Koan Advisory's White Paper on the Indian Retail Sector and Digital Payments, Released by Shri Piyush Goyal, Minister of Power, Government of India, on 03 December 2016

The Confederation of All India Traders (CAIT) recently instituted the “Alliance for Digital Bharat” (ADB) with support from MasterCard. The ADB consists of several organizations from different industries including transporters, farmers, MSMEs, hawkers, labourers, self-employed groups, as well as women entrepreneurs, consumers and other stakeholders.

A multi-stakeholder conference was organised under the aegis of the ADB on 6th October, 2016, to discuss the opportunities and challenges of a less-cash ecosystem. The following white paper was authored by Koan Advisory as part of its knowledge engagement with ADB and released by Minister of Power, Shri Piyush Goyal, on 03 December:

A less cash society: Towards a stakeholder centric approach:
https://drive.google.com/file/d/0B-tlOGzCdDrlazlENEdGX2hEWGVkd2hsQ0ZuekhqVnBPUjJr/view?usp=sharing

Rishabh Kumar: What we know about the wealthy, Business Standard, 27 Oct 2016

http://www.business-standard.com/article/opinion/what-we-know-about-the-wealthy-116102601646_1.html

The first modern book in economics was called Wealth of Nations because its writer, Adam Smith, understood (and transmuted the idea) that the key to prosperity and growth was the generation and distribution of wealth — not just the flow of income. Recent interest in economics has started to return to this question, especially in the context of today’s rich countries. The academic attention on the metamorphosis and concentration of wealth has so far excluded poor countries. In fact, the study of the wealth of poor nations should be a core question in development economics (over income growth) because wealth tends to cumulate all past prosperity or disparity.

I found it notable that despite the detailed historical analysis in Thomas Piketty’s book Capital in the 21st Century, there was no mention of Indian wealth (although Mr Piketty is responsible for a top Indian income series: Banerjee and Piketty, 2005). To an extent this is understandable because personal wealth data on India is so limited and unreliable that documenting it would require a book in itself. Till date, the Reserve Bank of India (RBI) does not follow the tradition of publishing regular household and private-sector balance sheets at market value, to assess accumulation and asset prices. And yet due to its sheer size and importance, India presents a unique challenge to the notion of prosperity — it is simultaneously home to some of the wealthiest and poorest global citizens. In the past, the question of India’s colonial subservience was related to the drain of wealth, rather than income — the British enriched themselves at the cost of their prized colony. What happened once India became independent?

Creating a time series

In recent research, I try to answer this question for a particular historical phase in Indian history. The term “Hindu rate of growth” is not really religious — it meant a country made up mostly of Hindus that did not grow at the levels seen in other Asian countries undergoing development at the time. Given that people’s assets are disclosed to tax authorities at the time of death for the purpose of inheritance and because India had an estate tax in place until 1985, I was able to develop a series of top wealth-holders and a model called the Estate Multiplier Technique (Lampman, 1962). Due to the exemption limits, it turns out that the series could only start from top 0.1 per cent; this in itself is an indicator of how concentrated wealth was. Unfortunately, comparison with the wealth of the nation as a whole could not be made, because such aggregate series are not available. Sometimes the National Sample Survey Organisation (NSSO) conducts an assets and liabilities survey, but it is decennial at best and as with most surveys, underestimates the wealthy. To “normalise” values, I estimate the wealth of these top groups as a ratio of national income — in a sense capturing how many months’ or years’ worth of gross domestic product (GDP) could be financed exclusively by the Indian elite.

Findings

My findings show sharp trends which seem quite reasonable in historical context. The elite declined in importance relative to national income due to a series of (oil-driven) inflation shocks and targeted anti-elite policies (mostly attributable to Indira Gandhi) such as the abolition of the privy purse1 and nationalisation of private assets in banking and coal. In 1966, the wealthiest 200,000 families could have financed around two months of national income but their decline was so dramatic that the top 0.1 per cent could barely finance a few days of GDP (Gross Domestic Product) by 1986. The composition of portfolios suggests that land related properties (urban and agricultural) lost a lot of their inflation-adjusted values. On the other hand, movable assets such as equities, bonds, gold etc. were able to recover their real values by 1986 consistent with the eventual relaxation of a super aggressive tax policy (Acharya, 2005). All this points to the rise of a new kind of savvy wealthy class amongst the elite themselves, because disparity within the elite themselves began increasing (after a decline until 1972) and the decline of the top 0.1 per cent was mostly due to the decline of the top 0.01 per cent or the super elite. Thus on net, the gainers were the intermediate elite (just below the top 0.01 per cent).

One way to rationalise these results is statistical equilibrium reasoning, which suggests that wealth concentration increases with liberalisation of capital transaction activities. Aggressive control and regulation of capital activity hence plays the opposite role, causing a reduction of sharp disparities in wealth portfolios — as was the case during my period of study.

