Economic Highlights

New Delhi, 14 November

Mounting Subsidies

NEED FOR STREAMLINING

By Dr. Vinod Mehta

(Former Research Director, ICSSR)

Exactly a year ago the National Development Council (NDC) at its 52^nd meeting approved the Approach Paper to the Eleventh Five Year Plan (2007-2012).  The Government has now approved the Draft Eleventh Plan and a month later the NDC is likely to give its final approval to the Eleventh Plan.

The Plan’s focus remains on development of agriculture, infrastructure and spending on social sectors like education, healthcare etc. However, while approving the Draft Plan at the meeting the Prime Minister expressed his concern over mounting subsidies on 3 Fs – food, fertilizer and fuel. 

The PM observed that the Government was providing subsidy to the tune of Rs.1,00,000 crore which essentially meant a cutback in essential spending on education, healthcare, agriculture, healthcare etc.  He was of the view that these subsidies need a fresh look and need to be streamlined.

In fact the subsidies (as well as the administered prices which go along with subsidises) appear to be getting out of control and could harm the growth in the long run. No Government has ever told the public as to what is the purpose of administered prices and subsidies as of now. 

These short term palliatives, which were introduced in the early years of our economic development, have been allowed to continue for more than five decades without any rational explanation. So much so that interest groups have emerged around administered prices and subsidies that will not let them go under any circumstance.  Since everything is hidden from the public view nobody knows what is happening in this area. 

Besides, the subsidy paid out on food rarely percolates down to the consumer but gets absorbed in the costs of handling and storing foodgrains. The main purpose of food subsidy is to provide food security to citizens, particularly the poor, as well as   incentives to farmers to keep foodgrain production at a comfortable level.

However, there are distortions in the way the food subsidy is paid.  It has been estimated that the cost of transferring a rupee to the poor through the PDS (Public Distribution System) is Rs.6.68 and the administrative costs account for 85 per cent of the total expenditure.

Shockingly, only about 12 paise of every rupee spent on the PDS actually reaches the poor in the form of food. The rest goes to wastage and bureaucratic expenses, according to Dr Kirit Parikh, former Director of the Indira Gandhi Institute for Development Research, and now Member, Planning Commission.

Again, the so-called subsidy on fertilizer is not a subsidy; the difference between the sale price and the production costs is being funded to the fertilizer industry. It is misnomer to call it a subsidy. It is reported that the fertilizer subsidy for 2007-08 is estimated at Rs 22,532 crore, which is stated to be less than half of the requirement.  In other words, the fertilizer industry wants more subsidy. 

But are the benefits really commensurate? Studies have shown that (a) almost half of the fertilizer subsidy goes to the fertilizer industry rather than to farmers and (b) the returns on government spending, are higher in the case of agriculture R&D, rural roads, rural education or irrigation; for every additional rupee spent on fertilizer subsidy, the returns are very low – at only 0.53 compared to returns from other sectors: agriculture R&D (6.9), rural roads (3.2), rural education (1.5) and irrigation (1.4),

So is the case of petroleum products.  It is common knowledge that we are a net importer of petroleum products as the domestic production is not enough to meet our current demand.  We have to pay for these products at the international prices.  When the Approach Paper was approved the international price of crude was US $80 a barrel and today it is US $98 a barrel. Logically speaking, there is no case for providing any subsidy or cross subsidy to any section of the society on these products.

These products could have been sold at commercial prices -- falling when the international prices are falling and rising when the international prices are rising.  What have we done?  The price of petrol in the domestic market have been kept at almost three times the price of petrol in other countries while the prices of cooking gas, diesel and kerosene have been kept lower than the international prices. 

Clearly showing that there is no rational economic explanation for this kind of pricing policy.  The opposition to hike in the oil prices would not have arisen if we had kept the prices of all the petroleum products in line with international prices all these years.

Moreover, unnecessary subsidies are leading to wastage of scarce resources.  For instance the extremely low recovery rates in sectors like irrigation, water, electricity and diesel lead to their wasteful use as these have been withdrawn from some other sectors in which these could have been very useful. 

Besides, the provision of free electricity to the farmers is a big drain on resources. It may be mentioned that except for petrol all other petroleum products like diesel, domestic gas, wax, naphtha, etc. are being subsidized in a big way.  Of the total subsidies paid on the petroleum products nearly half of it goes to diesel, kerosene and domestic gas in that order.  As per the Rangarajan Committee Report on petroleum prices, the current subsidy on cooking gas is still whopping Rs.171 per cylinder.

