The Indian Covid Blame Game

 The entire country is down with a massive surge of covid cases and seems like there is no end in sight. The experts have predicted mid-May as peak for most states though some believe that Maharashtra may peak earlier and UP may continue till the end of the month. Nevertheless it seems no respite in sight and on top of it massive casualty is being reported from across the country with heart-moving scenes making the rounds some savoury others not so much. Mostly of the latter kind abound.

Another very interesting aspect is blame game with all finding some kind of scapegoats to fit their logic of why the concerned needs to be blamed. The western media has blamed the ruling BJP and our honourable PM for all the ills. Infact some have gone so far ahead to call him a super-spreader. No that I am either a friend or foe of the ruling party or the parties in opposition but I find the logic being thrown around as unpalatable. Let me try to work my logic point by point.

a) Let's start with state governments as health in India is a state subject. So given that each state has regular access to its numbers why did the states not realise what they were looking at especially in the context of micro-containment zones. The granularity and clarity of data at local or state level is much deeper to give a first hand picture of what to expect. So why did no state government rush into action ? And why blame centre for waiting it out if states are not clear about their own data and situation? 

b) Vaccination being inadequate. Well many issues here. First being that Indian Government did not invest in R&D during early stage like US Government. I find the logic laughable, can Indian Government bet on R&D given our history and will the opposition and people allow this to be done given that the money (few 100 crores) may be all down the drain without any results in worst case. Unlikely, give our conservative systems. Second is vaccine diplomacy. I again find it strange, compared to 14 odd crores vaccinated the vaccines exported is not less than half of that, and still nowhere close to the target of 100 crore vaccinated that we may be seeking. Even if we did add these to our own stocks another 0.5% may have been vaccinated, but now a country like Bhutan stands mostly vaccinated and so are few others thanks to such initiatives. Besides at the beginning of Jan 21 no one had any clue of where the covid numbers were going (we felt it was going down). Third point is initial vaccination of 45 plus population. Again I think it was a logical step given the production cycles and maximum return in terms of saving lives. It was well established that elderly and co-morbid above 45 are more prone to severe infections.  

c) Kumbh Mela: Another interesting issue, and definitely holding kumbh mela was avoidable. However, when it started the numbers looked in control. Besides it can't be said that kumbh mela was the primary reason for rise in cases across Punjab and Maharashtra. At least I don't think so. Nevertheless, after some damage the kumbh mela was partially shuttered and it was a good thing given the spike in cases. The fact that after personal request of PM and such bleak covid situation, certain people still took a dip as late as 27 April shows the challenge of governing India. 

d) Elections: Well this one is easy, did any political party to begin with boycott or called for the polls to be postponed due to covid. At least I did not get to read any such news item. So, why blame only BJP when all the political parties were actually busy fighting a very acrimonious election. Infact, had PM postponed the elections he would have been called a dictator. Some people went ahead and called him spreader of Covid, I fail to understand how did only BJP rallies led to covid infections. Again the initial covid numbers were not understood or taken seriously and things went downhill but all political parties are equally to blame. They could have all called for postponement.

e) Some newspapers have brought in additional elements like Central Vista at this time, well my question is what has it to do with covid and did not the economists say that capex by Government shall help the economy. So here it is capex and one that is needed since quite some time as it is said that existing parliament building is in bad state and needs much maintenance.  

All states and political parties and western media had called the lockdown of 2020 as draconian. And yes, for the migrants it was extremely painful. But can they actually say that it did not save lives given the experience of second wave? At the start of 2020 covid in India we neither had treatment protocols nor vaccine nor much experience. Therefore, it was in hindsight an ok plan. Such was the glaring criticism of the idea that no proper lockdown was implemented across any of the states this year. But did we miss a trick or two here in terms of not being able to develop a framework of how and when to implement a lockdown and to what degree. This could be an error that Centre did make. 

