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

Infrastructure Sectors That Boost Growth

 

Apply proven policies in telecom and electricity to rev up the economy.

Shyam Ponappa  |   August 4, 2022 

Does infrastructure spending promote economic growth, or is it the other way around? The arguments go back to questions such as whether building America’s railroads in the 1850s led to growth, or the reverse. While the costs and benefits of building transportation may be contested, partly because of what is measured and what is not, one positive linkage that has emerged is between improvements in information and communications technology and economic growth.

Potentially useful findings are given below.

1. A World Bank study (2021) reviewed the contribution of three categories of infrastructure to growth from 1992-2017: Transport, electricity, and telecommunications. The study covered 87 countries out of 189, because of missing data and to ensure a balanced panel. One finding was that infrastructure, especially electricity generation and telecommunications, significantly affected economic growth. This effect was larger more recently (1992-2017) than before (1970-1991), and developing economies experienced stronger effects than industrialised economies.¹

The researchers considered the contribution of physical capital, human capital, electricity, roads, railways, mobile phones and telephones to gross domestic product (GDP). The first principal component derived from these that explained most of the variation, comprising mainly electricity, mobile phones, and land-line phones, was characterised as the telecommunications and electricity factor. The second principal component, comprising largely roads and railways, was characterised as the transport factor. These factors roughly kept pace with population except mobile phones, which increased very significantly, driving the increase in the first principal component.

The chart of the GDP response to the two principal components demonstrates the effect of the primarily electricity-and-telecommunications principal component PC1, and of the primarily transport principal component PC2. The latter initially reduced output for some years. The implication is a need for policies that prioritise telecommunications, including broadband and internet, and electricity.

2. An Asian Development Bank publication on digitalisation and economic performance in India and China found that the internet and mobile density have a significant impact on economic growth.²

3. A study of factors that drove the surge in India’s service exports by researchers at the Institute of Economic Growth and Symbiosis found that attributes that affect the highest service exports (computers, communication and other services were nearly three times the traditional service exports in 2013), were driven by teledensity, together with financial sector development, human capital, and R&D expenditure (chart 2 ).³

The impact of telecommunications and electricity together with strengths in computers and communications services points to India’s needs: Prioritise enabling policies for telecommunications infrastructure for broadband and internet (integrated with the rest: Electricity and transportation, water and sewerage, logistics/transport, financial support, taxation, and so on). Parallel support is required to develop local ecosystems for equipment, which would have to be imported otherwise.

Effect on Policies 

What matters is how these conclusions affect government’s policies, because policies and regulations permit or constrain what we do and how we live. The solutions required ideally are for overall community needs, and not for what individuals, sectors, or stakeholders might need, as the consideration below indicates.

5G Auction & Prospects

Now that the government has bagged Rs 1.5 trillion from the 5G auction, what are the prospects for growth? If this amount is channelled to support BSNL/MTNL, with more government intervention to make them profitable, consider the probable outcomes.

(a) Things could turn out as planned, resulting in a strong telecommunications sector with four operators propelling growth. BSNL/MTNL certainly need support for their important, widespread services. The issue is whether they can be profitable, given their role. On the one hand are their market position in coverage/saturation and diminished share, while on the other are their responsibilities for essential services for strategic purposes and in difficult, unremunerative locations.

It is unreasonable to expect profitable performance in competition with private operators who can cherry-pick their markets. The very idea that governance through providing essential services must make profits is untenable, as it is for security, defence, or disaster management. Yet, this expectation has led to price cuts that have ended in a race to the bottom. Such pricing is a disservice, because it constrains investment in services, and thereby overall country capacity, to low-quality bottom-feeding. We expect and get low prices, but are saddled with low quality. The sector cannot build high-quality, reliable services, and is falling farther behind global service levels. India cannot possibly compete burdened with such self-imposed handicaps.

(b) Another possible outcome is that there will be unsustainable price cuts as before, with unfair access to spectrum (announced), and unfair competition from corporations. The losses could be perpetual, with the sector and the economy in shambles.

