Will Startup India stem the exodus of startups to Singapore?

This article of mine was published on Economic Times, Asia’s largest business newspaper and on e27, one of Asia’s biggest startup news sources on 19th January, 2016 over here and here.

Starting in the early part of this decade, we have seen a large number of startups move out of India, to places like Singapore. Examples of such startups are Grofers, Flipkart, InMobi and MobiKon. The difficulty in doing business in is often cited as the key reasons for this. In this article, we will analyze the impact that Prime Minister Narendra Modi’s Startup India Action Plan is likely to have on this mass exodus of India’s best startups to Singapore.

Startup India: The intent is visible but will it translate to action on the ground?

Prime Minister Narendra Modi has taken up the cause of startups via the Startup India initiative and put it on mission mode. The Startup India Action Plan has a series of policy initiatives and schemes that are aimed at easing the hurdles that startups face. The intention is laudable, especially given that earlier governments did precious little to further the cause of startups and MSMEs. However, the key question is – “Is this enough and will this help stem the exodus of startups to places like Singapore?”

Of the proposals put forth in the Startup Action Plan, I found the most interesting ones to be:

  1. 1-day incorporation via a mobile app: This is by far the most important proposal outlined in the plan though I would be pleasantly surprised if the system can pull off a 1 day incorporation and thus remain skeptical about its execution. As of now, it takes anywhere between 15 and 30 days for a company to get incorporated. It would also be interesting would be to see if all steps ranging from Digital Signatures, Director Identification Numbers (DINs), Name approvals and Certificates of Incorporation are covered by this app.
  1. The exemption of startups from labour inspections for the first 3 years: This proposal, if implemented, would save startups from harassment by labour inspectors.
  1. 3 year tax holiday for startups: This is a welcome step, though I would think that most startups would not benefit since they tend not to make profits in the initial years anyway.
  1. Faster exits for startups: The winding down of defunct startups is a cumbersome process currently. If the stated 90-day winding-down scheme is indeed implemented, it would be a major step towards making it easier to do business in India. However, I am skeptical about the execution of this step given that the bill is stuck in gridlocked Parliament.

 

  1. Capital gains exemption on startups: Another welcome step in line with best practices globally.
  1. Credit Guarantee Fund for loans to startups: This proposal, if executed (big IF), would be a game changer for startups in line with the schemes of the US Small Business Administration. Unfortunately, India’ experience with the CGTS scheme for MSMEs has been rather tepid with less than 1% of the total credit demand being covered by the scheme.
  1. Fund of Funds that invests in startups: If this is executed, unlike the unspent budget allocations of the past, it would be a big boost to startups.

What remains unaddressed?

While these are all good steps in the right direction, a lot has been left unaddressed. Two such examples are:

  1. “Angel tax”-This is the cause of much harassment by tax-authorities and allows the Assessing Office to judge the “Fair Market Value” (FMV) of a startup and tax all investment at a valuation above this FMV as income.
  1. Ongoing compliance – This has not been made any easier by this Action Plan. For example, even a startup with no revenue has to file audited accounts every year and submit returns- thus incurring significant costs. In contrast, Singapore exempts all startups from these cumbersome requirements under the “Exempt Pte Ltd” category.

Further, the definition of a “startup” under this action plan leaves room for more red-tape with the requirement for certification by an “Inter-Ministerial Board”.

Will this Action Plan prevent India’s best startups from moving to Singapore?

Getting back to the original discussion on startups leaving India en-masse- while people talk about India’s “best startups” moving to Singapore, they tend to overlook the fact that most of these startups that move to Singapore are hardly startups when they move. Most of them are 2-5 years old and have annual revenues in order of millions or tens of millions of dollars. While we think of them as “startups” because they started small, they are certainly not small organizations when they actually move out.

Of course, these companies continue to access the Indian market (high growth) and keep almost 100% of their operations in India (cost reasons), but move their headquarters to Singapore, wrapping the Indian operations as a wholly-owned-subsidiary of the Singaporean entity.

I am of the opinion that this exodus has almost nothing to do with the stifling red-tape that chokes entrepreneurs in India. After all, even if a startup moves its holding company to Singapore, its Indian entity still has to deal with the very same red-tape, get harassed by the very same “babus” and jump through the same hoops that the holding company would have escaped by moving to Singapore. There is also the additional headache of transfer-pricing and the tax-man breathing down your neck on this front.

Therefore, it is not logical to think of red-tape as being the reason for the move to Singapore. This phenomenon of companies moving their holding companies to Singapore is due to the following reasons, which I believe cannot possibly be addressed by Startup India in 1 year or even 5 years:

  1. Lower Capital Gains Tax rates– Singapore has a 0% Capital Gains Tax, compared to India’s 20% (with inflation benefits). Therefore, founders and investors can save millions of dollars on capital gains tax if they sell their Singapore listed company’s shares rather than their Indian listed company’s shares, while simultaneously structuring the deal smartly and remaining out of the country for 183 days in that Financial Year.

Startup India effect -The Startup India Action plan abolishes capital gains tax on startups, but because of the definition of “Startups”, most of these companies re-incorporating in Singapore do not qualify for these benefits.

 

  1. Lower Corporate Tax rates – Singapore has a Corporate tax rate of 17% p.a. while India has a rate of 30% p.a. Therefore, even after accounting for “transfer pricing” and the associated harassment involving the Indian subsidiary, the company saves tax by incorporating in Singapore.

The Startup India effect -The tax-holiday for 3 years will not help these companies as they are usually older than 3 years and would usually have revenue higher than the Rs 25cr limit.

 

  1. Access to well-developed capital markets – Indian capital markets, especially the equity markets are simply not deep enough for companies like SnapDeal or Flipkart to get the kind of valuation on an IPO that they would get in Singapore or USA. Therefore, it makes sense for them to list their holding company in Singapore, which would work to their advantage while listing on an SGX or a Nasdaq.

The Startup India effect -Startup India cannot reasonably be expected to address this aspect and I would reckon that it would take a minimum of 10 years of fast-tracked reforms for our markets to come close that of a developed economy’s.

 

  1. Reputation of being a “Singapore company” – When it comes to doing business with American, European or even South East Asian clients or investors, there is nothing like being a “Singapore company” or an “American company”. Singapore has an excellent reputation for investor protection, ease of doing business and intellectual property protection. Therefore, investors and clients are much more likely to be comfortable doing business with a company registered in Singapore rather than one registered in India.

The Startup India effect – This too is an aspect that we cannot expect Startup India to address. It will take decades of brand-building, effective enforcement of laws and hard reforms to address this issue.

The bottom line

The Startup India initiative is praise-worthy as it has some very important steps around the ease of doing business, taxation and intellectual property protection. However, the definition of a “startup” for the purpose of these schemes means that a company with over Rs 25 cr in revenue or older than 5 years or without “certification from the Inter-Ministerial Board” (more red tape?) cannot get any of these tax or policy incentives. This would automatically disqualify the Snapdeals, Flipkarts and Grofers of the world from any of these benefits.

In summary, while Startup India is a great first step in the right direction and will probably help startups to some extent, it will probably not make a dent on the exodus of India’s Flipkarts or InMobis to Singapore in any meaningful way. Will it help small startups become the next Flipkart or InMobi? That really depends on the execution and we will come to know only after the next few years.

Ashwini Anand, CFA is a 2nd time FinTech Entrepreneur who had startups in India as well as Singapore. He is currently a Co-Founder and Director at Monsoon FinTech– a startup that uses machine learning to help lenders make profitable loans.

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2016: The year of FinTech?

This piece of mine was published on iamWire on 5th January, 2016 here.

2016: The year of FinTech?