My greatest issue is with the education experts like myself who have been clamouring for starting the classes in so called bio-bubbles with scant regard for the mental health of those inside. Without vaccine or proper research on how the covid could have impacted the kids and school going teenagers and young people we thought it fit to open the schools exposing the future generation to a virulent and unknown, constantly mutating virus. To me that was the biggest folly. And state govt after state govt was keen to open the schools trying to portray a sense of normalcy which was not there. Our schools and colleges too suffer from lack of open spaces and in many cases can be crowded as well making schools ad colleges genuine super spreaders through the students of all ages and sizes and the teachers. Some parent groups even went as far as fighting the school management to ope schools as it was difficult for the kids to be mentored with work in office having started. While I understand the point of view here, but what is more important, health of the kids or their offices. I think the answer in such cases is easy enough.

So in my personal opinion we are all responsible for the second wave and not just the Govt or PM. We let our guard down. We let ourselves to be lulled by a sense of false normalcy. 

The Spectrum Conundrum

Let us examine the recent telecom spectrum mess which has been widely reported. The genesis of TRAI recommendations arose after the last two auctions announced by Government of India for spectrum went completely bust with no participants for most circles. The reason for above was high base price quoted by DoT which amounted to almost INR 14000 crore for a 5 MHz pan-India spectrum.  In theory, auctions are widely favoured as aiding in price discovery where it is difficult to place a price on an asset, however, it has been reiterated again and again that the reserve price or the base price has to be rational and in tune with times. Rightfully, TRAI had suggested a 37% cut in the base price for spectrum in the 1800 MHz band and up to 60% cut in the reserve price of airwaves in the 900 MHz spectrum. However, DoT panel has rejected the TRAI proposal and have questioned the pricing formula being used by TRAI. We really need to examine this argument before we arrive at a judgment. First, TRAI may have got the pricing formula incorrect as there is no sure shot way of arriving at a number, however, the very design of auction has an inbuilt mechanism of ensuring that price discovery happens. When TRAI lowered the prices, at no point it meant that this is the final price, on the contrary it was achieving its primary purpose of ensuring high level of participation in the auction. Once auction is put in place, the market forces would take over and assuming that the participants have greater incentive to get hold of spectrum as compared to collusion (tacit or otherwise) the price discovery would be fair. So a reduction in reserve price is by no degree tantamount to selling spectrum cheap by any standards.

The second issue of interest here is the spectrum usage charge (SUC). Presently DoT charges 3-8% of the revenue as SUC, but TRAI had proposed a flat charge for the same, which has also been rejected by DoT. The argument given by DoT is that older players own cheap, pre-auction bandwidth and so it does not give a level ground for the new players who need to invest in costly spectrum. This argument if examined from an economics perspective, does not hold as the new players are making investment knowing fully well that incumbent players have inherent advantages. If the new players are keen to invest, it would be based on some future outlook and earning potential that they see in telecom sector. If the new players cannot compete with the incumbents on any parameter, they are better off sitting out of the market. Besides, most licenses given 20 years ago are anyway coming for renewal and they are not going to go any cheaper as the firms in business would need to protect their investments made over the years not to mention the fact that they would anyway need spectrum to be in business. However, if we look at the argument from a business cycle perspective, it holds more value. Three years ago the 3G spectrum raised over 1 lakh crore for the government. At the time, the general macroeconomic outlook was bullish and telecom firms anticipated high value business from data intensive services through 3G. However, the scenario never really played out and the firms ended up being in huge debt with deteriorating network and service quality. However, this business oversight cannot be blamed on the Government. At the end of the day, firms bid those amounts anticipating huge revenues. If the economic outlook today had been better, the firms would have again bid at astronomical prices. But having said that, this does not mean that DoT should offer these firms, spectrum at lower prices just because economic outlook is gloomy. A year down the line when the environment improves, it may result in higher returns for the firms at a high cost for the exchequer. So what is the way out?

It has been proved beyond doubt that whenever telecom auctions have been conducted across the world with very high reserve prices (examples of UK, and other countries in Europe are a case in point), this leads to either lower penetration of the costly service (with high price being passed on to the consumers) or no uptake by the telecom firms citing high prices. A better way out is to keep a reserve price may be on a lower side but argue for a higher percentage of revenue share in the form of SUC as it ensures that money keeps flowing both during crests and troughs. Moreover, lower one-time payment enables firm to keep the service charges rational to ensure greater penetration of telecommunication services.