The Alternative for Policymakers 

Instead of continuing with unreasonable and ineffective practices that prevent us from realising our potential, even now, the government can change policies to capitalise on our strengths of being imaginative and resourceful, with the capacity to perform well with good systems and processes.

The success of NTP-99 can be repeated, by converting auction payments to revenue-share, this time for spectrum instead of licence fees. The difference is that operator dues can be financed from actual revenues, and not loans on anticipated revenues. This will not only enable immediate investment in networks and services, but as with NTP-99, is likely to result in substantial growth, with much higher government collections, and as a multiplier across sectors.

Legislation can be framed to convert spectrum auction payments to a reasonable percentage of revenues, as for licences. Instead of destabilising markets to favour BSNL/MTNL or corporations, insights can be applied and best-practice regulations can be adapted for our circumstances. The introduction of shared infrastructure through two or more mandatory consortiums led by corporate entities, with BSNL/MTNL as a strategic stakeholder ensuring national security and public interest, will enable even greater leveraging of network assets.

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Shyam (no space) Ponappa at gmail dot com

(1): Timilsina G. et al: https://openknowledge.worldbank.org

(2): D Sahoo et al: https://www.adb.org/publications

(3): Pravakar Sahoo & Ranjan Kumar Dash: "What Drives India's Surge in Service Exports?"

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3620313

Transformation, or Drift?

We need transformative policies and incentives with purpose, especially in solar power and digital infrastructure.

Shyam Ponappa   |   August 7, 2014

An uneasy sense of drift has set in after the anticipation that accompanied the swearing-in of the National Democratic Alliance government. Surely, the government understands that its real task is to build on hopes and expectations, to channel energies, to organise and coordinate for results, even perhaps try bipartisan teams? The opportunity is to overcome factionalism and harness people's energies, instead of floundering in disunity. We need transformative policies, programmes and incentiveswith purpose.

Resolute efforts in specific sectors can change this sense of the same old same-old. Two aspects of infrastructure that need early attention are: first, solar power, and second,digital infrastructure (see "A great start by Modi government", June 5, Business Standard).

Solar power, critically important in its own right, is essential for digital infrastructure because of the poor grid supply. Disappointingly, the steps taken are more of the same. For instance, the renewal of the national solar mission. for an increased 1,500 megawatts, is on the same lines as before - that is, a 30 per cent subsidy for solar farms, accelerated depreciation and renewable energy credits (RECs) that provide subsidies for a fixed period. While the target is higher, it is minuscule compared to the potential, and relative to other energy sources. For distributed user installations, interest-free loans seem ineffectual, because the high prices are unchanged, although payable in instalments - hardly ground-breaking.

Could the government try a more radical incentive of zero tax on equipment in addition to a 30 per cent subsidy, with immediate reimbursement and stiff penalties for misuse? Lower capital costs would probably induce much more extensive deployment, spurring manufacturing and innovation through sheer volume. This is likely for solar farms as well, and these incentives could be made available if such farms are really desirable. The government would lose upfront taxes on equipment, but avoid the cost and complexities of the RECs and accelerated depreciation, while gaining taxes downstream from increased productivity.

Similarly, in communications, we need countrywide access to broadband at reasonable prices. Users could benefit from applications such as education at all levels, from secondary school to college to continuing education for adults, healthcare; e-commerce; remote working/telecommuting; government services, information; and entertainment. Of course, once we have broadband, we'd need the range of useful, attractive content and services that result in improved user satisfaction, as well as productivity. These "supplementary effects" will undoubtedly take time to develop and play out, but the prerequisite is the access.

On this score, the much-awaited spectrum sharing recommendations are sorely disappointing. Their intent is puzzling because they are so restrictive, limiting sharing to two operators who have acquired frequencies in the same band in the same manner, with a cap of 50 per cent.

