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”?