Vijay Kumar Gaba

Thursday, July 12, 2018

If you find it tough, well it is!

Thought for the day

"The world's been pretty good at coming up with new ways of doing things."

—James Mirrlees (Scottish, 1936-)

Word for the day

Solecism (n)

A breach of good manners or etiquette.

Any error, impropriety, or inconsistency

Malice towards none

Honestly, with hand on your heart, "Did you bet for France in FIFA finals"?

First random thought this morning

Past four weeks have been overwhelming for Indian sports lovers. Soccer, tennis, badminton, cricket, hockey, gymnastic etc have seen major events. India earned some glory in cricket, hockey and gymnastic.

Nonetheless, millions of people have remained busy following numerous sporting events. People have been opening newspapers from backside. New soccer stars have become household names, while TV channels have remained submerged in Mumbai floods, Burari suicides, and rapes.

No one is discussing or highlighting any economic distress or failing monsoon. All seems well and stock market continues to rise.

If you find it tough, well it is!

At the risk of sounding irritatingly repetitive, I would like to reiterate that in past 7 decades we have focused too much on our weaknesses and tried hard to overcome these by importing technology, energy, intellectual property, capital, and consumption patterns. The root cause of many economic problems, e.g., current account deficit, fiscal deficit, energy deficiency, excessive dependence on external IPR & capital flows, etc. could be traced to this misplaced focus.

In my view, just by focusing on our intrinsic strengths, we can not only conveniently reverse the flow of trade to pre British era but also be successful in achieving our secular goals of sustainable and faster economic growth.

I have been suggesting that implementing the programs like the few illustrated below, we could improve the balance of payment substantially and structurally:

(a) Indians spend approx USD25bn annually on education and related overseas travel. Creating 5 Special Education Zones (SEZ) with liberal VISA, forex, taxation and real estate ownership rules, and allowing foreign institutions to freely set up campuses could potentially reverse this flow. Students from India, far-east, middle-east and Africa who find it difficult to get VISA for US/UK etc. or find that expensive could also benefit from this. Our politicians have often spoken about recreating Nalanda and Takshila. This in my view is the easiest way to do that.

(b) It is common knowledge that India holds tremendous potential for tourism. However lack of proper infrastructure and a holistic approach to harness the potential has traditionally constricted the growth of this sector. On the other hand Indian outbound tourists flow is rising. The government and hospitality sector entrepreneurs will have to think really big to reverse these flows and bring India on world tourism map. Developing some world class self contained international tourism centers, e.g., on lines of Macau, Bangkok, Dubai, Santorini, Las Vegas, etc. with liberal VISA, forex, taxation and real estate ownership could be the first step in this direction.

(c) Vindavan, Tirupati, Varanasi, Gaya, etc. all have potential to be as desirable, venerable and popular destinations as Mecca, Vatican and Jerusalem.

Converting these centers of Indian religion and culture into self contained special zones with international airport, adequate number of high star category hotels, and annual event calendar could add substantially to India's external sector.

For example, Vrindavan can have two annual events Holi and Janamashtmi, when more than half million foreign tourist can visit the holy town

(d) Considering the worsening demographic profile of rich countries in Europe and Japan, the rising need for healthcare assistants can be hardly emphasized more. Opening one world class nurse training institute in each state with special emphasis on teaching foreign languages to the trainees, may do the same wonders as ITeS did in last two decades.

(e) Operating special incentive schemes for building global consumer brands may help in substantially enhancing the value of Indian exports. The government, for example, consider providing special incentives (tax rebates, promotion through government campaigns, etc.) for all locally developed consumer brands that are able to achieve more than US$500mn in merchandise sale in a year.

These projects also have the potential to generate large scale productive employment opportunity for local talent, besides contributing to economic growth and true globalization of Indian economy.

I acknowledge some of these suggestions may sound extremely difficult to implement in the current socio-political narrative. But then who said running a government in India is an easy task!

Wednesday, July 11, 2018

Budget tourists and assembly lines

Thought for the day

"Encourage your own curiosity; pursue the problems based on that."

—James Mirrlees (Scottish, 1936-)

Word for the day

Makebate (n)

A person who causes contention or discord.

