Changing Global Logistics Scenario: Implications for India

A few important global events have received almost no attention in India. Seemingly unconnected, these events will have far reaching economic and trade ramifications for the Global and Indian economy. All these events are directly connected to the global logistics, transportation and commodity supply. As a natural corollary, these will have an impact on businesses, consumers and governments. This is because any impact on sea trade has major reverberations since 90% of the world trade is seaborne. This is more important considering that the global logistics industry (all segments) is worth US$4 trillion. Egypt has recently announced the opening of an expanded Suez Canal water. The second event was the announcement that the expanded Panama Canal will open to traffic in early 2016. The third event was Iran’s announcement that India will build a port and help build an alternate sea and land trade transit route passing through their country and some other Central Asian Countries overland to reach Europe. This new land and sea route will help trade from India to Europe without passing through Suez Canal. India will also receive gas from Central Asia without having to pass through hostile Pakistani or Chinese territory. A few months ago Brazil’s Iron ore company “Vale” reintroduced giant ships that can carry 4 lakh tonnes (deadweight tonnage or DWT in shipping terminology) of ore to China. These ships called Valemax were first introduced in 2011 to help reduce cost of carry iron ore from Brazil to China and to give Vale a competitive edge over rivals by carrying large quantity of dry commodities. To place the size of these ships in perspective: around 18 ships such large ships can carry all the Iron ore 70 lakh tonnes of Iron ore exported by India in 2014. The consequences of these events will play out over the next decade and were hard to imagine a few years ago.

Expansion of Panama Canal and Suez Canal

Egypt recently expanded the Suez Canal. Panama Canal expansion is due to be completed in 2016. The 72 kms Suez Canal expansion entailed 37 kms of expansion as well as deepening of the existing canal as well as another 35 kms of creating a parallel waterway close to the present one. This will help double traffic from the present average of about 1426 ships per month (or 48 ships per day) by 2023 thereby increasing revenues for Egypt to US$13.2 billion from the present US$5.3 billion. The new route will reduce time taken to pass through it from 18 hours to 11 hours. More importantly, it allows the passage of much larger ships. Similarly, Panama has completed more than 90% of the work on expanding the Panama Canal. After completion the canal will permit 97% of the global merchant ships to pass through it. This is especially important in container shipping because once complete the type of ships that carry almost 45% of the container cargo to USA.

The introduction of new ships to carry commodities and containers is another important step that is bringing out major changes in the sea trade in the next few decades. Apart from Vale which can use ships to carry out dry commodities in bulk, this move is present even among container shipping companies. Maresk Line, the largest Danish container shipping line (which carries 15% of the world’s sea container freight recently ordered ships that are 400 meters long and 59 meters wide with a capacity of 19,678 containers that are 20 feet to replace their older ships which can carry 18,224 containers that are 20 feet. These larger ships are expected to reduce costs for the customers and increase margins for the company as provide the advantage of economies of scale. 

All the above changes have immense economic implications for India. Apart from the above scenario, Indian logistics scenario in the next decade or two may be at the cusp of phenomenal changes. India could benefit immensely if its plans to expand trade and cooperation with Iran fructify. This has the potential for reducing cost of transportation, increase margins of companies, reduce costs and give India access to gas thereby speeding up the economic and trade cycle in India. If India’s plans to develop ports in Iran and build a transit route that combine sea and road to Europe through Iran and Central Asia materialise, it is estimated that they can halve the travel time for goods from India to Europe and reduce costs by 70%. They can take this alternative route without going through the longer Suez Canal or without passing through hostile Pakistan. This could also facilitate access to oil and gas in Central Asian countries like Turkmenistan and other CIS countries for India. 

An immediate consequence of these new, much larger ships is that they can increase the volume of goods transported while reducing the factor cost of goods transported. The expansion of the Suez and Panama canals means that larger ships can easily move through the expanded canals (though Valemax cannot go through the canal as yet). Together these changes along with other technology investments will shorten the cycle across the world – even in countries like India. Once the India-Iran-Europe Transit is ready, a 10 day reduction in time taken will make a big difference in the cost of goods and services. An important unanswered question that only time answer is if there is sufficient demand to absorb such a huge capacity addition and the impact of a shortened economic cycle. It has been pointed out that the Suez expansion comes at time when traffic is declining (down from a daily average of 58.5 ships in 2008 to the present 48). These doubts arise largely because of the consequence of the global credit crisis, slowing of China and the problems in Europe. One thing that we can rest assured is that shipping companies in the future will prefer large ships in order to reduce costs and protect their margins in a world economy that is rapidly slowing down. 

