Saturday, October 14, 2017

Weekend reading links

1. Government intervention to make strategic purchases to both catalyse markets and lower prices is logical. The most cited example of such intervention in recent times has been the procurement of 770 million LED lights by 2019 as part of India's Domestic Efficient Lighting Program (DELP), which has resulted in a steep drop in the prices of LED lights.

Buoyed by the success, the government company, Energy Efficiency Services Ltd (EESL), is seeking to procure 5 million smart electricity meters and drive down prices. Livemint reports that L&T have won a Rs 13.61 billion contract to supply 5 million meters over three years to discoms in UP and Haryana at Rs 2722 a piece, 40-50% lower than the current market rate. 
Power distribution companies will not have to make an upfront investment to deploy these meters. EESL is investing in procuring smart electricity meters and the services of the system integrator. Utilities can pay back through savings resulting from enhanced billing efficiency and avoided meter reading costs. EESL will also appoint a firm, a “system aggregator”, to manage the installation of smart electricity meters and to collect and store data on power consumption for analysis.
A very rare example of innovation and big-scale public policy thinking in India. The challenge, in this case, will be to hold the supplier honest and make them deliver good quality meters, and have the "system aggregator" be able to actually collect and make available the required data for energy audit. The matter of getting stuff done. But a very good initiative. 

2. Much of the analysis about the ongoing movement against informality glosses over the demand side of the equation. Manas Chakravarthy writes in Livemint,
One consequence of the introduction of GST and some of the other measures to tackle black money will be increased market share for the corporate sector. Stockbrokers have been celebrating the opportunities opened up. A Citibank research report says: “The Indian government’s ongoing structural initiatives (and the GST rollout) will accelerate the transition toward the organized sector. Moves towards a less-cash economy, indirect tax changes through GST, direct tax compliance, e-commerce, and some progress on labour law reforms, among others, will prove disruptive to traditional structures in the medium term and result in accelerated formalization as well as economies of scale in the long term.” It’s no surprise that big business has backed these changes to the hilt.
Let me repeat what I have said earlier many times, the informal economy is not going to disappear. It will linger on and only gradually shrink over decades.

Formality introduces costs, which the producer will have to pass on to the buyers. But we need buyers who can afford to pay the higher price to access that good or service. This affordability can come only with increased incomes, a function of economic growth.

Barbers sitting on roadside and on makeshift arrangements offering haircuts for Rs 10-30 will form the vast majority of haircuts in India for the foreseeable future. In contrast, salons where the haircuts cost Rs 75-100 or more, likely to be in the formal sector, form only a very small proportion of haircuts. Governments can do whatever it wants to force these barbers to become formal, but they will not. The simple reason is that there is only so much demand that can be generated for salon haircuts! The shift to salons will happen only with economic growth.

3. In the best GST article I have read, Indira Rajaraman, draws attention to a weakness of the current GST architecture and how it affect the risk sharing mechanism in India's retail eco-system. She writes,
The principal culprit is the monthly frequency of reporting required under the GST (for businesses with annual turnover more than Rs75 lakh). Within each month, there are three dates in sequence for voucher uploading, consolidation and claims, with a daily penalty beyond deadlines crossed, added to interest on any tax credits denied. This formal voucher-based monthly reporting has dealt a death blow to the risk-sharing mechanism underpinning the efficiency of the Indian retail supply chain as we know it. And that is what has hit growth. Take a retailer of non-perishable items like garments or footwear. Retailers order a consignment from upstream wholesalers according to their best judgement of what clients will buy. The traditional practice was that if a retailer overestimated the appeal of a new style to his client catchment area, he returned unsold stock to the wholesaler, and finally paid the wholesaler a few months later only for his net purchase, net of returned stock.


Risk cover does best when risk is pooled across many locations with diversified patterns of incidence. The wholesaler is able to bear the risk of sale reversal because he can re-distribute returned stock. A new style in garments or slippers may lie unsold in one location, but fly off the shelves in another. Wholesalers in turn spurn retailers who return stock beyond some percentage limit of the gross purchase, thus leaving enough risk with the retailer to incentivize him to judge his market correctly and put in his best sales effort. If goods are defective, the wholesaler in turn returns the stock to the manufacturer, which again assigns risk to the only level where defects can actually be addressed.

When there is a switch to monthly reporting, a wholesaler uploads the initial gross sale to each retailer, with GST charged on a numbered invoice lodged in the system. Although the GST system does permit reversal of sale through issue of a credit note which can be offset against the next sale to the same retailer, it adds to the procedural burden, and is not something wholesalers are willing to touch. In effect, sale reversal has become impossible under GST, even for defectives. Retail buyers are now being asked to take a consignment at their own risk, and thereafter hold their peace. The traditional risk-sharing mechanism lies shattered.