One could go on and on but it is sufficient to say that the nation cannot afford to go on paying subsidies on every conceivable product and service. Subsidies beyond a certain level are harmful to the economy in various ways.  Firstly it leads to wasteful use of resources. If a farmer is getting diesel or electricity at a very cheap rate he would not bother about economizing on the use of these two inputs. 

Additionally, who knows whether the electricity and diesel is also being used by farmers for non-agricultural purposes? The wasteful use of electricity and diesel by the agricultural sector implies that some other important sector of the economy like industry is being denied the optimum use of these inputs. 

Secondly, subsidies lead to distortion of relative prices in the country and send wrong signals to business units. For instance, the railways are known to be the cheapest mode of transport as far as bulk commodities are concerned. But by subsidizing diesel we are artificially propping up the motor transport sector and at the same time forcing the railways also to keep their freight rates relatively lower from those of the motor transport etc. None of these two sub sectors have any incentives to economize on the use of diesel, coal and electricity or to improve their efficiency by reducing their operational expenses. 

Thirdly, subsidies beyond a certain level also imply that either the country resorts to deficit financing or imposes higher taxes on the people. Subsidies are not produced out of thin air; somebody has to pay for it. Subsidies are essentially, what economists call transfer incomes.  Subsidies are in fact, a modern version of the old saying "Robbing Peter to pay Paul". Therefore, at one level the choice boils down to either having more subsidies and more taxes or fewer subsidies and fewer taxes. 

Fourthly, the subsidies are also inimical to the export sector. They make the cost of exports lower to the foreign buyers; to that extent the domestic population is aiding the consumption of foreign buyers.  One cannot afford to support the export sector on the basis of subsidized inputs for all times to come. Subsidies only reflect the uncompetitiveness of the domestic production and hence there is no incentive for the exporters to improve their efficiency by reducing production costs. 

Therefore, what the country needs is to have a dispassionate look at all kinds of subsidies and decide as to which subsidies need to be continued, which subsidies need to be reduced and which subsidies need to be discarded.  This cannot be a one-time affair but a continuous process in the sense that the effects of subsidies need to be reviewed every three to four years to see if they are fulfilling their role and a decision taken as to whether it needs to be continued, reduced or discarded. ---- INFA

(Copyright India News & Feature Alliance)

Economic Highlights

New Delhi, 7 November 2007

International Firms Arrive

INDIANS, BUILD UP BRANDS

By Dr. Vinod Mehta

(Former Research Director, ICSSR)

Brands have an important role to play in a buyers' market.  Once the brand value is established it is relatively easier to sell the goods.  The foreign brand names in this case have an edge over Indian brands.  However, with the economy booming, the time is ripe for Indian companies to start thinking in terms of establishing brand names for their products, not only in the domestic market but also in the international market.  They must have a time horizon of 15 to 20 years to establish their brands, which will bring them immense benefits for a number of years in the long run.

It is not an easy task, but Indian companies will have to learn to build up their brand names if they have to survive in the competitive market, both domestic and foreign.  There is nothing to be afraid of, as past experience shows that all foreign brands that entered India haven’t done so well. Therefore, instead of worrying about foreign brands coming to India, our companies should concentrate their energies on establishing their own brands worldwide.

About a decade ago a report in a weekly newspaper stated that the foreign brand names were crowding out Indian brand names in the domestic market.  It said that the multi-national corporations (MNCs) had purchased out 31 Indian brand names since their entry into the Indian market. Two most significant examples were in the soft drinks and ice cream sector.

In the 31 cases that had been cited, the Indian companies had sold their brands for various reasons ranging from making a fast buck as in the case of soft drinks and ice cream industry while the going was good, to the inability of the Indian partners to raise matching resources for the continuation of their partnership.

At one level, one would have wished these brands to survive and expected the Indian entrepreneurs to give a fight to the multi-nationals, but at another level there is little to mourn about the demise of some of those brand names. 

If one looks back in the Indian corporate history, one will find that even in the protected market environment a number of Indian brands that had emerged on the top simply disappeared from the market making way for other Indian brands to emerge.  This is a natural process of the survival of the fittest.  Those companies, which are run by non-professionals, who are unable to interpret the market signals even when the market is highly protected and monopolistic type, will never survive and in fact did not.  

For instance, a number of television manufacturers emerged on the scene in the early sixties when India was still in the black and white TV era.  The top names that emerged then were Televista, Weston and Standard.  After being at the top they just disappeared. The question is: who were responsible for the death of these brands when there was no outside competition per se?