Possible Impact on India

If India has to take advantage of the changes that are underway in the global economy, India needs to rapidly upgrade its infrastructure. These include speeding up the building of inland waterways, coastal shipping, ports, airports that cater to freight, road network, etc. If India cannot do so, there is a risk that Indian manufacturers will not be competitive in the global market place. On the positive side, the government has announced its intention to invest in Inland Water Transportation (IWT). Any success with IWT can decisively alter the Indian economy from a structurally high cost one to a low cost economy since IWT can facilitate transfer at least 10 times the quantity of goods fraction of the cost. In the past, it was estimated that the cost of inland transportation costs Rs.0.40 per tonne per kilometre while the cost of transportation by Rail is Rs.0.50 and by road nearly Rs.0.90. However, the global logistics boom and IWT can be a double edged sword, especially in a country like India. Unless the governments are prepared and prepare the people, the coming changes can revolutionise and wreck havoc on the present transportation sector, especially in the lorry sector. An example best illustrates this: the vessels that are proposed to transport goods on the Krishna River from Vijayawada to Kakinada are expected to carry 100 tonnes initially and later upto 1000 tonnes. In contrast the maximum possible transportation by a lorry is about 30-40 tonnes. That in turn will have huge repercussions on employment and nature of transportation. In short, the Indian logistics sector has to completely rework its business model – something that it has to prepare from today rather than wait for the last minute. These changes will invariably have major change in the employment scenario. It is unlikely that IWT vessels will need so many people directly. Instead it will require a large part of the workforce to be redeployed (like for loading/unloading, etc). Hence, different parts of the transportation value chain require different kinds of skills - which cannot be learnt in one day. They have to be acquired gradually. Hence, the best time to start preparations for the future on the part of Government and businesses is today. 

This does not mean that India benefits automatically. We have to build larger ports which can dock and unload goods quickly. The average turnaround time for a standard container vessel in Hong Kong, Singapore and most of the ports in China is 10 hours or maximum of 12 hours. In contrast, in India it varies from 3-4 days. There is a need for India to build larger ports that can allow large vessels to dock in the country and to load/unload commodities and containers. Otherwise these large ships will simply avoid India and we will miss an opportunity to change the fundamental nature of our economy - from a structurally high cost one to a low cost one. More importantly, we need to link these port cities to our hinterland using IWT. Development of coastal shipping may actually help. Example: if a huge carrier can dock in Vizag then using coastal shipping can help transfer goods from Vizag to Kakinada then transfer them inland using IWT. Since tens of lakhs of tonnes of goods will move through large vessels the cost for these commodities can fall dramatically. 

Thus, if India cannot take advantage of the major structural change that is likely to come about in global logistics and transportation sector in the next decade, it will be yet another lost opportunity. Importantly, taking advantage of these changes will mean a complete structural transformation of India from a high cost economy to a low cost economy.

(A shorter version of this was Published in the Telugu Daily, Eenadu on 14 August 2015, p.4)

Dreaming about a Rosy Future: Another shade to the Daily life in a city

Dreaming about a Rosy future has different side - it offers a great business model for the more enterprising kids. 

A Scene from Vijayawada, Andhra Pradesh in February 2015

Delhi Election Results: Understanding the Washout

The Delhi Election results are truly momentous in the history of Indian Politics. Never in the history of India has a single party won 95% of the seats. Never before in the history of India have national parties been so badly humiliated. One of them could not open its account. The BJP barely eked out that three seats – just a little better than others. A lot will be written on these historic results for a long time. For a second time in less than one year, voters decided that it was better give one party an overwhelming majority. For a second time in a year, a Six-sigma event seems to have become the norm. In terms of statistical probabilities such result is considered to be an outlier with the probabilities being one in one crore probabilities. However, such huge majorities may actually become the norm – an indicator that there is a major underlying sociological change in India and among the voters.   If BJP draws the right lessons, this electoral wipe out could be the best thing that could have happened to it. Unless BJP draws the right lessons, things can get a lot worse for the party. There will be a temptation within the BJP to dismiss the election results as insignificant since the electorate of Delhi accounts for only 2% of the total electorate in India and Delhi sends only seven members to the Parliament. Delhi has never been important because of the numbers. At the end of the day, it is the seat of power – at points of time in history it was only symbolic but most of the time it was/is the real seat of power. It is not without a reason that everybody in Indian sub-continent looks to Delhi for direction. More importantly, Delhi is a microcosm of the country. It literally has people from all parts of India – and, in large numbers. In other words, Delhi is important because it is a barometer for the country. 

History has a number of important lessons – for those who are willing to draw the right lessons. After the 2014 general elections, Political pundits loved to point out that for the first time in 30 years there is a stable government. Though it is very early, there is a need take another lesson from history: Congress party winning a majority on its own in 1984 was also the last time that they ever formed a one party government. The party went into a long-term decline after that stupendous win. 