Ashwini Anand, CFA

Has Financial Technology or FinTech finally come of age in India? While, FinTech accounted only for 13.3% of the $ 9 billion raised by Indian startups in 2015[i], the gross investment into it was up 8 times over the equivalent 2014 number of $145.1 million[ii]. While that looks amazing at first glance, it has to be noted that m-commerce platform One97 (Paytm) accounted for about 74% of the money raised by FinTech companies this year. Nonetheless, even if one were to exclude this number, Indian FinTech investment has doubled over the 2014 number. India’s FinTech sector has been a far cry from its global peers, accounting only for 6% of the total global FinTech space[iii] (by funding), but clearly as the numbers above show, that is changing fairly rapidly.

FinTech is more than just payment-technology

FinTech in India has been synonymous with payment-technology, a niche that has produced India’s only FinTech unicorn – One97 (valued at $2 billion). However, from a global perspective, FinTech is not limited to payments alone. Globally, there are 11 FinTech lending unicorns[iv] such as Affirm, Prospr, LendingClub & Wonga, 11 semi-unicorns (>$500 million valuation) such as Kreditech & Kabbage while the equivalent numbers for payment-tech startups are 11 and 6. The rest of the FinTech unicorns and semi-unicorns are from a variety of other sub-sectors such as investing, insurance, credit reporting, bitcoin-tech and others. Therefore, among sub-sectors in FinTech, lending is clearly the elephant in the room, followed closely by payments.

India is warming up to core-FinTech

India is warming up to core-FinTech as investors and entrepreneurs being to realize the scale and scope of the opportunity in these sub-spaces such as lending and to a much lesser extent-personal finance. It is not that the scope for payments-tech is saturated, it is just that there are far too many low-hanging fruits in the lending and personal finance space to ignore anymore.

The case for FinTech in lending

There are over 11,582 NBFCs and about hundred commercial banks in India[v] , most of which make limited use of technology in their lending process. Lending decisions are made by credit managers, with limited standardization across applications & varying levels of credit risk management at each institution. $121 billion in individual credit and several times that number in credit to MSMEs is handled this way. The results are nothing to cheer about. Going by data published by the Reserve Bank of India, about 8-9% [vi] of the loans made to individuals go bad when measured in terms of the Impaired Assets Ratio (Gross Non-Performing assets + Restructured assets / Total Advances). This number worse when it comes to loans made to Micro and Small enterprises (MSMEs) at 10-14% depending on the stage in the credit-cycle.

The use of technology is typically confined to the use of a “credit-score” which is calculated based on the credit history of a borrower. The effectiveness of credit score-based lending is seriously undermined by the following:

  • Close to 80% of India does not have a credit score.

 

  • Credit scores are calculated in a semi-linear manner and are only a rudimentary predictor of the credit risk associated with a borrower.

 

  • A large number of potential borrowers have limited credit-history and therefore, are plagued by what is known as the “thin-file” problem.

FinTech has been able to solve these problems fairly effectively in developed markets. It has been proven that machine learning algorithms, when applied to existing data available with lending institutions have been able to make better credit decisions than humans and thus improve the profitability of lenders. Cases in point- Kreditech, Lenddo and Kabbage have extremely low default rates in their loan portfolios. In fact, our own software at Monsoon FinTech has been able to improve the on-paper profitability of a large real-world US based loan book by over 58% without any additional information on borrowers by identifying defaulters before they can default.

Further, there are several alternative data points such as social media footprints, call-records and shopping histories associated with borrowers that have been proven to be good predictors of the credit-worthiness of borrowers- a fact widely acknowledged by the banking community & demonstrated time and again by studies.

The scenario in India

There are a limited number of companies in India that are pursuing this space and even fewer which have proven their credit-hypothesis on real world data. However, it has been done and given the size of the opportunity, it is a matter of time before serious money starts flowing into this sector. Capital Float and LendingKart are startups that are pursuing the MSME segment and seem to be gaining traction. Several more will likely join their ranks over time as we have seen in developed markets, with over 10 large FinTech lenders and an equal number of FinTech companies in this space that offer their credit-underwriting software as a service (e.g. Zest Finance, Lenddo, Dataminr, FinGenius).

The big banks know that FinTech is the future and that it is a matter of time before the “alternate lenders” catch up with the established ones. Canaan Partners, which made 50 times its investment in LendingClub seems to think it could happen over the next few years (hit $200 billion)[vii] . 2015 has clearly been a great year for FinTech. Let’s see how much better 2016 turns out to be.

About the author

Ashwini Anand, CFA was with Merrill Lynch, Barclays Capital and Bank of America before starting his first FinTech startup Investopresto that received critical acclaim and close to half a million dollars in funding before shutting down in 2013. His current startup-Monsoon FinTech is trying to disrupt the lending space in India through the application of advanced machine learning technology on unstructured and new-age data for credit-underwriting, to improve the profitability of lenders.

References

[i] Investors pump $9 billion into Indian startups in 2015

[ii] India 2015: A record year for Fintech

[iii] Fintech Moved Mainstream: Reflections on 2015

[iv] Fintech Unicorn List Q2 2015: An Estimated 46 Have Arrived

[v] Reserve Bank of India

[vi] Re-emerging Stress in the Asset Quality of Indian Banks

[vii] An Early Lending Club Investor on the Future of Fin Tech

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Will artificial intelligence take your job or make you rich?

My article titled, “Will artificial intelligence take your job or make you rich?” was published on Asia’s largest business newspaper- The Economic Times on 21st December, 2015 over here & on e27, one of Asia’s largest startup and technology blogs , over here.

Artificial intelligence: The past, present & the future

While it is already beyond doubt that machines can perform most tasks that require physical labour more quickly and efficiently than humans, it is becoming increasingly clear that computers are able to perform several tasks that require, for the lack of a better word, “intelligence” better than humans.

Tasks that require a narrow range of expertise, that can be boiled down to a linear progression of steps were mastered by computers ages ago e.g. calculating the 25th root of a 25 digit number. Over time, the machines got better at tasks that required more than just basic logic. In 1997 itself, an IBM supercomputer – Deep Blue beat the world’s best human chess player. Now, chess is a game that requires a whole lot more than just basic computation. It requires complex strategic thinking and decision making, even creativity – something that was thought to be the fore of humans. Deep Blue is an example of Artificial Narrow Intelligence i.e. a system that performs exceedingly well in a limited domain but is incapable of doing much in a different domain.

Over time, the machines have gotten better at more complex tasks such as data mining, financial modeling, drug discovery, DNA sequencing and even driving cars! Not only have they gotten better over time, they have been able to outperform humans at many of these tasks. They will replace humans at most of these tasks in the near future. In fact, a studies estimate that 47% of jobs in USA and 34% of the jobs in UK are at risk of being lost forever to machines.

While this may be terrible news to people whose jobs are at risk, it is great news for the shareholders of companies which have good A.I systems since they will be able to cut costs and drastically improve productivity & therefore profitability. Let us take the example of 1 industry and see how artificial intelligence (intelligent systems) is changing it forever – the banking industry.

The problem with Indian banks

“Banking is necessary, banks are not” – Bill Gates

10.7% of the loan-book of by the Indian banking system consists of stressed loans (GNPAs + restructured loans). This number has been varying roughly between 8% and 11% over the recent years indicating that there is something wrong with the way loans are being made. Slightly older data shows that SME loans and individual loans were stressed (GNPA + Restructured advances) at ~ 10.6% and ~8.8% respectively, completely demolishing the widespread notion that it was the “fat-cat” promoters of bankrupt or near-bankrupt companies that were responsible for most of the stressed assets of Indian banks. The size of the market is staggering. Just the credit gap (excess demand over supply) for MSME loans in India is estimated to be $260 billion p.a. while the demand for individual loans in India (personal loans, gold loans, car loans etc.) is estimated to be $120 billion p.a. So, clearly there is a problem which, if solved even partially, can yield rich dividends.

The problem can be broken up as follows:

  1. The Data – Traditional data that encompasses credit history is surprisingly hard to come by especially in a place like India. According to the World Bank, 73% of the world’s population and 78% of India’s population are not covered by any credit bureaus. Even when data is available, it is not always of high quality and is often incomplete. So, on what basis can credit decisions be made when relevant data is missing or incomplete?