 At one point of time, Murphy was on the top amongst radios but it too disappeared from the market. Two German manufacturing companies namely Telefunken and Grundig tried unsuccessfully to enter the Indian radio market in a joint venture with an Indian firm but both disappeared from the Indian market without a trace.

The moot question is that when no tears were shed when new Indian brands crowded out old brands from the domestic market, why should tears be shed when International brands are crowding out some Indian brands?

Commonsense economic explanation for the crowding out of Indian brand names by other local brand names was simple: those companies which were inefficient for one reason or the other had to make way for the more efficient.  The same logic would also apply in the case of multi-national companies crowding out inefficient and mismanaged Indian companies including their brand names. 

But, there have been certain exceptions when established brand names were sold out by their owners just to make loads of money.  For instance, in the soft drink sector owners of leader “Thumps Up” sold its brand to the Coca Cola company rather than fight it. Similarly, the Indian ice cream leader, namely “Kwality” sold out to Hindustan Lever (now Hindustan Unilever) to rake in money rather than fight back. 

Initially, the Godrej Soaps felt its business would not survive when international Camay soaps decided to enter the Indian market. Out of fear it joined hands with the Camay Group.  However, later the Godrej soap broke away from Camay and decided to compete with it on its own as it found that Camay soap had little demand in the country.   But, one should also keep in mind that when some established brand is being taken over by MNCe, there are other reputable Indian brands which are determined to put up a fight  as well as there are emerging brands which decide to take on these MNCs in the domestic market. 

Take the case of Amul and Mother Diary in ice cream sector, which has taken on Hindustan Lever's “Walls” ice cream headlong. Incidentally, it may be mentioned that this is within the organized sector only.  There is a vast unorganized sector in ice cream which no MNCs or even Amul would be able to compete.  In the cheese sector too, Amul has taken Britannia and Dabon cheese (now Lebon) headlong.

Similarly, a few years ago, in the soap and detergent sector it was the new Indian brand Nirma which gave Hindustan Lever a run for its money. Today, this Indian brand has decided to give a fight to international detergents like “Surf”, “Arial” and “Henko”, which are currently being sold in India.  Two foreign brands in toilet soap namely Camay and Imperial Lather are still struggling to establish themselves here. It may be observed that if foreign reputed brands find it difficult to establish themselves in India, it is going to be a tough fight for Indian brands to establish themselves in the overseas market.

This is what is required of an entrepreneur: to take risks, to  produce quality products and to compete in the international markets and emerge a winner.  By their actions, the owners of Kwality ice cream and Thumps Up have unfortunately revealed that they were only market operators and not entrepreneurs. Therefore, there is no need to weep over the fact that they sold their brands to the foreign competitors, instead look forward and see how Indian entrepreneurs can be encouraged to fight the MNCs not only in the home turf but also abroad and establish themselves.

These 15 years of economic reforms has belied the myth that foreign brands will always crowd out Indian brands.  One should be firm that the Indian brands have the capacity to give fight back both in domestic and international markets, provided they maintain consistent quality and keep prices competitive. Now, Indian companies need to change their outlook and become aggressive. ---INFA

 (Copyright, India News and Feature Alliance)

Economic Highlights

New Delhi, 1 November 2007

Innovation Key To Success

URGENT NEED TO FOCUS ON R&D

By Dhurjati Mukherjee

Innovation is the key to success according to the recently released World Bank report. This is borne out by investments in Research and Development (R&D) in the country, which grew seven-fold in 2004 as compared to 1991.

The report titled Unleashing India’s Innovation has pointed out that “liberal economic policies, transparency and relaxed import laws will provide better opportunities for small industries to grow bigger which will further enhance the investments in R & D”.

The report stressed that private firms, apart from enhancing skill development of employees, also need to spend more on innovation. In fact, after more than a decade of liberalization, 75-80 per cent of the expenditure on R & D was incurred by the public sector in 2005.

Unfortunately, the aggregate domestic spending on research and development has never exceeded one per cent of the GDP. This clearly revealed that the country is lacking on the innovation front and more efforts are needed. Specially, against the backdrop, that the GDP is surging ahead at a very fast rate for which R & D support is imperative.

Records reveal that multi-national companies (MNCs) have filed more patents in India over the past decade (1995-2005) than all of public and private institutions put together. Of the 50 applications for patents in India, 44 were from private firms.

