Wednesday, July 1, 2015

The slow, but surely changing face of Indian Railways

Indian Railways has come a long way and still has a long way to go. There has been a number of empty slogans and huge budget outlays since a decade to ensure cleanliness is maintained on the stations  and services are improved. However, most of them haven't taken off.  The number of aggressive measures by the Govt since last year offers some real hope.

One of my friends commented when Modi talked about "Golden Quadrilateral of bullet trains connecting India" that a bullet train won't solve a problem unless Railways improves its quality of service both inside and outside the trains. It is very true that we can't simply have bullet trains when Railways fail to provide some basic services or upgrade its quality drastically. At the same time bullet trains must be executed.

There is a perceptible change in which Railways has improved with respect to providing services in the last 1 year. There are several ones and I thought I should highlight some of them as they play an important role in understanding how they are changing for the better, This is a sincere start of providing tangible services to passengers for the first time since decades.

The expectation is so high from the current government that people are looking to see radical changes. For me the day the first bullet train starts in India is a whole new revolution in itself. No matter how many people have varied opinions the presence of bullet train will create gigantic changes in the economy.

1) Aggressive pace of introduction of bio toilets in Indian Railways:
In 2011 only 57 bio toilets were introduced and then it was 169, and 1337 in 2013-14. However, in 2015 the number has drastically jumped to 17,000. Another 17,000 will be installed this year. All newly built coaches do have this and DRDO's patent design is being used in the Railways. This is a very important initiative that is gaining momentum, According to several reports(source) the fitting of bio toilets has been saving Rs.350 crore annually on manually removing the waste and costs Rs. 3 lakh for fitting in a coach. This often is not even cleaned manually in a proper manner. The absence of bio toilets will surely make our tracks worse and stink beyond explanation.

These bio toilets convert the waste into gas form when cleaning. However, people can be insane and can throw bottles, cigarette butts in these and there should be proper awareness spread about it. The list of trains fitted with these ones are listed in the source here

2) Cleaning up New Delhi Railway Station with frequent cleaning by private players
Now even though it is still a long dream to see our train stations cleaned and maintained well, a start has begun in New Delhi Railway Station.

This link in Times of India contains pictures and more stats on how the station is being cleaned

Not sure how long this will be kept clean.

3) E catering of food on 76 trains in phase - 1:
Passengers can order food at or call the toll-free number 1800-1034-139 or 0120-4383892-99 to avail the facility. IRCTC has tied up with Pizza chain such as Dominos and MTR for providing different types of food to be delivered to the passenger fresh. Once the booking is made a one-time password is sent to the registered mobile number (required at the time of delivery). The food is delivered only between 6 am - 10 pm and payment can be made online or by card.  The website will list all the trains stations where food will be delivered and the types of food. 

In the event train reaches late or cancelled there is a small fees and the difference will be refunded. (Source)

4) Increasing the refund for Tatkal tickets and changing the window of the booking
The refund for Tatkal tickets has been increased to a maximum of 50%. Also, the window of booking for AC Classes is 10-11 am and non-AC is 11 am onwards. This dedicated booking slot is to ensure there is no overcrowding or surge in online booking.

5) To prevent agents making bulk reservations of tickets and then selling at a higher price - This was a bad practice and a loophole quite easily exploited by station agents and affected customers who could not get tickets from IRCTC website between 8 am -12 noon. If any such tickets are booked somehow and passengers have it then the agent and the passenger - both will be penalized.
Here's an interesting news item that explains how the agents are making black money affecting actual passengers whose tickets never get confirmed.

6) To use preloaded Ru-Pay Debit Card to make purchase on the website.

7) Book 120 days in advance as against the existing 60 days.

8) Cash on Delivery for tickets for those customers who are apprehensive of using their credit/debit cards online

9) SMS intimation on cancelled or delayed train status. Refer for more information such as PNR alerts, Train status, Availability, schedule etc

10) Operation 5 minutes - where a ticketless passenger can get a ticket within 5 minutes of boarding the train. There is no need for printing the ticket and the confirmation will be stored on the user's smartphone and cannot be cancelled once booked. This is in its pilot stages and will be available soon for all smartphone users

11) Enhancing IRTC website to handle more ticket bookings daily:
Currently, The website can handle only 1.2 lakh tickets/day. Now, it is increased to 4 lakh tickets/day. This is a phenomenal increase and has been achieved because of installation of new software and increasing the capacity of existing servers.

The problem is the speed of the trains we have is too slow. We are still in 18th century world where the speed of the train is still less than 80 km/hr for 99% of the trains. This speed is so slow and pathetic that we are easily centuries behind. The right step is to introduce more semi-high speed and high speed trains. One good initiative so far being taken is Delhi-Agra train. This can run at 160 km/hr and can reach Agra well within 1 hour 10 mins. However, there are 8 other paths where trains have been selected to run at that speed but there is no momentum in that direction.

Overall the direction is encouraging even if far from inspiring.

Monday, March 9, 2015

Understanding the debate about Land Acquisition Bill

The PM Modi has promised houses for all by 2022. Is there no government in the past that has not promised building homes for homeless? Every state and central governments be it headed by Congress or BJP or otherwise has promised this and the promise is far from reality. Every one knows it.

To build these houses one requires land. To build highways, expressways, bullet trains we need land. To kick start manufacturing we need land. The Land act that was being followed by the Govt until UPA's Land Acquisition Act of 2013 came in was the British version of 1894 Land Act. Even though this act was devilish in nature it is the one that has led to urbanization we have seen in 60 years. Had it been not for this act we would not have seen modern airports in Delhi, Mumbai, Bangalore and we would not have seen the beautiful Golden Quadrilateral national highway system. No one can argue that the benefits of these highways, ports and airports has reached different sects of life - laborers, real estate developers, construction companies, power companies, water companies, skilled labors involved and many more in the evolution and maintenance of such projects. Imagine if these projects had not taken place we would still be the land of the villages with only villages everywhere. There would not have been good roads and so the transportation boom would have never taken place. This sort of boom also enabled people to travel across country making life and communication easier. The farmers who are at the center of the storm called Land Acquistion Bill Amdendment of 2014 have also benefited. There are of course several projects where farmers did not benefit because land was taken forcibly both by private companies and the government gave inadequate or no compensation to all or most of them. This resulted in large violent protests in different parts of the country. Between 2004-2010 there were several cases of farmers losing their lands and not getting anything at all.