 

  1. The Decision making process – The decision making process used in traditional lending is deeply flawed. For starters, it relies on a rudimentary and semi-linear credit score that captures only a component of the credit risk associated with an individual. Next, the decisions are made by humans who, by nature, are prone to cognitive biases and there making errors. Standard operating procedures help to some extent but also bring a new set of problems including taking away discretion from decision makers.

Can Artificial Intelligence (Intelligent systems) solve this problem?

Banks and financial institutions are slowly being challenged by intelligent systems in developed markets e.g. Kreditech & Kabbage which use such systems to make lending decisions based on a variety of data points ranging from the social media footprint of a borrower to his credit history. As of now, they tend to target individuals or businesses with limited credit history or sub-optimal credit scores. Conventional lenders simply cannot accurately assess the creditworthiness of these borrowers and therefore either do not lend to them or lend at exorbitant rates sometimes as ridiculous as 100% p.a. (APR).

These intelligent systems use a wide variety of machine learning algorithms and apply them on a diverse set of new-age data points. Studies have shown that a person’s social media footprint, call records and even online shopping habits are good predictors of his creditworthiness (when viewed together). Therefore, they can be used to make credit decisions in the absence of conventional credit histories or even to augment the existing process.

Many of these intelligent systems find patterns hidden in the vast amounts of data available to them. Seemingly innocuous metrics such as the amount of time a person’s Twitter account has been active for, the time he spends reading the “Terms and Conditions” section of an online form are the number of telephone calls he makes per day are all, when viewed together & in totality, robust indicators of creditworthiness.

The best part is that this approach is working! These intelligent systems have default rates that tend to be lower than the industry averages – a fact that is reflected in the rapid growth of these companies’ loan portfolios, some even in the order of half a billion dollars. There are over 10 different companies in Europe and USA that use intelligent systems to make credit decisions and there is no doubt that more will come up over time and perhaps in a decade or so start giving banks a serious run for their money.

The road ahead

FinTech in India has largely been about payments thus far but it is a matter of time before lenders that use intelligent systems to make credit decisions become mainstream players. There are several startups working in this space even in India, with my own Monsoon FinTech being one of them. New age data is one part of the solution but even without it, machine learning based intelligent systems have been demonstrated to often make better decisions than the current SOP-based model. The simplest way for an NBFC or a bank to verify this statement is to get a robust intelligent system to learn on half of their existing loan book and verify its performance on paper (profitability) on the other half.

Banks and NBFCs in India are trying to embrace new technologies with the largest bank – SBI being surprisingly proactive. The results thus far are very encouraging. India poses unique challenges but there are a surprisingly large number of low-hanging fruits that are ripe for the picking. Even incremental value added could fetch hefty payoffs with the math being heavily loaded in the favor of new technologies. I will leave the reader with a simple math problem. If an NBFC or a bank has an impaired assets ratio of 8% of its loan-book and an intelligent system manages to perform 20% better than its current system (an incremental improvement), what would be the boost to the profitability of the loan-book? Therein lies the answer to the question – Will artificial intelligence take your job or make you rich? (Hint- The answer is not 20 %.)

 

(Ashwini Anand, CFA is a Co-Founder of Monsoon Fintech, an Indian startup that builds & leverages on intelligent systems to help lenders make profitable loans. He used to work with investment banks such as Merrill Lynch, Bank or America and Barclays Capital before this. He can be contacted on LinkedIn here )

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Why India is not a secular state

This article of mine appeared on The Economic Times on 7th December, 2015 over here and on OpIndia over here.

The 42nd amendment to the Constitution of India inserted the word “secular” into the preamble thus making India a “secular” Republic. But is India truly a secular country?

While the Merriam-Webster dictionary defines secularism as “the belief that religion should not play a role in government, education, or other public parts of society”, the most commonly accepted definition of secularism is “separation of religion and state”. By this definition, I would submit that the India of today is not a secular country. I further assert that the policies of the Indian state are nor just unsecular but smack of blatant religious reverse-discrimination against its majority community.

Here is why I assert that the Indian state is NOT secular:

  • Different laws for Hindus, Muslims and Christians

In a truly secular country, all citizens irrespective of religion would be covered by a single set of laws. In India, however, people of different religion beliefs are covered by different laws. While Hindus, Sikhs and Buddhists are covered by the Hindu code bills (Hindu Marriage Act, Hindu Succession Act etc.), Muslims are covered by Muslim Personal laws and Christians are covered by Christian Personal laws. So, Hindus, Muslims, Christians & Parsis inherit property differently, have different rules for marriage, divorce and adoption among other things.

Some separation of religion and state indeed!

 

  • Government control of temples but not of mosques or churches

How many people know that while Hindu temples are under governmental control, mosques and churches are completely autonomous? The Hindu Religious and Charitable Endowment Act allows state governments to take over temples and control their vast properties & assets. Bizarrely, the state government can use the money generated by a temple (donations, income from assets etc.) for purposes that have absolutely nothing to do with not just the temple, or other temples but even those which have nothing to do with Hindus or Hinduism! Interestingly, none of this applies to mosques, churches or gurudwaras. The government has no legal authority to take over the management of a non-Hindu place of worship.

As I write this, the questions – “In which universe is this fair?” and “What business does the government have in places of worship?” pop into my head. I have no answers.

 

  • Different laws for minority schools and “majority” schools

Did you know that even though minority schools (not all, but many) receive money from the government in the form of grants/aid, they need not comply with the regulations of the Right to Education Act? While the government has clearly not spared even private schools that receive no money from the government, from RTE regulations that force schools to reserve 25% of their seats for children from economically disadvantaged backgrounds (reimbursed by the govt.), it had not dared to go anywhere near minority schools. Note that Hindu schools receive no such exemption.

One law for minority schools and another for “majority” schools – exemplary secularism!

  • Subsidies for Haj but not for Amarnath Yatra

I find the concept of the state funding a pilgrimage using tax-payer money rather strange. A truly secular country would not subsidize any pilgrimage- period! However, the Indian government spent Rs 836 crores on Haj subsidies in 2012 . The Supreme Court passed an order that directed the government to phase out this subsidy within 10 years.

If the state were so keen to subsidize pilgrimages, shouldn’t it subsidize the pilgrimages of all religions? Why are subsidies of the same scale not extended to an Amarnath Yatra, a Kumbh Mela or for that matter a pilgrimage to Israel? Before critics argue that the government spends a lot of money on providing pilgrims of the Amarnath Yatra or Kumbh Mela security I would submit that the provision of security to citizens is not a favour but a basic responsibility of any state.

Affirmative action or blatant reverse discrimination?

These are 4 concrete examples of blatant reverse-discrimination against Hindus by the Indian state. One should keep in mind that India was ruled by the Mughals (Muslims) from 1526-1857 and by the British Empire (Christians) from 1757-1947. Therefore, it is hard to see how the Hindu “majority” oppressed the minorities enough to warrant affirmative action.

The role of political parties and the media

What makes this a whole lot worse is that political parties and large sections of the media are seen as being over-eager to win the favour of the minority communities. Take for example, the unfortunate and condemnable Dadri lynching episode during which Mohd. Akhlaq was lynched by a mob. Needless to say, this incident was shameful.But by no means was it unprecedented. Akhlaq’s family received compensation of Rs 45 lakhs and 4 flats in Noida from the state government of Uttar Pradesh and the incident received almost 24 hour TV coverage for days on end.

At roughly the same time, animal rights activist- Prashant Poojary, was brutally hacked to death in an equally shameful incident. The mainstream media did not cover the incident till there was outrage on social media channels. I am yet to see a report on any compensation paid to the family of Prashant Poojary by the state government. (The Sangh Parivar- a private organization, paid Rs 10 lakhs to the family).