Build and Run Communications Networks Like Roads

Perhaps the telecom regulator's recommendations on spectrum sharing are an opening gambit to explore active network sharing. The logic for network and spectrum sharing is compelling. With India's self-created spectrum constraints and genuine deficiencies of capital and network coverage, the rational approach for our developing economy would be to optimise their use, as with roads. For this, active network sharing, including radio access networks and spectrum, is the most efficient solution, as is the case for roads.

Unfortunately, our policies are at the other extreme, of spectrum auctions and exclusive networks. This is least efficient for extending underdeveloped infrastructure services, as building and operating multiple exclusive networks requires the most resources, including capital. Auctions may be a reasonable alternative where there's existing infrastructure, and the issue is of allocating resources to whoever can make the best use of them. In our situation and given our needs, the way we build and operate roads may be a better alternative to achieve coverage.

To see why, compare the contrasting approaches of building communications networks with highways and roads. Road developers not only don't have to pay auction fees for the right to build roads, they are paid periodically for the construction of the assets. Ownership of the assets is then transferred to the state or other agency, and all road tax and toll payers may use the facilities. Similarly, all licensed operators could have access to communications networks on payment. While payback periods are often longer for roads, the nature of the financial flows are the same: capital must be invested in building the network before revenues are generated from users. People need to be informed and educated about this inescapable process.

Sparsely populated rural areas have lower revenue potential than urban areas. Hence, communications networks and services in rural areas lag because of commercial considerations. This deprivation is aggravated by front-loading auction fees for spectrum, which curtails investments in the networks and services in areas with lower potential. Also, unless operators pool resources, exclusive usage militates against full utilisation of the infrastructure. Our policies should reflect all this, instead of restricting spectrum access and sharing, including for 3G.

The real irony is that the pay-for-use principle is well accepted for roads; yet the opposite principle of auctions is used for communications networks. This is the unintended consequence of accepting auctions without thinking through what we need in our circumstances compared with advanced economies, and how to achieve those objectives.

Our spectrum policies have resulted in small bands of non-contiguous spectrum holdings that severely restrict capacity. Besides, operators have to invest heavily simply to protect the assets built. Yet countrywide broadband services need more spectrum to be used much more effectively to facilitate last-mile access. The kind of solution we need is for all remaining spectrum to be used for a common-access network, owned by a consortium of operators, including state-owned Bharat Sanchar Nigam and Mahanagar Telephone Nigam as "anchors". Once integrated with existing networks, operators can commercially deploy services with enhanced capacity, for which they pay as they use, and get paid. Broadband can be revolutionised by setting this up and converting spectrum fees to pure revenue sharing, as happened for mobile telephony with licence fees years ago. With the benefit of hindsight, the fees can be set low from the start, with regulatory oversight to avoid predatory pricing, and growth will most likely explode.

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Shyam nospace Ponappa at gmail dot com

What a Highway Can Do

Despite signs of transformational change, we need more - SOPs and quality

Shyam Ponappa / September 02, 2010

Even as the country reels from the extended rains and the imminent Commonwealth Games, there are unmistakable signs in Delhi’s environs of an unprecedented transformation. To see and feel this, try driving to the Delhi-Noida toll bridge (the “DND”), and go past Noida on the expressway to Greater Noida.

It isn’t perfect, and there are many details that could be handled better, from the assets built to how we use them. These include unfinished verges with construction debris near the Ashram crossing, cambers without proper drainage that get flooded in some stretches of the expressway, motorcyclists sheltering from the rain under the flyovers/overpasses spilling on to the expressway, pedestrians with no place to cross, trucks at night without even reflectors, trucks that are parked without hazard lights, tractors, and occasional cattle. Most dangerous are the undisciplined drivers who act as if they are puttering along at 30 km per hour while going at the 100 km speed limit or more, or who drive on the wrong side against oncoming traffic. And the resurfacing of the road in parts leaves much to be desired…

The transformation under way

Ignore this cavilling and carping, however, and it is bliss. One can cover 30 km from the DND toll plaza to Greater Noida in 20 minutes legally, although within New Delhi, it may take as long or even longer to travel just a few kilometres. I was amazed recently driving from Shantiniketan to Greater Noida in 40 minutes. It was like driving in California — quite different from the contentious driving that is customary on our roads.