Malice towards none

Why can't BJP just accept that AK is CM of Delhi and cooperate with him to improve life of the people living in Delhi!

First random thought this morning

Adi Godrej group is reportedly opposing the proposed acquisition of their Vikhroli land for Mumbai-Ahmadabad bullet train project.

So far the opposition to the ambitious project had come from farmers and opposition parties. This is the first instance an industrialist (that too someone who always sounded highly impressed by PM Modi) has opposed the pet project of the prime minister. This may signifies either of the following:

(a) Industrialists want everything but wouldn't give away even a small piece of land lying vacant for 100years for the development of the country. or

(b) Government has totally failed in convincing people about the need, necessity and importance of Bullet train project.

Budget tourists and assembly lines

The primary idea behind the activity of trading is to let everyone do whatever they can do best.

"Trade" thus allows the people use their scarce resources in most efficient way and exchange the output of their expertise with the output of others' expertise. Trade renders every one better off, as it facilitates the most efficient exploitation of scarce resources and enables production of goods and services at lowest feasible rates.

In an ideal world, the objectives of "Trade" are hence achieved when:

(a) All owners of resources, producers of goods and services, and consumers of such goods and services are allowed to freely trade with each other; and

(b) Everyone produces as per their specialization and everyone consumes as per their affordability.

If trade is restricted, optimum exploitation of resources would not be possible, and people will be forced to do things beyond their domain of expertise. This results in (a) irrational pricing of resources, goods and services; (b) economic imbalances; and (c) dissipation of scarce resources.

The erstwhile Soviet Block, which restricted trade with the western world, is a classic example of this phenomenon. India and China also followed largely restrictive trade policies till 1980s and suffered slower growth, poverty, and high inflation. Opening of Indian and Chinese economy may have significantly helped in containing global inflation through cheaper labor and resources.

Similarly, if people are allowed to consume more than what they can economically afford, the demand-price equilibrium of goods and services will get distorted leading to (a) abnormal pricing of resources; (b) avoidable wastage of resources; (c) poor sustainability; (d) frequent financial crisis; and (e) socio-economic inequalities.

The sub-prime crisis that rattled the global economy a decade ago is a classical example of this "eating more than you can digest" phenomenon.

I also see consumption of fossil fuel by Indians as a reflection of consuming beyond affordability. Had successive Indian governments since independence, focused on harnessing the abundantly available solar, wind, and hydel sources of energy, rather than over relying on imports of fossil fuels, the trajectory of Indian economic development could have been very different.

Similarly, constricting free trade in agri produce and making the farmers dependent on subsidies and loan waivers etc. is another trade distortion that may have seriously hindered India's position in global trade, besides introducing serious discrepancies (almost irreparable now due to political compulsions) in the socio-economic structure of the country.

The short point I would like to make is that to increase its share in global trade to a respectable level (say 5%) from the current ~2%, India needs to focus on its core strengths and expertise.

If someone asks me "what are the 10 key strengths of India" in socio-economic context, I would list the following:

Food
Languages
Religion & Mythology
Spiritual knowledge
Traditional arts
History & culture
Variety of beautiful landscapes
Hard working people with better than average IQ
Abundant sunshine and water flowing through rivers
Second largest pool of arable land

As a minister for trade and commerce, I would therefore focus on these strengths to increase my share in global trade, rather than simply importing crude oil and exporting petroleum products; or importing raw diamonds and bullion and making jewelry as per the specification and designs provided by foreign buyers; or providing a base to foreign manufacturers for assembling mobile phones or motor vehicles from mostly imported parts; or worst be contended with small number of low budget foreign tourists!

Tuesday, July 10, 2018

High street or flea market

Thought for the day

When things begin to go bad, the perception of people makes it worse.

—James Mirrlees (Scottish, 1936-)

Word for the day

Ullage (n)

The amount by which the contents fall short of filling a container, as a cask or bottle.

The quantity of wine, liquor, or the like, remaining in a container that has lost part of its contents by evaporation, leakage, or use.

Malice towards none

If the government can convince that "nominal growth" is the "real growth", and raise inflation to 6%, we will definitely have sustainable double digit growth.