The UPA government in 2013 passed an act that all together changed the terms of compensation for the affected and restricted the usage of lands for several purposes. I had debated the pros and cons of this bill in the article listed here. The Act was Congress's only chance to capture power in 2014 and they went to market it to farmers telling them no land of theirs can be taken by anyone including the Government leave alone private companies.  The clause added was that 80% of land owners must agree to give up their land; then there would be a SOCIAL IMPACT STUDY and then the land would be given to the buyer. The compensation fixed was 4 times the market value in rural and 2 times in urban areas. While the act itself was good in intent it was flawed. In the name of social impact assessment no project was allowed to start from 2013 till now. The bill is right in terms of compensation because that was what farmers wanted and the act does satisfy it.

Social Impact Assessment merely means government will study who would be impacted by the land if acquired and then compensate everyone accordingly. This is ridiculous since there is no impartial way of doing this and this simply delays the process to years. Several buyers who wanted to acquire the land lost interest and walked away. The real way farmers are going to get value of their own lands is when a) either technology is improved on their agricultural lands b) The land value increases which means they get a very high compensation in return for giving up their land so they can lead a different life.  a) doesn't happen and b) will not happen unless there is a demand for that land and a transparent way of getting the land for the buyer.  The existing act makes the whole process 4-5 years which makes any project unviable (Source)

Well known economist Amartya Sen once said right after passing the act - "Even though the land may be very fertile, industrial production could generate many times more than the value of the product produced by agriculture. The locations of great industry, be it Manchester or Lancashire, these were all on heavily fertile land. Industry has always competed against agriculture because the shared land was convenient for industry for trade and transportation," (source)

It is true that India cannot be an agrarian economy because it can never lift people out of poverty. The poverty that was more than 50% in 1947 drastically reduced to 30% because of economic reforms. If we continued to be agrarian we would have not come even this far. All educated Indians never even think of agriculture. Very few do. Rest all move to industries. Can one explain why this happens? Industries pay higher and returns is more predictable and secure. In the case of agriculture if land is not  maintained or there are crop failures they are doomed. The sons and daughters of most farmers don't want their kids on the land but do something else. Take any fresh graduate. They will prefer hi tech companies, multi national companies, manufacturing companies, construction companies because these are the jobs that can give monetary satisfaction. 

Several state governments have written detailed letters to the PM asking him to help in starting several projects that have been stalled because of this act. Congress states themselves have written such letters (another source). Several politicians love the fact that the land acquisition has become tougher because several rural politicians are land lords with vested interests. The middlemen involved in Social impact study will make the study harder to pass.

The total list of stalled projects is over 100 and they are worth 10 lakh crore. With these many stalled projects no state government has been able to start any industry. All the highway projects that were announced in 2014 and 2015 haven't even taken off. There are several companies who want to start their own manufacturing units so they can create jobs but the existing law makes it impossible to get the land. Just today the economictimes published that projects worth Rs.90,000 crore related to power projects haven't been started because of unavailability of land. It is this scary situation that the Government is seeking to change.

So, what does NDA amendment (source of the exact clauses) to the act do?

1) It has retained all clauses of the bill except that the process of acquisition has been made fast if it involves acquiring land for purposes of housing, rural electrification, defence, highways and industrial corridors. Which means there is no way the process can take 5 years, but instead the compensation will be made quick and fast. 

2) Private educational institutes and private hospitals can be built by acquiring land but not private hotels.

3) The existing law states that if a project is not done within 5 years the unused land has to be given back to the owner. This existing clause has been now made been more specific - "a period specified for setting up of any project or for five years, whichever is later."

4) Instead of applying different formula the existing law has one while evaluating compensation, but now 13 acts are included in the amendment which implies the compensation rates will vary and will be higher if the land is acquired for the larger causes such as electrification, highways and defense related purposes. The farmers tend to benefit from this.

5) It also does away with Social Impact study if the projects are small and involves rural electrification, highways, defense, housing for the poor. This is required because if government has to build houses it needs land. The other day Delhi CM Kejriwal met Mr. Modi and asked his help in fulfilling the dream of housing for all since land ownership is under Center in Delhi. Apparently, the PM informed him that the numbers are not in his favor to modify the existing land act and that makes it impossible for giving any land to Kejriwal for fulfilling the dream (Source of these details). All political parties including the BJP are hypocratic on many aspects. I wondered if Kejriwal can be different, but he too has proved he is the same. It is nothing but hypocrisy on the part of Kejriwal that he decided to join Anna Hazare's protest against this bill. He should have supported the PM instead. Anna Hazare is blinded by the fact that farmers will prosper only if they remain farmers and India will grow only if it continues to be a hopeless agrarian economy. How long can you stop preventing farmer suicides if you don't give them a happy path to their lives? Industrialization is not the answer to farmer suicides but will surely help them if they are quickly compensated with a huge amount instead of giving them loan waivers or keeping them in debt cycles one after another. 

My Problems with the NDA Amendment:

The act has two problems according to me. First, it dilutes the act to the extent that even farm lands where agricultural output is very high can be taken for this purpose. If the existing land produces more output it should be allowed to do so. After all it is these tracts of fertile land that has made us self sufficient in our food production. This is a clause that must be amended. Second, it is very well known that in the name of Special Economic Zone (SEZ) huge tracts of land were misused and the unused land is left as is. This should not happen and the fact that on the pretext of industrial corridors land can be acquired must be amended.

Mr. Modi has a big problem on this legislation. He has no numbers in the Rajya Sabha and he is in no mood to bend. The entire opposition and the allies want his blood and they feel this can bring his downfall for sure as the farmers vote banks is the way of winning any elections. This fight for his blood has only made matters worse for him.

When China reached this cross road two decades ago it decided to make farmers part of any factory that would come up on their land. Labor and training was given so that they can benefit in the long run. Similar provisions must be made.

In my view the PM is committing two major blunders:

1) Allowing this act to be the center piece of the Parliament session when he can get several acts passed and then tackle this act later. He can use his majority in Lok Sabha to pass more legislations that every party and the people have dreamt of since 1984. Examples include acts to modernize education, health, police stations and other legal and social sector reforms. These acts are far more powerful and significant.

2) Not been communicating to the people like the way he communicates every day. He should get down to radio, TV, newspapers, media highlighting the good intent of this act. This has clearly not happened and the opposition has increased their voice of dissent and suppressed all the good intentions.

