End unproductive populism!

Since Independence, Subsidies have been used as a policy tool by successive governments till today. Some of these were necessary, some were introduced due to political compulsions. After Independence there were very few people or groups who were capable of investing money into big businesses, which in turn would generate employment and in turn would help the building nation. Hence the government started subsidizing industrialists in the form of cheap land, electricity and taxes. This could be justified given the business environment at that point in time. But gradually this practice gave rise to the now abolished “License Raj/Permit Raj”. Multinationals were discouraged from doing business to protect the local business. eg. Companies like Coca-Cola, Daimler, Royal-Dutch Shell had to close there operations in India. Businessmen started finding it more convenient to do business under the protected environment of the License Raj.  With lack of credible competition, the quality of products or services never seemed to improve. Premier Padmini and Ambassador were the only cars which were available for generations. Its was quite evident that the real beneficiaries of these policies was not the common man but these handful of business men and the bureaucracy.

Types of Subsidies
Subsidies have been granted in different formats few of them are listed below:

a. Food Subsidy:

This can be considered the most crucial form of subsidy. It is such a pity that after more than 60 years of independence, there is a huge population which is counted as Below Poverty Line(BPL). Making food available to these people is important. But due to non-availability of dependable mechanism in our Public Distribution System (PDS), significant portion of the allocated food ends up with population which doesn’t actually needs it. Even the mid-day meals program run under the “Sarv Shiksha Abhiyan” has huge amounts of leakages and has not yielded the desired dividends. It has been consistently observed in rural areas that kids run away from school after the meals are distributed. Hopefully the Aadhar program, by providing unique numbers to each citizen, may help in plugging few of the above leaks. But even the governments commitment towards successful implementation of Aadhar program has come under doubts, especially after concerns raised by the home ministry.

b. Fuel Subsidy:

India imports more than 80% of its energy requirement. With more than $120 billion in our import bill for oil in 2011,  India is amongst the top 10 crude oil importer in the world. Any efficient government would like to discourage use of resources which result in drain from its exchequer. On the contrary the government in India forces its oil marketing companies (OMC’s) to sell fuel at prices which are below its cost thus creating an artificial demand. The OMC’s incurred huge losses amounting to more than Rs.1 lakh crore in 2011. These losses are partially shared by upstream oil companies like ONGC, Oil India and Gail and the government. Even the subsidy sharing formula is not certain, and is decided on the whims and fancies of few populist politicians. Thus effecting the valuation and competitiveness of our navratna companies. The amount of subsidy if capped to a reasonable level could have saved ONGC billions of dollars. This money could have in-turn be used for more oil exploration in Indian basins like Krishna-Godavari, Mumbai High, Mahanadi basin etc. If not invested in these fields, this fund could have given ONGC enough muscle to buy valuable oil assets abroad, thus contributing to country’s energy security.

c. Fertilizers Subsidy:

This is one of the most crucial and arguably the most hazardous form of subsidy. The government has been paying subsidy to farmers which costs the exchequer thousands of crores of rupees. Government has been subsidizing fertilizers like urea to a great extent. Like oil, most of the urea is imported, thus fueling India’s trade deficit. Apart from the cost impact, it has been consistently observed that farmers tend to use much more urea than actually required since it can be bought cheap! This has been affecting the quality of soil and will have an impact on harvests in long run. The money wasted in these subsidy could have have been used in other productive avenues like better warehouses and logistics for farm products or may be in research for better seeds and pesticides. This would have significantly reduced the wastage of farm products, thereby providing better earnings for farmers. Even after 60 years of independence more than 50% of farmers have to rely on monsoon for farming. A better irrigation program consisting of dams and canals could have been much more productive.

d. Electricity Subsidy:

In the last few years there has been a populist trend in many states where in successive governments are offering free electricity to farmers for farming. With almost half of the population in the country still not having access to electricity, out of the remaining half, baring the few urban pockets almost all other areas have to face hours of outages(load shedding). Given the scenario, can we afford such largesses? The side effect of such freebies is that farmers tend to use their ground water pumps endlessly, thus effecting the ground water levels. As is evident in many states, the ground water level has gone down to alarming level. Farmers now have to dig in deeper and deeper to get water for consumption. Apart from this the average amount of electricity lost in transmission and distribution is at huge 30%. The primary reason for this is theft. It is not that the relevant agencies are not aware of the culprits, but many a times local politicians protect the people responsible in lieu of their votes. These freebies and transmission losses thus raise the cost of electricity for industries and residential customers. Reducing losses and bringing down the cost of electricity would indirectly aid in making our factories and other industries more competitive.