The sheer ease and convenience apart, another, arguably greater, benefit is the gain in productivity. It is this potential for productivity that, if we can wring from ourselves, is one part of the equation in our pursuit of an improved quality of life. It is especially important because of our vast numbers, including the much-bruited potential demographic dividend, which is not new. As Babur put it in the 16th century*: “…if they fix their eyes on a place in which to settle …as the population of Hindustan is unlimited, it swarms in.” Little has changed, and much needs to be built from the ground up, starting with sanitation and water, not to mention energy, communications, and transportation systems.

But just consider: the limited instance of the drive on the expressway reveals a productivity gain of three to four times at 20 minutes for covering 30 km, compared with covering only 7-10 km in the same time (or taking three to four times longer for 30 km). That’s a gain of 300-400 per cent!

There’s another noticeable change: a willingness of everyone to work very much harder at whatever they do. All levels of people, from entrepreneur-managers to electricians, plumbers, gardeners, and day labourers, work so hard that a major change seems to be afoot. I am familiar with the hardworking farmer and rural wage earner, having grown up on a farm myself. I have also experienced the recalcitrance of some public sector employees and private sector unions, as well as the productive, hard-charging PSU, government, and private sector employees. Yet, in the work attitudes of boomtown Greater Noida, I see impressive energy and application.

The failings

Let me not gloss over the weaknesses. There are big failures in delivery capability, and these arise from two critical lacunae:

a) SOPs, systems and procedures
A major failing appears to be the lack of Standard Operating Procedures (SOPs) even for simple construction jobs, like painting metal: the ramrod, sequential steps of first scrape, then clean, apply primer, apply the first coat of paint and dry off; then apply the second coat… People simply don’t follow sound work practices — systems and procedures that, when applied, yield consistent good results. This is partly an endogenous failing, arising from lack of appropriate education/training and discipline. It is also partly attributable to the lack of organised systems and procedures.

b) Infrastructure
An equally critical exogenous failing of the environment is reliable infrastructure, whether in the form of energy (power/electricity), communications, transportation excepting a one-off good stretch of highway, or water and sanitation. Take any single area, say energy. The extent of wasted manpower because of lack of adequate electricity supply is beyond imagination.

Add the bases for learning and functioning competently, and there’s education (including training) and health care as a support function. Proper education and training — and discipline — are absolutely essential for learning and developing sound work processes, and for applying them. There was an impression many years ago that incompetence or recalcitrance in delivery resulted from the inadequate capacity of individuals. In the last several years, it is evident that we have good people, but they have very poor training, systems and organisation, and equally poor infrastructure. You could call it a lack of leadership and discipline at all levels.

What we need

We need two sets of fixes. The first is for our inherent failings: the lack of SOPs and the need to learn to work to inexorable checklists and timelines. It is imperative to learn the discipline of project management at all levels — starting from the top, not the bottom! This is a sweeping change that entails shifting from feudal criteria to respect for professional competence and processes.

The second fix required is a supportive environment: good infrastructure and the appurtenances of good policies. Going by the figures, we will build more roads, power plants and factories in the next few years than in the last 60. But the net gain to society will depend on their quality. If they are shoddy, the gains will be much less. Assets that are not integrated into coherent systems will be less beneficial than if they are integrated to deliver results, e.g. isolated housing without a web of transportation and communication links near where people work; isolated good stretches of highway. It is imperative that we design and execute the infrastructure to support our productivity. This is an area of weakness we must address and execute more comprehensively.

shyamponappa@gmail.com

*Babur-Nama, translated by Annette Susannah Beveridge http://www.farlang.com/diamonds/beveridge-baburnama/page_546