Mr. Modi is very right that he needs to tackle this problem. It is the foundation on which the economy can grow. With good changes or amendments that the government has done the opposition will simply will not co-operate. The PM now has a very tough walk to do. If he succeeds the economy will turn around like nothing, but if he fails it will be his downfall. The downfall is mainly because the themes -" Make in India", "Bullet trains","Smart cities","24 hour electricity promise" - all will fail as it requires land. He would have wasted a landslide opportunity and will never get elected back.

What do you think the PM must do? Should be bend and make amendments or give up the fight for now and concentrate on a lot more pressing issues?

Sunday, February 1, 2015

The Govt's plan for Jan Dhan Yojana

On Jan 21st the national and private banks released data to the Government as to how many accounts have been opened under the Pradhan Mantri Jan Dhan Yojana. The figures stood at 115 million. The numbers immediately were recorded in the Guinness World Record (Gusiness site confirming the same). This was because in a short term of 7 months banks were pushed on an aggressive drive to involve people into the banking system. The target was 75 million to be achieved before Jan 26, 2015. The reality far exceeded the expectations.

The Modi government pushed guaranteed wages for every bank correspondent who reaches out to rural and far flung areas to open bank accounts, something the UPA Government did not guarantee. Even though this system started under UPA, the banking targets were never made aggressive nor attractive for banks. The focus of the UPA initiative was covering villages, but PM Modi wanted covering households so money could be transferred to from the perspective of "households". In addition to ensure people find this scheme attractive announced a) Upon satisfactory running of the account for 6 months will get Rs.5000 overdraft facility b) RuPay Debit Card that can be used anywhere across the country c) Rs. 1 lakh accident insurance cover.  Personally, Modi wrote an email to all bank officers across the country (source of the email). Some statements in that email are below:

We need to enroll over 7 crore households and open their accounts. This is a national priority and we must rise to meet this challenge. There is an urgency to this exercise as all other development activities are hindered by this single disability. I am sure we will overcome this situation collectively. 

put your shoulder to the wheel and try your level best to ensure that no one is left without a bank account. This itself will be a source of immense satisfaction for you and your teams. I will myself recognize the achievements of the best performing branches.

If one carefully analyzes how this scheme was launched, pushed and target achieved it is very clear that Modi believes in achieving things with a "corporate style" of win-win. For close to 40 years despite bank nationalization bank penetration has been so low especially in rural areas. Now, things are so drastically different.

Let's look at some basic numbers based on Census of India 2011 (Source).Using some numbers of the Census and Jan Dhan Yojana I made this table below.

When you add existing 243 million to 116 million it covers more than 90% of India as far as number of households under the banking ambit.

Based on the numbers above it is very clear no where in the world with a population as huge as India's banking has penetrated so quickly. Of these 116 million, 83 million have zero balance. This is mainly because the Jan Dhan Yojana allows you to maintain it and still get an accidental coverage insurance.  Now, imagine if the government begins to transfer money to these accounts via banks using Electronic Credit? It will probably be the most transparent way of ensuring money reaches instantly and effectively. With a near complete wipe out of middlemen and citizens facing hassles to get their own money, it will be a tremendous change of benefit flow in the country. The main concern is duplication of accounts and benefits. The government will soon announce AADHAR to be linked to these bank accounts to avail benefits. Once that is done the number of duplicate accounts for the benefits will reduce. Let's assume for a moment that of these 116 million even if 20 million accounts are duplicates the number still is huge and can help plug leakages of nearly Rs.50,000 crore every year [SOURCE] which is a huge amount. Imagine if such a huge sum of money is flowed through proper channels?

The government has already started LPG Subsidy transfers. The amount being transferred is about 650 Crore rupees every year right now. The customer pays market price and the difference between subsidized and market price goes to the consumer's account holder directly. The LPG distribution agencies have already made it mandatory for one household to link their unique LPG account number to a bank account in turn linked with AADHAR or a bank account not linked to AADHAR. As recently as Jan 31st 97.5 million customers (64% of population using LPG) are already connected to the system under PAHAL (Pratyaksha Hastaantarit Laabh) . Regarding complaints as per numbers available Livemint reports 1.09 lakh (0.1% of transactions) and 85% has been resolved (source).

The government now would target 27 schemes including Pension, Rural Employment Wages, Scholarship and many more through these Bank Accounts.

The government has already issued memos and circulars for 14 Departments to be digitally ready to disburse money of various schemes such as Crop insurance, fishermen's welfare scheme, artists' pension, social security fund for the unorganized sector, grants for women's self-help groups, health insurance for sterilization programmes, scholarships and assistance for the disabled, cash transfer for girl children, cash awards for sportspersons

The next things to be in the pipeline are kerosene, food and fertilizer subsidy. When all of these subsidies flow it is believed it will become the world's largest electronic and direct benefit transfer in the world. These subsidies run into millions of dollars. 

Recently, Tehelka did report that several bank representatives were not helpful enough and friendly enough in this initiative. However, no scheme of this magnitude can ever be defect free.  These defects or loopholes must not stop the initiative from being used to the very purpose it was initiated.

Over 20 Indian and foreign companies have already agreed to support the mechanism of any payment gateway or help in scaling the transactions associated with such a huge scale of bank accounts. 

In its truest sense banking would really be part of everyone's lives when there are more ATM's to draw money, more bank branches where one can visit and do transactions not possible to do in an ATM. 

Does anyone have ideas how this scheme could be made even better?

Saturday, December 20, 2014

Gauging the pulse and pace of the Modi Govt Oct through mid December 2014

No one can deny that the Modi govt has begun to cause tectonic changes in the speed at which files are being cleared and stalled projects being reinstated. The entire bureaucracy is energized like never before. However, on the ground reality is that economy is not showing signs of stable recovery. To expect that it will happen overtime is futile. While many of his bureaucrats are working overtime to come up with effective legislations or amendments to existing legislations the lack of majority in Rajya Sabha has tied Modi's hands. Major legislations that can bring the economy back on track requires majority from both Lok and Rajya Sabha members. The government is very well aware of the fact that until 2016 Rajya Sabha numbers won't change. Legislations such as amendment to Land Acquisition Bill, Labor Reforms and Goods and Services Tax (GST) - are critical to make "Made in India" a reality. Of these 3 the last one is something the government has been making real headway. If all goes well at least GST will be a reality making the entire country into one tax system cutting across all states. The remaining ones are highly doubtful as mentioned earlier with the government in a minority in Rajya Sabha and Congress will not easily support just like BJP did not during the UPA time.