Better use of limited resources

If we calculate the total subsidies, it could easily go above Rs. 2 lakh crores. Even after spending such humongous amounts what have we achieved in so many years? Rather than making its recipients self sufficient, subsidies are making them more dependent. Countries like Israel, which are water deficient have innovated and found ways to grow foodgrains in desert, but for us, even after falling in monsoon region we are still not able farm throughout the year!

The amount spent above could have easily been used for productive means. Infrastructure in our country lags far behind what it should have been. Investing in roads, railways, logistic hubs, cold storage’s would need thousands of crores of rupees. Such projects would create lakhs of jobs. These jobs would primarily be taken up by people who are dependent on agriculture. This would thus help in mechanizing farming, making it more profitable.  Projects similar to e-choupal, which provides farm related information should be given priority. Education is one more aspect which needs huge investment. Government schools in rural areas do not have proper teaching staff and classrooms. Children have to travel far of for there schools daily. Educated people do not find teaching as a competitive career option. These children if given good education, would be capable to stand on there on feet. They would no more be dependent on wasteful subsidies. The government should channelize tax payers money to productive avenues like research in fields like health, biotech, defense, technology etc. Companies like Infosys, Bharti and Wipro etc, have flourished without such protective subsidies. Our policies should be directed such that the next Microsoft, Google or Apple may come from India. We should invest in our people to make them capable enough to take advantage of India’s Demographic Dividend.

Reaping the Demographic Dividend

INDIA has been experiencing steady and moderately high GDP growth rates during most years since the economic liberalization. This has encouraged optimistic projections about India’s future growth potential. The argument is that India can now move to a new growth trajectory where growth could average as much as 9 per cent per annum. Needless to say, such projections must be based on an assessment identifying potential sources of the new dynamism.

One such assessment turns on the demographic advantages that India currently has relative to the developed countries and also countries such as China. India is and will remain for some time one of the youngest countries in the world. A third of India’s population was below 15 years of age in 2000 and close to 20 per cent were young people in the 15-24 age groups.

In 2020, the average Indian will be only 29 years old, compared with 37 in China and the US, 45 in West Europe and 48 in Japan.

This trend is significant on the grounds that what matters is not the size of the population, but its age structure. A population “bulge” in the working age groups, however large the total population, is seen as an inevitable advantage characterized as a “demographic dividend”. A nation’s population can be divided into those in the labour force (say, the 15-64 age group) and those outside it. Since those outside the workforce would be consuming part of what is produced by currently employed workers, the ratio of those outside the workforce to those in it (the dependency ratio) would be among the factors influencing the surplus available for investment after current consumption. Hence, everything else remaining the same, the higher the share of workers to non-workers, the larger would be the surplus. And for given unemployment rates, the higher the ratio of those in the labour force to those outside it, the larger would be the surplus. If this larger surplus is mobilised for investment, growth would accelerate.

According to demographers, initially, the death rate tends to decline because of declines in infant and child mortality resulting from improved “public health interventions related to water and sanitation, and to medical interventions such as vaccine coverage and the use of antibiotics.” Improved knowledge and reduced costs allow for these factors to be exploited even at relatively low levels of per capita income so long as political pressure or the political will to provide basic social services and rudimentary health facilities exist. At a later stage the decline in the death rate and increases in average life expectancy result from reduced death rates in the middle and older age groups because of higher incomes, improved lifestyles and better and more expensive medical technology. As compared with this, birth rate reductions depend on the age of marriage and the fertility rate. Both of these depend on the level of development to a far greater degree. Development often leads to the dilution of social norms prescribing early marriage, and fertility rates within marriage decline as higher child survival rates, female education and labour market opportunities associated with development reduce the desired family size. Though social policy can make a substantial difference to child survival rates and female education, and family planning programmes can influence the desired fertility rate, the observed decline in birth rates tends to begin well after the decline in death rates sets in. The difference in the relationship between death and birth rates, on the one hand, and development, on the other, affects not just the rate of population growth but the age structure of the population.

Finally, the bulge enters the old age bracket, as is happening in the developed countries like Japan,Italy etc currently.

Implications for growth

Shifting age structure can have significant implications for economic growth. Periods characterised by a low dependency ratio would be characterised by higher growth, if the inducement to invest surpluses exists, whereas periods characterised by a high dependency ratio would be characterised by a slowing of growth, unless productivity increases raise the output of a smaller proportion of workers enough to neutralise the demographic deficit.

