Demand Vs Supply Economics. Steps the government should take immediately

 Over last several months, several reforms have been rolled out by the NDA government. Most of these are supply side mesaures and top 3 of them are:

1. Reduction in corporate tax.

2. 20Tn Rs Atmanirbhar package - mostly in form of credit.

3. Farm Bills - Freedom to farmers to sell produce out of APMC.

However, these measures will only help when there are proportionate reforms on the Demand side. The middle class which is the highest contributor to direct and indirect taxes needs sufficient cash in hand or incentives to spend. The government should do the following in the least effective immediately:

1. Slash personal income tax by half across all brackets or double the brackets with same rates(the former option being better).

2. Incentivize the middle class to spend on the items having higher GST rates and provide them tax exemption on the GST paid.

3. The business class gets tax benefits on purchase of cars via depreciation benefits. The government should pass on these benefits to the salaried class. This will give huge boost to the collection of compensation cess and GST along with the direct and indirect jobs the auto industry would create.

Learning too much from the past?

Decision making is a very important aspect in all spheres of our life; be it business, academics, profession, personal life etc. Given the nature of Indian society, our decisions naturally get altered based on our surroundings, upbringing and more importantly our past experience.

I read the below article in my favorite news paper The Hindu Businessline, which succinctly describes all these factors which we consider in the decision making process. The crux of the article is, while it is good to have rich experience in framing a decision, it is equally important to focus on the process. Time, people and situations change. We must learn from the past and alter the process based on the current environment. I always believe, in any life game, the rules or the processes which added value to you or to the society a few years ago might not necessarily add value now. Therefore, it is necessary to learn our lessons hard and correct ourself.

Since, I keep a lot of interest in politics, I hope Modiji our PM reads this article and understands that whatever worked in past might not necessarily work in future.

Here's the article from the hindu businessline.

What worked in the past may not work in the future unless we focus on the process.

We rely on the weight of experience to make judgments and decisions. We interpret the past – what we’ve seen and what we’ve been told – to chart a course for the future, secure in the wisdom of our insights. After all, didn’t our ability to make sense of what we’ve been through get us where we are now? It’s reasonable that we go back to the same well to make new decisions.

It could also be a mistake.

Experience seems like a reliable guide, yet sometimes it fools us instead of making us wiser.

The problem is that we view the past through numerous filters that distort our perceptions. As a result, our interpretations of experience are biased, and the judgments and decisions we base on those interpretations can be misguided.

If our goal is to improve decision-making, we can use our knowledge of those filters to understand just what our experience has to teach us and learn how to overcome our biases.

We focus on what we can see

In the business environment, the outcomes of decisions are highly visible, readily available for us to observe and judge. But the details of the decision process, which we can control far more than the result, typically don’t catch our attention. If the aim is to learn from experience – mistakes as well as successes – acknowledging that process is crucial.

Circle of advisers

Honest feedback – an unbiased, undistorted assessment of one’s experience – is essential for improving decisions. Yet decision makers are often surrounded by individuals who have incentives to feed them censored and self-serving information – and these people are not necessarily a crowd of yes-men.

Overvaluing experience

We can’t place all the blame for our distorted view of the world on the environment and our inner circle. Some of the blame lies with us. We tend to search for and use evidence that confirms our beliefs and hypotheses, and we gloss over or ignore information that contradicts them – an exercise of selectively building and interpreting experience known as the confirmation bias.

How not to be fooled

The following techniques can uncover the real lessons experience offers and help you base decisions on a clearer view of the world.

Sample failure: Failures and the processes that lead to them are doomed to stay in the dark unless special occasions are created to bring them to light. To identify what could be done better in the future, companies can also conduct decision post-mortems to analyse underlying processes.

Don’t miss near misses: Another oft-ignored event is the near miss – a failure that’s disguised as a success, but only because there are generally no dire consequences.

Pursue prevention: Recognising a potential problem requires a different approach than solving an actual problem. One strategy is to harness employees’ collective talents by allowing people to raise concerns about the firm’s operations. Disagree: As Peter Drucker wrote, “The first rule in decision making is that one does not make a decision unless there is disagreement.” To devise healthy strategies, executives need to hear many perspectives.