In spite of being cognizant of all these facts the BJP government has given the fuel for opposition to prevent the normal functioning of Rajya Sabha. The sad pace of legislative bills getting passed in this Winter session is very disappointing. Clearly, the government is at fault for a lot of this. Allowing irresponsible statements from some of his irresponsible ministers is definitely casting shadow on Modi's image and government. The statement by Sadhvi saying people of Delhi will have to choose a government that of the "Raamzaade" or that of "Haraamzaade" and statement by Saakshi Maharaj calling "Godse a patriot" are clearly just unwanted and ridiculous statements. These cast a shadow on thousands of supporters who voted for BJP the first time. It also tarnishes the very governance agenda that he wants to fulfill. This is still early in the game and Modi hopefully will be able to contain these elements just like he did in Gujarat when the fringe elements began to take over his governing agenda. 

6 months in office is too early to conclude about the policies of the government, but the road is very rocky. This article is my own critical evaluation of the govt mainly from Oct to mid Dec 2014. This is because October and November brought about an unusual pace of effective activity.  They were series of decisions that have created optimism in the economy. This by no means is enough although promising.

The PM is working 24*7 even if his government is not. There is over time activity to get legislations drafted so that some basic foundation can be laid on top of which all promises made can be fulfilled. 
Modi remarked in one of his speeches on the evening of "Made in India" event that his aim is to make India reach 50 in the list of countries in the ease of doing business. Currently, India is at 143. To achieve this a slew of legislative changes in labor, tax and land is very much needed. 

Some of the good steps taken so far are as below:

1) Decentralizing diesel prices and removing them from the subsidies. Inflation has been reduced to lowest levels one can think of  and luck is a factor with the government. There was no Modi effect on inflation being low. Global crude prices have been falling since the last 2 months that has drastically decreased inflation. The government basically took advantage of this opportunity and eliminated the subsidies on diesel and made it in line with the market prices just like petrol. This is required and yet good as long as prices are down. The distribution channel of goods need to be structured so that inflation effects are moderated (GST is supposedly going to answer this anomaly). 

2) The random computerized selection of inspectors and units to be inspected to aid 1.3 million companies.
This has been pending since a decade. Prior to this law the 1800 inspectors from EPFO, Employees’ State Insurance Corporation, Central Labour Commissioner and Director General of Mines’ Safety used to randomly select manufacturing units, conduct arbitrary inspections, manipulate reports and harass manufacturing units in the name of non-compliance. With this new rule no manufacturing industry will know ahead of time which inspector is going to inspect its premises for safety and regulatory audits and what the criteria is. The fact that these inspectors have to submit their report within 72 hours makes it even more difficult to bribe or manipulate the inspectors (although very much possible).  However, there are some major doubts - can the inspector himself be trusted? Will 72 hours be a guarantee that a honest report is done? What is the certainty that the inspector is not bribed?

3) Launching of a Universal Account Number for Provident Funds so that employees who switch companies need not cancel existing PF account and open a new one. This was waste of time and energy for both employer and employee. With this announcement sooner or later there will be a universal number for employees.

4) Transfer of LPG subsidy directly into Bank Accounts: This is a huge initiative. Banks are working overtime to meet the target set by the Government. Earlier when the UPA government wanted to implement this scheme using AADHAR, the Supreme Court passed an order that citizens cannot be forced to get an AADHAR since the bill to make it mandatory has not been passed by the Parliament. Therefore, the government issued a directive to consumers whether they have AADHAR or not, having a bank account and registering or linking that to the LPG is a must. This way they honored Supreme Court order but still allowed money to reach directly into consumer's bank account. Now, there is a huge rush across country to open bank branches in the name of "Jan Dhan Yojana". If played correctly all the subsidies or benefit transfer of fuel and fertilizer can be done through this mechanism. This will eliminate crores of rupees being eaten by the middle men in the system reducing a lot of corruption. Just by pushing LPG subsidy into Bank Accounts the Government aims to save 10,000 crore of rupees in a year which is lost in corruption. An interesting article to read is this.

5) The bill to change the coal block allocations passed in Lok Sabha- Coal is still used to source 60% of India's electricity needs. There is no proper coal transportation mechanism in the country and the expenses in transporting coals to the plants where electricity is produced is very high. All the coal allocations done (whatever mechanism used) from the 1993 till 2014 have been scrapped by the Supreme Court. So, Lok Sabha passed a new bill that allows private companies to aid in the mining of some of the coal mines without any monopoly attached to any one company.(Source). However, this bill needs its clearance in Rajya Sabha which is very challenging. If this bill gets passed then the coal supply and production will get a new life and will aid in meeting electricity demands.

6) The approval of 25 solar parks each with 500MW of solar energy production - This is to aid to generation of solar energy and its contribution to the electricity grid. These parks will not have to go through any environmental clearance or other regulations. These solar parks will have "Made in india" solar panels. Hopefully these projects will see the reality.

7) Filing one form instead of 16 to comply with 44 labor laws of the Center. In a huge relief the Government announced an online way of filing labor related forms so that one form will replace 16 different forms and ease the pace of business.

8) A tangible and result oriented foreign policy is being pursued and Modi is spearheading the policy despite Sushma Swaraj being the External Affairs Minister. He has established strong relationships with countries in East Asia, Australia, Russia, USA, and Middle east. His recent visits to some of these countries has attracted them to invest heavily in India for manufacturing. He has ensured that Pakistan is forced to accept no talks after attacks on Kashmir border and made China go silent for a while at the border. Here is an article in World Politics Review which sums up Modi's foreign policy as "Zero Problems Approach"

9) Aadhar based Digital Life Certificate for pensioners. This would help pensioners get their pension continuously without having to produce certain documents every year. For more on this one can read this article.

While the above are very encouraging there have been several failures or non-starters and some of them are as below:

Ganga Rejuvenation Plan:
No one knows where this plan is headed. There is absolute silence on the implementation of this Rejuvenation Scheme. This personally is something I am keenly waiting for since it is a constituency the PM is elected from and there are great expectations on this. 6 months is too early to judge this but with a person like Modi at the Center there is more to expect.