But if the “window of opportunity” available when the population bulge enters the working age groups is to result in an acceleration in growth, the processes of development which in part created this bulge must have been such as to ensure that the quality of those entering the workforce is of the desired level and that these workers find employment opportunities as and when they enter the labour force. To understand what kinds of policies can help exploit the window of opportunity created by a demographic bulge in the working age groups, it is necessary to recognise that the dependency ratio must be defined not as the ratio of the nonworking age to working age population but the ratio of actual non-workers to workers. The difference between the two is determined by the extent of absorption into work of the available labour force, which must take account of underemployment besides unemployment.

Since unemployment and underemployment are typically the outcome of demand-side constraints, even if the presumption that increased longevity would be accompanied by higher savings rates is right, there could be scenarios in which investment rates fall short of savings rates and result in deflation rather than growth. What is more, even in periods when the population bulge is not in the working age groups we may have large-scale unemployment and inadequate expenditure on education both by the government and by households. This would only erode the ability of countries to exploit the demographic dividend as and when it emerges.

The Indian case

India is indeed in the midst of a process where it faces the window of opportunity created by the demographic dividend. During the first two decades of post-Independence development, while infant mortality rates fell significantly, the fertility rate was more or less stagnant. This would have increased the population of young people significantly, merely because of greater child survival. In the three decades since then, though the fertility rate has been declining, the infant mortality rate has fallen quite sharply, with possibly the same effect. One consequence of these trends is the sharper fall in the crude death rate than the birth rate, though declining mortality in the higher age groups would have influenced this as well. The effect of these trends on the dependency ratio has been along expected lines. The total dependency rose initially because of a rise in the child dependency ratio and stagnation in the old-age dependency ratio. Subsequently, it began to fall (from 79) in 1970 as the child dependency ratio fell with the baby boomer generation moving into working age groups and with old-age dependency rising only marginally because of reduced death rates in older age groups. It is estimated to have fallen to 64 in 2005. Thus India had begun to reap the demographic dividend around 1980. But the process is likely to extend well into this century with the dependency ratio projected to fall to 48 in 2025 because of continued fall in the child dependency ratio and then rise to 50 by 2050 because of an increase in the old-age dependency ratio as the bulge moves forward and the death rate in the older income groups declines.

Impact on the youth

This is true of India’s young population as well. The rate of growth of employment in the 15-30 age group, which stood at around 2.4 per cent a year between 1987 and 1994 for both rural and urban males, fell to the 0.7 for rural males and 0.3 per cent for urban males during 1994 to 2004. This deceleration in employment growth suggests that the advantage offered by a young labour force has not been exploited.

The shortfall in youth employment relative to the youth population is not as much a problem because it partly reflects a restructuring of the labour force in the direction of greater education. Second, it suggests that the challenge set by the demographic dividend is that of meeting the aspirations for education of a generation that is currently rapidly expanding. Finally, it implies that the system must readjust itself so as to offer a greater number of jobs for an educated workforce that is now bound to make new demands. Therefore, as of now, the expectation that the demographic dividend would itself trigger processes that would help exploit its benefits does not seem to be warranted in the Indian case. Thus far, the task of absorbing an increasingly youthful workforce has been postponed rather than undertaken. If the challenge is not met soon, the dividend can prove a liability. The implication is clear. Just as the “excess population” argument failed to recognise the benefits that can be garnered if these excess workers could be put to work, the “demographic dividend” argument ignores the fact that available workers are not automatically absorbed to deliver high growth. Strategies exist to exploit the demographic window of opportunity that India has today. But they need to be adopted and implemented.

*This blog is based on my readings of various articles from internet, magazines and  newspapers.

Leveraging IT for inclusive growth

Everybody is talking about India being the second fastest growing economy in the world. We would probably be the third largest economy in the world in a few decades. We are part of the elite group of emerging nations (BRIC– Brazil, Russia, India & China) whose influence in global politics is increasing rapidly.

But is India growing uniformly? Are the fruits of liberalization and high growth reaching every Indian? Is the per capita income increasing at the same pace throughout? In fact are all Indians even aware of this growth? The answer to the above is unfortunately a – No.

Since independence we had a couple of revolutions viz. Green Revolution and White Revolution. They were huge successes in their respective domains.  The green revolution brought with it high yielding variants of paddy, cereals etc. States like Punjab, Haryana & UP benefited from it.green revolution White revolution on its part propelled India to the largest producer of milk in the world. Successful though but these had impact on a section of our population. The others were kept starved from a fair share of this growth.