Amongst other things, my study contrasts the relationship between wealth concentration and economic growth in India against Piketty’s hypothesis for the industrialised world. During low-growth phases in today’s industralised countries, past saving made wealthy incumbents more important relative to the majority of the income-earning population. The opposite was seen for India during my period of study - modest growth and a demise of the assets of the rich and elite. Indian growth during this era was quite low and driven by national capital accumulation for the development objective (Nehruvian Socialism, as it is called), with simultaneous tax scrutiny of the elite. If national capital crowds out personal wealth, then it makes sense that wealthy classes lose their importance.2 At the same time, tax policies aimed at equalising wealth distributions also play a huge role in breaking the endless cycle of inheritance and accumulation which otherwise perpetuates inequality. As more data becomes available, longer time series of top wealth-holders will tell us if these trends have been (as expected) reversed and whether the Indian elite are back again.

---

 1. The abolition of the privy purse took away a source of handsome payments made to the princely class for their role in Indian integration
2. The accumulation of national capital is perhaps most evident in the publicly financed institutions of higher learning and the investment into State-owned enterprises during this era
Published with permission from Ideas for India (www.ideasforindia.in), an economics and policy portal

Vivan Sharan Moderating a Panel with the Indian Telecom Minister, TRAI, and other eminent panelists at CII Big Picture on 26 Oct 2016

Government of India should not Make in India; co-authored column by Vivan Sharan, in Mint, 07 Oct 2016

http://www.livemint.com/Opinion/eLQGanpcx6DGwMDSFMCFNI/Government-of-India-should-not-Make-in-India.html

India is recording historically high investments in technology-oriented industries such as telecom and over the top (OTT) services that ride on telecom networks such as financial technology and e-commerce.

The latest infusion of Rs47,700 crore by UK-based telecom giant Vodafone Plc. into its Indian arm is indicative of the fact that the Indian market remains much coveted despite the headwinds to global growth. Manufacturing investments are also targeting the tech-hungry Indian consumer.

Chinese telecom giant Huawei will begin manufacturing smart phones in India this year, the 40th such manufacturing investment in the country in the past two years alone. With such investments and parliamentary consensus on the GST, one may be tempted to conclude that ‘Make in India’ is on track. This may be premature.

India’s transition from an agricultural economy to a service economy has posed a conceptual challenge for many who see industrialization as the only way to create jobs. Industrialization requires best-in-class infrastructure, cheap energy and a skilled workforce, all impossible prerequisites to fulfil in the short or medium term. But the ‘digital economy’ offers a way out.

While productivity gains from automation and digitisation have driven industrial growth in advanced countries over previous decades, their effects are not fully felt here.

The digital economy can potentially mobilise millions of Indians, constituting the ‘informal workforce’, bringing them within a more productive fold. India’s biggest challenge is also its best opportunity: it has a large, young and untrained workforce that can intuitively understand applied technology, if given early exposure.

In fact, India can extract greater relative gains from the digital economy than its advanced country counterparts. Real income growth in advanced countries requires sustained and fundamental innovation whereas India can harness incremental innovation towards higher rates of growth (mostly owing to a favourable demographic).

But continued innovation support through private sector investments is not inevitable. Many policymakers mistakenly believe that India cannot be ignored as an investment destination. Nothing is inevitable.

Conversely, Make in India’s greatest threat is the ubiquitous government-run enterprise itself. And this is borne out in a number of technology-oriented industries; which is worrying as successive governments have first created favourable conditions for investments and then jeopardised them.

For instance, the telecom industry, often cited as an example of successful liberalization, finds itself at a crossroads. It is dependent on falling voice call revenues despite enough global precedent to show that data revenues are the future. The industry lacks the bandwidth to deliver affordable data.

And there is policy inertia to address this, partly due to the existence of BSNL. Policymakers have hesitated from undertaking comprehensive reforms around key challenges such as Right of Way regulations, hoping that BSNL’s networks will save the day. And BSNL has not delivered the goods: the quality of its Internet infrastructure and service ethic are reminiscent of the pre-liberalisation era.

Instead of harnessing a well-designed ‘ring network’ as was originally conceptualised in ‘BharatNet’, India has to settle for optic fibre cables thrown on electricity poles, barely resilient enough to withstand a windy day.

Another competitive technology industry, broadcasting, is another example. While most advanced countries have public broadcasters, few have created legacy issues as profound as Prasar Bharati has here.

The private broadcasting industry has been haemorrhaging money owing to high cost of ‘carriage’ and regulatory restrictions on deriving more revenues. Prasar Bharati has been on the wrong side of both these issues—not readily relinquishing spectrum to private operators which could help lower carriage costs, and forcing private operators to circumscribe their lifeline advertising revenues by applying Mandatory Sharing regulations on high value content such as sports broadcasts. Policymakers have conflated national interest with consumer choice.

The result is that broadcasting investments have been muted over the past decade despite progressive liberalization of FDI caps. The larger lesson to draw is that governments should not be both regulators and competitors. This is not the easiest pill to swallow, particularly when sentimentality accompanies the notion of government-run enterprise.

The introduction of RuPay cards by the National Payment Corporation of India, which is heavily guided by the Reserve Bank of India, indicates that the government is tempted to enter markets to disrupt perceived monopolies even in the digital economy.

Ironically, India is a party to the US-led dispute with China at the WTO on the Chinese variant of RuPay, called UnionPay. India’s approach therefore is neither consistent nor wise. It is a legacy of the past, wherein the government created markets for ‘old economy’ industries such as energy and infrastructure.

While public enterprises have succeeded, to an extent, in traditional industries, they are not optimized for the new economy which requires constant innovation and high standards of service delivery.