Disconfirm: Rather than finding clues that corroborate your hunch – all too easy in an information-rich world – start by asking yourself how you could know you were, in fact, wrong.

Source:  Experience is not always wisdom

The PPP way to growth

While big-ticket reforms are held up, let’s address infra concerns

Again a goodread from The Hindu's Businessline, an excellent newspaper for policy making articles.

That the Narendra Modi government ran into a wall of Opposition in Parliament in trying to push reform legislation in coal and insurance is unfortunate Even so, ordinances cannot institutionalise a new model of governance; at best, they may only signal to a restive industry that the Centre means business and buy some time to cobble up a consensus in Parliament. But even if such a consensus on amending laws on land acquisition, labour, mining and the financial sector takes time in coming, there are enough areas where supply side constraints can be eased without breaking into so much as a sweat. One of these is allowing for renegotiation in new PPP projects, if not in existing ones. The 3P India initiative, announced by Finance Minister Arun Jaitley in the Budget, marks a salutary attempt to address “weaknesses of the PPP framework, the rigidities in contractual arrangements, the need to develop more nuanced models of contracting, and speedy dispute redressal”. This process needs to be cranked up for the over 900 PPP infrastructure projects in the fray, involving a credit exposure of nearly ₹9 trillion.

In this context, the recent RBI circular extending the so-called 5:25 scheme to existing infrastructure projects is to be welcomed. These projects can now get finance over 25 years, with the banks being allowed to refinance or sell out their loans every five years. This is a way out of the stressed assets logjam that has frozen up both the supply and demand for credit. The growth of bank credit to infrastructure sectors fell from 45 per cent in 2011-12 to 18 per cent in 2013-14 and has been trending downward since. Banks cannot lend beyond a tenure of 10 to 12 years due to their asset profile, and this impacts both the viability of the loan and the costing/pricing of projects such as roads and metros, among others. The India Infrastructure Finance Company, set up in 2006 to overcome the asset-liability mismatch, does not seem to have made enough headway.

However, as the Finance Minister observed, finance is only one of the problems weighing down PPPs. Contracts need to be renegotiated when macroeconomic shocks overturn earlier assumptions. To ward off allegations of crony capitalism or litigation from bidders who lose out in the first stage, it is important to create a credible institutional mechanism. This is precisely what 3P India should set out to do, besides thinking up innovative financial instruments and concession agreements. It could ease up exit conditions, so that promoters can use the freed up capital for other projects. Pricing should combine public purpose considerations with those of risk and efficiency. Pushing big ticket reforms is no cakewalk in a raucous polity such as ours. Yet, a robust PPP framework can make a difference in cranking up investment and growth.

New subsidy regime | The HinduBusinessline opinion, a good read

The Centre has adopted a pragmatic approach to cooking gas subsidies

The reintroduction of the direct benefits transfer scheme for the supply of cooking gas, after its withdrawal in March this year, is a welcome signal that subsidy targeting is back on the policy agenda. Unlike its UPA avatar, cash transfers will now be based on LPG consumers providing their bank account numbers, rather than Aadhaar numbers, to distributors. The change in approach is a way of addressing the Supreme Court ruling in March prohibiting Aadhaar from being made compulsory in the implementation of welfare schemes. The Centre has also drawn up a scheme to make an advance deposit in bank accounts in an apparent bid to offset the hardship of coughing up the market rate that poorer customers may face while making their first purchase under the new scheme. Those without a unique identification number may switch to Aadhaar-based bank accounts once enrolled. The modified DBT scheme is a further indication that the Modi government will use Aadhaar as a vehicle for the delivery of benefits and subsidies. Already, 60 per cent of the population has an Aadhaar number and, hopefully, it is only a matter of time that such things as LPG distribution and other welfare programmes become UID-driven. The reservations expressed by the Home Ministry about a full roll-out of Aadhaar have been thankfully overcome.

