Do it yourself

Wednesday, January 29, 2020

Indian railways on the slippery tracks

Earlier this month, the National Institution for Transforming India (NITI Aayog) issued a discussion paper on Private Participation in Passenger Trains (see here). The discussion paper proposes engagement of private players for running passenger trains on 100 train routes. The routes proposed include some of the most popular routes from Delhi, Mumbai, Patna, Chennai, Hyderabad and Kolkata.

The objectives of the proposal to engage private operators for running passenger train are stated as follows:

Introduction of modern technology rolling stock with reduced maintenance
Significantly Reduce Transit Time
World Class Service – Improved User Experience
Capacity Augmentation
Reduce Supply Demand Deficit

I would not like to delve into the mundane issue of whether this proposal is a tacit admission by the Indian Railway that it is not possible for it to provide global standard services in the present format.

I want to raise a rather meaningful and certainly relevant issue.

With over 1.3million employees, Indian Railways is one of the largest civilian employers in the world. With an annual budget of over Rs2trn, it plays a significant role in the Indian economy.

As per the latest data released by the CAG, Indian Railways could be one of the most inefficient rail operators in the world with an operating ratio of 98.44% in FY18. This implies that Indian Railways spends Rs98.44 for every Rs100 of revenue it earns. Excluding the advances received from NTPC and IRCON, the operating ratio for FY18 would be 102.66%, implying operating loss in operations of Indian Railways.

The primary argument behind the privatization of passenger services in my view may be to relieve the Railways from the burden of huge subsidy it provides for carrying appx 8.5bn passengers every year. As per the CAG report, almost 95% of the profits from freight haulage services was utilized towards the loss on operation of passenger and other coaching services.

Besides, the share of internal resources in total capital expenditure also fell to 3.01% in FY18, resulting in higher dependence on the gross budgetary support and extra budgetary resources for capital expenditure. The growth and modernization plans of Railways is obviously suffering.

Keeping the current conditions of the Railways in mind, the points to ponder are as follows:

(a) Once the dedicated rail freight corridors and Sagarmala (sea route for non export cargo movement) projects are completed the share of Indian Railways in freight movement may come down.

(b) Development of highways shall continue to challenge the Railways dominance in the freight movement business.

(c) GST has changed the trade paradigm in the country. There are high chances that henceforth most large projects will be set up close to raw material sources minimizing the movement of bulk materials like coal, iron ore etc.

(d) Engagement of private operators in the passenger freight business may not result in any meaningful reduction in fixed off track (administrative) costs of Indian Railways.

This would essentially mean that the Indian Railways shall be treading on the same path as the public telecom operators (MTNL & BSNL), public air carrier (Air India), Public Power Equipment Manufacturer (BHEL), and Public Coal Producer (Coal India) have treaded in past 2 decades.

With the inbuilt operating inefficiencies and largely inflexible cost structure, running the Indian Railways as a business venture may no longer be viable.

Tuesday, January 28, 2020

India Energy Policy Review

In a recently published report "India 2020 - Energy Policy Review", the International Energy Agency (IEA) highly appreciated the efforts of Indian government in achieving energy efficiency, energy security and sustainability, and robust data and policy governance. IEA also made significant recommendations for further enhancing the efforts and achieving greater results. The recommendations assume further significance as these could have material impact on the investments in the Indian energy sector.

The key points highlighted in the report could be listed as follows:

India vital for future of global energy market

With a population of 1.4 billion and one of the world’s fastest-growing major economies, India will be vital for the future of the global energy markets. The Government of India has made impressive progress in recent years in increasing citizens’ access to electricity and clean cooking. It has also successfully implemented a range of energy market reforms and carried out a huge amount of renewable electricity deployment, notably in solar energy.

Progress towards affordable, secure and cleaner energy

Around 750 million people in India gained access to electricity between 2000 and 2019, reflecting strong and effective policy implementation. The IEA highly commends the Government of India for this outstanding result and supports its efforts to shift the focus towards reaching isolated areas and ensuring round-the-clock reliability of electricity supply.

The government of India has also made significant progress in reducing the use of traditional biomass in cooking, the chief cause of indoor air pollution that particularly affects women and children.

Energy security improving

India’s electricity security has improved markedly through the creation of a single national power system and major investments in thermal and renewable capacity. India’s power system is currently experiencing a major shift to higher shares of variable renewable energy, which is making system integration and flexibility priority issues. The Government of India has supported greater interconnections across the country and now requires the existing coal fleet to operate more flexibly. It is also promoting affordable battery storage.