The government should remain a licensor, regulator and adjudicator and let consumer choice select winners in markets where neither capital nor technology are constraints.

Samir Saran is vice-president, Observer Research Foundation, New Delhi; and Vivan Sharan is founding partner at Koan Advisory Group, India.

This article has been produced in collaboration with the World Economic Forum and in line with the programme topics of the India Economic Summit on 6-7 October 2016 in New Delhi under the theme “Fostering an Inclusive India through Digital Transformation.” For more information about the meeting visit http://wef.ch/ies16.

Vivan Sharan speaks on BRICS on India's Public Radio, 04 Oct 2016

Vivan Sharan in discussion on IPR with a delegation of Indian Parliamentarians in Washington DC, 16 Sept 2016

Vivan Sharan in discussion with panelists at the Dialogue on Economics of Prosperity, 19 July 2016, New Delhi

Panelists include Anil Padmanabhan, Managing Editor, Mint; Rajat Kathuria, Director, ICRIER, and Wilfred Aulbur, Managing Partner, Roland Berger India. 

Don’t Shackle the New Economy with the Restrictions of the Old: Vivan Sharan in The Wire, 11 July 2016

http://thewire.in/50544/old-vs-new-challenges-of-a-changing-economy/

There is a perpetual tussle between the old and the new. Perhaps nothing exemplifies this better than the tensions between the old economy and the new economy. A large share of the billions of dollars of foreign investments into India are now linked to the new economy. The new economy in turn is one that benefits from the freer movement of capital that has been enabled through a gradual opening up of our domestic market. And this capital is ruthless. It is attracted by productivity and efficiency, and not the populist impulses of our political class. Conversely, the old economy does seem to care about social equity – insofar as at least giving back through entrenched political patronage. A number of fallacies persist in the manner in which the old is pitted against the new –  and recent debates on Uber versus traditional taxi operators illustrate this.

Perhaps the biggest fallacy is that there are no common traits between old and new economy businesses. Of course, both aim to maximise profit, albeit through different means. Old economy businesses rely on high barriers to entry, which in the case of traditional taxi services are achieved through manipulation of the political economy. Anyone attempting to use community parking spots in Delhi for instance, would quickly realise that taxi stand operators have managed to appropriate space in a number of them, by paying ‘rent’ to the local officials. No doubt the cost of this rent is lower than that which would have to be paid if this were a formal levy.

On the other hand, new economy businesses such as Uber, rely on the sheer efficiency of technology to minimise costs. A nifty mobile application matches demand and supply in the taxi market, through an interactive experience that both the driver and the rider can use. There should be no mistaking the fact that the objective of any technology that is applied commercially is to create a monopoly of some form. And this is enabled through intellectual property laws that are widely recognised as essential for innovation, with some governments also complicit in perpetuating this virtuous cycle. Indeed, old and new economy businesses have different ways to achieve the same objective of achieving some form of monopoly in a product or a service value chain. And it remains incumbent on the government to regulate monopoly formation through appropriate regulatory mechanisms – whether for the old or for the new.

Another fallacy worth pointing out is that foreign capital is very different from domestic capital in its ruthlessness. The first quarter of the 2016-17 fiscal year has already witnessed the highest capital raise through initial public offerings (IPOs) in India in nine years. While the sum is a relatively paltry Rs. 5,855 crores (less than a billion dollars), capital allocation patterns are illustrative of this fallacy. Three out the six of the companies that participated in these IPOs were previously funded through private equity or venture capital investments, which are in turn intrinsically linked to capital availability in the global markets. Distinguishing between foreign and domestic capital, at some level or the other, is a fool’s game.  If India has chosen not to remain isolated from global markets, it is incumbent upon policymakers to make capital available for domestic enterprise to flourish.

So how can policymakers resolve this regulatory debate? One would imagine that a first step would be to reduce entry barriers, including licenses wherever possible, in order to foster competition. This should include doing what it takes to increase access to capital as well as removal of arbitrary pre-conditions at every step. Instead, state governments are busy figuring out how entry barriers to technologically-enabled businesses can be made higher. Karnataka for instance, has issued “On-demand Transportation Technology Aggregators Rules, 2016”; wherein one of pre-conditions is that licensees should have a minimum of 100 taxis in their fleet. This is perhaps not the best way to ‘Start-Up India’.

An alternative could be to first revisit and reconcile existing regulations and to focus on institutional capacity building within government while finding ways to enforce transparency. It is neither the moral responsibility of the private sector to think beyond its stakeholders, nor is it the task of governments to save the old economy from disruptions. It is however necessary for technology-driven businesses to be transparent given their inherent complexities; and in turn for governments to manage inevitable transitions from old to new by through some useful form of ‘co-regulation’ that empowers consumers.  

The ability of government or for that matter, the judiciary, to regulate dynamic sectors is limited – most recently evidenced in the call-drop case wherein the judgement states that telecom operators should not be penalised for bad quality of service since the faults cannot be “traceable exclusively” to them. Consumer experiences can easily prove otherwise and therefore should be used as a metric within the regulatory paradigm.

The author is a partner at Koan Advisory Group.

Submission to the Telecom Regulatory Authority of India (TRAI) on the consultation on Free Data

Please click on the link below to be taken to the TRAI website where the file is accessible:

http://trai.gov.in/Comments_FreeData/Companies_n_Organizations/KOAN.pdf

Please write to us in case you cannot access the file. 