Failure on the Black Money issue:

The UPA Government had mentioned that there is no clear way of coming up with a figure as to exactly how much money is stashed illegally abroad in Swiss banks and any effort in getting it is not government's alone. The BJP at that time said that Congress was intentionally not interested in bringing back the money and Modi had promised that next Government (BJP) will bring it. He also went to the extent saying each salaried individual will get a share of the money. 6 months into the office the Government has no proper figures and nor a concrete mechanism to get it out. The only good thing is the Special Investigation Team (SIT) has been constituted and it is doing some serious work on it. Despite having information the government mentioned only 4 names to the public and then sent the entire document to the Supreme Court after it gave a harsh statement to the Modi government. Read this article that explains how the numbers stack up

Smart cities:

If the Government cannot get Land Acquisition Act amended Smart cities will only be a dream. There has no headway in the direction so far other than a blueprint which serves no purpose. I see this as a distant dream - something not even visible in the next decade. Do the readers think otherwise?

Swach bharath
With all the nice gestures and sincere attempt by the PM there is no ground breaking move yet in the direction of making Swach Bharath a successful mission. There is still ambiguity over how much Center is willing to spend and how the states and also how the private companies will build toilets or implement solid waste management projects. This needs to resolve at the earliest.(source).

In a nutshell even though Modi is working 24*7 and keeping the requisite grip on bureaucracy he has to still rein in elements meant to spoil his party, government and agenda. He has to make sure through legislation radical changes are done to Land and labor laws. The whole world is waiting for this to make Made in India a reality. 

What do you think about the last 3 months of Modi's policies?

Thursday, September 25, 2014

Modi's China gamble and Japan's secure friendship

When Modi ascended to power there were doubts about his diplomatic ability to gauge our neighbors who share boundaries with us and with other countries whose investment can tremendously help India. In the past few months his visit to Bhutan, Nepal, and Japan clearly demonstrated his diplomatic and business acumen of dealing with various East Asian countries. Modi's Japan tour is extraordinarily historic because no Indian Prime Minister has been able to extract such concrete investments in one single visit. 

Back in 1993 when former PM Narasimha Rao coined "Look East" policy term it was for Indian diplomacy to look east of India to countries such as China, Japan, ASEAN - (includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam). Subsequent governments irrespective of parties contributed to this policy. At the beginning of 2000, former PM Vajpayee dedicated a lot of his diplomatic strength to make America a long standing ally of India in addition to engaging East Asian countries. His achievement was to change the definition of Indo-US ties forever. However, political, diplomatic and security compulsions led to this direction. The current PM Mr. Modi is leading this policy again of Look East but purely for economic gains. This is the first time an Indian PM is trying so hard to get China and Japan together to invest in India in very specific sectors.

Even though his tours of Nepal and Bhutan were significant for India an enormous excitement was in store for his Japan tour. The tour resulted in Japan investing close to 35 billion dollars in very specific sectors like High Speed Railways to give financial, operational and technical support. Unlike the World Bank loan which can be siphoned off easily without achieving the objective for which the loan was taken Japan will not give away hard cash. It is going to invest over 5 years and will monitor how India performs on speedy clearances and expedition of processes to ease business in India. Japan will participate in helping "Clean Ganga", "Develop Smart cities" and "Metro projects in Ahmedabad", "set up Industrial parks in the two countries", "make Varanasi like Kyoto"

The key achievement was to sign up agreements specific to these projects to be implemented in a time bound manner. I hope that the agreement translates into a reality everyone would love to see.

Apart from the photo ops and speeches made by Modi it was clear that he needed to act on this investment in a transparent manner. He has decided to set up a special team to look into the way these funds are utilized and will have a member from Japan as well. This is good as we hope that the investment is sincerely utilized to realize the election promise and the dream of India getting the bullet train. The time of completion may be 10 years but it is important to get it started.

Besides Japan also decided to sell US-2 amphibian aircraft something India needs since it carries the strength of 21 firefighting helicopters. US2 will significantly enhance Indian Navy's capabilities. For more information on the abilities read here. It is no mean achievement that Japan lifted sanctions on India with respect to sell and transfer military equipment. After World War II this is the first time Japan has done so with India. One of the most important reasons why Modi was able to extract this from Japan is because Japanese PM Abe and Modi share a personal rapport and friendship of many years.

If Japan's tour was picture perfect, Chinese President Xi's visit to India was that of a big gamble. In my previous articles I had already articulated the reasons for India's defeat of 1961 war, the cause and solution of the disputes in the Ladakh and Arunachal region. Modi knew that just like Japan, Chinese investment in India and their expertise will be of great significance. He played this gamble in a near perfect manner until the intrusion in Ladakh region became the stumbling block.

Let's understand the role of China in the Asia Pacific Region in a larger context. There are 2 hard facts to consider:

1) The control of South China Sea for decades has been a bone of contention amongst several countries like Indonesia, Vietnam, Singapore, Malacca Straits, Cambodia, Thailand and many more. 

(image courtesy: Wikipedia)

China has for ages dominated the control of this sea. In order to balance this domination US allied with Japan and together they form the other end of the control. However, in recent times China has begun to get in touch with all these countries giving them economic and financial aid thereby getting their support. With the US beginning to lose its grip it began to ally with India and Japan to balance the control. In this context since 2011 Indian diplomats began steps to secure friendship with countries such as Bangladesh, Vietnam etc. The "Look East" policy that was active in 1993 under Narasimha Rao and then under Vajpayee till 2003 suddenly lost momentum and again in 2011 gained slow speed under Manmohan Singh. Modi is accelerating this policy with targeted investments so that there is a win-win situation. South China Sea is known for huge oil reserves and all countries want to control it. With China having territorial disputes with almost everyone in the region has always upped the ante. China's arch enemy is Japan and both cannot stand each other.

In this context, recently India signed agreements to provide loan and sophisticated boats to Vietnam against China's territorial aggressions in return for getting oil supply from the waters around Vietnam. The Chinese categorically warned of consequences if India extracts oil from Vietnam.

2) String of Pearl strategy by China:  When China began to rise in 2001 it began this policy of involving all of India's neighbors to form a string so that upon necessity it can prepare for attack on India. For this it began to develop friendships with Nepal flooding its market with goods and helping it in financial aid. It then began to deepen its friendship with Pakistan to develop Gwadar port to the west of Gujarat, controlling ports in Bangladesh and putting pressure on Bhutan to support China in every way. Besides all these ventures China also began developing Tibet such that within an hour through roads and high speed railways can reach Indian borders if a situation arises. The UPA Government was least interested in acting upon these steps. Only in the last few years of UPA II the former PM Manmohan Singh began to take steps to mend friendships with Bangladesh.