Unfortunately, incidents like these send the signal (rightly or wrongly) that the Indian state & sections of the Indian media value the life of a member of one religious community more than the life of a member of another religious community – hardly something that would happen in a secular country!

The bottom line

The vast majority of Hindus, Muslims, Christians, Parsis, Sikhs, Agnostics and Atheists live peacefully in India-as they should. Communal violence is not very common with roughly 54 communal incidents a month in a nation of 1.25 billion people.

Of course, the ideal would be to have 0 communal incidents in the country. India should aim to get there over time and become the model state for the rest of world to emulate. But, the way to get there is surely not to discriminate between its citizens on the basis of religion. It is not just counter-productive, but I would argue – morally wrong.

At the end of the day, India must become a truly secular country where the state treats all citizens equally irrespective of their religious beliefs. I am not asking for the majority community to receive preferential treatment – just that the State of India make no distinction between its citizens. Too much to ask for?

(Ashwini Anand was formerly a Founding Member of one of India’s premier socio-political organizations.)

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The Big O Factor & what it means for the Bihar elections

This article of mine (co-authored with Neha Srivastava), was published on The Economic Times, over here.

The Big O Factor & what it means for the Bihar elections

The Big O of elections

The Big O of politics – Organization, is very often the thing that makes or breaks a party’s fortunes at the ballot box. Yet, it is probably the most overlooked aspect of political campaigns in this day and age when “new-age electioneering” has become synonymous with giant hoardings all over the place, catchy political jingles playing on radio & TV and mobile campaign vehicles crisscrossing constituencies with screens and speakers. The narrative that is being alluded to of late holds that elections are won or lost in war rooms, where geniuses, equipped with the latest technology do everything from making complex caste-calculations, deciding on party ticket distribution, carefully crafting campaign messaging, managing the branding associated with the party leadership and above all – the thankless job of coordinating the myriad campaign rallies all over the place.

As folks who have worked on campaigns in the past, we are of the firm opinion that while new age electioneering techniques relying on technology and PR of the world are definitely, what military strategists would call, “force-multipliers”, they are far from the “be-all” s and the “end-all” s of electioneering. The core-force (to be multiplied) however has to come from the party’s organization i.e. its cadre and volunteers. A high-tech campaign, combined with an enthused party cadre with deep roots across the state/country is like a skilled Arjuna (warrior) wielding the powerful Gandiva (bow) & Pashupatastra (mythical weapon capable of destroying the entire world) to become a Parantapa (scorcher of enemies). Remove the organizational base and all you are left with is something similar to a 5-year old child struggling to lift an M-16 gun – a sight that evokes pathos rather than fear.

Electoral Effectiveness = (Output of Party Cadre) x (Force-multiplier from Tech & PR)

 

Mirror, mirror on the wall, who has the best organization of them all?

We could try to model the Output of the Party Cadre before an election in a very simplistic, yet reasonably accurate manner as follows:

Output of Party Cadre = (Strength of Party Organization) x (Morale of Party Workers)

Getting to specifics, the RJD has a strong party organization[i] with a loyal cadre base drawn largely from the MY (Muslim-Yadav) demographic. In fact, Lalu’s cadre has stayed with him despite the RJD being out of power for the last 10 years – something that analysts often attribute to Laluji’s culture of taking care of those he considers loyal to him.

The JDU, say analysts, has a much less effective party organization and used to depend heavily on the BJP’s cadre when they were part of the NDA. Therefore, JDU-BJP alliance used the personal popularity of Nitish Kumar and the organizational strength of the BJP’s while fighting elections – a combination that worked like magic till the JDU broke up with the NDA over Modiji’s elevation as the Prime Ministerial candidate in 2013 [ii].

The BJP’s story is very different. The party does indeed have a strong organizational infrastructure, but for more interesting reasons than you’d expect.

  • Title Inflation – A friend who is a senior office bearer in the BJP once remarked that the party seemed to have a habit of “distributing posts like chocolates”. A typical city is divided into parliamentary constituencies, which are further divided into assembly constituencies & then divisions (which elect Corporators). The BJP has the party, a student wing (ABVP), the youth wing (BJYM) and several “Cells” & “Morchas” e.g. SC Morcha, IT-Cell, Weavers’ Cell etc. Each wing often has local Conveners, Co-Conveners & bigger “wings” often have General Secretaries/Presidents, Secretaries etc., not only at the Parliamentary Constituency (PC) levels, but also at the Assembly Constituency (AC) and division levels. So, if a city has 2 PCs, 10 ACs & 5 divisions per AC, you already have up to 3 X 5 X 10 X 2 = 300 office bearers from each “wing” who have fancy- titles. You could have 2 wings, the main party and a bunch of different cells –all adding up to say 500 office bearers across the city. This is the elite-fighting force of the party’s cadre in a city, a group of people who will work their hearts out before elections, for free, often each roping in 10-15 of their friends, relatives and associates, bringing the fighting force available for deployment up to 5,000 in one city.

Title-inflation isn’t happenstance. It is a strategy used across some of the most successful organizations of the world, ranging from Bank of America to JP Morgan, to help boost employee morale and improve retention. The logic– give a person a good title & his morale will stay high on its own. Self-actualization, after all, stands at the top of Maslow’s pyramid.

Title inflation is not exclusively a BJP-phenomenon, with virtually every party adopting the strategy to some extent or the other. However, this is a double-edged sword. Office bearers with exalted titles can either work their hearts out to fulfill the responsibility that comes with the title, or fight with other exalted title-bearers to satisfy the big ego that also comes with the title. It has worked both ways even for the BJP. Herein comes the next factor which mitigates the negative effects of title inflation and to a large extent amplifies the positive effects – The RSS!

 

  • The RSS – The secret weapon that amplifies the strength of BJP’s organization in most areas in Northern and Central India is the RSS.

Volunteer network – The RSS has a strong network of volunteers across the country, more so in places like MP, Rajasthan, Gujarat and even large parts of UP & Bihar. The “pracharaks” lead “shakhas” or branches across towns and villages, working with local communities. “Vistaraks” work for fixed periods of time and help improve the reach of the organization. Then come the affiliated organizations which aren’t directly part of the RSS but are loosely associated e.g. the SJM, ABVP. At the village level, the lines often blur between the organizations and volunteers tend to be associated with the activities of several of the “Sangh Parivar” (Family) organizations.

Come election time and the party has the support of this entire network of volunteers – unpaid passionate individuals who work for a cause rather than for money.

Management –on-deputation– A lot of people don’t know that the RSS deputes key leaders to the BJP at the national and state levels. These leaders become the General Secretaries (Organization). Their key mandate is to build up the party’s organization in their states, train party workers and keep the machine running smoothly. They typically live Spartan lifestyles, with many of them not even using air-conditioners in their offices. You are much more likely to find them sipping road-made “chai” in the party offices while interacting with party workers than giving long speeches in 5 star hotels.

These people are the real bulwark of the party’s organizational structure, commanding respect from across the party’s network of ‘karyakartas’ or volunteers – a natural consequence of their clean image, passion and frugal lifestyle. Possibly as a direct result of this, they are able to resolve any disputes that crop up and act as rudders, carefully steering the otherwise hard-to-manage behemoth network of party workers, volunteers and well-wishers. Conflict stemming from title-inflation is almost non-existent where the Sangh leaders on deputation are effective and active, thus addressing the potential problems cropping up in the previous section.

Neither of us are experts on the JD (U) or RJD, but isn’t it quite obvious that without the support of an RSS-like “mother organization” to build up the cadre-base, iron out management wrinkles and help effectively steer it, the core organization of these parties is no match to that of the BJP’s ? (This, is less of a problem with the RJD, where Lalu Yadav holds absolute sway.)

So, what about 2004 and 2009?