The Tricky Challenges of Regulating Service-in-India: Op-ed in The Wire by Vivan Sharan, 27 May

http://thewire.in/39061/the-tricky-challenges-of-regulating-service-in-india

It has been two years since the last general elections and currently a range of assessments of the Modi government’s performance are dominating headlines. Despite the recent debate between the finance minister and the central bank governor on whether or not India is a “one-eyed king in the land of the blind’’, it is clear that for foreign investors, the country’s growth is exceptional. Evidence for this is in the equity inflows over 2015-16, which touched around $41 billion, up from around $32 billion in 2014-15.  

While the final data is awaited, a large share of equity inflows were targeted at service industries. Therefore, FDI growth is not yet a cause for ‘Make-in-India’ triumphalism. Rather, trends indicate that ‘Service-in-India’ is where investor interest really lies. And within the services sector, e-commerce and other over-the-top (OTT) services have attracted among the largest shares of inbound capital. This poses challenges for Mr. Modi’s policy makers at multiple levels particularly since technologies are not static, unlike the policies that circumscribe them. Moreover, disruptive innovation is a concept that is still far from understood by government.

The Department of Industrial Policy and Promotion’s (DIPP) recent guidelines for FDI in e-commerce are a case in point. The policy finally recognises multi-crore investments by e-commerce companies in the “marketplace” model as legitimate; by allowing FDI in “business to business e-commerce”. Buyers and sellers transact on e-commerce marketplaces directly, facilitated by technology platforms that underpin them. Such clarity on whether FDI is allowed should ordinarily be cause for celebration. However, problems remain.

The DIPP’s policy pronouncement came with strings attached – marketplace companies cannot “directly” or “indirectly” affect the price of products sold through their proprietary platforms. The net result will be that only companies that are backed by investors with deep pockets will be able to survive. Litigation will inevitably ensure, on subjective interpretations of “directly” and “indirectly” and courts will be relied upon to define economic policy.  This is something that the finance minister has spoken out against in his recent comments on taxation policies and the active role of the judiciary, and yet there is dissonance within government.

One of the main reasons why brick and mortar retail purportedly cannot compete with e-commerce is the heavy product discounting on internet marketplaces. This is linked to economic logic – if a seller does not need to keep a large inventory as is the case in a dynamic marketplace, lower business costs allow the margins for discounting. These discounts also derive from large marketing budgets of e-commerce incumbents with foreign investors. Consequently, sellers do not have to spend a dime on the most critical function of frontend retail. So what happens to the small retailer?

Whatever happens should in no case be decided through courts or committees of government. It should be decided through fair competition and transparency in the business ecosystem. Both the small and large players in retail should do their part to allow for this. Large businesses must utilise their technological prowess to create channels of reporting and feedback, that can lead to a clearer understanding of transactions, taxation and all other grey areas as government sees them. The reluctance on part of big businesses to share data is an untenable 20th century legacy.  And small businesses should simply evolve by adopting technology wherever possible. Nothing stops small retailers from selling on internet platforms; either their own or those offered by incumbent e-commerce companies that have managed to integrate thousands of small sellers already.    

A favourite quote of many “India watchers” is that whatever you can think of the country, the opposite also holds true. This also seems to be the case in India’s business ecosystem, technology centric services included. For instance, large telecom service providers (TSPs) have been lobbying for differential pricing of “Over the Top” (OTT) services on the internet. That is, they have been demanding government intervention in pricing of internet services, based on usage of different consumer applications. To be clear, this is a case of the private sector asking policymakers to regulate the best level playing field for businesses that exists today; the internet.

Conversely of course, technology entrepreneurs contend that differential pricing should not be allowed as it will kill competition and a free internet. As a result of this debate, the Telecom Regulatory Authority of India (TRAI) has been busy taking wildly differing positions over the issue. A year ago, TRAI was accused of favouring TSPs, whereas today, it seems to have taken a more considered stance in favour of keeping the internet unfettered.  At the core of the TSPs’ demands are an inherent inability to provide OTT services that can compete with rapid innovation. For instance, TSPs fear revenue losses owing to voice over internet protocol based international calling.

The question to ponder over is: whether a sustainable solution to competitiveness concerns such as those raised by small retailers or large TSPs, is more regulation? What are the origins of some of the largest internet based service companies in the world? The answer to the latter is that many of them were not necessarily Internet-focussed from the start, but adapted to changing realities.  

Disruptive innovations enhance competitiveness in a way that protectionism in any form cannot.  In India, a predominantly young country reliant on the service sector, the inexorable role of technology in business and job creation, should not be undermined by myopic regulation. Technology in turn can help leapfrog some of the seemingly intractable challenges the country faces today including in education and healthcare delivery. India’s growth may be unique, but the Modi government should recognise that so are its stark socio-economic circumstances that must be overcome.

In the case of the internet, the role of government should be limited to provision of secure and resilient digital infrastructure for universal access (whatever happened to ‘BharatNet’?); as well as to demand from businesses, as much transparency as technology allows.

*Vivan Sharan is a Partner at Koan Advisory Group.