The reasons for this pragmatism are not far to seek. Through better targeting, Aadhaar-based transfers can reduce subsidies by about ₹50,000 crore (about 20 per cent of the overall subsidy bill) without hurting the poor and needy. Of this, the saving on LPG subsidy, which ran up a bill of over ₹46,000 crore last year, could be between ₹6,500 and ₹10,000 crore. The LPG savings will result from bogus consumers being weeded out, a cap on the subsidy amount (most LPG users are middle-class and above, anyway) and conservation efforts, leading to lower imports. It is estimated that a quarter of the LPG connections in Karnataka and a fifth in Andhra Pradesh are bogus. The first round of DBT brought down the diversion of subsidised cylinders for commercial purposes: subsidised cylinders accounted for about three-fourth of total LPG usage last year, against four-fifths in 2011-12.

However, this is only the beginning. It is necessary to promote the shift away from inefficient cooking fuels such as firewood to LPG in rural areas. To this end, the subsidy should be gradually diverted from the well-to-do sections, who account for at least 60 per cent of all LPG users. The Jan Dhan scheme and post office network can come in handy. Above all, it is necessary to have foolproof systems. Consumers’ reservations over sharing their bank account number with their distributors — pointed out by the Dhande committee report on LPG reforms this May — should be addressed. The stakeholders should come up with credible solutions. We cannot afford a second derailment of DBT.

Source: TheHinduBusinessLine

All you wanted to know about Shale Oil

In an unexpected stroke of good luck for you, me and the country, the price of crude oil has fallen from $115 a barrel in June all the way down to $84. This has meant cheaper petrol and diesel, and a lower subsidy bill for the Government. One big factor responsible for this price fall is the unexpected increase in oil produced from shale in the US.

What is it?

Shale oil is essentially crude oil but an unconventional one at that. While the conventional fuel is usually found in porous rocks such as sandstone, shale oil is trapped in shale rock formations that are not easily permeable and hence is tougher to tap. So though its existence has been known for long, shale oil wasn’t being extracted in large quantities.

But technological advancements — horizontal drilling and fracturing (fracking) — introduced and honed since the early part of the century have enabled shale oil exploration and production on an industrial scale.

Most of the action in shale oil so far has been in the US where explorers have struck copious quantities of the black gold. It has not been smooth sailing though. Environmentalists and local communities have been up in arms against the pollution caused to land and water bodies by the chemicals used in the fracking process.

Nevertheless, shale oil produced in the country has grown by leaps and bounds over the years. So the dependence of the US — the largest oil consumer in the world — on imported crude oil has fallen sharply. And this has added to the weakness of global crude oil price in recent months.

Conventional crude oil producers such as Saudi Arabia have been cutting prices to maintain their market share and to drive some of the high cost shale oil producers out of action.

But whether this will have the desired effect remains to be seen — technological improvements are expected to push down the cost of shale oil production.

Also, while Saudi Arabia might have the financial muscle to sustain low prices for quite some time, other conventional producers such as Venezuela and Nigeria may likely find it difficult to hold out.

Why is it important?

Shale oil has the potential to be a massive game-changer in global energy supply and pricing — with enormous geopolitical implications. It’s not just the US; countries such as Russia, China and Argentina are also believed to have vast stores of shale oil. India too is taking baby steps to find and explore its shale assets potential.

Progress in other nations has been quite slow so far. But there’s no saying when the inflection point will be reached. If production continues to expand, countries such as the US could start exporting oil in a few years.

Why should I care?

For starters, more shale oil means lower petrol and diesel prices. So you spend less on travel.

Cheaper crude oil also reduces India’s current account deficit and subsidy bill and will also give a boost to the country’s GDP — that means more and better-paying jobs, and more profitable businesses. But shale oil production in India in the future could also mean more environmental challenges. So the right trade-off needs to be made.

Source: BusinessLine

Labor Reforms....

The Prime Minister’s assault on red tape can make a real difference

The much awaited labour reforms necessary for mass manufacturing in India were initiated by Prime Minister Modi on October 15. Any efforts to rationalise labour rules, around 250 of them at the Central and State levels, is a welcome step for industry.

