Posted by: qmaxim | January 28, 2015

Priorities for PM Modi – How to add 2% to India’s GDP growth- Some ideas

PM Modi lead NDA govt completed 8 months in office recently. It has been a hyper active period with slew of  initiatives/announcements related  investment, manufacturing (‘make in India’), financial inclusion (‘Jandhan Yojana’), skill development (‘skill india’),  security, digital connectivity (‘digital India’) and  health and hygiene (‘Swatch Bharat’). PM Modi  also made  several successful foreign trips. India also had numerous high level visits from  foreign countries. Last high profile  visitors being – US President Obama &  US foreign secretary John Kelly.

It is now time for action. First step in making  these mega  initiatives bear fruit is to ask bold fundamental questions & challenge assumptions- then make plans based on these. Here are my five  big ideas on  way forward – these can  add 2% to the GDP. Most of these will support ‘make in India’ initiative.

 

  1. Economic policy:

Some questions-

RBI   reduced lending rates only recently but rate is still pretty high- is there an advantage in keeping them high?
Why  govt is so fixated on holding deficit percentage – there is also news that govt is reducing investment to meet deficit target.
Govt also set itself a further deficit reduction targets for coming years –is it desirable?

What should be done?

There is no evidence to prove  that keeping lending rates high brings down inflation –see my previous blog. On the contrary  it chokes growth in sectors which are dependent on borrowing from banks such as consumer goods, construction, housing , manufacturing, etc.

In the developed economies there is very little scope of improving infrastructure or basic needs of citizens as they are already taken care of- hence growth has to come from increasing consumption. In India, there is big scope for increasing  growth by improving poor state of infrastructure, meeting basic needs of large set of citizens, manufacturing. All these need large investments. Increasing investment into productive sectors will increase growth.
Anyway, deficit targets were fixed by previous govt. – was based on  fanciful  assumptions – it looks like these will not be met. If there is no acceleration in growth soon it is unlikely that challenging deficits targets will be met in the coming years too. As  long as productive assets are being created this will not lead to increased inflation.

It should be noted that China’s economic boom at least  in the initial years was primarily due to massive govt funded  investment  into infrastructure – & use of infrastructure is not free in China.

Govt should not be too fixated on reducing deficits at the cost of investment.  If investment is reduced to control deficit as proposed,  it will lead to downward growth spiral. Hence, there is a need to re-look at the proposed deficit   targets in the coming years & keep the deficit levels at the highest rate possible without stroking inflation.   Same goes for ‘fighting’ inflation by keeping interest rates high- lending rates should be kept as low as possible.

  1. Air travel:

Two fundamental questions-

Why the cost of air travel so high in India (travel to Singapore costs only 10,000 Rupees whereas B’lore to Calcutta costs 15000, B’lore to Gulf 30000), but still, except for one carrier, all  Indian carriers have been  making losses year after year? Air India’s accumulated losses are about 5.9 billion Dollars –with no profit in sight any time soon.

Why outgoing air travel is almost completely dominated by gulf and other foreign carriers?

Why repeated safety and other violations (e.g. it has worst on time performance of all carriers) particularly  by Air India is being tolerated by the   aviation regulator – DGCA  year after year?

Reason:

One reason touted for high fares and losses is- costly aviation fuel due to high level of taxes.  Due to this   local airlines are at disadvantage. Is it the only reason for the high cost ? Probably not.  If this were so, how is that one Indian airline is  able to make profits consistently?  This aspect should be studied.

Primarily due  terrible state of affairs in Air India foreign carriers are able to price their tickets at very high levels and rake in high profits. Due to AirIndia’s inability over the years to  ramp up operations quickly, foreign carriers have been able grab most of outbound market especially to Gulf destinations.  As 7 million Indians make gulf their home, this is a captive market waiting to be grabbed.

What can be done:

Reduce duties on aviation fuel as well other charges – this is happening already- support Indian carriers so that they become competitive –and treat all the Indian carriers equally. Remove all restrictions on private airlines so that they can grab as much of outgoing market as possible – this should enable them to double their size in next 5 years . Stop govt patronage to Air India – ask it compete for market share. Make  Air India public sector company to begin with, to reduce govt interference, ask it  to shape up otherwise sell it off. Reducing cost of air travel in India can give a big fillip to tourism industry.

Revamp  DGCA completely, bring in experienced  engineering talent – if required on deputation from foreign regulators such as US’s  FAA.

  1. Oil and gas

Why does India import 85% oil and more than 50% natural gas ?
India is 4th largest importer of oil – last year’s import bill was about  100 billion dollars. This is a big strategic and security issue.
Going by the current trends –no major discoveries in last 5 years-  this is only likely to go up. In the same period US has almost become self sufficient due to shale revolution- India does not even have a draft shale gas policy let alone any new discovery. Gas is imported at 3-4 times the cost of locally produced gas.

Reason:  Public sector ONGC has not made any new oil discovery in the last 10 years. Only major Gas discovery made by RIL is stuck in technical issues and litigation. Even when discovery is made DGH (the down stream regulator) and ministry takes ages to check this and give their approval. Many of the old public sector refineries can’t  handle different grades of crude thus reducing their flexibility.