Koan Advisory supported FICCI and UNEP report released on 29 April by RBI Deputy Governor

Koan Advisory has supported the United Nations Environment Programme led "inquiry on the design of a sustainable financial system" in India.

The RBI deputy governor Mr. R. Gandhi released the final report in Mumbai on 29 April 2016 in the presence of the financial community.

The final report can be accessed here: http://unepinquiry.org/wp-content/uploads/2016/04/Delivering_a_Sustainable_Financial_System_in_India.pdf

Inauguration of Nepal's Public Diplomacy Programme in New Delhi, organised by Koan Advisory, 13 April

Koan Advisory organised the inaugural session of the Government of Nepal's new "Public Diplomacy Programme" with support from IDSA and the BP Koirala Foundation on 13 April. The conversations were candid and substantive. 

There Has Never Been a Better Time to Reach Out to China, Article by Vivan Sharan in The Wire, 3 April

http://thewire.in/2016/04/03/there-has-never-been-a-better-time-to-reach-out-to-china-27238/

The Indian economy is facing some serious challenges on the external front. It relies heavily on ‘external demand’, evidenced by the fact that slowing global economic growth has resulted in fifteen consecutive months of export contraction in the country. This is despite the fact that India’s trade with emerging and developing countries has been growing faster than its trade with developed economies. The IMF estimates that the aggregate growth in emerging and developing economies would work out to around four per cent in 2015, the lowest since the financial crisis.

There is growing suspicion among analysts that this subdued growth, along with the slowdown in the commodities cycle, represents a ‘new normal’. In such circumstances, it can be argued that there has never been a better time for India to reach out to China. There are at least three arguments to support this premise.

First, Chinese growth is expected to slow to around 6.3% in 2016 and 6.0% in 2017 (IMF). This in turn has two critical implications: the slowdown in China’s trade and investments will continue to be a significant drag on the global economy and commodity prices, and Chinese businesses and policymakers will be forced to look for unconventional solutions to their economic woes. A few years ago, when Chinese policymakers first realized that this slowdown was on the cards, their economic strategy began to evolve rapidly. From a strong focus on the external economy, Chinese policymakers began to focus on the ‘domestic demand’ narrative. However, this has not quite managed to pull the country out of the docks. Excess production capacity remains a challenge for almost all manufacturing industries in the country.

Meanwhile, the Indian consumption demand is perhaps the only story worth telling in the context of its faltering economy. Industrial growth is nothing to write home about, and the pace of real GDP growth is a source of worry to many who observe the economy closely. Of course the fact that consumption is growing from a low base helps. It is no surprise then that India remains a hotspot for venture capital and private equity deals in consumer driven businesses ranging from ecommerce to transport solutions. And this growing consumer demands presents a ready market for China. This is a bargaining chip for India with no parallel. It is time for Indian policymakers and businesses to also think out of the box and strike lucrative deals with China.

Second, the corruption crackdown led by Xi Jinping is unprecedented in its scale and impact. With hundreds of thousands of officials under investigation, the businesses running through their patronage are also under the scanner. Consequently, many Chinese elite are busy liquidating assets, from private jets to factories and buildings. The corruption crackdown will not last forever. Xi Jinping has used this as an opportunity to control opposition within the Communist Party, and not necessarily to revisit structural flaws in the functioning of the state. However, while it lasts, there are opportunities aplenty for Indian businesses to acquire Chinese assets across the world. The key would be to assess the value proposition correctly.

Third, the downward spiral of the commodity cycle has led to a sharp reduction in investments in the extractives sector in China. The spillover effect of this is being felt by many of the state owned enterprises (SOEs) that are focused on resource extraction. A key incentive for large investments by Chinese SOEs in geographies such as Africa has been the large natural resources that can be secured for the State. Now that the value of natural resources is being rebalanced through a ‘new’ cycle of demand and supply, many SOEs will have to look to diversify their business interests abroad. Moreover, many such SOEs are saddled with large cash reserves that will depreciate over time.

This need to diversify can be leveraged by Indian industry, particularly the infrastructure sector. Infrastructure companies in India are over-leveraged and have been the primary contributors to the non-performing assets (NPAs) in the banking sector. Stressed assets on banks’ books are estimated at Rs. 4,00,000 crore. Which in turn has resulted in a liquidity crisis in the infrastructure sector. The large NPAs owe their origins to pervasive crony capitalism and poorly managed companies that grew rapidly in the years following the liberalization of the Indian economy. Given this liquidity constraint in the Indian banking industry, the timing is optimal for select well-managed Indian firms to raise funds from Chinese SOEs, and solicit their participation in building critical infrastructure assets.

It goes without saying that some of what has been suggested here comes with its own set of challenges, philosophical and real. The philosophical challenges relate to how the Indian state views its relationship with China. This is bound to change over time. Those who have grown up and earned their stripes in the post-liberalization era would not tend to think of China as the ‘enemy’, or the national border issues as something that should impact business ties. However the point is that India has often missed the bus in terms of timing its economic moves in the past. It cannot afford to overlook an enhanced commercial engagement with China, even as it courts the United States, Japan, South Korea and other partners from beyond its neighbourhood.  