At the onset, it is important to point out that the election results should worry all parties in equal measure. It is clear that the electorate has become smarter than what they were credited with. Andhra Pradesh and Delhi election results indicate that the voters have become very knowledgeable, discerning and are not willing to waste their vote by sticking with their traditional preference – especially, if they want to punish a party. In this case, it was clear that the voters wanted to punish the BJP and hence decided to vote en masse for AAP because they stood the best chance of winning. In other words, unlike in the past, when voters are angry, it is unlikely that they will waste their vote. The 2014 general elections indicated the same when Congress was punished and Delhi elections is a reinforcement of that trend. It is likely that this will be the central theme of future elections. 

There is a long list of takeaways from the Delhi Results. The key take away of the results is that the sun is about to set or has already set on the Congress Party. The party has not just fallen off a cliff; instead, the results make it clear that the party has fallen into an abyss where nobody knows where the bottom is. Importantly, the results seems to indicate the regionalisation of the Congress Party. Technically, it may be a national party but, in terms of spread it may be more like a regional party with some pockets of influence. In other words, it means that Congress will from now on (and in practical terms) be more of a regional party. The BJP is likely to take the Congress Party’s place as the principal party that will drive the agenda. Hence, in future, electoral battles are likely with BJP on one side and others on the other side. The results clearly show that the era of regional parties is not over. On the contrary, the decline of the Congress seems to have convinced people that a regional party has a better chance of successfully opposing the BJP. An important point that BJP strategists have to keep in mind is that they have done exceedingly well only when they were fighting the Congress party and not any regional party. In Haryana and Maharashtra, the BJP decimated the INC but, in Jharkhand where the opposition was a regional party, it just about managed to form the government. Hence, there is an urgent need for the BJP not to lose sight of the fact that the vote for them in regional elections was essentially a vote against the ruling Congress party.  

There will also be strong temptation within BJP to blame internal squabbles for the loss. Internal squabbles are not a cause for such a huge washout.  The winning party got about 52% of the vote share – or about 25% more than BJP. In contrast, the BJP’s vote share was more or less constant from 2013. Therefore, internal squabbles played only a minor role – if at all they played any role. A frank analysis indicates that the Modi government needs a course correction. First and foremost, it has to understand that despite the fact that it has a majority on its own, it should learn to treat its friends with more respect and should be magnanimous in victory. Any political party, especially a national party, cannot afford to be considered as a fair-weather friend. Elections are all about mobilising support and converting goodwill into votes. Votes are one part of it. Mobilising support from all quarters is very important. In such a scenario, the direct and indirect support of friends is also important. If one antagonises friends it is likely that they will not mobilise their supporters: even if they sit at home, it will damage the prospects of the ally. It seems like as if within nine months the NDA allies simply did not bother to canvass support for the BJP – an important factor when the contests are intense and tight.  

BJP also needs to understand that it cannot become like the Congress and forget about promises made during elections. Making tall promises is easy but implementing them is another matter altogether. It is likely that many people are likely to think that inability to bring black money back is a major reason. However, it is unlikely that it was a major cause. Bringing black money does not touch the lives of the poor on a daily basis. In contrast, the poor were definitely affected by things like Direct Benefits Transfers, issues related to price rise and the inability to create jobs. A major reason for the wipe of UPA in 2014 general elections was their inability to control food prices and to create jobs. The promise to control prices and to create jobs along with good governance endeared the voters to Modi during the election campaign. 

The claim that the Modi Government controlled inflation did not cut much ice with the voters for two reasons: food prices have not come down and despite fall in international oil price the prices did not fall commensurately for the consumers. BJPs biggest and core strength is the support among traders and middle classes. The problem with the middle class is that it strongly believes in the concept of “Charity begins at home while justice next door”. Traders and the Middle classes did not benefit from the near 50% fall in oil price. Unlike a decade ago, 24-hours live television means that people are quite aware of global and national events. Hence, when oil prices did not fall in tandem with the global prices it hurt the BJPs core support base. Food and petrol are something that middle classes buy at least once a week. Consequently, each time they opened their purse to purchase food or petrol it opened a can of discontent. The undecided, independent minded voters who punished the congress for this reason and swung the 2014 elections now moved to AAP. In retrospect, it would have been less damaging for the BJP if it had passed on at least half of the benefits that accrued from the international fall in oil prices. 

Another important reason is the promise to create jobs. Creating jobs is not easy. However, when expectations are extremely high, as in the case of the aftermath of the General Elections of 2014, things can go awfully wrong when expectations are met at immediately. ‘Feel good factor’ may be good for the stock market but not for a poor person looking for a job. As long as the economy does not get better on the employment front, it is unlikely that there will be political benefits for the ruling party. 