What can be done:

Simplify  oil discovery policy radically and fix the price of oil/gas (based on ease of extraction- onshore, offshore, deep sea, and so on)  to balance between cost to consumer  and  at the same time making it   attractive for investment. It is necessary to make investment attractive as most of oil and gas is found in not easy to find unlike oil rich countries. Shut down   regulator DGH – it has only lead to endless discussions, litigation and delays.  Also, regulator’s impartiality is in question as  it is manned mostly by   public sector oil industry employees on deputation- they are unlikely to go against their parent organizations. Have a simple revenue sharing price formula in which share of the govt progressively  increases as the years go by -so  that contractor recovers his investment. Have a time bound approval mechanism. Come out with attractive shale gas policy pronto.
Build a large corpus when the price of oil is low -as it is now-so that there is enough buffer for investment and to subsidize when the price of oil begins to climb again. Modernize refineries so that they can handle all types of crude including low grade   crude – which many of them are unable to do at present.

Have 20-30 year  fixed price contract with foreign oil suppliers (particularly the ones with high production cost or their govts are vulnerable ) similar to what Russia signed recently with China. While western oil companies are moving out of Russia due to uncertain environment – China is quietly pouring billions of  dollars in developing oil resources. Negotiate with the US so that they allow their shale gas producers to export low cost gas –currently    export is allowed only to their  strategic partners.

Encourage India’s oil suppliers to invest more in India and import more to reduce massive deficits.  Use foreign exchange reserves to fill strategic reserves which are being constructed – buy oil when the prices are low – which is now .

  1. Electronic Hardware:

Why does India  import  almost 100% of electronic hardware ? Most of the imports are from  China. TV sets, mobile phones/ tablets, electronic switches, computers, medical equipment are imported – the list is endless. Only cell phone assembly plant in India shut down recently. This  plant  based in Chennai, owned by Nokia, employed 20,000 people.  Current imports are about 100 billion dollars which is likely to touch 300 Billion dollars in the next 5 years if the  govt’s ambitious  digital India & computerization programs takes 0ff & internet penetration in India reaches the expected level. Import bill is lot  more than India’s oil import bill.

What can be done:

Provide incentives & improve ease of doing business -and woo    investors particularly from Taiwan, Japan and South Korea. These countries are the largest investors in China and have created millions of jobs there. Just doing  electronic assembly can create millions of  jobs.For example, Foxconn a Taiwanese  contract manufacturer, employs 1.2 million people mostly in China. Foxconn is a contract manufacturer for Apple, Xbox,Amazon and many  others.But just incentives may not be sufficient inducement for this to happen quickly- for this to happen quickly  some amount coercion is required. One way would be- tax on imports – rate of tax progressively  decreasing with lower import content.   This is somewhat similar to strategy followed by China- insisted on technology transfer and partnership with Chinese companies in the initial years as a condition to access large Chinese market.

Make it mandatory for large electronic networks such as  Facebook, Flipkart, LinkedIn, Amazon, Google, Microsoft, Visa, WhatsApp, Twitter, Yahoo and Indian telcos to have  their server farms in India. Presently none of them have servers in India. After all, ultimate objective of these platforms is e-commerce. This is important due to economy and security  considerations. At the rate which  these networks are exploding investment of billions of dollars will be needed. For example, India constitutes 2nd largest number of  Facebook users, so is the case of   LinkedIn. Transaction done on Amazon platform in India is likely to  touch 2 billion dollars this year. Apart from employing thousands it will also  lead to skill development on a massive scale.

 

  1. Metal and Mining:
    Why no addition has been made to Gold reserves even though India has been consistently 1st or 2nd  largest importer of Gold all these years?
    Legal Gold imports were roughly 50 billion Dollars last year, probably the total is 70 billion dollars -may be even more.
    India has one of the largest reserves of Iron ore & fourth largest Steel producer – still is a very large importer of Iron ore?
    India one of the largest Coal producers and has one of the highest  coal reserves- still a large Coal importer?

       Reason:

Except for one  mine  in Karnataka which produces  small amount of Gold –there has not been  addition in the last 60 years – there is not even a Gold exploration policy.
Mining of  Iron ore was stopped in large parts of country due to orders of supreme court- have started to reopen.  Also, imported ore in many cases is  cheaper than locally produced ore.

Coal mining is largely the monopoly of  Coal India and they have not been able to ramp up production.  Also, calorific value of coal produced is inferior to imported coal in most cases.  Some times, landed cost of imported coal is cheaper than        locally produced coal.

What can be done:

Urgently, put gold exploration policy  and incentives in place to encourage gold mining. In the short term,  import gold directly from gold producers such as South Africa.  Bypassing intermediaries  can save lots of money , put smugglers out of business, &  lead to development of gold processing industry in India. There is no reason why govt of India should not certify purity of Gold.  For example, India imported gold worth Rs 1 lakh  crore      from Switzerland alone last year. India should also explore  buying up  gold mines. By using large gold jewelry manufacturing  talent in India, India can become a big exporter in the field.

Encourage development of Iron ore mines by speeding up environmental clearance and sorting out other issues. Treat private and public sector producers on par. Allow export of some portion  of ores produced. Countries like Australia have achieved  high living standard mostly by exporting natural resources- there is no reason why India should not be doing the same. There is no reason why India can’t become second largest Steel producer- most resources are already available- all which is needed is encouraging environment.

Same goes for Coal. There is no reason why coal India should  have monopoly for mining coal- coal is not a strategic material any more – open the field completely. Govt has taken encouraging moves in this regard. Allow export of coal later.

 

All these initiatives  will contribute   substantially to  GDP growth and act as fillip to ‘make in India’ initiative. Recently,some skeptics expressed doubt whether there is market for output for ‘make in India’ . There is no need to find new markets – market already exists in India right now.

This is by no means a comprehensive list – there are other large opportunities, for example, import of  bulk drugs and pharma ingredients.

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