The real challenges relate to the trust deficit that businesses from both countries need to work on. Chinese businesses do not trust Indian conditions – while they are happy to pay fixed sums of money  ‘to get things done’, the fact that nothing seems to be time bound in India is deeply concerning to the Chinese businessman. Conversely, Chinese service standards are infamous in India. Anecdotes of Chinese equipment failure, operational opacity and the lack of a service ethic are fairly commonplace. The way around these issues is to ‘partner’ in every sense of the word. The two countries must begin to do business on equal terms, with equal stakes and with a clear sense of their shared future. And there are enough mid-sized, professionally-run companies that can benefit from this relationship on both sides, as long as their governments let them.

Vivan Sharan is Partner at Koan Advisory Group

Three Structural Challenges that the Budget Hopes to Overcome: Article by Vivan Sharan in The Wire, 29 March

http://thewire.in/2016/02/29/the-three-structural-challenges-that-the-budget-hopes-to-overcome-23137/

It is a strange time for the observers of the Indian economy. Some commentators seem to place a great deal of hope in the future while others are worried that the headwinds of the global economy will inevitably overwhelm us. This is a rather stark conceptual binary. Clear answers are further obfuscated by three structural challenges that are highlighted here along with the salient features of the Union Budget announced today.

It worth pointing out that the finance minister (FM) himself did not succumb to the aforementioned binary. He began his speech by lauding India’s resilience to a weak global economy and simultaneously cautioned against a continuing unfavourable external environment. This was a good hedge as the FM would be acutely aware that the even though India’s growth rate at constant prices is projected to increase to 7.6 per cent in 2015-16, real GDP growth is beginning to converge with nominal GDP growth. This is largely owing to the fact that wholesale price inflation (WPI), the index for producer’s prices, has collapsed to negative territory. Banks are still lending at over 10 per cent despite this. Moreover the convergence of the two GDPs means that the government’s balance sheet liabilities cannot be financed by assumptions of an expanding base.

In the face of new liabilities accruing from one rank one pension (OROP) and the seventh pay commission recommendations, sticking to the deficit target of 3.5 per cent in 2016-17 will prove difficult, especially given that public spending seems to be a primary driver of growth today. This is the first structural challenge. The FM was candid about the fact that some experts wanted him to expand spending to resuscitate the investment cycle and others wanted him to continue to be fiscally prudent. He decided in favour of the latter, which is perhaps the wiser option given that governments are bad resource allocators in general, and concomitantly the quality of spending should be the primary focus rather than quantity.

Second, another vexing challenge relates to the pace and pattern of manufacturing sector growth in the country. The ‘Make in India’ initiative is expected to generate growth and jobs. And the industrial production (IIP) shows that production in the sector grew by a healthy 3.1 per cent during April-December 2015, as compared to 1.8 per cent in the corresponding period in 2014. However, growth in credit to the sector was a subdued 2.5 per cent in in the same period as compared 13.2 per cent in the corresponding period in 2014. This does not bode well for the investment cycle.

Holes in the strategy

And, despite the ‘fiery’ Make in India thrust, the service sector contribution to growth continues to prove that there is something amiss in this strategy. The service sector’s share in the economy has increased by four percentage points from 49 to 53 per cent in 2015-16 and it contributed to about 69 per cent of the total economic growth between 2011-12 and 2015-16. Moreover nearly half of the tax revenues of the country come from corporate tax and service tax receipts. Yet, the FM has decided to add another cess (Krishi Kalyan Cess of 0.5 per cent) to the service tax starting June 2016, and to reduce the corporate tax by only one per cent only for small companies with turnover less than INR five crores and 25 per cent for new manufacturing companies. The embedded logic seems to be that service sector competitiveness cannot be undermined by any of the burdens imposed by the state.

A third challenge is that of the exports sector which has been witnessing a sustained contraction owing to weak global demand. The new Economic Survey has pointed out that every percentage point decrease in the global growth rate is now associated with a 0.42 percentage point decrease in India’s growth, compared with 0.2 percentage point decrease between 1991-2002T. The Budget has not made any attempt to address the export slowdown, despite the fact that the Economic Survey has highlighted that the contraction in India’s export, in services industries in particular, is cause for “alarm”.

Ignored areas

Despite the potential for focused interventions in service industries such as tourism, manufacturing sector exports command all of government attention. Yet, even in terms of manufacturing, one of India’s strangest structural binaries lies exposed. On the one hand, a large share of the manufacturing exports contraction is due to lower value of petroleum exports. On the other, the Government has more than capitalised on the opportunity to tax domestic sales. The central excise duty collection from petroleum products has resulted in revenues to the tune of Rs. 1.3 lakh crores this fiscal (up till December 2015) as against Rs. 0.7 lakh crores in the same period the previous year. The question therefore arises: what happens if oil prices begin to recover? While this would be good for exports, does the government have a backup plan for fiscal consolidation?

Thankfully, this year’s speech was not littered with tall promises based on a gamut of Rs. 100 crore schemes which seem to have gone nowhere. The FM’s call to put a sunset clause on all new schemes, along with a review of outcomes, is a leading contender for timely governance reform that could put an end to budgets such as last year’s.  Other good moves include the much needed relook at the Fiscal Responsibility and Budget Management (FRBM) Act, as well as the promised statutory backing to the Aadhar platform for targeting beneficiaries of subsidies. The unwavering focus on roads and ports, as well as electrification too may yield some benefits in the medium term. In fact Nitin Gadkari and Piyush Goyal were the only two ministers chosen for praise by the FM in his speech. Conversely, some would say this indicates limited bench strength.