Modi wanted to change the situation to make China an economic partner and go beyond just boundary disputes. Keeping the boundary issues aside he wanted to involve China to invest with a strong economic agenda. When he was Gujarat CM he visited China several times and often in his speeches he talked about China as the real competitor to India. When Chinese President Xi came to India the rumor was that investment would be to the tune of 100 billion dollars - thrice the amount Japan agreed to invest. It was a huge gain if China had invested this amount. However, it reduced to 20 billion dollars, which is less than Japan's investment. What triggered this?

Like Modi, Xi is considered reform oriented Chinese President. An investment to the tune of 100 billion would have benefited China as well. It looks like there was a hidden twist to this whole story. The Chinese, exactly hours before the meeting of Modi and Xi, infiltrated into Chumar region of Ladakh. The number was 1000. This is the highest number of soldiers entering the territory post 1962 war. This whole incident shadowed the event Modi had organized.

On one side Modi achieved a lot when agreements were signed to make Pune and Ahmedabad export and manufacturing hubs, train Railway officials to increase the speed of Bangalore-Mysore-Chennai train, rejuvenating Railway stations, setting up a Railway university, giving enhanced access to Indian agricultural and pharma products in China, and opening up a new route to Manas Sarovar through Sikkim.

On the other side he had to talk tough to ask Xi to withdraw his troops. The tough negotiations by Modi finally led to the withdrawl of the troops. However, things did not stop here. Two days after this meeting troops again entered the territory. This time the number was just 50. Since this is a mystery that will hardly be revealed, this article explains 3 possible reasons as to why the Chinese intruded right at this moment - a) The People liberation Army (PLA) that is controlled by the Chinese Government is not under Xi's control b) Xi knew this intrusion and was done intentionally c) Xi wanted PLA to do its work and he wanted to do his. So, one wing aggressively pursuing border issues and the other economically winning deals with India. 

In my personal view the third reason is most probable since Chinese history is well know to all countries in South China Sea. China is probably the only country yet to have so many territorial disputes with everyone in its neighborhood. India has no options but to constantly monitor the situation and rise economically and strengthen its infrastructure in these regions.

Since Modi's ascent he seems to be planning to break the very trap China has set up. With India cozying up to Japan and the recent steps taken by his Government to engage Vietnam and Bangladesh to corner China this game of Chinese checkers is getting very interesting. China was quite naturally baffled and decided to intrude into Indian territory to increase the scale of provocation.

Such diplomatic games by China is hard to play with. With a single party and a single focused agenda Chinese government, economy and defense is way ahead of India by about 50 years, With changing political equations and central governments India lacks a consistent tough leadership. As long as Modi is going to rule India there will be tough moves by his government in every way possible.

At this point the country's economy is very important and the investments from China and Japan would play a critical role in realizing many projects which we do not have expertise in. Together this is the biggest investment India can dream of getting in to achieve its most complex goals.

Monday, September 8, 2014

Why Planning Commission needs a credible replacement?

I remember my school days when I used to study about Five-Year Plans in Civics class and it was so painful to understand and remember what the First, Second, Third Five Year Plan outlined and so on. At one point in 1999 when I saw the rise of cell phones a question did come to my mind. Just one year and one policy brought a meteoric rise of cell phones in India and how could a five year plan think of changes needed in 5 years from the point of planning? 

India's bureaucratic system is notorious for having multiple agencies doing the same task and in certain cases a single agency having no power. 

Recently, the PM decided to abolish this body and replace it with a brand new body with new powers. No one knows what shape it will take. Planning Commission is currently chaired by the PM and it has experts in Economics, Administration, Industry and Science. This article tries to understand why the existing Planning Commission has become so non-functional and obsolete and what the possible solutions are.

To understand this one has to know 3 facts. The first - Planning Commission is not a body recognized by the Indian Constitution. The second - it's authority has far exceeded its capability (This statement was made by Mr. Modi (Source) when he was the CM of Gujarat). The third is the existence of Finance Commission of India which is accountable to the Parliament and is appointed by the President to look into many of the affairs Planning Commission does and thereby duplicating responsibilities.

Let's elaborate these further. Planning Commission was constituted by India's first PM Nehru who was inspired by Soviets and thought a centralized planning body would help India grow much faster than anticipated. His idea which also translated into a Resolution had 5 major functions -a) Formulate 5 year plan providing framework for development b) How much money each scheme announced by the govt would get c) Appraising the scheme to see if resources are optimally utilized d) Monitoring the same e) act as a mediator between center and states.

The Planning Commission did some commendable jobs. Until the late 1960's Planning Commission had some great experts whose recommendation was taken seriously by Nehru and he established the IIT, IIM, DRDO, IISC and such other prestigious institutions that have helped the country tremendously. Many aspects of land reforms were also formulated and implemented by the Planning Commission. Planning Commission was responsible for recognizing and establishing steel plants (Bhilai, Rourkela, Durgapur), Hydroelectric power projects, state electricity boards and many more.

Since this was not a body accountable to the Parliament and has no constitutional authority each of the successive governments used it to push their agenda and made Planning Commission a transfer agent of centre's money to the states. This was an absolute deviation from the vision it was set up with. As each state became more complex to manage it was in the late 60's that the amount of money to be given to any state became dependent on tax the state generated, its population and many such parameters(Gadgil Formula as it is called). 

When the economy opened up in 1991 private sector began to control many of the resources which the government controlled till then. As an example amount of money needed to make roads, airports or ports. These began to be built in partnership with private companies and no state or government could get into the business of allocating resources. This began to make its role of resource allocation meaningless. Instead of planning with a vision they became a body of monitoring central schemes and transferring money to states in the name of the schemes. So, post 1970's functions a), b),d) became the only function of the Planning Commission.

Truly, formulating a 5 year plan has become obsolete now since every year new technology and scientific innovation forces existing mechanisms to be re-evaluated. So, the Planning Commission is out of touch with this reality. If one remembers this commission was widely criticized for coming up with the definition of poverty which was anyone close to spending Rs.32 per day or below. 

