration, electric two-wheelers, drones, and lithium-ion batteries.

Now consider contrary examples of manufacturing success against all odds. There is indeed an industry where Indian manufacturers excel, and that is in motorcycles. An interesting account by a veteran describes how Bajaj Auto painstakingly built its R&D team 20 years ago, and went on to design and build products to hold its own.² TVS Motors did the same. When Chinese motorcycles launched in India and undercut the market in 2005, the apprehension was of the imminent demise of India’s motorcycle manufacturing. Within six months however, Chinese manufacturers failed because of poor quality and high tariffs, bowing out. Bajaj then addressed markets in Africa, where their better quality and prices lower than premium Japanese motorcycles prevailed. Now, Bajaj and TVS have the top slots in Africa, and there are reportedly no Chinese products. This was repeated in South America. In Europe, KTM is the market leader and Bajaj owns 48 per cent. Three Indian companies now dominate world markets: Hero, Bajaj and TVS. The author ends with the question: ‘‘Why was this not done in TVs, computers, mobile phones, pharmaceuticals, and other industries? It’s the same country, same labour laws, same infrastructure, but not the same entrepreneurs.” Possibly, together with all the constraints and impediments, because of factors such as limited vision and/or ambition, and absence of government support?

Developing the Value Chains

Returning to the development of value chains, six of the 11 account for about 80 per cent of the estimated gains: chemicals and petrochemicals, agriculture and food processing, electronics and semiconductors, capital goods and machine tools, iron ore and steel, and automotive components and vehicles. The report emphasises the importance of government support, and for manufacturers to dare to invest in organisation and scale to increase productivity per worker. An indicative agenda for the agricultural and food value chain is available here.³

Two aspects are highlighted overall: (a) the need for higher productivity (for instance, Indonesia is double India’s, and China and Korea, four times); (b) the availability of capital being the single biggest obstacle. This is where government, business, political and citizen energies have to be convergent to achieve good outcomes.

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Shyam (No Space) Ponappa @ gmail dot com

1: McKinsey - Rajat Dhawan & Suvojoy Sengupta, October 2020: “A new growth formula for manufacturing in India”:

https://www.mckinsey.com/industries/advanced-electronics/our-insights/a-new-growth-formula-for-manufacturing-in-india.pdf

2: Srinivas Kantheti, 15 June, 2020: https://www.cnbctv18.com/views/how-one-indian-industry-beat-china-at-manufacturing-and-created-a-global-footprint-6135001.htm ; 

3: McKinsey, Ibid, Page 7: “Catalyzing growth in the agricultural and food value chain”.

 

See additional related articles:

a. Don Williams, September 25, 2014: "China's Motorcycle Export Battle with India".

https://ultimatemotorcycling.com/2014/09/25/chinas-motorcycle-export-battle-india/

b. Michael Uhlarik, August 9, 2017: "Motorcycle Industry New World Order: India is the Next Japan".
https://www.linkedin.com/pulse/motorcycle-industry-new-world-order-india-next-japan-micheal-uhlarik/

c. For a network analysis of India's export opportunities, see second half of:
"Democracy, Digital India and Networks", May 2, 2019: https://organizing-india.blogspot.com/2019/05/democracy-digital-india-and-networks.html