One could easily ask the question – “So, if the BJP’s organization and its RSS support base are so great, then why did it lose 2004 & 2009”? The answer, we think, lies with the “Morale of Party Workers” term of the model outlined before.

Morale is especially important in the case of the BJP’s workers who are motivated by ideology more than anything else. In 2004, the Vajpayee government seemed to have been unable to articulate its achievements succinctly to its cadre. The Food-for Work program which eventually became NREGA, the PM Gram Sadak Yojana, the Golden Quadrilateral etc.-all of which should have become election issues, were eclipsed by the ill-fated “India Shining” campaign [iii]. This, coupled with what was perceived to be a lack of a significant change from the “Establishment policies” of the past, seemed to result in a cadre that was not enthused. It certainly didn’t help that the government was seen to be at loggerheads with the RSS Chief K Sudarshan [iv]. Because of the lack of enthusiasm of the party workers, it seems as if the base was simply not pumped up enough to get out to vote.

Before the 2009 elections, NREGA had put in large amounts of money into the rural populace’s pockets, economic growth seemed to be going well and not insignificantly, Jinnah turned secular[v]. The cadre had no major reason to be pumped up, nor did independent voters have a reason to rush to the BJP’s side. And that what it was.

Ground level chemistry, Cadre-morale and the Bihar polls

What does all this mean for the upcoming Bihar polls? For starters, the party workers of the Mahagatbandhan face an interesting predicament. They have to work with their former foes and against their former friends and allies. Further, the ground-level chemistry between the party workers can be queered by the following factors:

Yadav-Kurmi rivalry: How do you think the Kurmi section of the JDU’s party organization will gel with the Yadav-centric RJD cadre given the legendary Yadav-Kurmi rivalry? While the Muslim-Yadav demographic forms ~ 28% of the electorate, the Kurmis- to whom the Chief Ministerial Candidate Nitish Kumar belongs, form only about 3%[vi]. Will the Yadav base of the RJD be able to make peace with not just voting but also campaigning for a Kurmi CM candidate? Only time will tell.

Sushasan babu + Perception of Jungle raj?: Another pertinent point is the potential lack of synergy between the party worker who, until 2013 touted his leader as being ‘Sushasan Babu’, who saved Bihar from Jungle Raj and the party worker who belongs to the party which is accused of bringing about Jungle Raj in Bihar. The leaders may have become allies and friends now, but can the average worker stomach this and work together with his former adversary? Would the burden of not just voting for the party that is accused of brining Jungle Raj to his state, but enthusiastically getting others to vote for it be too much for the conscientious JD(U) party worker? Again, only time will tell.

It is not that the NDA is problem free. With Manjhi and Paswan openly sparring[vii], cadre-chemistry among the Mahadalit and Dalit sections could possibly be queered, but the scale of the problem, we think, is not of the same order of magnitude as that faced by the “Mahagatbandhan”. In fact, the very presence of Narendra Modi in Bihar as the campaigner-in-chief is likely to boost the morale of the party organization and goad them to work with enhanced vigor.

The last word

In summary, the Big O factor of electoral politics gives the BJP-led alliance a distinct advantage. If the Mahagatbandhan wins despite anti-incumbency, lack of organizational-level chemistry and the Modi wave, it will be a miracle. After all, a well-trained Ninja with a stick can beat the hell out of a 6 year old who stares blankly at his new Walther PPQ M2 pistol.

About the authors

Ashwini Anand has worked extensively in the political campaign management space and was formerly, a Founder Member of one of India’s premier socio-political organizations.

Neha Srivastava is an alumna of Columbia University and works with a leading Wall Street firm.

[i] Alliance seats show Lalu is boss : The Telegraph

[ii] NDA splits over Modi elevation: Daily Mail

[iii] Advani: NDA lost in 2004 because of over-confidence, wrong slogans : The Hindu

[iv] RSS turns heat on BJP as KS Sudarshan warns party of straying from its ideological moorings: India Today

[v] Advani and Jinnah: The Economist

[vi] Bihar polls: 10 things that work for Nitish Kumar and 10 that don’t

[vii] Paswan-Manjhi tiff ahead of Bihar elections(The Indian Express)

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Why the media seems to hate the Modi government

This piece of mine was published on The Economic times on 15th September, 2015 over here.

The media does not seem to be particularly in love with the Modi government or the BJP

Meat Ban-Wagon Grows as Haryana Orders 9-Day Curb (NDTV), Under Siege for Others’ Failures, Modi Must Win Back Trust of His Core Constituents (New Indian Express), Empty chairs greet PM at rally venue (The Tribune), By basing asylum policy on religion, Modi government has set a dangerous precedent (Scroll), India’s only Muslim-majority state hit by beef ban (Financial Times) – These are some of the recent headlines pertaining to the Modi government in the mainstream media. After looking at these headlines and contrasting the broad narrative espoused by the media with what one observes in his day to day life, can you blame someone for coming to the conclusion that the media has a visceral dislike for the Modi government and for that matter, the BJP?

modimediaThe media’s antagonism for the Modi government is taken for granted in social media circles, with several commentators regularly putting forward a counter-narrative that is lapped up by folks on Twitter and Facebook. In fact, OpIndia runs a series of monthly articles in which it highlights what it considers “lies” spread by the mainstream media, typically against the ruling Modi government/BJP. Let us try to analyze some of the reasons for this apparent “bias”.

  1. Ownership patterns of media houses

The reality is that a large number of media houses are owned by politicians/people close of politicians. For example, NDTV is owned in part by close relatives of Congress MP Navin Jindal as well as by the sister of the CPI(M) MP Brinda Karat. News X, India News and Sunday Guardian are owned in part by the son of former Congress leader Venod Sharma as well as by relatives of former Haryana Chief Minister Bhupinder Singh Hooda of the Congress. These facts are not very well known, though Newslaundry has put out a very interesting piece which highlights exactly this point. Further, it seems as if the Congress is much better entrenched in the media than the BJP, though the latter holds some sway with Hindi news channels.

Is it unthinkable that the ownership pattern of a news channel/ newspaper influences the narrative promoted by that channel/paper and substantially shapes its portrayal of the government’s work? Given that Congress leaders & their relatives own far more channels/newspapers, I don’t find it surprising that the mainstream media tends to favour the Congress over the BJP.

  1. Strained relationships with individual journalists/editors

During the course of my work over the last couple of years, I had a chance to meet several journalists/editors, some of whom are now friends. They tell me that the media’s levels of access to ministers, bureaucrats and other key policy makers has dwindled drastically since the Modi government came to power and that the ruling establishment seems to want to keep the media at an arm’s length. One journalist who writes more front-page articles in a leading newspaper than any other journalist I know, told me that her fraternity feels unwelcome in government offices these days and that senior decision makers often treat reporters with disdain, perhaps even contempt. Some leaders have openly refer to journalists as “presstitutes”.

Naturally, these strained personal relationships with individual journalists/the media at large reflects in the news stories/editorials that come out, thus negatively influencing the media’s narrative on the government’s work.

  1. A culture that doesn’t necessarily nurture long-term relationships

A fairly prominent South Indian businessman once highlighted to me, what he thinks of the difference in culture between the two major political parties. He recalled how Congress leaders remember even small favours done by him, whether it is a medium sized campaign contribution or something as simple as allowing party workers to use his vehicles or guest-houses during the elections. He lamented about how, in stark contrast, the BJP has completely forgotten all the help he has rendered to it, with leaders remaining largely inaccessible to him.

I have heard several people, ranging from stars, mediapersons, businesspersons and retired distinguished professionals, unaffiliated to the BJP, who I know for sure have contributed their time and spent money from their pockets to help the party during the elections, complain about what they perceive to be the lack of acknowledgment from the party. Many of these people would have been content with a phone call from a party leader thanking them for their contribution or an invitation to a party leader’s house for a cup of tea. Most of these people don’t expect government contracts, appointments or Padma awards, just a simple acknowledgement; though I would reckon that a cup of coffee with a leader would not suffice for many of the businessmen.