Let's explore now the 3rd fact before getting to the second one. The Finance Commission of India was set up under Article 280 of the Constitution (Source). Its functions, roles and responsibilities are all explained on the website. This body contains 5 experts nominated by the President of India and has done a fair job in coming up with numbers as to which states must get what money and it has a wide variety of parameters based on which it comes up with a formula. It also changes these parameters as and when required. This money typically is the transfer of total taxes collected on various items or services collected by the Center to various states on various formulae (Source). Unlike Planning Commission which uses its own discretion about how much money needs to go to one state, the Finance Commission applies formula and rationale behind its math. The Government of the day has to submit a report about "action taken" and both the Government and Finance Commission are accountable to the Parliament. The Finance Commission also meets with the concerned officials of every state and has the powers of a civil court in the event of discharging such duties. 

Now, coming back to the second fact - The Planning Commission's authority far exceeds its capability. This is very true because Planning Commission is an extra constitutional authority. It has no powers to transfer money to the states and is often accused of using adhoc mechanisms to estimate several parameters and make it binding on the states to accept it. Over the past 10 years according to this article, Planning Commission began to appraise all PPP projects in infrastructure something which the respective departments in the Government must do. Planning Commission got into a direct conflict between several departments.

Clearly, the function of formulating plans with a vision was sidetracked and Planning Commission became a body of monitoring schemes and transferring money to states. 

What can be done in this scenario?

a) Finance Commission is appointed every 5 years. Instead, it should be 2 or 3 years and must be made permanent.
b) It should now become the de-facto body of transferring funds to states since it has the required expertise. Currently, it does non-planned expenditure only. The difference between the two must be removed and all money transfers must now take place only through Finance Commission.
c) Make the recommendations of the Finance Commission binding on the Union Government. So, far almost all Central Government's have accepted Finance Commission recommendations. However, the Commission must be given powers to identify if the Govt has indeed acted on the report it produced in the Parliament.
d) Make Planning Commission strictly a body that can formulate plans with a vision and have experts in it who have enough experience to plan with a big picture.
e) Have planning commission officials in every state who can share their expertise with the respective state since each state has its own geography, resource constraints and demographics. One suggestion applied in Kashmir may not work in TamilNadu and one formula applied in Kerala may not work in West Bengal.
f) There should be one wing of academicians who study the similar problems that exist in other parts of the world and solutions applied to the same. These academicians must submit a report of their own assessment. 
g) A reward mechanism must be set in place where such students/academcians who suggest out of the box and practical solutions be given recognition.

Only time will say when the new body will be formed and whether it will be made effective enough to cause a difference in the broad policy framework. Planning is essential, but planning that includes policies that are feasible to implement is the only way of measuring success of such a body.

While Mr. Modi is in the right direction he needs to take it to the right conclusion. If this does not happen then the new body will be like the old wine in a new bottle.

Tuesday, July 22, 2014

A directional analysis of the maiden budget

The Modi government's first Railway and Union Budget  are a reflection of prioritizing promises made in the manifesto personally ratified by PM Modi during election campaign. Just like it was Arun Jaitley's maiden budget so is my analysis. The intent of writing this blog post is not to highlight the maze of numbers going into budget or aspects connected to bond and investor market, but to analyze the direction in which the Govt is headed. Of the 2 budgets passed the Railways was more path breaking than the Union Budget. The Finance Minister(FM) Jaitley had very little time and little financial resources to expand or initiate big reforms.
The maiden budget preparation time has been too short (around 45 days) and so to expect to do something from scratch in such a short time and that too with a new government in place is a lot to expect from. This was also compounded by the fact that the country is in an extremely messy and tough financial condition.

However, many well known economists have said Jaitley's budget was disappointing and called repackaged UPA's budget. It is true that Chidambaram said -"Modi talked about Congress Mukt Bharat, but he could not even do Congress Mukth Budget". It is true that lack of time and lack of money made the budget less revolutionary. However, no one denies that money has been allotted in the right sectors with right priorities. 

According to this article the NDA government added 59.9 million jobs between 1999-2004 mainly because of high expenditure on infrastructure of ports, highways and airports while UPA added only about 14 million jobs during the whole decade (2004-2014). While UPA increased subsidies in the form of farm loan waivers, oil and LPG, fertilizers etc it was expected that Modi's government would seriously think of reducing it. On the contrary it increased even more. It has to be observed that from 1999-2009 there were huge tax revenues for the government which both governments used to pay for subsidies (Source). To be fair it was NDA which started reforms giving huge tax revenues which UPA continued until 2009. During UPA II tax revenues saw a sharp fall, but the government went ahead with increasing subsidies without analyzing how to raise money for the purpose. The first budget of Modi's government was expected to increase growth despite the expected increase of fiscal deficit, but it appears that the government wants to balance both. Hence, the government retained many of the populist schemes of UPA, but has initiated the process of being pro-business.

So, here's the quick analysis of the sectors where Budget concentrated on and the direction in which these would go in the overall growth of the economy.

Regarding the power sector: Close to 80% of energy needs are still met by thermal plants and they already have reached a point where there is not much coal left. There is no proper coal distribution supply and linkage in the country today and neither is a Coal Regulator. Obviously, solar energy and other renewable energy must be tapped. Jaitley has alloted Rs.1000 crore to develop Ultra Mega Solar Power Plants in Rajasthan, Gujarat, TamilNadu and Ladakh which receive huge amount of radiation every year. I still remember the India Today Conclave Speech of last year when Modi highlighted a fact that in the intense hot regions of Rajasthan there is immense potential to tap solar energy and despite his written proposal to the then PM Singh no action was taken. Keeping this in view he has definitely asked Jaitley to allot money in such areas. Imagine if power from renewable energy reaches 30% from the existing 13% we would have added a lot of electricity to the grid. It is interesting to note while UPA's Jawaharlal Solar Mission Project's aim is to install 20GW by 2020 we are no where near that target until mega projects are actually taken off and, hopefully, this allocation will yield results. Customs Duty has been reduced for any equipment bought for this purpose. In the power sector Jaitley has also given a 10 year tax holiday on any firms that are willing to generate and start transmission by Mar 2017. This is a huge incentive that will propel companies to start getting into electricity generation and will aid in the direction of 24*7 electricity target. This Jyoti Gram Yojana that was called in Gujarat is now called Deen Dayal Upadhyaya Gram Jyoti Yojana. Further, an additional 500 Crore has been allotted to separate the distribution lines so that rural areas get high priority.