A major issue that may not have gone down well with the people is the importance that the Modi government has given to Aadhaar and Direct Benefits Transfer. Considering the fact that the BJP had opposed it while it was in the opposition embracing it while in power does not seem to have gone down well with the voters. The BJP government would not have suffered such a fate if the roll out had slower and had given more time to the people especially in the case of LPG. Even to this day, the gas agencies are teeming with crowds who are facing a problem of LPG. It is a mistake to think that LPG is not used by the lower classes. Successive government have given LPG connections to the lower classes as part of one scheme or the other. A number of these consumers are facing a lot of trouble navigating the new set of rules. Each trip to the gas agency leaves the consumer fuming because it requires people to forego their work for at least that day – if the problem is solved in one day. 

The lesson for BJP is that it should keep all its promises – not just those that have an All-India relevance (like food prices or petrol prices). This is because unlike the 1980s or 1990s, migrants who settle down far from their native place are an important component of our voting populace in all our major cities. The larger the city, the more they number. In the case of Delhi, people from South India, especially those from AP, Kerala and Tamil Nadu make up an important component of the voters. BJP going back on its promise of special status has clearly not gone down well with people from AP settled in Delhi. The paltry and insulting package of Rs.850 crores was like adding salt to a festering wound. It was like as if the Modi government had thrown crumbs to its pet dog. While Congress bifurcated AP, BJP went back on its promise. So for a settler from AP in Delhi, it was no brainer that the best way to punish both the national parties was to vote for AAP. The Sooner BJP keeps its promise of Special Status of abundant funds to AP, the better for the party. This is because there are a number of constituencies in Karnataka and Tamil Nadu, which have a large concentration of people from Andhra Pradesh. Hence, it is better not to antagonise people of AP – their curse can be a problem far beyond the boundaries of AP. To this must be added the fact that there are very few South Indian ministers in Modi’s cabinet has surely not gone down well with the South Indian population. In the General Elections of 2014, such issues receded into the background as the anger was primarily directed at the ruling UPA . 

An almost unnoticed aspect of the Delhi elections but one that has ominous implications for BJP in Andhra Pradesh is that Arvind Kejriwal has clearly shown the Power of an Apology – especially when it is made innumerable times. At the time when elections were announced, the abrupt resignation of AAP government after 49 days was an issue. Though he had apologised in the past, in the early days of the campaign Kejriwal apologised so many times that on the voting day, abrupt resignation was a dead issue though the BJP tried to revive the issue. This has major implications in AP: if the Congress were to similarly keep apologising it is likely that instead of Congress Bifurcating AP by 2019, BJP going back on its promise of Special status and help to AP may become a major issue – thereby offering a major chance for the INC to revive itself from the present almost moribund state.  

This is not to claim that this is the end of the road for BJP though the implications of this will be felt for a long time in a number of states. An immediate consequence will be felt in Bihar where it may give hope for those against BJP to draw lessons and put up a united fight. Until date, straight fight has damaged the BJP more than the other parties. Second, more importantly, there is an urgent need for the BJP to revisit its hurry to introduce Direct Benefits Transfer. While the administrative benefits of DBT cannot be faulted, the manner in which they are implemented tend to inconvenience the people when introduced in a hurry. There is now an attempt to push movement of even food and related measures through the DBT route. If all the welfare measures are moved through DBT, the impact of this on prices is not known. Hence, there is a need for the BJP or its allies to study the implications of DBT in more detail before going full throttle on these measures. The haste in which Congress introduced DBT was a factor in its defeat – though the Congress will not accept it. The political implications cannot be missed: almost all the large states except UP and Bihar (parliament seat wise) are now ruled by BJP or its allies. Hence, any inconvenience to the consumers will invariably have a political consequence. Similarly, any measure that has long-term and large implications on the consumers there is a need for the government to take the people into confidence rather than use its majority in the Lok Sabha to push measures. Pushing measures in haste will send the wrong signal to the people. AAP was able to spring back only because it went directly to the people and took them into confidence. There is now a need for the BJP to do the same. Unless the BJP uses this crisis to introspect, it will be a crisis wasted and lessons not learnt.  

Oil Price: Interesting Chart Patterns

The recent fall in Oil prices from about US$107 to its low of  US$45 or thereabout has led to a cacophony of claims that it is headed much lower. The estimates vary from US$20 to US$30. Nobody really knows which will be the lowest point. A quick look at the chart patterns seem to indicate that the oil may be way too oversold to hit those lows in the in the next few weeks. On the contrary, it seems to be ripe for a sharp rally that could take it by 10 or possibly 20% or more higher. There is never any point in speculating about the exact price since most of the time we will be wrong. 