I consider this to be one of the key reasons for individual editors and journalists favor the Congress party. The argument is simple – “Why align oneself with the BJP and get nothing, when you can align yourself with the Congress and be treated well when they are in power?”

Is it possible that while the Congress has nurtured relationships over the decades, including with the media, the bureaucracy and with the business fraternity, the BJP has largely ignored personal relationships and maybe even alienated its natural supporters by not acknowledging their efforts? I think it is not only possible but also likely.

  1. The loss of articulate spokespersons to government roles

One of the key strengths of the BJP when it was in the opposition was its articulate & effective de-facto spokespersons like Nirmala Sitharaman, Ravi Shankar Prasad, Smriti Irani and Piyush Goyal who would make liberal use of data, statistics and anecdotes to support their arguments while exposing scams and puncturing feeble counter-attacks from the Congress . Leaders like Arun Jaitley and Sushma Swaraj would step in when required, with their oratorical skills to take down what was left of any of the Congress government’s credibility, under the leadership of Modiji, who would enthuse the cadre and independent voters alike.

But now, the tables have been turned. While the most effectual communicators of the BJP are in government, the best of the Congress’s arsenal i.e. the likes of Manish Tewari, Abhishek Singhvi and Jairam Ramesh are interacting with the media almost on a daily basis and are overwhelming the massively depleted spokesperson corps of the BJP which looks hapless on TV debates.

A case in point was the failure of the BJP spokespersons to effectively highlight, on TV debates, the fact that the Beef Ban (context- Maharashtra) is mentioned in the Directive Principles of State Policy in the constitution of India, that the meat ban in Mumbai on Jain festivals pre-dated the Fadnavis government and that UP (a non-BJP ruled state) too has such a ban in place. They looked helpless as TV anchors seemed to mercilessly rip them apart (metaphorically) and paint the Modi-led government as the new fascist game in town, out to turn Hindustan into “Banistan. It took an intervention from Nirmala Seetharaman before the record was set straight and some semblance of sanity was restored to the debate.

What next?

Perhaps it is time for the ruling establishment to recruit more effective spokespersons, rebuild old relationships and start taking PR more seriously before what many (including me) consider misinformation and a disingenuous narrative put forth by sections of the media erode popular support that the government currently enjoys?

(The author was formerly a Founder-Member of one of India’s leading socio-political organizations that is credited with having helped change political campaigning in India. He can be followed on www.twitter.com/ashkronos and https://ashwinianand.wordpress.com )

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Is the Bihar election really about “Sushasan” or Nitish Kumar’s ambition?

This article of mine, co-authored with Neha Srivastava, was published on Swarajya Magazine on 31st August,2015 here.

Should Nitish Kumar alone be credited for bringing back stability and development in Bihar? A close look reveals that most of the development during his Chief Ministership happened only when the BJP was part of the ruling alliance.

Nitish Kumar transformed Bihar, ended the Jungle Raj and put it on the path of development after the Lalu-Rabri era. Or at least that’s what we are being told these days. But was it really Nitish who transformed Bihar? While he was certainly the face of the JDU-BJP alliance does he deserve to get all the credit?

Everyone knows that 15 years of Lalu-Rabri rule was a dark period in Bihar’s history. This era is pejoratively referred to as ‘jungle-raj’. Crime was extremely high, kidnappings in broad-daylight were the norm as were rapes and murders..

Conventional wisdom seems to suggest that once Nitish Kumar took over the state in 2005, he started clamping down on crime, built roads, provided electricity and transformed Bihar. This, he is said to have done over the course of a decade, earning the moniker of ‘Sushasan Babu’. There are two issues with this narrative.

First, a cursory look at the National Crime Records Bureau (NCRB) records on violent crime in Bihar raises some interesting questions. Take a look at the number of kidnappings and murders over time from 2006-2014. They have actually increased. Rapes are marginally lower. The only bright spot is that dacoities have fallen drastically over time.

Second, the BJP was a rock-solid support for Nitish and played a huge role in the development that took place. There was absolute political stability, with no political blackmail or brinkmanship. This climate of stability allowed development to take place.

It is clear that the law and order situation has worsened since 2012 as reflected by the rise in the number of rapes, murders and kidnappings. Is it a co-incidence that the cold-war between the BJP & JDU started building up in 2012 and eventually led to their break-up in 2013?

likME

Source of Data: National Crime Records Bureau

Now lets look at the economy.

Undoubtedly Bihar has come a long way from 2005, but notice the trends since the BJP-JDU tensions began in 2012. Note that FY ’13 pertains to 9 months of the calendar year 2012.

ItJ60

Source of Data: Niti Aayog ( 1,2,3,4)

So, as we can see, ever since BJP has been out of the picture, Nitish Kumar’s “Sushasan Babu” tag has been eluding him. Now that Nitish has allied with the architect of the ‘jungle-raj’ it is anybody’s guess as to whether he will be able deliver on governance.

So there is this question of whether Nitish can save Bihar from Jungle Raj redux. But before we get there we must ask ourselves whether Nitish is actually in control of the alliance and the overall political direction. True, he is the Chief Ministerial candidate of the JDU-RJD-Congress alliance. However, if you take a look at the seat distribution, you will find that the JD(U) and RJD are equal partners –  contesting 100 seats each.

Therefore, it is only reasonable to think that a vote for the JD(U) is a vote for the RJD – the party behind ‘jungle raj’ years. Even the Congress, a dying beast, has managed to arm-twist Nitish into giving them 40 seats.

This is the sum-total of all the power and leverage JDU has over this alliance. While the tug-of-war over seats etc continues between JDU and Lalu, Congress is likely to benefit the most out of this alliance because they can be the deciding factor in the game. We’ll just close with this common Awadhi saying,

“काजल की कोठरी में कितनौ सयानौ जाये, एक लीक काजल की जौ लागी है, तै लागी है ।”

(No matter how smart a person enters a coal mine, he is bound to get stained by the darkness).

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Make in India: Can Modi make it possible?

An edited version of this article of mine, co-authored with Neha Srivastava was published on Swarajya on 29th October,2014.

Virtually everyone agrees that India’s manufacturing sector has tremendous potential for the growth. India has a large, young population (1.25 billion people[1], over 800 million[2] of whom are aged 35 years or less) whose income levels are low (Per-capita income stands at a modest $1,500[3] p.a.) – thus providing the industry with a large pool of inexpensive labour. However, manufacturing only accounts for a mere 15.1% of GDP[4] currently.

PM Modi has vowed to change that through the ambitious ‘Make in India’ initiative. As part of this initiative, he has promised to cut out red-rape holding back the industry, make legal compliance easier, introduce online-applications for notoriously opaque government clearances and amend restrictive laws.

However, there are serious legal and practical hurdles that threaten to derail his dream program. In this article, we attempt to analyze four key issues that Mr. Modi has inherited from his predecessors, which have the potential to wreck the initiative.

Legal Hurdles

Prohibitive land acquisition laws:

Acquiring land for industrial projects has always been an ordeal in India. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (a pet project of the former UPA government) made land acquisition even more complex, time-consuming and expensive than it already was. For example, it requires the consent of 80% of the affected land owners for private industry to acquire any land even for industrial projects that generate local employment. Further, the law mandates that a study known as a Social Impact Assessment (SIA) be conducted before the acquisition of single inch of land. Last but not least, the law sets the price paid by the acquirer at 2-4 times the market rate (depending on the location). Industry experts now say that the time it takes to acquire land for industrial projects has gone up from 5 years to 8 years due to the provisions of the new law.

In spite of all this, the risk of litigation remains, with higher courts often overruling the decisions of the lower courts and sometimes striking down the decisions of the governments.