There are also some contenders for initiatives that are most likely to fail. There has been a severe contraction in lending by scheduled commercial banks to the ‘food sector’, with -4.1 per cent year on year decrease in 2014-15. Despite this, the FM promises to deliver Rs. 9 lakh crore by way of farm credit in the next fiscal. Similarly, the FM proposes to set up 1500 ‘Muti Skill Training Institutes’ with just Rs. 1700 crores. That’s just over Rs. 1.13 crores per institute – seemingly unviable from the outset, but it would be great to be proved wrong. In the end, what stood out was that the government has now pivoted to being more circumspect and social sector oriented. In the run up to this Budget, the finance ministry had asked Indian Twitter users’ opinions to determine the focus of the Budget. Perhaps better perspectives can be garnered from the ground next time, partly by enhancing the feedback loop with Panchayati Raj Institutions. One can hope that the massive grant in aid promised to Gram Panchayats (Rs. 80 lakhs on average) can help with this instead of being squandered in return for well-timed political mileage.  

Vivan Sharan is a Partner at the Koan Advisory Group

Road map for a Future Ready Naval Force - By Rahul Prakash, Koan Advisory

With the advent of nanotechnology, robotics, directed energy technology among others, there has been a paradigm shift in capabilities of naval forces in the 21st century. 

Navies of the future are likely to make use of lasers, electromagnetic railguns, unmanned vehicles, space assets, stealth technologies, and information-centric combat systems. Allocation of budgets and build-up of manpower resources are going to be critical variables that will determine adoption of these technologies. Cost benefit, long-term sustainability, maintenance requirements and inter-operability will also have a bearing on technology development and adoption in the future. 

This background note was used as a curtain raiser for the ‘Make in India Paradigm: Road map for a Future Ready Naval Force’ event in collaboration with FICCI. The note provides a snapshot of modern day technologies and trends that offer a glimpse into the future of naval capabilities. 

For the full report: http://www.ficci.in/study-page.asp?spid=20920&sectorid=9

Vivan Sharan on "No Country for Start-Ups Yet", BusinessWorld, 06 February 2016

http://businessworld.in/article/No-Country-For-Start-Ups-Yet-/06-02-2016-90917/

The Government of India's "Action Plan" for catalysing a start-up ecosystem feels incomplete and somewhat amorphous. PM Modi's commendable vision of "starting-up" India is premised on the ability of start-ups to capitalise on the so-called "demographic dividend" and also leverage the large domestic markets for their services and products. Of course the PM's thrust for creating this ecosystem must also derive from a desire to reduce the state's own disproportionate burden of job creation. With one million people joining the workforce every month and only a handful of formal jobs to go around, start-ups are seen as a panacea for all that ails the Indian economy.

There is much scope for improvement in the approach taken thus far starting with how the Government procures services from the private sector. In order to promote a start-up ecosystem the Government must first fundamentally reorganise its procurement policies (admittedly there is some lip service to this effect in the Action Plan). In doing so it would recognise two facts - that start-ups have the potential to disrupt existing service providers through new technology, processes and dynamism, and that government departments are among the largest potential clients and beneficiaries of an emerging start-up ecosystem.

There are limited avenues for start-ups to engage directly with government, and all of them are circumscribed by an anachronistic set of regulations called the General Financial Rules (GFR). A voluminous set of regulations, the GFR has limited provisions that allow for purely merit based selection of service providers. The Ministry of Finance wields the rules on any hint of deviation, even if some procurement may actually be in the larger public interest (something it may not itself be optimally set-up to assess).

Some state governments have taken progressive steps to overcome the limitations of the GFR variety. States like Rajasthan have a procurement process called "Swiss Challenge" to promote innovative interventions in service delivery and infrastructure creation. Rajasthan's Swiss Challenge Guidelines are laid down in an amendment made to the Rajasthan Transparency in Public Procurement Rules, 2012. This method of procurement allows for the private sector to suggest innovative projects to the State, which in turn can form the basis for a public tender on which the propositional entity has first right of refusal. This method exists in a few advanced economies and the objective is generally to allow for non-government stakeholders to address service delivery and infrastructure creation/maintenance challenges through innovative means and viable economics.

However, the Swiss Challenge method also has its inherent biases. For a state like Rajasthan, small businesses are the backbone of the economy. Yet, the rules do not allow for firms with less than three years of audited balance sheets and less than Rs 50 crores in value, to take part. The rules show a clear bias towards infrastructure projects rather than service delivery. In fact this logic of attempting to harness the private sector for picking up the slack for the public sector's ability to create infrastructure is ubiquitous. A few years ago, the erstwhile Planning Commission estimated that India needs $1 trillion every five years, in the medium to long run, to invest in infrastructure creation; about half of this would have to come from the private sector. Perhaps the preponderance on public-private partnerships as a development model stems from the hope that the private sector can somehow plug all the fiscal holes in government planning. It does not seem emanate from some inherent appreciation of the private sector's delivery styles or efficiencies.