The chart below (from www.stockcharts.com) is a Kagi chart from 2012. The problem with the chart is that there are too few data points. I would have been more comfortable if the data started with the 1980s or at least 1990s. But, the chart pattern is one of the most successful on a long-term basis (1-3 year perspective). 

It seems to indicate that Oil may be way too oversold. This combined with data that the net short by Hedge funds for West Texas Intermediate Crude is at a record high may offer some reasons for the prices to go higher. Finacialisation of Commodities and near zero interest rates offer some great opportunities for large trading companies to speculate in a win-win manner. If they make profits they keep it, if they lose money then they can palm off the losses to the central banks.

Season of Migration is about to Start

The onset of this summer will probably offer a number of insights that will be indicative of the directions of India's public policy in the next few years. 

The debate about importance of NREGA, the largest provider of jobs to the rural poor is about to tested. Already, a number of economists, ministers and social activists along with innumerable others have pleaded that the NREGA should not be diluted. While the debate about NREGA is unlikely to end in foreseeable future, on the ground the conditions of migrant workers is unlikely to change. 

The photo below show the accommodation that is provided to migratory workers in a brick klin in Andhra Pradesh that is dependent on migratory labour. On the day of their arrival, the workers "repair" these structures that are used for resting after the end of their work day. The work day varies and is based on the number of bricks that they can make rather than one based on the number of hours. 

Hustle Bustle of a Ferry in a Remote Region

The establishment of a ferry service across the River Krishna in 2014 seems to have had interesting economic impact in Gudimetla. The remote village, located in Krishna District, is interesting because it exists in the revenue records but, about 50 years ago people from the village moved out and settled in the neighbouring villages. Not many know the reasons for this. 

The Ferry (picture below) connects Guntur and Krishna districts. The Guntur side of the landing point for Ferry is about 15 kilometers from the village where the new Capital of Andhra Pradesh will be built.

In the first year, the contract to operate the Ferry service was auctioned by the government for Rs.1.8 million. In the second year (current year), competitive bidding push it to Rs.5.4 million - indicative of its popularity and utility. 

The picture below of the Ferry as it reaches the river bank on the Vijayawada side. Trucks carrying upto 5-6 tonnes frequently use it. It usually takes about 20 minutes to reach the other side. However, when it is overloaded it takes upto 30 minutes: most of the time it is overloaded. It consumes about 35 liters of Diesel for each trip. 

They charge Rs.10 for an individual, Rs.30 for a bike, Rs.150 for a car and Rs.1200 for a truck. A road trip between the two points means covering about 160 kilometers - which could take at least four hours. 

One immediate consequence is that land prices in the villages have gone up - much before the explosion in real estate prices in Andhra Pradesh.

Probably, it is one of those rare cases where a government investment turns out to be a win-win for all the stakeholders from the first day. The government gets the auction proceeds, people pay and actually benefit in a clearly quantifiable manner in economic terms. Time for more such investments by the government? 

Union Budget 2014-15: Preparing the Ground for a Socio-economic Churning in Rural Areas?

The budget has mostly received flak for what is has not done or one that is too little. The story that seems to have largely been missed is the one related to Rural areas.  One article says that there is no shift away from the past. Another details various measures including a price stabilisation fund, establish a national market for farm produce, irrigation schemes, agricultural universities, warehouses and rural internet connectivity, measures for providing credit to tenant farmers and providing long-term credit. The criticism that these measures may be mere 'tokenism' is to an extent valid. However, it is important to understand that not everything needs to be taken up by announcing it in the budget or the parliament. In the area of Rural Development, a number of important measures in this budget are more likely to be remembered over the next few decades for their social and political impact rather than only for their economic impact. These changes, if used adroitly have the potential to rework the caste/class relations in the rural areas – much like the manner in which some policy interventions were used in the 1970s and 1980s. Good examples of such changes are those related to cooperatives and poverty alleviation programmes. In other words, the BJP can do what the INC did to its power base. Interestingly, the possible long-term consequences that the budget could possibly trigger (subject to implementation of policy) have largely been missed. This is not to claim that the changes are likely to play out immediately. The budget is probably indicative of the direction in which various attempts to rework socio-economic changes are likely to be experimented in the next few years. To cut a long-story short, the Union Budget could probably be only a dress rehearsal to the story that may unfold in the next 3-4 years. .