Restrictive labour laws

India’s labour laws are excessively restrictive, employer-unfriendly and sometimes outright bizarre. There are at least 16 different central labour laws, some of which were framed as long ago as 1923. Since labour law is on the concurrent list, the parliament as well as state legislatures can make laws, thus complicating matters further. Compliance is notoriously difficult and involves filing numerous reports at regular intervals and being at the mercy of government “inspections”. About 175,000 “inspections” [5] are carried out annually, with companies complaining of harassment and extortion during these inspections.

The laws also impose severe restrictions on the industry. For example, it is virtually impossible to “lay-off” workers in India thanks to The Industrial Disputes Act of 1947 that specifies that any company employing more than 100 people needs government permission before laying workers. A provision of the Apprentices Act of 1961 gives the government the power to arrest and imprison employers who don’t comply with certain technical provisions of the Act. Such laws have had the effect of killing industry, discouraging hiring and allowing government officials to harass and extort money from the industry.

Practical Hurdles

Poor infrastructure:

If you were wondering about infrastructure has to do with manufacturing, imagine a factory trying to produce goods without electricity, trying to transport raw materials or finished goods in the absence of good roads or exporting its products without adequate port linkages.

The hard truth is that India has simply not invested in its infrastructure over the years. While countries like China have spent liberally on building power plants, highways, ports and high-speed rail networks, India has remained far behind. Apart from physical infrastructure, India sorely lacks electricity, with states like Telangana and Tamil Nadu reeling from chronic blackouts, colloquially known as “power-cuts”. India has had chronic power deficits, with 2014’s figure likely to stand at 5.1% [6]of demand. In addition to insufficient power generation capacity and lack of adequate fuel linkages to power plants, India’s state-run power distribution companies are in poor financial health, thus severely limiting their ability to buy power from power plants. To make matters even worse, India’s power transmission and distribution losses (T&D losses), standing at 23% of the average generated power[7], are among the highest in the world.

Therefore, until India creates the necessary public infrastructure, starting with simple things like electricity and coal, it is difficult to imagine manufacturing taking off in a big way.

Slow environmental clearances:

The Indian bureaucratic and political class is notoriously slow in granting clearances to projects. Every major industrial project requires a host of government clearances starting with an environmental clearance. While environmental clearances are supposed to take about 9 months, in reality, they take far, far longer. For example, POSCO’s flagship 52,000 crore steel and port project got its final environmental clearance after an 8 year long, agonizing wait.[8] Even government projects are not spared, with power projects and mining projects bearing the brunt of the delays. Slow decision making and delay in clearances drastically raise the overall cost of projects (interest on debt) and discourage investments.

Encouraging progress

PM Modi’s follow-up action on his promises to the industry has been encouraging thus far – he has introduced online-applications for environmental clearances, raised FDI caps, increased the validity of industrial and shipping licenses, curtailed the powers of “inspectors” and taken up the reform of a few key labour laws. Yet, it is still early days for the government.

The hard road ahead

While practical issues pertaining to clearances and bureaucratic hurdles can be cleared if there is political will, the legal hurdles are far harder to ameliorate. While PM Modi’s NDA enjoys a large majority in the Lok Sabha, it lacks the numbers in India’s upper house- the Rajya Sabha, thus making the passage of critical amendments challenging. To make matters worse, under India’s federal structure, several of the key issues at play in this context, such as labour laws, are on India’s concurrent list, thus allowing both the states and the Centre to legislate on them.

Further, the amendment of the laws in question involves a tight-rope walk to balance out several competing interests. For example, the amendment of the new Land Acquisition Act is politically operose as would put at risk, Mr. Modi’s goodwill among the small and marginal farmers as well as tribals, but without which, the industry will simply not invest in factories or power plants required to make this initiative successful. The issue of the amendment of labour laws is another political minefield where a single misstep could alienate trade unions and industrial workers. Even if PM Modi spends political capital on having the requisite laws amended, the effective implementation of these laws requires the co-operation of the states, many of which aren’t ruled by NDA governments.

The bottom line

The “Make in India” initiative is an ambitious project, which if executed out well, can transform the face of the Indian economy, create lakhs of jobs and put India on the path to prosperity. However, clearly it is a hard road ahead. In the next article in this series, we will examine the different ways in which PM Modi can ensure the successful implementation of the ‘Make in India’ initiative.
About the authors

Ashwini Anand, CFA is an investment professional and Founder Member of India’s premier socio-political organization – Citizens for Accountable Governance.

Neha Srivastava is an alumnus of Columbia University and works with a leading Wall Street firm in New York.)

 

[1] Statista

[2] Wall Street Journal

[3] World Bank data

[4] CII and BCG report

[5] Livemint report

6 Goldman Sachs Report

7Business Standard Report

[6] Indian Express report

[7] TERI report

[8] Times of India report

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Solar power, subsidies and capitalism

This piece of mine was published on The Indian Republic on 1st October, 2014 over here.

Subsidies galore

It has been raining subsidies in the solar energy space, not only in India but globally. It is estimated that the US Federal government spent approximately $81 billion (inflation-adjusted) between 1950 and 2010 on assistance to the renewables space that consists of the solar, wind and geo-thermal energy sectors[1]. Following in its footsteps, the Indian government approved spending of Rs 4337 crores between 2010 and 2013 under the first phase of the Jawaharlal Nehru National Solar Mission- mostly in the form of incentives to solar power producers[2].

In India, solar power producers receive government assistance in a variety of ways e.g. generation based incentives (GBI) that entail a higher price per unit of energy supplied to the grid, viability-gap funding (VGF) that entails a government grant of up to 30% of the cost of setting up the plant. But, the most interesting form of government assistance consists of what is known as “accelerated depreciation” (AD). This provision allows the power producer to write-off 80% of the cost of setting up the plant in the very first year of operation. This allows the power plant-owner to save a significant amount of tax if he has other departments in the same company generating profits. However, this provision is useful only to companies that generate large profits from other businesses and thus is of little use to pure play -solar energy companies.

Solar power is simply not economically viable today. The notional cost of producing one kilowatt-hour of solar energy is about Rs 6.5 (based on the lowest bid received) as of today and it therefore makes no sense for a power producer to produce solar energy at this price and sell it to the grid at a price that averages about Rs 5.5 (e.g. Rs 5.71 in Delhi).[3] Therefore, if the government wants more solar energy to be produced in the country, subsidies are a must.

Subsidies are controversial as it is. But, when an industry that competes directly with thermal power industry is subsidized, the debate heats up further. The question is – Should the government continue subsidizing solar power?

The case for subsidies to power the solar industry

Solar power is clean energy: In the era of global warming, solar power scores over thermal power as it is environmentally clean and could play a large role in reducing the world’s green-house emissions. Data from the UN’s Intergovernmental Panel on Climate Change (IPCC) shows that a solar power plant produces only about 4.5% of the greenhouse emissions per unit of electricity produces as a coal powered thermal power plant and about 9.8% as much as a natural gas powered power plant[4]. Therefore, solar power could hold a key to drastic cuts in greenhouse emissions in the medium-long term.

Unsubsidized solar power is expected to become commercially viable in this decade itself: Another important point in favour of subsidies to the solar industry is that the solar power is getting much cheaper over time and therefore, government subsidies need not be continued for long. A US Department of Energy report observed that the median price of solar power from commercial and residential systems fell by 80% from 2008 to 2012.[5] The cost of producing solar power in India fell by a whopping 61% over the last three years.[6]

With the price of solar power falling sharply and the cost of power from conventional sources rising, unsubsidized solar power is expected to achieve grid-parity (same cost of production as the price paid by the grid) and become commercially viable in this decade itself, with some analysts estimating grid parity to be achieved by 2017. In fact, it is already theoretically profitable to produce (unsubsidized) solar power and supply it directly to commercial establishments in some part of India such as Maharashtra where the utilities charge as much as Rs 10.91 per kwHr [7][8].

