Sunday, August 9, 2015

Indian economy weekend reading links

1. Livemint points to an Fitch Ratings report which claims that banks may have to take haircuts amounting to more than a trillion rupees on their exposures to power, roads, steel, and other infrastructure sectors. It is estimated that nearly Rs 93000 Cr would be on public sector banks.

2. The RBI's latest survey on capacity utilization shows that in the manufacturing sector, it has plunged to its lowest level is seven years for the March-April quarter. Business expectations index too is declining sharply. Make in India is clearly facing very strong headwinds.
3. Mary Hallward-Driemeier and Lant Pritchett (via WSJ here) find "almost zero correlation" between the World Bank's popular Doing Business Survey's and the surveys of business enterprises done by the Bank and others across the world. The former is based on surveys of local lawyers, accountants, and other professionals and their estimations of the time and cost of complying with local regulations. The latter asks firms themselves about the costs and delays they actually deal with. 

They find that, on average, the amount of time companies tell surveyors they spend on obtaining construction permits and operating licenses, and importing goods is "much, much less" than that recorded in the DB Survey. They attribute the divergence to the "gulf in poor countries between the laws and policies that exist on the books and the ones that prevail - or perhaps don't prevail - in reality". They write,
It is commonly observed that policy implementation often deviates from the stated policy in firm-specific ways, but this hypothesis has not been easy to document. It appears that when strict rules meet weak state capability—or, more broadly, “institutions”—the rules bend and become more like individuated “deals” where outcomes are not the result of a neutral application of policy to the facts but rather have to be negotiated case by case... Given our evidence, it is a completely open question how reforms that altered the Doing Business indicators will actually affect the investment climate that most firms actually experience... firm performance was affected by measures of the variability of the policy implementation they faced, more so than the level. From this perspective, one can imagine that initiatives that have minimal impact on de jure policy but which signal a decisive shift in policy implementation might have substantial impacts on investor expectations and initiate an acceleration of growth. 
This carries a note of caution for countries like India, which have made the DB Survey the basis for their ease of doing business interventions. Tweaking the form (rules and regulations) without strengthening the state may not be very effective. Even with the best-practice form, the real constraint will be the state capability. 

4. Talking about enterprise surveys, here is a comparison of the findings from World Bank's enterprise surveys from 2006...
... and 2014 (9281 firms chose the biggest constraints among 15 business environment obstacles).
Electricity, tax rates, and corruption are the top three in both, though the informal practices and access to finance have recently emerged as important constraints. Note that labour regulations etc are marginal constraints in both periods.

5. I had blogged earlier urging caution with India's metro rail ambitions saying that global experience shows that farebox recovery ratios on railways can rarely cover half the operating expenses. Business Standard has this examination of the operating balance sheet of the Delhi Metro Rail Corporation (DMRC),
In FY14, the latest year for which finances are available, the company produced a meagre Rs 9 in revenue for every Rs 100 worth of investment in fixed assets. Specifically, the utility generated revenues of Rs 2,952 crore on a gross block of Rs 34,385 crore in FY14... Given the current interest rate of 10 per cent, a similar depreciation charge and 15 per cent expected return on equity, the capital cost for DMRC works out to be around Rs 7,500 crore per annum. Throw-in the running and maintenance costs, the DMRC system would need at least Rs 10,000 crore worth of revenues to be financially viable in the conventional sense.
DMRC operating expenses were Rs 2,136 crore or 72 per cent of its revenues from operations.The above calculation doesn’t show in DMRC numbers because it has been liberally capitalised by the government. At the end of FY14, DMRC paid-capital (or seed capital) was Rs 14,187 crore twice that of NTPC and three-times that of Power Grid Corp, two of the most capital intensive government owned companies. Besides, government tops-up DMRC equity base every year with Rs 2,100 crore pumped as equity in fiscal 2014 itself. The debt part of the DMRC has been taken care of by concessional loan from Japan’s Overseas Development Agency (ODA) at the rate of 2 per cent with 10 year moratorium on interest and principal repayment. A private sector enterprise will never get this comfort.
6. That India's power sector is in a mess is well known. Livemint points to a recent ICRA report which has a few interesting factoids about the dismal story,
In fiscal 2015, power deficit had reduced to 3.6%, but that is just the reported number. Ratings agency Icra Ltd reckons that the actual power deficit is 15%. Simply put, power plants are idle at such a high level of power deficit because state electricity boards are not buying. In the June quarter, merchant demand on the exchanges declined 22.3% from a year ago. Even on a sequential basis, it fell 9.3%, despite it being high summer. The last major power purchase agreement signed by a state electricity board was Kerala in 2013.... The accumulated losses of state discoms at the end of March 2013 were close to Rs.3 trillion. Wiping out these losses will take time. Even to recover regulatory assets—those expenses approved by state electricity regulatory commissions for recovery through future tariffs—over a period of five years, tariff hikes as high as 23% would be required in some states, such as Rajasthan.
Update 1 (21.08.2015)

More on the DMRC's finances, a foretaste of what is to come from other metros,
DMRC earned a total revenue of Rs 3,198 crore in 2013-14, including Rs 1,364 crore (43 per cent) from fare box collection and Rs 1,833 crore (57 per cent) of other revenues, including those from real estate, consultancy and external projects... The growth in revenue from fare box collection, the company’s core area of operation, has dropped sharply from 80 per cent in 2010-11 to 11 per cent in 2013-14, the latest year for which numbers are available. Also, the share of other revenues in the total revenue has risen from 43 per cent in 2009-10 to 57 per cent in 2013-14. Further, the company’s total expenses jumped 29 per cent to Rs 2,006 crore in a single year ending March 2014, indicating how profitability came under pressure. DMRC’s fares were last revised in 2009 when the minimum fare was raised from Rs 6 to Rs 8 with the maximum fare raised from Rs 22 to Rs 30. For comparison, consumer price index (CPI)-based inflation stood at 9.9 per cent a month on an average for the five year period between 2009 and 2014.

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