India now needs more such revolutions to pull its huge population out of poverty. To sustain the high growth which India has been experiencing for last few years, she should be able to turn her huge population to its own advantage. Demographic dividend is what we should be able to reap.

Fortunately in the 21st century we have the tools and the wherewithal which can help us achieve our ultimate dream.

Telecom & Broadband: With telecom penetration in our country reaching to more than 50% level in just fifteen years, it is time we start using this stupendous growth for the advantage of our masses. The thousands of kilometres of Fibre optic can be used to take broadband to the remote areas of the country. The price of hardware too has come down to a reasonable level. Cost of low end laptops have been bought to Rs.1500. Even smart phones & palmtops are now available at reasonable cost. With the advent of 3G and WiMax intelligent applications can be made available on phones and computers at a very low cost.

Inclusive growth

e-Choupal” has made wonders for the thousands of farmers in rural India. Traditionally the middleman use to make most of the profits. ITC Limited has now provided computers and Internet access in rural areas across several agricultural regions of the country, where the farmers can directly negotiate the sale of their produce with ITC Limited. This online access enables farmers to obtain information on mandi prices, and good farming practices, and to place orders for agricultural inputs like seeds and fertilizers. This helps farmers improve the quality of their products, and helps in obtaining a better price.

Similar initiatives can be taken to bring distance education to hundreds of thousands of boys and girls in remote places. Making available various courses so as to make them better equipped for employment. This way we can shift a huge workforce from farming to other allied services.

Broadband and mobile banking can be used to take financial services to the nooks and corners of the country. These initiatives could save financial institutions crores of rupees which otherwise they would have to invest in having physical infrastructure like branches and trained staff. Thus serving people residing in far flung areas would be a more viable preposition. The obvious outcome of these would be financial inclusion.

With the UID becoming a reality in some time, it would be easy to collect information pertaining to citizens. Individuals on their part could get access to services like e-governance and other related services. In our democratic setup, individuals can raise their concerns without going through the bureaucratic red tape.

In simple words, broadband can be a great enabler.

Cloud Computing: The excitement is similar to what it was in the last decade when the Internet was assuming the shape we see it in today. Just as we cannot imagine a world sans the World Wide Web now, the cloud could rapidly change the way we view and use information technology.
A cloud can basically be defined as ‘a standardised IT capability, such as software, app platform or infrastructure, delivered via Internet technologies in a pay-per-use and self-service way’. People have been using the cloud for years. Hotmail, Yahoo, Gmail have been on the cloud for a while now. The difference between then and now lies is just who is using it, and the volume and the type of data that is involved.

Today’s notion of cloud computing is about taking online services to enterprise networks, not just to solitary consumers. This also means that the volume of data that is being processed and stored online is of a gigantic magnitude.
In fact, if we were to break down the services that the cloud today provides, they can be classified into:

  1. Software-as-a-service (SaaS): It comprises end-user applications delivered as a service rather than traditional on-premise software.
  2. Platform-as-a-service (PaaS): It provides an independent platform as a service on which developers can build and deploy customer applications.
  3. Infrastructure-as-a-service (IaaS): It primarily comprises the hardware and technology for computing power, storage, operating systems or other infrastructure delivered as an on-demand service rather than a dedicated onsite resource.

Cloud computing can fundamentally transform government services, scientific exploration and discovery, and economic and social development. For example, the cloud can expand and support an e-government services platform and a research and development platform for eco-friendly services wherever applicable. Companies like Microsoft are completely committed to the cloud, their services and solutions come with the reliability, security and global reach that customers deserve and demand (Windows azure being an example).

Longer term, cloud computing is turning out to bring a transformative change in the business landscape. It is aiding the making of a new generation of products and services, creating a new awareness of the greater Internet, and Web 2.0 in particular, and supporting a more self-service IT architecture. Developers can write basic cloud applications that work in all of the major cloud platforms so as to achieve interoperability.

This is just the beginning. New and additional standards will emerge as new and inventive scenarios develop from evolving platforms, standards and technologies. But this will work well and in our favour only if we make technology both personal and democratic.

In the Indian context, cloud computing holds greater potential because of an obvious reason: we have no legacy systems that need to evolve or move into the cloud. For instance, both our state and central governments are in the process going digital, and the time is just right to implement the cloud right off. While keeping costs low, the cloud will not just put an efficient document management system in place, but will also ensure efficiency in service delivery.     So, yes, cloud computing is an Idea whose time has come.