Political leadership vs Functional expertise

Popular literature, various political parties, news channels etc. have been focusing on the debate of  two centers of power in present UPA government. Political circles have branded our honourable Prime-minister as weak, without political acumen, and have harped on his lack of connect with masses as he has never been a political leader. However, if we look at the model from an organizational perspective certain key points emerge.

First of all let us agree on the assumption that just because some one is a political leader with mass following does not mean she/he is the best person to look after a responsible designation in government. For example, a political leader might not be an expert in economics but might end up becoming a trade and commerce minister or a finance minister. No doubt, such people have a retinue of bureaucrats to help them out but fact of the matter is that one's own understanding does play an important role. Gone are the days when generalists ruled the roost and in today's world of super specialization having a deep understanding of the function could well be the difference between running the show with success or failure. The entire gamut of bureaucrats (undoubtedly highly qualified) might have their own fish to fry. I am not doubting the abilities of our political leaders but let us accept  this that not everything is straight forward to understand and simple to execute. 

What I am getting to is separation of political leadership and functional expertise. A particular political party might have a set of experts who subscribe to basic party philosophy but when it comes to making decision which are complex such people should have the say. In event of political parties forming governments such experts need to be given specific responsibilities. 

In this context let us examine the present scenario. Mrs. Sonia Gandhi is primary leader representing congress party but prime ministerial candidate was chosen as Dr. Manmohan Singh, well known economist, ex RBI governor, ex-finance minister. In my opinion if we look at the event  keeping away the political tones, this represents meritocracy at the highest level. Not that I am a congressman or something but I believe this separation between political leadership and functional expertise is the way to go in future. This could bring about appropriate debate between popular politics as it plays out in most decisions and an appropriate technical analysis conducted by an expert to bring out a way which is acceptable to both the sides.

Lastly, I am no way implying that this will bring down the significance of mass based political leaders. In fact it will only serve to enhance their political base and give a fillip to good policy making.

2G Vs Coal block allocation

The recent furore over CAG report on mishandling of coal block allocation and then on its estimate of  loss to exchequer at around 1.86 lakh crore has created ripples across the nation. Let us examine this issue together with the 2G issue and try to draw some parallels and differences across the two.

The minister for telecom decided to allocate spectrum on first come first serve basis instead of resorting to auctioning the spectrum which could have helped in actual price discovery. It has been argued that based on 3G auction estimates, the 2G auction might have netted around 24,000 crore or so for the Government.  But by resorting to first come first serve basis; minister enabled a set of players to get access to spectrum, many of whom did not even set-up the network as stipulated by the overall licensing conditions. However, with only limited consortiums who actually qualify for the tedious and expensive spectrum auction mostly players with some serious standing were a part of this allocation. Although a couple of firms that did not put up network were sitting on spectrum, they were not allowed to sell off their spectrum to other players given the regulations already put in place by TRAI. Thus the arbitrage based on entry and exit without spending money was not possible. As for justification on the part of government, our PM Dr. Singh has himself expressed in an interview that this was like a subsidy to the telecom sector that enabled low call rates and rapid expansion of telephony in the country. The argument cannot be completely falsified and definitely has an element of logic to it and undoubtedly low call rates did play an important role in the expansion of mobile telephony in the country.

Now let us look at the coal block allocation. Unlike minimum stringent requirements set forth by TRAI for licensing and spectrum allocation (such as strong technological capability for putting up a network, previous experience of running a network either self or through a partner), coal ministry was a lot lax. Almost anyone could have applied for a license and could acquire one if one was on good terms with the state government or the central government as allocation was completely based on judgment of the presiding ministries. As a result groups with no previous experience in power projects or coal handling applied, were allocated blocks and then they were quick to sell the blocks to others and exit from the scene without spending much in the process.