The Council for Scientific & Industrial Research (CSIR) and the Defence Ministry were the two Indian public sector departments with the highest number of patents in the country followed by the Steel Authority of India. The two private companies that filed patents were Ranbaxy and Dr. Reddy’s Laboratories.

While India is emerging as a top global innovator in information technology and bio-technology, less than 3 per cent of the Indian workforce is in the modern private sector while 90 per cent remains in the informal sector where the productivity is quite low.

Besides, the report has found that the average enterprise productivity in finance, insurance and real estate companies is nearly 23 times than that in agriculture. But these industries account for only 1.3 per cent of national employment!

Pertinently, the World Bank report has aptly pointed out that “only economic policy will not be enough as there is a major divide and disparity in the population”. Whether it is education, health or even accessing mobile phones, there is a wide gap between urban and rural areas in the country.

It is in this context that Mark Dutz, the senior economist of the Bank and editor of the report, observed that “inclusive innovation can play a critical role in lowering the costs of goods and services and in creating income opportunities for poor people”.

For this to happen there is need for better coordination between the industry and the academic world. In India, as mentioned in the report, the private sector is not quite interested to fund R & D as a result of which the industry-academia relationship has not flourished. The lab-to-land approach also has become a myth and has yet to become a reality for which agricultural productivity has not increased to the desired levels.

A positive step to promote innovation would be the creation of district R & D centres or “innovation clusters” which would bring together user industries, technology solution providers, research institutions and the academia. Such clusters could provide the right ambience for innovation and result in considerable synergy between the different sectors.

Moreover, the Government would have to ensure that such clusters are set up at least in one out of every 4 or 5 districts and a plan of action evolved with the participation of universities. 

The former President, A.P.J. Kalam, a well-known space scientist, had repeatedly emphasized the need for better coordination between the universities, on the one hand, and the industry and agriculture, on the other so as to develop skills, innovation and productivity. President Kalam’s influence had a bearing on the Government’s decision to set up a few research institutions while increasing the number of Central universities in the country.

There is also a necessity that more agricultural universities should be opened which should have a direct contact with the farming community. Meanwhile, it is heartening to note that NASSCOM, the apex body of the IT industry, has proposed knowledge townships that would seek to bring institutional convergence.

There are signs of research picking up in some of the major economies. This is confirmed in a study which has projected that R & D is shifting from the US to Asia, specially India and China. In the next ten years, the global R & D activity will shake loose the near domination that the US has held for the past 50 years and be split into thirds between the US, European Union and China and India in terms of efforts, funds and activity.

The study conducted by the US-based Battelle, the world’s largest independent R & D organization, has pointed out that the long history of R & D inter-actions among US, western Europe and Japan has been growing to include the rest of Asia, specially India and China.    

One of the key factors driving the change is that outsourcing and off-shoring of R& D is becoming increasingly prevalent among all the players in the R & D enterprise with the US leading the trend. Close on the heels though are EU and Asia, increasingly off-shoring R & D to the US in order to be in a better position to enhance their market shares.

It is quite natural that competition for R & D funds will get more intense as globalization grows. Thus, companies aiming to understand the emerging trends in order to make the best investments and to capitalize on the global economy would have to reserve funds for innovation and research. India would be no exception and the latest trends reveal that there is a significant change from what one witnessed in the 90s.

As India has emerged a very strong economy, during the last few years, it is imperative that R & D should be give due attention to enhance its position further. There are scientists and engineers of very high calibre in the country, most of whom migrate abroad for lack of research facilities.

Things are destined to change and the thrust on research would definitely increase in the coming years with active support and encouragement from the Government and aided by the private sector.

Clearly, funds would not be constraint for a country of India’s stature as the benefits of increased R & D would be widespread. Importantly, as underscored by the World Bank report, the country needs to generate more income opportunities, increase exports, make goods more competitive and ensure a better livelihood for the poorer sections of society. ---- INFA

(Copyright India News and Feature Alliance)

Economic Highlights

New Delhi, 25 October 2007

Building Bridges With South-East

MULTI-LAYERED STRATEGY NEEDING

By Dr. Vinod Mehta

(Former Research Director, ICSSR)

One of the features of the Narasimha Rao Government’s liberal economic policies was to look towards the East, i.e., South-East Asia and later East Asia and Pacific countries for business, trade and investments.  This is being steadily pursued by all the Governments in power since 1991.