Given that the retailer can no longer (in effect) reverse any part of an uploaded transaction, he minimizes risk by reducing his gross purchase from the wholesaler to the floor of his expected range of retail sales. This is what has hit growth. Wholesalers faced with reduced retailer offtake in turn place lower orders from manufacturers. Manufacturers have responded by sharply lowering production, some operating at as little as 25% of capacity.
She proposes doing away with the voucher uploading and matching process and replacing it with rigorous sample audits. I am inclined to agree.

4. A great stall is on in India's construction sector, the second largest employer after agriculture. Sample this,
For three consecutive quarters, the stalling rate in the realty sector has been in double digits, with the total value of stalled realty projects touching Rs1.27 trillion in the September quarter. The stalling rate (or value of stalled projects as a percentage of projects under implementation), at 12.7%, was at its third-highest level in nine years, only marginally better than in the June quarter, when the stalling rate hit a nine-year high of 13.3%. The commercial real estate sector has been the worst-hit, with a fifth of such projects getting stalled.
5. Talking of stalling, stalled infrastructure projects are no longer news. The latest on them shows limited progress in addressing the chronic problem. The value of stalled projects reached its highest level of Rs 13.22 trillion for the September quarter and stalling rate was 13.3% of all projects under implementation.
The reasons for stalling were the usual suspects - lack of clearances, fuel supply, finances, land etc.
A total of 39.04% of the projects are in the power sector and 25.59% in manufacturing. But the most disturbing news is in the declining new investment announcements. Sample this,
The value of new private sector project announcements in the quarter ended September was Rs31,000 crore. This value was Rs1.79 trillion and Rs1.69 trillion in the quarters ended September 2016 and 2015. 
6. This is a nice graphic that captures the fact that average commuter trip lengths rise with increase in city population size.

The article laments about the political difficulty of increasing urban mass transit fares and the resultant subsidy gaps.

While raising mass transit fares periodically is important, we should also bear in mind that farebox ratios are less than 50% in most metro rail systems across the world. In other words, more than half the operating expenses are subsidised. Therefore a more serious issue for consideration than cost-recovery may be to mark metro ticket prices as a percentage share of the median commuter wages.

The report states that the Railways subsidised Mumbai suburban railway commuters to an extent of Rs 33.94 bn over the past three years. That's not at all bad. An annual subsidy of Rs 11.3 bn for ferrying over 2.5 bn commuters (or 7.5 million per day), especially when seen as the cost of keeping them off Mumbai's roads, is actually a very good deal! In terms of efficiency, it would easily be the most cost-effective urban mass transit operation anywhere in the world. Managing a city is not just about recovering costs, it is about creating the conditions for creating growth, jobs, and wealth. And Mumbai mass transit does it better than most other enablers that the government has put in place.

7. Just like with anything else, too much competition is bad. As Andy Mukherjee writes, India's telecoms market is the best example. The race to the bottom with call and data tariffs have left everyone bleeding, and threatens to make this the latest addition to the bad debt problem for Indian banks. Mukherjee suggests that the carnage will not stop till the industry undergoes more consolidation and failures and reduces to four players.

However, I do not think that even then it is unlikely to be much different. As I blogged earlier, the elimination of interconnect charges on grounds that it would lower profits may not, in retrospect, turn out to have been a very good decision. 

8. Aeon has a fantastic essay on the evolution of higher education system in the US. It talks about the role of property speculators trying to use the College/University as a cultural centre and anchor to attract property buyers; competition among towns, state, and even church to establish colleges; the modest government funding forced colleges to charges fees and thereby compete to make college valuable for students; the limited regulation beyond grant of charter which allowed colleges lot of autonomy to innovate to attract students; the practicality associated with attracting middle class fee-paying students meant offering job-oriented course-work (engineering, agriculture etc) and accord importance to things like football.

And for those countries trying to replicate the US model of higher education, the author has this advise
Since it’s a system that emerged without a plan, there’s no model for others to imitate. It’s an accident that arose under unique circumstances: when the state was weak, the market strong, and the church divided; when there was too much land and not enough buyers; and when academic standards were low. Good luck trying to replicate that pattern anywhere in the 21st century.
9. The week Richard Thaler won Nobel Prize in Economics, comes this report from SCMP on the use of nudges (or, are they "shoves" here?) to get people to pay their taxes
Local governments have been told to set up name-and-shame databases – which will be searchable by anyone – by the end of the year... In the southern city of Guangzhou, the personal details of some 141 debt defaulters have so far been displayed on screens in buses, commercial buildings and on media platforms at the request of local courts. Meanwhile in Jiangsu, Henan and Sichuan provinces, the courts have teamed up with telecoms operators to create a recorded message – played every time someone calls – for those who fail to repay their loans. The message tells the caller: “The person you are calling has been put on a blacklist by the courts for failing to repay their debts. Please urge this person to honour their legal obligations.”
10. Finally, the award for risk diversification best practice has to go to LIC. It has been reported to have made a bid for shares worth Rs 7000-8000 Cr in the IPO of reinsurer General Insurance Corporation (GIC) Re. Talk about insurer buying exposure into a reinsurer who also insures some part of LIC's own portfolio! Or is it a case of LIC as the buyer of last resort in disinvestments.

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