Although a lot better entire telecom ministry was put to task for the 2G issue, however, we see nothing of the sort happening for coal ministry???? The most amusing argument from government was that CAG has miscalculated the extent of loss. Even if that is the case and we give or take a few thousand crores, it is still upwards of 1 lakh crore, which is unprecedented in the history of this country!!!!!!!!!!!

I do hope the PAC takes this seriously and guilty are taken to task, but more importantly there is a need to address ad-hocism in the policy making space in this country, it is high time we adopt a consistent policy line and toe it without compromise.

3G: Right decision or a goof up???

Today got an opportunity to hear two interesting perspectives on the state of telecom sector in the country. Although the two perspectives were from fundamentally different sides, one from a MNC telecom equipment developer side and the another from VAS side, they did resonate on the point of utterly pathetic situation of service providers in the country. I have talked in the past about dwindling ARPUs, wafer thin margins, voice still being the primary bread and butter, but with rising inflation, increase in opex after a major jolt of capex in the form of 3G has left the service providers in tatters. One cannot underplay the importance of service providers in the telecom ecosystem, but the fact that higher uptake of smartphones has actually not made much difference to their business is an indication of inequitable roles in the telecom ecosystem. Why should the service providers alone invest in the network? More often than not a technology is pushed through by large telecom manufacturers, driven more by getting a return on their high R&D expenses, rather than understanding the needs of the region,or any consideration for the shelf life of an existing technology. In the Indian scenario 3G auction was the only way MNCs could get the service providers to buy a technology which was to be weeded out in a matter of 1-2 years. With a windfall gain for the Government it was a win win for all but the service providers and the ordinary subscribers of this country. The 3G auction was at best a pyrrhic victory for the service provides as they fought against each other for lucrative deals. What was forgotten was the fact that irrespective of winners the technology would actually be bought from a handful of companies with huge cross holding of patents, thereby ensuring a good earning for the manufacturers. If the above was not bad enough, to debar the Chinese companies from getting business Government bodies expressed security concerns. Now it is anyone's guess how much of it was security risk and how much ensued from lobbying by the likes of western MNCs eyeing business from Indian service providers. Undoubtedly the large MNCs still toe the standard line of 3G being a necessity before 4G which has no rhyme or reason. Fact of the matter is that even after huge outlays in network infra and subsequently in marketing campaigns, it will still take at least 3-4 years for the firms to reach a decent subscriber base out of metros.

In my opinion, auctions should be conducted by combinations of equipment manufacturers and service providers, this will ensure that the equipment developers are not mere spectators immune to a service providers situation but in case of servcie not being picked up by subscribers have a financial liability. This would push the telecom equipment developers to remove information asymmetry inherent in the market and offer the best solutions keeping in mind the fact that they would need to spend again in the auction if the shelf life of technology is not appropriate.

The next step for Indian IT industry

Indian IT industry has made rapid strides and in the last 10-15 years, has reached a status wherein IT contributes a whopping 11% to the Indian GDP with revenues of around US$ 70 Billion for the financial year 2010-11 (NASSCOM). Several well known and well understood factors have contributed to this growth such as availability of a large pool of technically trained humanpower (manpower sounds too gender specific!!!) that could converse in English, labour wage rate vis-a-vis west, currency conversion factor, low capital expenditure involved in setting up a small IT company (therefore high returns could be expected), lack of interest in manufacturing related jobs among the graduates etc. Year after year Indian IT companies played to this strength of labour arbitrage, favourable Government policies and not much of a competition on a global front especially in terms of the scale that Indian companies could offer. No doubt Indian companies have established themselves as credible players in the global delivery related models. Top 3-5 Indian IT companies boast of size and scale that is second to none in their respective fields. Today more than 80% of revenues generated by IT firms comprise customized software development and maintenance (NASSCOM). However, they have reached a critical point and since last 3-4 years there has been consistent debate on moving to the next level on the ladder of evolution.