The Budget has promised many investments in agriculture and Rural Development. The impact of these steps will vary and will depend on the ability to implement projects/programme – always government’s Achilles heel. A large part the analysis/views on are based on field experiences over the past few years. They may or may not be applicable to the country as a whole. These important announcements though do not have much funding considering the size of the country or the task, may be the beginning of the trend. The important measures that caught my attention in the budget include:

• More funding for various programmes related to agriculture, rural housing, water and roads;
• Enhancing Warehousing infrastructure by providing Rs.5000 crores assistance
•  Improve post-harvest lending to farmers which also calls for reinvigorating the framework of Warehouse Development and Regulatory Authority (Point 127 of Budget Speech). 
•  Long-term credit and increased funding to NABARD. 
•  Broadband connectivity to villages under Digital India Initiative and National Rural Internet and Technology Mission. (Point 62& 63 in Budget Speech) 
•  Establish 100 Mobile soil testing centres. 
•  NABARD to encourage 5,00,000 Joint Farming Groups to help tenant farmers (Point 80 in Budget Speech) 
•  Producers’ Organisation Development Fund (Rs.200 crores) to build 2000 producers organisations (Point 90 of Budget Speech). 
•  Expanding Financial Inclusion through a Financial Inclusion Mission (Point 130 of Budget Speech);

It is quite surprising that the most important business newspapers have not covered at all or have simply not bothered to understand the ramifications of some of these measures especially those related to Producers and broadband connectivity to the villages. Of course, the reason to explain overlooking the broadband connectivity measure is not difficult: pushing technology often turns out to possess a tinge of elitism to it, especially by the time the policy decision is transmitted from policy level to implementation level. Inexplicably, missing the part about Producers Organisations is inexplicable. Probably not many expect these to succeed. Interestingly, an overwhelming number of cooperatives that have succeeded have mostly been in the sphere of credit or petty commodity production. However, I believe that even a partial success of these programmes will provide extraordinary political benefits to BJP. Infact, their success may be more in the realm of the political and social sphere in the rural areas rather than the economic sphere.

Among the many measures in the budget at least five of them are likely to have large scale ramifications in the long-term – even if there are problems related to faulty and uneven implementation. These include:

1. 1Improving agricultural storage facilities. 
2. Financial Inclusion Mission 
3. Digital India Initiative and National Rural Internet & Technology Mission 
4.  Joint Farming Groups 
5.  Producers Organisation Development Fund

The first of the above measures has widespread ramifications for consumer interests while the other four have extraordinary potential to unleash social and economic changes in the rural areas. These changes are likely to put in place a new classes and castes firmly in control of rural areas. Some of them are dealt with below:

1.      Improving Agricultural Storage and expanding the scope of the commodity market has obvious advantages but the measures proposed in the budget can work both ways. Depending on government policy and oversight they are likely to become a double edged sword.The advantages are well known and have been discussed over the past many months. However, there is a need for abundant caution since the measures have the potential to create a massive information asymmetry which, if combined with trading in the commodity markets has the potential to be detrimental to consumer interests. However, if used with abundant safeguards it can provide substantial succour to the consumers by enhancing storage facilities.

A hypothetical case of the worst case scenario is explained: Assume that a few large players or a syndicate of medium/large players who own/operate warehouses work in coordination and share information about the volume of food-stocks they hold on their own or on behalf of their clients – in other words, form and operate as a cartel. Assume that they control stocks through their merchant/social or peer networks to the tune of approximately 10% of the total warehouse storage capacity (easily possible). In case of a delayed monsoon or failed monsoon (as in the present year), these players will be the only ones with the price sensitive information. Assume that these players work in tandem with one or more of the largest food companies in the country and share the information. The result: these companies will have sufficient power to move prices in the direction that is profitable to them but, detrimental to the larger consumer interests. The moot question is it possible for such a scenario to play out in real life. I think the probability is very high. Example: the case of Cement Industry in India, which routinely indulges in “Production management” – basically price fixing.

The private sector will find the Warehouse trading receipts extremely profitable, especially when they can be traded in a calibrated manner in the commodity markets provided the user has the right information and trading access at their disposal. In my years in the field and an observer of various markets, I have constantly pointed out that the most important and price sensitive information is always very expensive and is accessible only to a few. A general, but horribly wrong perception is that internet has made information more easily accessible and democratised it availability. Unfortunately, that is not the case. The information that is available free or at a low cost usually has no relevance in the market place.

A logical and obvious question that arises is if it possible to avoid such tactics? The short answer is that it is not difficult. The government can compulsorily requires a mandatory filings by all warehouses to declare the stocks moving in and out of each and every warehouse, preferably on a real time basis (or at least hourly basis) along with figures of the net stock available in each warehouse at any given point of time. Even better, if the owner of the stock is declared (just as participants have disclose their identity in case of block deals to purchase or sell equities) This information should be placed on the government website and distributed free of cost.