India’s coal supply has increased rapidly since the early 2000s, and coal continues to be the largest domestic source of energy supply and electricity generation. Amid more stringent air pollution regulations, new coal power plants that are more efficient, flexible and relatively lower in emissions will be better positioned for their economic viability. By contrast, old and inefficient plants, which require expensive retrofits to comply with environmental standards, are in a difficult position.

The government aims to increase the share of natural gas in the country’s energy mix to 15% by 2030, from 6% today. The role of gas has grown in India’s residential and transport sectors but fallen in power generation, where imported natural gas remains squeezed by cheap renewables and coal.

Reforms to achieve greater energy efficiency

The creation of functioning energy markets will ensure economic efficiency in the management of the coal, gas and power sectors, which is critical to achieving energy security and supporting the country’s economic growth. This will be increasingly important in the future, as energy demand and investment needs increase in line with India’s economic expansion.

Reform of India’s electricity sector will need to be comprehensive to achieve these goals. A country-wide wholesale market is very much needed as a backbone for the national grid.

India also faces the challenge of ensuring the financial health of its power sector which is dealing with surplus capacity, lower utilization of coal and natural gas plants, and increasing shares of variable renewable energy.

Sustainability

India has made important progress towards meeting the United Nations Sustainable Development Goals, notably Goal 7 on delivering energy access. Both the energy and emission intensities of India’s gross domestic product (GDP) have decreased by more than 20% over the past decade. This represents commendable progress even as total energyrelated carbon dioxide (CO2) emissions continue to rise. India’s per capita emissions today are 1.6 tonnes of CO2, well below the global average of 4.4 tonnes, while its share of global total CO2 emissions is some 6.4%.

Energy data and policy governance

Good quality and timely energy data are vital for monitoring, reviewing progress and enforcing the implementation of energy policies. The government has identified the critical importance of energy data and is taking action to improve their collection and dissemination.

Key recommendations

Establish permanent energy policy co-ordination in the central government, with an overarching national energy policy framework to support the development of a secure, sustainable and affordable energy system.
Continue to encourage investment in India’s energy sector by

(i) Ensuring full non-discriminatory access to energy transport networks

(ii) Working with the states to implement power sector and tariff policy reforms with a focus on smooth integration of variable renewable energy and power system flexibility

(iii) Moving from government allocation of energy supplies to allocation by market pricing

(iv) Further rationalising subsidies and cross-subsidies.

Prioritise actions to foster greater energy security by:

(i) Reinforcing oil emergency response measures with larger dedicated emergency stocks and improved procedures, including demand-restraint action and proper analysis of risks by using oil disruption scenarios and capitalising on international engagement

(ii) Strengthening the resilience of India’s energy infrastructure, based on a robust analysis of the water–energy nexus and cooling demand, notably when planning future investment.

Improve the collection, consistency, transparency and availability of energy data across the energy system at central and state government levels.
Adopt a co-ordinated cross-government strategy for energy RDo&D, which enables impact-oriented measurement and dissemination of results.
Ensure India’s international energy collaboration continues to be strong and mutually beneficial, highlighting the country’s energy successes and supporting continued opportunities to learn from international best practices.

You can read the full report here.

Friday, January 24, 2020

Market and economy are moving in tandem

In the discussions about the present market conditions and likely emerging scenarios in next few months with some seasoned investors and money managers earlier this week, an cliché but still interesting point was raised. A large majority of the participants felt that the equity markets have diverged a long way from the real economy in past couple of years; and this is matter of grave concern since this kind of divergences in the past have not ended in a pleasant market scenario.

I however was on the side of small minority which felt that the market movement in the past two years has actually been in total congruence with the conditions in the real economy; and that is a cause of even more serious concern.

In past couple of years while the overall economic growth has slipped, a comparatively smaller section of the economy has done extremely well. The number of billionaires in India has risen at a faster pace. The number of Unicorns (start ups ventures valued more than a billion USD) have risen rapidly. The sale of luxury vehicles has sustained while the sale of entry level vehicles, two wheelers and commercial vehicles has collapsed. The salary of CEOs has recorded rise of high two digits while the salary of lower level workers has stagnated or even fallen. The wealth of top 1% has recorded sharp jump while the bottom 70% have hardly grown. The air travel has recorded much higher growth than railway and road transport passengers. The telecom ARPU has recorded increase after many years.

Similarly, if we analyze the price performance of the companies traded on the National Stock Exchange (NSE) during the two year period from 1 January 2018 to 31 December 2019, we get a very similar picture.