First random thought this morning

While 24X7 news channels are scaring people by showing images of furious floods across the country, the official IMD data indicates that about 50% of country has received normal rains so far this season. The rest of the areas are either dry or inundated. As the monsoon progress has slowed considerably, last week, only about one third of the country received normal rainfall, while another one third was mostly dry.

The statistics however tells that the rainfall so far has only been 7% less than the long term average.

How does one decide if monsoon is good, normal or poor?

High street or flea market

In past many decades, cheaper labor has been at the core of Indian exports competitiveness. The traditional engine of Indian export growth, e.g., textile, gems and jewelry, ITeS, banking services, CRAMs, etc. have all been mostly running primarily on the fuel of wage rate arbitrage.

Though it would be foolish to deny the specialized skills and expertise of various businesses, but I must say that the primary driver of export growth has been the availability of abundant skilled labor at much cheaper rates.

Engineering exports, especially automotive sector exports, could be marked as exception. Perhaps because the development and growth of this sector has been primarily driven by companies from developed countries, especially Japan and Germany, known for manufacturing prowess and process orientation. These foreign OEMs have successfully introduced best practices, processes and work culture in their Indian operations, besides investing in local enterprises to make them competitive enough to become their global partners. Otherwise, consider the following:

(a) How many Indian brands do you find in top 100 global apparels brands? How many Indian textile designers are known globally? Though a number of Indian textile manufacturers like Arvind Mills, figure in the list top 100 textile producers of the world.

(b) How many Indian jewelry designers are there in top 100 globally? Though, India is one of the largest manufacturers of jewelry products in the world.

(c) India is widely considered as the IT powerhouse of the world. How many Indian IT products and innovations could you recall?

(d) We have a fledgling CRAM industry that does research function for almost all renowned global pharmaceutical innovators, on contract basis. But how many "New Drugs" have been innovated by Indian companies in past seven decades?

(e) Indian bankers and technology professionals manage operations (both front desk and back end), of global banking giants. But how many Indian banks figure in top 50 global banks list?

(f) Despite being surrounded by hostile neighbors ever since independence, India is still one of the largest importers of arms and ammunitions. We figure nowhere in the global list of arms suppliers.

The point I am trying to make is that innovation, advanced technology, branding, niche marketing and high value addition has been mostly missing from the Indian export enterprise. We have either been a low cost, faceless contract manufacturer for the rich of the world or a flea market selling spurious goods to the poor of the world. This needs to change, and change fast, if we need to turn trade balance positive on sustainable basis....to continue

Friday, July 6, 2018

Focus on strengths

Thought for the day

"Shadow owes its birth to light."

—John Gay (American, 1685-1732)

Word for the day

Debonair (adj)

Courteous, gracious, and having a sophisticated charm.

Malice towards none

While in Delhi, Congress leaders, especially P. Chidambaram, are clamoring for reduction in taxes on fuel, their government in Karnataka has announced 2% hike in tax rates for petrol and diesel.

First random thought this morning

Tata Nano was once hailed as revolution by many. It was celebrated as the best example of Indian Jugaad (low cost innovative solution); and marketed as most affordable mobility solution for rising middle class of India.

After a massive controversy was raised in West Bengal, the original location for Nano's production, the plant was shifted to Gujarat near Ahemdabad. The then Gujarat government marketed it as harbinger of its business friendliness.

In June 2018, Tata Motor produced just one (and perhaps the last) unit of Nano. Management experts will perform the autopsy to find out what went wrong and management students will be taught how not to do things.

Focus on strengths

As I mentioned yesterday (see here), the government has been repeatedly stating that increase the domestic production of energy and electronic products to substitute import.

The government has placed significant focus on renewable sources of energy, especially solar, and incentive for producing electronics products within the country under Make in India program.

There have been some notable achievements in these areas in recent years. For example consider the following:

FDI grew 4.4 times in Electronics & IT sector- from $2.77 billion (2011-14) to $12.24 billion (2014-17)
1.9 lakh crore of electronics products manufactured indigenously in 2014-15.
Highest ever wind power capacity addition of 3,300 MW in 2015-16.
140% increase in solar power capacity addition during 2014-16 as compared to 2012-14.
34 solar parks of aggregate capacity of 20,000 MW sanctioned for 21 states.
31,472 solar water pumps installed in 2015-16, highest ever since 1991.