Question is what are the next layers and how does one make a transition to the more evolved layers? Answer to the first question is strongly context specific. A well diversified IT company like the big three in India have many options to look forward to. For example, they could make a transition from services to software product development in a much greater way than what they do today (less than 10 % of revenue is through software products). These firms could start with India specific products and then move to more customized ones through various development centers that these firms have created across the globe. When I say India specific products, possibilities are infinite, for example we hardly have a product that can help us plan a balanced Indian diet. Indian population is at greater risk of suffering from diseases like diabetes, cardio-vascular diseases as well as other life style related diseases. A product with loads of data about calorie related information about Indian food products could help people plan a wholesome diet on a daily basis. If this could be integrated to existing desktop/laptop/smartphone applications this would go a long way in promoting healthy lifestyle. Similarly there could be applications related to readymade analytics packages, e-governance and m-governance packages that could be potentially market winning. As I said earlier possibilities in this sphere are infinite.

The other more technical option is moving into high end research and development related to new paradigms in computing and networking, computer and network security, hardware design and manufacturing, especially customized embedded systems. Robotics and artificial intelligence related work could offer great prospects. However our technical workforce is ill equipped to deal with this kind of development work and only a few companies have the wherewithal to move ahead in this direction. There is requirement of substantial investment as well if a company wants to really make a difference on this front. However, a success on this front could have potentially high gains. This direction essentially leads to where several IT/technology companies of west stand today. Filing of patents forms an integral part of work accomplished by such firms. A logical step to make transition in this direction might include strategic acquisitions abroad, essentially niche firms focusing on high end technology.

A third direction is moving to the more conventional side of business consulting. With wide experience of having worked on a plethora of projects with different industries, most IT companies have gathered knowledge and skills that could be utilized for business strategy consulting. This in house skills could be a goldmine that could turn these companies to potential competitors for larger consulting companies.

However, to make this transition companies need to look beyond their existing business models. Companies should no longer be satisfied by getting newer and larger outsourcing projects . Today they are a staple but in the coming future labour arbitrage will not work and might lead to serious social consequences given the size of large Indian IT companies. Before market forces you to change by leaving no option at all it will be much better to start self evaluating various options including the ones mentioned above for a long term strategic fit. Up coming companies across Latin America, Ireland, Eastern Europe, Russia, Israel have the potential of disrupting the business of Indian companies, similar in many ways to what Indian companies did to some of their western counterparts. Like succession planning is so integral to businesses, similarly transition planning to move to the next level should be thought through by careful planning.

In their path to the next level firms would have to be patient and realise that such initiatives would be cost centers to begin with. IT industry in general has been looking at quick gains without much capex or time delays and this will be a fundamental shift in their operating model. Initially say around 10-15 % of funds need to be allocated to new initiatives and these initiatives may take 3-5 years to reach a level of maturity wherein they will start earning revenues. All in all complacency of Indian IT companies by over persistence with their existing business models might lead to their decline and now is the time to act to prevent this from happening. Although some comapnies have taken small steps in this direction, this needs to accelerated to maintain the competitive edge of Indian IT companies.

A First-cut Look at Salient Features of Union Budget 2011

A First-cut Look at Salient Features of Union Budget 2011

By Prageet Aeron

Union budget is always an event of interest for every section of society owing to its importance in both planning and developing expectations for the coming year. Union Budget 2011 presents several interesting issues before us. Some of them will be discussed here with the aim of trying to unravel their impact on various stakeholders.

a) Exemption of tax for senior citizens above the age of 80 years up to an income of 5 lakhs: A very positive step, at a stage of life where you tend to spend more on health related and other issues, this would give the senior citizens some relief. Also viewed from a more philosophical point of view, citizens of this age group need to be looked after as there is hardly any systemic arrangement in our country for looking after the elderly.

b) Senior citizen benefits to begin from age of 60 instead of 65, again a welcome effort to help the elderly.

c) Exemption raised to 1.8 lakhs for male taxpayers and 1.9 lakhs fro female taxpayers. This seems more like lip service rather than any concrete step. Raising the limit to 2 lakhs for both might have been better. With inflation at almost 20% for certain products, this increase of barely 12% will hardly bring any relief. On the other hand in the long run this discrepancy between male and female taxpayers is discriminative without much logic and should be eliminated.