2.      Financial Inclusion Mission Combined with Digital India: Frankly, I did not expect the present government to push this programme. The fact that it did probably indicates the realisation of the importance of the banking sector in general and Financial Inclusion (FI) in particular. Mission mode execution is likely to bring with it a sense of urgency. Opening bank accounts is not, in itself a big deal. There are already millions of non-operational/unused accounts. The importance of the programme lies in the opening accounts with an inbuilt credit mechanism (if press reports are to be believed and if the FM’s speech is an indicator). Reports point out that these account will be given an overdraft  (reported at Rs.5000 in the press but not stated by the FM). Assuming that the banks are able to open 50 million new accounts and provides credit to another 50 million account holders already possessing a bank account. Assuming that the credit provided is as little as Rs.5000 per account, it translates into 100 million multiplied by 5000. It provides a huge push to the rural economy. Interestingly, I find that a large number of people have borrowings in the range of Rs.500 to Rs.10,000 from pawnbrokers in rural areas. This means a household can balance their very short-term cash flow requirements by a judicious use of the bank accounts.

Expansion of FI can have huge long-term ramifications. I have found in Kolhapur district that the establishment of a Business Correspondent outlet and the disbursal of a bank loan have increased incomes of small businesses by 30-40% (based on interactions – no data gathered. The benefits accrued by way of amount saved as interest rate differential (saved by borrowing from the formal sector), time and money saved making the weekly trip to the bank, advantage of paying online to suppliers and so on. The catch lies in completing financial literacy classes. The banks do not have the infrastructure to take up such a large scale financial literacy drive. Often financial literacy training is a programme that the banks take up only due to regulatory compliance. The second question is who will meet the costs related to financial literacy training.

It is in the above context that we have approach the broadband push. Ideally, the broadband push should start with villages or regions that presently do not have any connectivity. In my experience that means about 20% of the villages. Assuming that this happens then the change can be quite substantial.

There are three critical pre-requisites for the success of these two measures: (a) Convince the banks to offer credit, (b) role of corporate entities serving as Business correspondent and, (c) who controls the broadband/information highway?

The first, convincing the banks, is easy: the government can offer a counter-guarantee or a loan insurance wherein the premium is paid by the government for two loan cycles on the over-draft facility offered on each account. In order to make the banks more interested in expanding the business and to collect the loans, the insurance itself can be offered on the basis of a larger loss sharing in the first loan cycle (say 90:10) and a lower loss sharing in the second loan cycle (say 50:50). Since the loan second loan cycle will not be needed in case of a default, the banks need not worry about the second loan cycle. In case the default occurs during the second loan cycle, they get only 50%. 

Second issue is a problematic one due to ideological reasons. In my experience of visiting nearly 150 BC outlets, 90% of the Corporate BCs are a failure (I have come across only one corporate entity that does excellent work – the rest do not work). Therefore, they should not be allowed to use the programme to gain a foot in the door and bring the programme to a halt.

The third issue is who will control the broadband digital highway? Due to its long-term business and other ramifications, the government should build it and then lease it out or allow any business or other agencies to use it for a small fee that allows it to meet costs and future investment needs. Public Private Partnership (PPP) should be strictly avoided.

If FI Mission or Digital India plan has to succeed, there is a need for the Finance Ministries, RBI and TRAI to work in tandem.

3.Joint Farming Groups for Tenant Farmers: This is another unexpected programme, especially when seen in the context of the policies of previous NDA governments (1996-2004). This is a good measure but, if the experience of pre-bifurcation Andhra Pradesh is indicative, it is going to be a difficult programme to succeed. Pre-bifurcation AP Government Socio-economic survey points out that by the end of 2012-13, a total 5,76,147 tenancy cards (eligible for a loan) were issued. Media reports cited in the context of the loan wavier related news items claimed that there were 28 lakh tenant farmers in Residuary Andhra Pradesh. In other words, less than 25% of the total tenant farmers possessed a tenancy card.

The difficulties arise due two reasons: (a) officially acceptable written recognition of tenancy is possible only with an agreement between the land owner and the tenant. This is likely to make it difficult to organise the groups and documenting/identifying the tenant farmers and the fields in which they work, (b) how to incentivise the banks to lend when there is little or no security and more importantly, when recovery can go down to near zero in case of recalcitrant and/or borrowers unwilling to repay the loans?

The first reason is difficult to deal with consider the rising cost of land that combines with circuitous or a lack of a quick arbitration mechanism. The inordinate delays in the judicial system only make it unlikely that the owner of the land will offer the documentary evidence attesting a tenant farmer’s status due to fear of litigation. The case of Krishna District is illustrative of some of the problems. In that region, the land prices vary from Rs.10 lakhs to Rs.5 crores. In contrast, the lease earned by renting land is less than Rs.20,000- lower than the returns on a savings bank account deposit. Fear of litigation, real or perceived,  by the tenant means that land owners are unwilling to risk leasing the land. The possible manner in which a landowner will agree to accepting formal tenancy agreement is the laws forbid litigation or to create a judicial framework that disposes off such cases in less than a year – both of which are unlikely. Such a risk may in the end leave the programme wide open to building Joint Farming Groups that are in essence patronage groups of the powers that be. Essentially, it means that it offers the ruling party a vehicle and reach to expand into the villages at a hitherto unknown speed. If the Elections results in 2014 are an indication, for the first time in the history of independent India, the BJP has the possibility of creating a non-congress, non-left support group right down to the village level.