Regarding Highways: The government has promised to reduce the number of clearances and early resolution of disputes. Clearly, the government of the day knows that Public Private Partnership route (PPP) has not yielded much results and yet they have promised to reduce the disputes. It is amazing that 189 of 332 National Highway Authority of India (NHAI) projects in 20 states are struck due to disputes over environmental and legal clearances. This has scaled down our pace of roads despite huge improvement in national highway connectivity. It is beyond doubt that airports and national highways have been transformed in India, but highways require huge investment. The total length of expressways is minuscule compared to that of China. The big vision of UPA to have 44 expressways by 2022 has not taken off with just only 4-5 in progress. The problem is not lack of private builders but that of arbitrations that never end. We will have to wait and see if the government ensures the newly enacted Land Acquisition Act is amended to expedite these clearances.

Regarding Insurance: By increasing the FDI cap in increase to 49% (with full Indian Management through Foreign Investment Promotion Board. This  means any foreign company can set up its shop with 49% partnership and 51% Indian counterpart with Indian Management control). Jaitley has only increased the competition amongst insurance companies. There will be an increased capital inflow with companies willing to set up insurance markets on a massive scale now. This is a good sign.

Regarding Defence: Increased FDI to 49%. This is an area where Modi government failed to seize the opportunity despite the fact that the government wants defence manufacturing to be developed in India. For that more than 50% FDI with mandatory technology transfer must take place. This is a clear failure. However, it is not the end of the road.

Regarding Broadband in India's villages: This "Digital India" programme to provide broadband connectivity with the help of Indian hardware and software companies is a good step forward. This will spur the growth of home grown companies to contribute back to the society.

Regarding Ganga Rejuvenation:  There is no concrete plan yet to revive and rejuvenate Ganga river and around Rs.2000 crore has been set aside. Not sure where this money will go and if there will truly be a revival. For the past 15 years all the money spent on this has yielded nothing but zero result. This is the toughest gamble PM Modi has taken on behalf of his constituency. 

100 crore club projects: Continuing the trend of UPA's 100 crore projects, Jaitley announced close to 27-  100 crore club projects and they are listed here. Only time will tell if the money allotted to each of these programs is utilized with utmost sincerity.

Regarding Agriculture: The Government has decided to start a new mission to promote irrigation, a 24 hour news channel only for farmers, restructuring Food Corporation of India (a poll promise Modi made), loans to landless farmers, and reducing transportation and distribution losses and increasing efficiency of Public Distribution System (PDS). The announcement that wheat and rice will be provided at reasonable prices to weaker sections may not work on the ground unless PDS is improved. Nothing is new about improving PDS, but the fact is that a lot of money has already been spent on this and yet no changes are visible on the ground. There is no evidence that restructuring FCI would change things. Unless Agricultural Produce Marketing Act (APMC Act) is amended that allows farmers to sell to anyone they want to inflation cannot come under control and hoarding will not cease to exist. I, personally, am waiting when this act will be amended.

Regarding Goods and Services Tax (GST): This GST has been hanging around and struck in discussions despite its introduction and numerous discussions with all states since 2009. Jaitley disappointed on this since he only stated he wants to expedite it. The passage of GST and implementation across the country alone can increase GDP up to 2%.

Regards Railways: Railway Minister Sadananda Gowda's budget was a path breaking one. This was because for the first time a large sum of money has been alloted for building new tracks, improving freight transport, safety and cleanliness of stations. Modi's brain was clearly behind several of these announcements. To overhaul 10 major stations, concentrate on railway food safety and railway safety are welcome things to hear. FDI in railways is totally unheard of the Railway budgets till now. FDI is required and private participation is required to increase the track length, cleanliness of stations and freight corridor development. The Budget talked about outsourcing cleaning to private players in 10 major stations.

Most importantly, the bullet train from Mumbai to Ahmedabad requires huge investment which India can't even afford at the moment. My personal thought is that the PM Modi might seek Japan's help like in the case of Delhi Metro. When Delhi Metro was first envisaged everyone thought India can never get such a transportation system. Such negative thoughts have been proved wrong with massive metro constructions and openings in almost all major metro and several non-metro cities. Let us hope something serious on the ground happens within the next 3 years. Railway budget also concentrated a lot on increasing efficiency of online ticket booking from 2000 to 7200 tickets per minute, allowing platform tickets to be purchased online and to go paperless in 6 years. Some of the other friendly initiatives including ready-to-eat foods of reputed brands to be made available in trains, food courts of various cuisines to be set up in several stations, feedback of food quality through IVRS, battery operated vehicles for disabled people and many more. The starting of semi-high speed trains between several short distance cities in the next 1 year is a huge welcome although 160-200 km is still slow when compared to China and Japan.

It is just so shameful that of the 99 new lines announced only 1 has been completed correctly in the past 60 years and in the past 30 years, 676 projects were sanctioned and only 317 completed. Our sluggish growth has made our Railways 100 years behind current time. Hopefully this will change.

Regarding Smart Cities Creation: Rs.7000 crore has been allotted to develop smart cities which will be brand new and would avail the best of facilities an ordinary man would accept. This proposal is surely going to take forever since it is an investment that will not easily match the returns. Don't be surprised if this will not take off in the next 5 years.

Regarding start ups and young entrepreneurs: For the first time in a decade a special Rs.10,000 crore for early start ups has been allotted. 100 Crore for start ups involving rural youth, 200 Crore for SC/ST youths. This has clearly created one of the highest financial pools for start ups anywhere in the world. However, it remains to be seen how the local banks would provide these for the start ups and if there are simplifications in availing the same.

The first Budget disappointed regarding tax rules that were undone by UPA Government despite Supreme Court order of not taxing Vodafone for acquiring assets within India and abroad. Jaitley only promised to look at them under the guidance of Central Board of Direct Taxes. Such taxation rules will discourage investment and seriously must be amended.

At the end of the day this government cannot be judged by this Budget since this is a beginning and the country's finances are in such a mess that big initiatives can't be easily taken. The Government appears to be fairly serious about amending Land Acquisition, Labor Laws and APMC Acts. Unless these 3 laws are amended and passed there is no hope for growth to pick up steam and neither will manufacturing pick up easily. It is therefore paramount to see these legislations pass through.