d) Thankfully exemption of additional Rs 20,000 on infrastructure bonds remains (possibly for one last year!!!). Would have been great if this would have been enhanced to Rs 40,000. A missed opportunity in my opinion.

e) A big positive is the removal of indirect subsidy on LPG and kerosene (cash subsidy to given directly). Given that Government was bleeding the oil companies with a subsidy of around Rs 350 on gas cylinders and a subsidy of around Rs 20-22 on kerosene. This will reduce the burden on the oil companies. Increase in price to its actual value (possibly) will also lead to better utilization of LPG by the customers by curbing wasteful practices. However on the down side there is still no mechanism for the delivery of direct cash subsidy. In the past nations that tried these forms of subsidy have failed on the execution front.

f) With LPG, diesel, petrol, ATF all increasing in price, cascading effects on other sectors are a natural outcome. Will certainly add to increasing inflationary phenomenon. However, increase in service tax on aviation industry seems unjustified. India needs a strong aviation industry, with business and other forms of travel having undergone a sharp increase it can no longer be seen as a luxury and Indian Government should move out of this mindset. Besides aviation industry also employs a large number of people, and an in the near future, development of manufacturing related to aircrafts is sure to increase this further.

g) Fertilizer industry has been given an infrastructure tag and now urea too would be given a nutrient based subsidy. This will be good for reducing deficit and also have appositive impact on the environment especially curbing excessive use of urea.

h) There seems to be a little movement towards GST but will surely take a lot more time may be 2 years to be implemented.

i) With medical infrastructure in tatters bringing the private hospital under service tax net is sure to hurt the middle class. This is a completely unnecessary burden which could have been avoided in the interest of welfare.

j) Allowing FIIs to invest in MFs in India might backfire in the short term by making the market more volatile. It could have been restricted to only infrastructure related mutual funds for the time being. However, on the positive side it will bring more funds into India.

k) Rural India has been showered with several gifts including 500 crores for the regional rural banks; special corpus for women self help groups as well as SIDBI controlled microfinance fund. Another 18000 crore have been allocated to develop rural infrastructure but again delivery mechanisms need to be strengthened.

l) A subsidy of 1% on housing loans till 15 lakhs for houses worth 25 lakhs vis a vis market rate will be useful for the tier 2 cities but will have little impact on metros where most housing schemes are way beyond 25 lakh mark.

m) Agriculture has been given a boost especially the eastern region of the country has been chosen as target for increased productivity. Generous allocations have been made to poultry, livestock and fodder development initiatives. Also agricultural credit has been increased to 475,000 crores (almost 16% increase Year on year). Lack of production has been rightly identified as the cause for inflation among the food items however, without adequate supply chain infrastructure related to cold storages etc any increase in productivity is of little value. The amount of investment required for developing supply chain infrastructure cannot be provided by Government alone and seeking private sector participation should have been a priority in this sector. This is where an increase in FDI in the retail sector could have come in handy with certain riders such as minimum investment guidelines for setting up cold storages and agri-processing units in far way regions. This is surely a missed opportunity.

n) Increase of duties on laptops and desktops does not look like a very positive step. However decrease of duty on hybrid vehicles is a good sign. Hopefully, hybrid vehicles will become the vehicle of choice among the super rich rather than the fuel guzzling environmental menace like SUVs.

o) MAT to be imposed on SEZs and equipment for UMPP (Ultra Mega Power Projects) to be exempted from duty. Latter is a tad late, should have been put up a year ago (better late than never).

Finance Minister has not tinkered much with most sectors of the economy and so there is not much element of surprise in the budget. This should transform into no shocks in stock market in near term. With expected growth of 9% in the future, optimism seems to be the mantra. Overall a budget that possibly focuses on social welfare of the lowest segment of the society but does not offer much to the tax paying middle class. Government has also promised to curb the menace of black money through a five point programme but with the political leaders across the board themselves undergoing scam investigations any quick output does not seem likely.

(Views expressed by the author are personal)