~50% of the companies have lost between 50.1% and 99.4% of their value in past two years. These companies include some really large names likes Reliance Infra (-95%), Reliance Power (-94%), Jain Irrigation (-94%), Jet Airways (-97%), DHFL (-97%), Reliance Communication (-98%), Yes Bank (-85%).
~36% of the companies have lost between 0.1% and 50% of their value in past two years.
Only 9% companies have gained between 0.1% and 50% in value during past two years.
Just 5% companies have gained over 50% in value during past two years, with just 1.5% gaining more than 100% in value.

While on one hand more than 75% of the population has suffered some sort of stress in the past two year, 86% of the companies traded on stock exchanges have given negative return.

Thursday, January 23, 2020

Unemployment ...before it become unmanageable

Two piece of information regarding the employment condition in the country came to my notice yesterday. The first piece was encouraging. The latest data released by the Employees State Insurance Corporation says "A whopping 19.6 lakh new employees were added to the payroll of Indian companies in November 2019. This is the second highest monthly addition of new employees in the formal sector after 19.86 lacs addition in July 2019.

The second piece of information was rather disturbing. As per the latest release of the Centre for Monitoring Indian Economy (CMIE), the employment rate in the country rose to 7.5% during September - December 2019 period. Reportedly, this is the highest rate of unemployment in 45 years. The unemployment has recorded consistent increase since 2017 (post demonetization).

As per the CMIE data release:

(a) The unemployment in the urban areas is at 9%, much higher than the rural areas and the national average.

This could be due to two factors: (i) lower economic activity in the industrial sector; and (ii) high incidence of disguised employment and under employment in the rural areas.

(b) The unemployment rate in the urban youth, especially educated one, is very high. While youngsters in the age group of 20-24 years reported an unemployment rate of 37%, graduates among them reported a much higher unemployment rate of over 60%. The average unemployment rate for graduates during 2019 was 63.4%. This trend is alarming but correlates well with the multiple waves of urban youth unrest in the country during past few years.

This trend may be interpreted in the following three ways:

(i) Not enough quality jobs are being created in the formal sector. Most of the new jobs that are being created are low paying and do not require technical or professional skills.

(ii) The quality of education is deteriorating faster. More and more grduates passing out of colleges are actually unemployable.

(iii) The economic growth is becoming much less employment intensive due to higher use of technology.

In whichever way we interpret the data, the fact can no longer be denied that unemployment of youth is perhaps the most serious socio-economic challenge India faces presently; and it needs to be addressed before the things become unmanageable.

In my view, urgency of the problem must be understood from the following three dimensions.

1. A large part of the fabled India story is built upon the "demographic dividend". Unless the youth of the country could be employed productively, this dividend could not be exploited. In two decades, India shall begin to grow old. Unless we exploit this demographic divided today and create enough wealth for the future, it will be very tough for Indian economy to sustain even marginal rate of growth in 2040s and 2050s.

2. Being the home of the largest number of youth population in the world, it is fiduciary responsibility of India to nurture, protect and grow this invaluable resource as a trustee of humanity.

3. Persistent unemployment of youth could potentially push our youth towards crime and drugs and turn our nation into a land of uber chaos, much worse than what we have seen in many Latin American countries.

Wednesday, January 22, 2020

A 180 degree turn - - from saviour to a threat

A decade ago, the global economy slipped into a deep abyss, contracting by more than 2.5% in 2009, as compared with a over 4% growth recorded during 2004-2007 period and a still positive growth of over 2% recorded in 2008. The extent of the slowdown could be gauged from the fact that over 100 countries (including 33 developed countries) all across the world recorded contraction in GDP during 2009.

The global financial markets had frozen; large banks were collapsing; some European and Latin American countries were on the verge of defaulting on their sovereign obligations and needed to bailed out by IMF.

Amongst all this chaos a group of four developing countries Brazil, Russia, India and China (BRIC) emerged as the savior. These countries recorded sharp growth recovery in 2010 and saved the global economy from slithering into a deeper recession, which many feared could have been much worse than the great depression of 1930s.

A decade later, all four BRIC countries are struggling with the growth. As per the latest growth statistics Brazil, India and China are all growing at a pace much less than 2010. The global institutions that lauded these economies for being engine of global growth in 2009-10, are now holding emerging economies, especially India, responsible for pulling down the global growth.