According to all available data and projections for the future, the Asian region is growing faster than the European or the American region, notwithstanding the melt down of South-East Asian economies a few years ago. This means that there are more business opportunities in the Asian region for Indian business as well as for the Asian business in India.

In the past more than one-and-a-half decade India’s trade ties with the South-East Asian and East Asian countries have increased significantly. Yet there is always a room for still more growth in trade ties. 

The Indian economy is already growing at the rate of nine per cent and the Eleventh Plan has put the target figure above nine per cent.  As against this, the individual Asian economies like Thailand, South Korea, Malaysia, Singapore, Indonesia and Taiwan are experiencing growth rates ranging between 8 per cent to 10 per cent. This indicates indirectly how the markets in these countries are growing and if India can develop comprehensive and an appropriate investment and trade strategy it can capture a part of this market.

It is, however, not going to be an easy task.  India will have to work hard, indeed very hard, to penetrate these markets as it has ignored this region for a very long time. In the meantime Japan, South Korea, Taiwan and other countries made huge investments and captured a big slice of these markets. Therefore, the strategy to come closer to the Asian countries will have to be a multi-layered strategy functioning simultaneously at various levels. 

The relationships established with the Asian countries in the past one-and-a-half decade needs to be vigorously followed up by Government to Government relationship like setting up of inter-governmental councils in the fields of economic affairs, education, science and technology, tourism and so on.

The regular exchange of parliamentary delegations as well as bureaucrats needs to be institutionalized.  This may be seen as confidence building measures to remove the pointless mutual suspicion that has crept into each others’ mind.

While building these measures we must also open our defence training colleges to military officers from the Asian countries. This is one way of underscoring the point that India has no territorial designs whatsoever and that it has the stability of the region uppermost in its mind. 

Already a few military officers from Thailand have been trained in Indian military colleges.  This defence link needs to be strengthened and institutionalized with almost all the South East Asian countries.  The most recent pact has been with the Singapore Government.

At the same time the Government needs to provide scholarships for higher education and research in India to students from these Asian countries.  This is one way of creating long term interest in India among the Asian countries.  Over a period of time India would have created an India lobby in these countries.

The last thing, which the Government needs to do in this direction, is to strengthen all types of communication infrastructure including air and shipping services.  India’s air connections with the capitals of Asian countries are less when compared with European countries or America.  India needs to be linked to almost all the Asian capitals by at least a daily air service. 

At the moment we have no direct air links with Indonesia, Philippines, Brunei, Cambodia, Vietnam, Laos and Myanmar. This comes in the way of fully exploiting the business opportunities that may exist between India and other Asian countries.

Apart from strengthening the communication infrastructure between India and capitals of the Asian countries, there is also a need to strengthen relationship in the financial sector including insurance. Till now either the American or the European banks have ensured their presence in India.

The presence of Asian banks has been negligible.  Some years ago the Bangkok Bank from Thailand and the Development Bank of Singapore (DBS Bank) have been permitted to open their offices in India and that is that. 

A clear cut policy needs to be developed here so that at least one bank from each of the Asian country has significant presence in India and one Indian bank present in almost all the Asian capitals. 

It may also be a good idea to start joint ventures with Asian insurance companies in the field of general and maritime insurance. This will make the financing of joint ventures in India and other Asian countries much easier.

While developing economic relations with the Asian countries, the role of the medium and small scale sector should not be ignored.  There are many medium and small enterprises in some of these Asian countries which have the latest technologies and may be willing to enter into technical collaboration with their Indian counterparts.  The field is very vast ranging from the manufacture of pencil sharpeners to plastic goods and auto parts. 

Unlike the large industrial houses which have the resources to strike deals on their own strength, the medium and small sector may need the support of some institutions like various chambers of commerce and industry.

Finally, to find a foothold in the Asian markets, Indian business will have to do a thorough research of the markets, consumer preferences and trading practices in each of the Asian countries.  The Japanese, European and American brand names are well established in these countries.

Moreover, the consumer in Asian country has become very price and quality conscious.  Therefore, to succeed in such a market, the Indian exporter and manufacturer will have to sell quality products at competitive prices.  This would also hold true for a large number of other commodities and services, which we may be thinking of exporting to these countries. 

What is needed is a collective effort on the part of Indian business to create a favourable image of themselves among both the individual and institutional consumers in Asian countries. 

Besides, the idea of free trade area between India and South-East Asian countries needs to be pursued vigorously.  From here we can then move to Latin American countries for increased trade as we are now presently doing. ---- INFA

(Copyright India News & Feature Alliance)