I believe that “roof top solar panel” has the potential greater than what has been seen in the mobile telephoney in past 15years. The government has been giving decent cash subsidies for installation of solar panels and roof top solar is gaining momentum in many states, but still it is not being done on mission mode. This needs to be transformed into a peoples' movement to accelerate the outcome.

A change in housing policy to mandatory accommodate the solar panels in all new building designs, especially in affordable housing projects, may help to great effect in my view.

Reducing energy intensity of water and developing a world class public transport infrastructure on priority basis, especially in tier II and III cities, and strict legal enforcement of energy efficiency are two other steps that are urgently needed to reduce the reliance on energy import. (Also read here)

Insofar as increase in the production of electronic goods in India to substitute the import is concerned, I totally differ from the Make in India approach taken by the government.

So far whatever actual investment or planned investment in electronic production I have heard is mostly in assembly lines with low value add products like plastics sourced from India. The key components like semi conductors, micro processors, memory chips etc. are all still imported. With this practice, not much help could be expected on trade balance in my view.

Establishing highly capital intensive integrated manufacturing facilities for electronic products within the country may not be a good idea after all. Especially, when significant capacities are available globally to cater to the Indian demand,

If we consider the high and still worsening obsolescence rate in technology and need for heavy recurring investment in new technologies and upgrades, this becomes even more avoidable. Imagine, a US$20bn manufacturing business suddenly going out of business due to technology obsolescence!

The better idea would be let Indian entrepreneurs to lease manufacturing facilities in Asian countries, produce their and import into India.

The government should rather focus on, in partnership with industry, investing in development of new technologies. It should make provision for training of millions of young IT professionals, who can then serve the global industry and earn enough foreign exchange to pay for import of mobile phones and television sets.

The emphasis should be on building on our strengths (manpower) rather than wasting scarce resources on building vulnerable and redundant factories.

...to continue on Tuesday

Thursday, July 5, 2018

Managing trade balance

Thought for the day

"Those who in quarrels interpose, must often wipe a bloody nose."

—John Gay (American, 1685-1732)

Word for the day

Fizgig (n)

A type of firework that makes a loud hissing sound.

Malice towards none

Is Arun Jaitely batting for dilution of "Prevention of Corruption Act", or just suggesting some corrective amendments?

First random thought this morning

The world is anticipating serious trade disruption, that may potentially lead to a recession. It that does happen, emerging markets will be badly affected. In spite of whatever, NITI Aayog and other experts feel, India may not be insulated from a global contagion.

Domestic situation not looking great either. Fiscal management requires day to day monitoring. CAD is expanding. INR and yields conditions worsening.

Amidst all this, no one knows who is FM of the country. The Finance Ministry website says, its AJ whereas people believe its PGl!

Managing trade balance

India imported over US$444bn worth of goods in 2017, i.e., a per capita import of appx Rs24,000. This is about 22% of annual per capita income.

Exports from India during the same year totaled US$298bn. i.e. per capita exports of Rs16,000. This is about 14% of annual per capita income

In past more than one decade, the share of India in overall global trade has been mostly stagnant below 2.5%, a rather unacceptable number for the third largest global economy in PPP terms. Since 2011, exports have remained close to US$300bn, briefly falling to ~US$265bn during 2015 and 2016.

India imports ~58% of its requirements from Asian trade partners. EU at ~18% and North America at ~8% are other major trade partners of India.

Traditionally, energy and precious metals & diamonds constituted a dominant part of India's import basket. But in recent years, electronics (phones, TV, solar panels, & computer parts etc.) have become significant part of India's import basket.

As per a Bloomberg report (see here) "The relentless rise in purchases of smartphones, TVs and other goods have made electronics India’s second-biggest import item after oil, and is pushing the nation’s trade deficit wider.

There are five challenges before the government, in my view—

(a) To increase the domestic production of energy and electronic products to substitute import.

(b) To make Indian exports more competitive.

(d) To diversify trade to non-traditional areas.

(e) To maintain trade balance with most trade partners.

I would like to share my random thoughts of these five challenges in next few posts.