IMF on Monday downgraded its growth estimates for India for next 2 years. As per IMF, Indian economy is now expected to grow by 4.8% in 2019; 5.8% in 2020 and 6.5% in 2021. These estimates are subject to fiscal and monetary stimulus by the government and subdued oil prices due to lower global demand growth.

Accordingly, the global growth would reach 3.3% in 2020, compared to 2.9% in 2019, which would be the slowest pace of recovery since the financial crisis a decade ago. This slow recovery in global growth in 2020 is highly contingent upon improved growth outcomes for stressed economies like Argentina, Iran, and Turkey and for underperforming emerging and developing economies such as Brazil, India, and Mexico.

The International Monetary Fund's (IMF) Chief Economist Gita Gopinath reportedly told media in Davos that "We’ve had a significant downward revision for India, over a 100 basis point for each of these years. It’s probably the most important factor for the overall global downgrade of 0.1 percent."

I have no doubts whatsoever that India and China which together house close to 3bn people, would certainly regain the economic momentum and become the engine of global growth again. But it would be foolish on my part to admit that the next couple of years are going to be extremely challenging, especially for India.

In view of the popular demands from the government in the forthcoming budget, Ms. Gopinath cautioned that the government must take steps keeping the fiscal room in mind. She said, “In the case of India, it is important that the fiscal targets are met, at least from a medium-term perspective. It is also important that when spending is done, it’s done on public investment as opposed to consumption spending.”

Ms. Gopinath cited that the poor credit growth, which is a direct fall out of the NBFC crisis, is one of primary reasons for below par economic growth. She highlighted that "In terms of the major issues to deal with, it’s the weakness in credit growth. How do you get credit growth back up while making sure at the same time that there will not be a second round of non-performing assets in the future? I think that’s the balance the government has to work towards."

Tuesday, January 21, 2020

Rising inequalities put question mark on sustainability of capitalism

Recently, the rights group Oxfam released a study titled "Time to Care", just ahead of the annual Meet-Greet-Eat-Retreat (MGER) event of the world's rich and powerful in Davos, the famous ski resort of Switzerland. The study once again highlights the burgeoning economic inequalities in the world and its potential impact on the global socio-economic conditions.

The report highlights that presently the personal wealth of 2153 global billionaires is more than the combined wealth of 4.6billion, which is about 60% of the planet's human population.

In Indian context, the conditions appear to be even worse. As per the report, the combined wealth of top 63 richest persons in India is more than the annual budget of the country, which was Rs24.42trn n FY19. The report further states that India's richest 1% people hold more than 4x the combined wealth of 953 million people who make up for the bottom 70% of the country's population.

The statistics are staggering by any standard.

Within overall parameters of the economic inequality, the gender inequality is even more alarming. As per the report, it would take a female domestic worker 22,277 years to earn what a top CEO of a technology company makes in one year.

The report further states, that women and girls put in 3.26 billion hours of unpaid care work each and every day -- a contribution to the Indian economy of at least Rs 19 lakh crore a year, which is 20 times the entire education budget of India in 2019 (Rs 93,000 crore).

The report suggests that even a meager 2% (of GDP) direct public investments in the care economy could potentially create 11 million new jobs. The women who are forced to "take care" of the household spend billions of hours cooking, cleaning and caring for children and the elderly. They get little time for education, skill building to be able to earn a decent living or have a say in how our societies are run, and who are therefore trapped at the bottom of the economy.

Another study presented by Edelman, highlighted that this unsustainable skew in global wealth and income, may be fast eroding the confidence in the system of capitalism itself.

The rise of socialism on both sides of the Atlantic may just be a harbinger of this trend.

Back home, the rise in the cases of civic unrest in past few years needs to be viewed from this angle also. The Patidar agitation in Gujarat, the farmers' protest in Maharashtra, the tribal protests in central India, the student protests across the country over a variety of issues may have one underline theme, i.e., economic stress and poor visibility of livelihood and growth.

In my view, it would be completely wrong to assume that the recent student's protests are merely to oppose recent amendment in the Citizenship law, or proposed population enumeration exercises.

The fact is that a common Indian youth is disillusioned, totally frustrated and deeply distressed.

First, the education they are getting is very expensive and mostly sub-standard.

Second, the employability quotient of youth graduated from most of the universities is abysmal.

Third, there are not enough job opportunities even for those who are competent. The conditions are truly pathetic beneath the facade of elite IIMs, IITs and ISBs.

Dismissing the protests merely as anti BJP propaganda would be monumental blunder on the part of the administration and the entire political establishment.