The two key areas of reform are ‘unified labour and industrial portal’ and ‘labour inspection scheme’. Introduction of the labour identification number (LIN) and putting inspection on a unified portal will help bring transparency in the use of labour rules.

The Prime Minister’s efforts to raise the minimum wage ceiling from ₹6,500 to ₹15,000 and to ensure EPF and the pension scheme for vulnerable groups are also laudable.

Overall it’s the first big step that’s been taken at the Central level to reform one of the most complicated issues in the post-reforms era. However, much more needs to be done to put together a system that is not biased against either employers or employees.

Further, the system should create an environment for productive employment with reasonable safety nets.

It’s been well established that China’s flexible and business friendly labour laws have ensured continued investments in Chinese manufacturing, unlike in India where restrictive labour laws have been a cause of concern for investors. Though the Indian labour force has been much more disciplined and cooperative in the post-reforms period leading to a decrease in the number of strikes, lockouts, mandays lost and so on, the large number of labour rules and the process of enforcement by inspectors scares investors, at least on paper.

Restrictive approach

India’s labour laws are restrictive in nature and hurt investments in the manufacturing sector. The Industrial Disputes Act (1947) has rigid provisions such as compulsory and prior government approval in the case of layoffs, retrenchment and closure of industrial establishments employing more than 100 workers. This clause applies even when there is a good reason to shut shop, or worker productivity is seriously low.

The Contract Labour (Regulation and Abolition) Act (1970) states that if the job content or nature of work of employees needs to be changed, 21 days’ notice must be given. The changes also require the consent of the employees, and this can be tricky.

While the right of workers to associate is important, the Trade Union Act (1926) provides for the creation of trade unions where even outsiders can be office-bearers. This hurts investor faith and restricts economic growth.

Rigid labour laws discourage firms from trying to introduce new technology, requiring some workers to be retrenched. This deters FDI because of the fear that it would not be possible to dismiss unproductive workers or to downsize during a downturn. Hence getting FDI into export-oriented labour-intensive sectors in India has not been fully achieved.

In contrast, China has succeeded in attracting FDI to export-oriented labour-intensive manufacturing, in part because of flexible labour laws such as the contract labour system implemented in 1995. Whereas in India, employers have taken to hiring workers on contract outside the institutional and legislative ambit, resulting in informalisation of the labour market. This hampers worker well-being.

Reforms initiatives

To undo the malady in India’s labour market, some changes have recently been initiated in the three acts that largely govern India’s labour market: the Factories Act (1948), the Labour Laws Act (1988) and the Apprenticeship Act (1961). Amendments to some restrictive provisions of all these acts have been cleared by the Cabinet and are set to be tabled in Parliament. Key changes proposed include dropping the punitive clause that calls for the imprisonment of company directors who fail to implement the Apprenticeship Act of 1961.

The Government is also going to do away with a proposed amendment to the Act that would mandate employers to absorb at least half of its apprentices in regular jobs.

In order to provide flexibility to managers and employers, the amendment to the Factories Act includes doubling the provision of overtime from 50 hours a quarter to 100 hours in some cases and from 75 hours to 125 hours in others involving work of public interest. This is seen by some as being anti-labour as it imposes greater working hours without ensuring their security and welfare.

However, the penalty for violating the Act has been increased so as to deter exploitation. Increasing the working hours might also have to do with low worker productivity in India.

However, even as productivity issues should be addressed in part by bringing in quality FDI, it is important that maximum-hour protection is strictly enforced so as to prevent worker exploitation.

The norms for the employment of women in certain industry segments have been relaxed. The number of days that an employee needs to work to be eligible for benefits like leave with pay has been reduced to 90 from 240.

The amendments to Labour Laws Act, 1988 meanwhile, will allow companies to hire more people without having to fulfil weighty labour law requirements as it is proposed that companies with 10-40 employees will be exempt from having to furnish and file returns on various aspects. This will help avoid procedural delays, a feature of doing business in India.