The (misplaced?) case against subsidies to the solar industry

Opponents of subsidies to the solar industry argue that the idea of subsidizing an inefficient and expensive energy source goes against the very grain of capitalism and economics. They argue that if the cost of conventional energy is really rising and if solar energy is really the way of the future, then solar power plants will mushroom when the cost of generating conventional energy becomes prohibitively high, thus making solar power economically viable.

The problem with this argument is that it does not take into account the time lag of about a decade at the very least that needs to go into research and development required to produce cheap solar panels and equipment necessary to build solar plants. Therefore, if governments did not start supporting the solar industry before it became economically viable; there would be a drastic energy-shock that would threaten to derail the global economy once the prices of crude oil and coal rise above a threshold level. Therefore, subsidies to the solar industry are essentially helping smoothen out the supply shocks that would become inevitable with rising crude and coal prices.

The bottom line

Viewed in isolation, the central government’s solar power subsidy number of Rs 4337 crore sounds huge, but India is slated to rack up a total subsidy bill of about Rs 2, 46,397 crores in 2014-15[9] itself i.e. 56.8 times the subsidy that was given to the solar industry over a 3 year period. In other words, at 0.59% of the annual subsidy bill, the annual subsidy given to the solar industry is a miniscule amount. Besides, subsidy given to the solar industry is spent on productive assets that pay-off over the long run while subsidies on food and fuel do not improve productivity in any significant way.

The economic cost of global warming is something that nations in general and India in particular simply cannot afford to ignore in the medium-long term (think flash floods, missing monsoons and submerged cities). Subsidies to the solar space are a very small price to pay to help avert long-term disaster and will not be needed in a few years anyway. While this surely isn’t laissez-faire capitalism, it sure is sensible capitalism.

Ashwini Anand, CFA is an investment professional and Founding Member of Citizens for Accountable Governance and can be reached on Ash dot Pillutla at gmail dot com

[1] Cornerstone Magazine

[2] MNRE, Govt of India.

[3] The Economic Times

[4] IPCC Report

[5] LBL report

[6] The Economic Times

[7] The Indian Express

[8] MSEB Report

[9] Times of India

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Our interview with Dr Arvind Virmani, former Chief Economic Advisor to the Govt of India

Originally published on The Indian Republic, over here.

The Indian Republic’s Chief Editor Akhil Handa and the Editor-at-large Ashwini Anand caught up with Dr Arvind Virmani over coffee at the Delhi Gymkhana Club in what turned out to be a very candid and revealing conversation. Dr Virmani who has served as India’s representative to the International Monetary Fund and as the Chief Economic Advisor to the Government of India talks about a variety of policy issues, lack of public policy experts, what ails the policy reform in India and the all-so-powerful vested interests. In Dr Virmani’s assessment, the Modi government has done the right things and is making the right noises but needs to maintain the momentum over the next 2 years to see India back to 8%+ growth.

Experience with the government and public policy

TIR: Dr Virmani, you have been India’s representative to the International Monetary Fund, served as the Chief Economic Advisor to the Government of India, taught at top-tier universities and served on over 60 different committees, working groups and expert groups. What is your sense on the state of public policy in India?

Dr Virmani: There is a shortage of experts on policy issues. We have people with operational experience and we have academics. What we need are experts with a thorough understanding of operational issues. It is at the policy stage that the gap is most felt. This is the gap I have been trying throughout my career. In fact, I started a think-tank called Chintan to help create an impact on the policy discourse in India.

TIR: You have served the nation at the highest levels for over 30 years, something that is very rare. What has been your biggest challenge?

Dr Virmani: Bringing about systemic change is a mammoth task and is a huge challenge. It is not as simple as people often think it is. There are various vested interests with different objectives. Therefore, one has to be prepared to counter their arguments, for decision makers to approve new policies and economic reforms. For example, if a new policy proposal is put forward, you might have a bureaucrat saying, “All this sounds good, but what about so and so case? How will we deal with that?” And that is the end of the proposal. Since I spent so long in the space and made sure that I had a thorough understanding of the operational details, I was able to address all the edge-cases in my proposals and ensure that there were no loose-ends.

TIR: What do you see as the role of the bureaucracy in the functioning of the government?

Dr Virmani: The upper bureaucracy is very powerful in The Central Govt. Some of them are quite smart and knowledgable, particularly about obscure details. The good ones also understand the laws and processes. They need to be balanced with those with specialist knowledge and data based analysis.

There is also a huge lower bureaucracy (babus) at the State & local level whose power is derived from ability to obstruct economic activity.

 

India’s economy

TIR: Expectations have been sky-high ever since Mr Modi took office. How would you rate his term so far?

Dr Virmani: I think they have done well so far. It has only been a short while since the new government took office and the focus has been on breaking the government gridlock and improving governance and delivery. It is not easy to change the way the system functions in a sustainable way and that will remain a challenge. They seem to be doing fine so far.

TIR: What single big-ticket reform, if pursued, would change the course of the economy?

Dr Virmani: I don’t think there is one single reform that can change the course of the economy. It is not as simple as saying that item X or item Y will transform the economy overnight. However one generic problem is the jungle of laws, rules, regulations and controls built during the Socialist period from 1950 to 1980. Cutting this jungle to size can benefit every part of the economy& society.

 

Monetary policy

TIR: Dr Raghuram Rajan has taken a hawkish stance by raising rates thrice since he took office despite lackluster GDP growth. Would you broadly agree that containing inflation should be a higher priority at this stage than reviving growth?

Dr. Virmani: Restoration of non-inflationary growth requires a “Macro Pivot”, a tightening of fiscal policy and a loosening of monetary, as I have been saying for many years.

TIR: Surjit Bhalla, has in a recent article in the Indian Express, seemed to suggest that inflation is influenced more by trailing MSPs than by RBI’s monetary policy actions. Would you agree?

Dr Virmani: His research confirms what several of us have been saying for several years, that mis-management of cereal procurement policy & excessive stock build up has played a significant role in agricultural inflation.

TIR: Paul Volker and Alan Greenspan, in a sense represent opposite ends of the spectrum. At one point of time when Volker was the Fed Chief, interest rates stood at 18%. Greenspan and to a large extent, his successor Ben Bernanke, kept interest rates at or very close to 0 for extended periods of time. At what levels do you think developed economies should keep interest rates? Obviously, there will be variations depending on business cycles, but a rough long term target in your view would be…?

Dr virmani: On the IMF board I was the first ED to warn about the negative effect of sharp expenditure cuts in Europe, and the likely emergence of a “lost decade” of growth a la Japan. I had urged a greater write off of private debt and emphasis on structural reforms to reduce fiscal deficits over medium-long term & QE by the ECB.

 

Future of the Indian economy

TIR: Where do you see the Indian economy 5 years down the line, in terms of growth, inflation and overall health?

Dr Virmani: if the Modi govt keeps its focus in next two years, on revival of investment & growth, the economy can be put back on a trend growth of 8% per annum.

TIR:. Which industries are you most optimistic about in the coming 5 years?

Dr Virmani: I leave stock market predictions to those whose business it is.

 

Dr Virmani’s future plans

TIR: What are you upcoming plans? You told us about your think-tank, Chintan. Do you plan to focus exclusively on this initiative or do you also have other plans?

Dr Virmani: My objective is to use all media (newspapers, TV, Internet, social media) to reach those potentially interested in public policy & to convey a sense of what good policies (economic. Foreign, security) are.  I am always open to new learning and trying new things.

TIR: Would you be open to considering lending your expertise to the new government?

Dr Virmani: I am very happy that the NDA Govt has taken several issues that I have researched, written and talked about, some for decades(eg governance). Other examples are sanitation (Swach Bharat), e-edu & e-health, E-gov & UID. However, I don’t think anyone in govt is looking for my particular blend of experience & knowledge.

– See more at: http://www.theindianrepublic.com/tbp/interview-arvind-virmani-gives-modi-govt-thumbs-talks-vested-interests-100049602.html#sthash.txER17Ev.dpuf

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