A central proposition that the state and central governments must begin to contend with is that unless the bureaucracy can begin to cultivate a modicum of empathy for private sector stakeholders, hoping for start-ups to invigorate job creation is unreasonable. The legacy of colonial rule has unfortunately not left government thinking - and while some would contest this, the continued resistance to allowing lateral entry of experts in decision making roles is indicative of this systemic challenge. Perhaps it is time for democracy to play its role and for the parliament to legislate its way out of the imminent impasse that limited governance capacity will result in.

Hard pressed for expertise in all spheres - ranging from diplomacy to technology and defence, government processes must now allow for the strategic involvement of domain experts and private sector professionals and firms. Of course this is easier said than done with an underlying trust deficit in engagement with partners outside the conventional government fold.

Raghav Priyadarshi and Vivan Sharan meet with His Holiness the Gyalwang Drukpa to discuss development initiatives in the Northern Gangetic Plains, January 2016

Raghav Priyadarshi and Vivan Sharan in a discussion with 'Global Youth India" on "Youth Social Service and Crowdfunding", February 2016

Vivan Sharan on "AN ODD PLAN WITH EVEN FAILINGS", The Pioneer, 08 December

http://www.dailypioneer.com/columnists/oped/an-odd-plan-with-even-failings.html

The Arvind Kejriwal Government should have given a more serious thought to the ‘odd-even’ plan of having private vehicles on Delhi’s roads before announcing its implementation. The idea suffers from structural deficiencies

Delhi’s air pollution has once again hit record levels this winter. On Friday December 4, Chief Minister Arvind Kejriwal decided to announce that vehicles with odd and even number plates will only be allowed to ply on alternative days, starting January next year. While Mr Kejriwal has conceded that this measure may need to be re-looked at, once implemented over a short duration, policymakers like him must begin to develop a habit of carefully assessing the robustness of their policies lest the city suffers another Bus Rapid Transit type of disaster. 

According to a 2015 Environment Pollution (Prevention and Control) Authority for NCR report, pollution in the city is at its peak when trucks are allowed in. Heavy-duty trucks (three axle and above) account for 61 per cent of the particulate matter load and 58 per cent of the nitrogen oxide load of all commercial vehicles entering the city. An official survey of such vehicles entering the city found that “40-60 per cent of heavy trucks were not destined for Delhi”. Yet the report draws the strange conclusion, which has since been accepted and implemented without a pre-feasibility check — that an additional MCD tax should be levied on trucks.

Let’s examine this by principles first. An additional tax on trucks equals stressing an already over-taxed industry. Indian businesses are trying to remain competitive despite poor connectivity and infrastructure. The journey between Beijing and Shanghai on an average takes half of what it takes to travel between Delhi to Mumbai by road, even though the distances are similar. Is the lack of infrastructure not a heavy enough price for businesses to pay? Instead of expediting arterial infrastructure, successive Governments have made hollow promises. Prime Minister Narendra Modi has at least managed to lay the foundation stone this November for the Western Expressway (Kundli, Manesar and Palwal,) that in conjunction with the Eastern Expressway (work yet to begin) will help re-route heavy vehicles. Of course, it remains to be seen how the pot-holes in planning and execution will be covered.

Another example is the directive to curb burning of garbage in Delhi. What is ironic about this curb is that the massive landfills across the city are ground zero for such activity — even though the Government itself is not accountable, it expects homeless people on the streets to be. Whether in the form of waste to energy or otherwise, technological solutions for large-scale waste management exist, but are currently too expensive to implement. Indians get paid for waste disposal by their local kabadiwalas. In stark contrast, waste disposal is a service which accounts for a meaningful share of household expenses in the West. This does not mean that policymakers should further increase the service tax cess for Swachch Bharat Abhiyan— a tax that does not even accrue to municipal authorities such as the bankrupt Municipal Corporation of Delhi! Rather, a systematic financial strategy to raise money  has to be devised.

In its latest regulation on private vehicles, the Delhi Government seems to have once again favoured a tactical and probabilistic approach. India’s is a story of growing middle class consumption. This is what it boasts of when brandishing its ‘emerging country’ avatar. Yet, the Delhi Government has decided to tax the aspirations of its middle class — the very drivers of the country’s growth. To be clear, the imposition of the policy will not curb the consumption patterns of the upper middle class or the elite — or for that matter most of whom read this paper. It will however, delay a ‘better life’ for most of the young legions of workers that aspire to travel in some comfort. It is such aspirations that they derive motivation from. They will now continue to endure an over-crowded and non-dependable public transportation and the dangerous summer heat.

And, it must be pointed out that comparisons on the utilisation of public transport with cities like New York or London, do not make sense. These cities have relatively stable populations and near seamless point-to-point connectivity. Where is the long-term thinking in Delhi’s planning?

There are some additional questions that should be plaguing us, but do not. Has anyone from the Delhi Government actually studied the success of similar prohibitions in places like Beijing and Paris? Where is the synthesis report if such an analysis was indeed carried out? Delhi Metro is already overcrowded in peak hours. What will happen when the millions of Indians who are currently unemployed, begin to find jobs in cities like Delhi? Or is there some viable plan to create economic hubs outside of the NCR with abundant skilled talent and infrastructure?

Who will compensate businesses for the inevitable inefficiencies arising out of the logistical nightmare that is point-to-point connectivity? Should not the State regime have consulted the lead implementation agency, Delhi Police, before announcing the odd-even “trial run”?