Rajasthan shows the way

With the finance minister encouraging States to bring in appropriate labour reforms, Rajasthan has gone the Chinese way. Henceforth, it will be easier for firms there to adopt hire and fire policies. The Rajasthan government’s labour reforms are manifold. For one, industrial establishments employing up to 300 workers are now allowed to retrench employees without seeking the prior permission of the Government.

In addition, the threshold of the number of employees required for the purpose of applicability of the Factories Act has been increased from 10 to 20 (in electricity-powered factories) and from 20 to 40 (in factories without power). This is expected to reduce bureaucratic delays.

Finally, membership of 30 per cent of the total workforce needs to be recorded for a union to obtain recognition, up from 15 per cent, a move that will halt productivity losses out of politically motivated petty strikes.

The reality is that manufacturing has to grow to absorb millions of semi-skilled young Indians, a difficult task without rationalising labour reforms. Overall, it seems Modi is on the right track.

Source: BusinessLine

Solarizing the nation is the only way forward

This article is in continuation to my blog on policy making. Here I am listing a few goodreads about how the government is going ahead on solar policy. As I had mentioned earlier, India has the potential of about 400-700GW of solar energy. But a decent target of 50GW over 10 years can make wonders in this sector. On the one hand it is good idea to augment the solar capacity in India, but we need to keep in mind that most of the solar panels are imported, thereby adding to our import bill and a soaring CAD. India needs to substantially invest in R&D as far as solar energy is concerned, because this does not include any natural resource constraint. A lot of research is going on in the world on solar energy and India should take lead here in providing latest technologies and not just be a the receiving end. Its is my firm belief that a solarizing revolution can take us on the path of energy security in years to come. Below are a few reads which should convince us that the government is serious about it and is taking some steps.

Welcome push to solar

Small rooftop solar plants to create 3.25 lakh jobs in 10 years

Ministry targets 1 lakh MW from renewables in 5 years

Sun shines on solar stocks as Govt promises PSU order

Interlinking rivers in India

The articles which I am sharing are part of my Political and Economic thinking. I came across an article in The Hindu Business-line, the news paper which I follow exclusively for policy making literature.

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“Atalji's dream of linking rivers is our dream as well. This can strengthen the efforts of our hardworking farmers,” tweeted Narendra Modi soon after an election campaign speech in Bihar in April.

The river linking project, which the National Water Development Agency (NWDA) calls inter-basin transfer of water, is designed to ease water shortages in western and southern India, while mitigating the impact of recurrent floods in the eastern parts of the Ganga basin.

“One of the most effective ways to increase the irrigation potential to improve foodgrain production, mitigate floods and droughts and reduce regional imbalances in the availability of water is the Inter Basin Water Transfer from surplus rivers to deficit areas. The Brahmaputra and the Ganga, particularly their northern tributaries; the Mahanadi, the Godavari, and the west-flowing rivers originating from the Western Ghats are found to be surplus in water resources,” NWDA says on its Website.

At its completion, the country will have 30 river links, 3,000 storage structures, a canal network stretching almost 15,000 km and can generate 34 GW of hydroelectric power, create some 87 million acres of irrigated land, and transfer 174 trillion litres of water a year. The initial cost of the project is estimated to be at ₹5.6 lakh crore, while around 580,000 people face the threat of displacement.

The plan

Under the National Perspective Plan (NPP) prepared by the Ministry of Water Resources, the NWDA has identified 14 links under the Himalayan Component and 16 links under the Peninsular Rivers Component. Out of these, feasibility reports for 14 links under the Peninsular Component and two links under the Himalayan Component have been prepared.

According to the NPP, the Himalayan Rivers Development Project envisages construction of storage reservoirs on the main Ganga and the Brahmaputra and their principal tributaries in India and Nepal, along with an inter-linking canal system to transfer surplus flow of the eastern tributaries of the Ganga to the West. It will also link the main Brahmaputra with the Ganga.

The Peninsular Rivers Development Component is divided into four major parts: interlinking of Mahanadi-Godavari-Krishna-Cauvery rivers and building storages at potential sites in these basins, interlinking West-flowing rivers north of Mumbai and south of the Tapi, interlinking of Ken-Chambal, and diversion of other West-flowing rivers. 

Bringing States on board

To implement the project successfully, the Government will have to convince States to come on board, as water is a State subject.

Andhra Pradesh, Chhattisgarh, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Odisha, Puducherry, Rajasthan, Tamil Nadu and Uttar Pradesh are the major States to benefit from the project. Several States have supported the plan, while some others have raised concerns. Chief Ministers of both Andhra Pradesh and Tamil Nadu have been urging the Centre to take up the 14 links under the peninsular component. Kerala, however, is worried about the proposed Pamba-Achankovil-Vaippar link.

The first steps

One of the initial tasks before the Government is to address the Supreme Court verdict of February 2014 on the interlinking of rivers. The court had directed the Government to create an appropriate body to plan, construct, and implement the massive project, starting with the Ken-Betwa link.

The two phases of the Ken-Betwa link project, involving Madhya Pradesh and Uttar Pradesh, are estimated to cost ₹11,676 crore. A detailed project report for both the phases has been submitted to the two State Governments. According to this report, a total of 11,723 ha of land could be submerged if this project is executed. This includes more than 5,000 ha of forest land belonging to the Panna Tiger Reserve. It will also affect 10,163 people belonging to 2,529 families in 22 villages.

“Together, both the phases of the Ken-Betwa Link project envisage 7.35 lakh ha of irrigation, 78 MW of hydropower and would provide drinking water to 15.07 lakh people,” said S Masood Husain, Director-General, NWDA. Other priority links are Parbati-Kalisindh-Chambal, Damanganga-Pinjal, Par-Tapi-Narmada, and Godavari (Polavaram)-Krishna (Vijayawada).

Of these, the detailed report for the Damanganga-Pinjal link is ready with the Centre. The report has already been submitted to the Governments of Maharashtra and Gujarat. “If implemented, this project can address Mumbai’s water problem to a great extent at least till 2040,” Husain added.

The downside to linking

However, the projects have already invited criticism from various political parties. In fact, those who were evicted for the construction of the Bhakra and the Pong dams, two of the oldest in India, have still not been fully rehabilitated.

“Environmentalists, hydrologists and economists around the world have expressed deep concerns at the irreversible damage that this sort of a mega project can do to the country’s environment and our water resources. Massive civil works will be involved, lakhs of people will be uprooted and vast sums of money will be required,” Congress leader and MP Karan Singh said.

The CPI (M) has also questioned the move. The party’s MP KN Balagopal said the Central Government’s plan is politically-motivated, giving the example of theParambikkulam-Aliayar project (in Kerala).” Farmers of Palakkad district have to hold protests during the crop season to get water from the project released. The proposed Pamba-Achankovil-Vaippar link will be a disaster for a riparian zone like Kerala, he says.

Failed attempts

The Government defends the project, saying the idea of river-linking is not new in India. In 1972, then Union Irrigation Minister KL Rao mooted the first major proposal to interlink the water basins. The 2,640-km-long Ganga-Cauvery link was the main component in the proposal. But Rao’s estimate of ₹12,500 crore was considered “grossly under-estimated and economically prohibitive.” In 1977, during the Moraji Desai Government, Captain Dinshaw J Dastur, an engineer, proposed the construction of two canals – the first for the Himalayan rivers and the second to cover the central and southern parts. A host of experts opined that his project was infeasible.

However, both the Government and the NWDA are now confident of implementing the project at the national level. The NWDA lists a number of initiatives such as the Periyar Project, the Parambikulam-Aliyar, Kurnool-Cudappah Canal, the Telugu Ganga Project, and the Ravi-Beas-Sutlej-Indira Gandhi Nahar Project as examples of successful execution of river linking.

“If we can build storage reservoirs on these (surplus) rivers and connect them to other parts of the country, regional imbalances could be reduced significantly and lot of benefits by way of additional irrigation, domestic and industrial water supply, hydropower generation, and navigational facilities would accrue,” it adds.