The second issue, incentivising the banks to lend, will be problematic but given the political advantages, the government owned banks can be subtly forced/convinced to lend either through refinance or loan insurance (as cited above).

4.      Starting Producers Organisations: I find this measure the most interesting part of the Union Budget. It has the potential to completely rework the socio-economic and political structures – if it works. On the positive side, the Producers’ Organisation can be used to organise, channelise agricultural inputs and market produce thereby leading to a huge jump in the bargaining power of the producers, especially the small and medium producers– exactly on the same grounds as a cooperative. Capacity building can encourage and even drastically transform the present agriculture. It has the potential to encourage investments that reduce, if not remove information asymmetry. Among the other positive effects, it could push intensive farming based on a high degree of mechanisation. In short, it could be the farmers’ equivalent of the Self help Group movement for the poor. As an organised collective, it could mean the emergence of a new, well organised, powerful force in the country side that have substantial clout – probably for the first time after independence.

But, the advantages go far beyond the realm of agriculture. Organising the producers has the potential to create a powerful group of supporters right down to the village level for the ruling party. Since any party that controls the Central Government controls the banks and all the organisations that can fund such Producers’ Organisations, the political benefits are substantial: exactly like what the cooperative did for the Indian National Congress in the 1970s and 1980s. Since the producers will be landed interests, for the first time, landed interests can be given a coherent right-wing orientation and push –something that the first NDA simply did not have.

Add to these other changes that we already witnessing in the form of internal migration and massive mechanisation of parts of the agricultural sector. Probably, we are at the cusp of huge but, scary set of socio-economic changes – the most important in nearly half a century. If socio-economic change span out as I think they will as question that I keep crossing my mind is:  where all this will leave the established left-wing parties and the INC?

Biggest Boom in the History of Indian Real Estate Sector?

Post Election Results in India, there is one sector in one area that has witnessed a phenomenal boom irrespective of the economic conditions in the country. The area that is a subject of this post are the two districts of Krishna and Guntur in the residuary State of Andhra Pradesh. The sector that is an object of this post is the real estate sector. Post bifurcation of Andhra Pradesh into two states (AP and Telengana) and the General Election results, real estate has exploded.

The nature of the boom in the sector was covered about a month ago in an article. At that time, the priciest piece of real estate was around Rs.5 crores per acre (nearly US$ 830,000). Fast forward to the present, the explosion in prices continues - much akin to reliving the Tulip Mania. The priciest land is now varies from Rs.12-16 crores ($US 2-2.6 million). The buyers are mostly from the former capital of the United State - Hyderabad. Land transactions are taking place in full swing. Knowledgable sources point out that the number of registrations have increased by 400% since May 2014 (when the results were announced).

This is striking because till the end of March 2014, the Department of Stamps and Registration was find it difficult to meet its targets. Interestingly, the benefits that accrue to the government are limited because there is no increase in the official valuation of the land (on which the Stamp duty have to be paid). 

The interesting aspect of this price move is that over the past two years, prices of land have shot up by more than 10 fold.

Probably the biggest boom in the history of Indian Real Estate Sector!

Commodity Pricing: New Dawn or Bubble About to Burst

Since the start of this blog, we have attempted to draw attention to increased financialisation of various markets and its impact on the way we live and work. The 2008 crisis was an important game changer in this process of financialisation. The subsequent measures to stablise the world economy only helped this process. Invariably, an important segment which witnessed volatility due to this financialisation were the commodity markets. A very interesting recent news item carried by Bloomberg News website carried seems to have largely gone largely unnoticed.

A reading and re-reading of the news item leads me to conclude that right or wrong, the views in the article will have two major consequences, dependening on whether the views are right or wrong.

First, if the article is wrong, then it indicates that we are close to a major top for most of the asset markets. If the past is any guide, a cursory glance at the CBOE Volatility Index (VIX) or for that matter the Volatility Index in any market/country indicates that market volatility is at the lowest level and complacency is at its highest levels. Interestingly, it is at levels close to those in early 2007. The lowest reading for the CBOE VIX in 2007 was 9.70. Currently (closing on 3rd July 2014), it reads at 10.32. Of course, it could go much lower but, that is not the point here. The point is that each time there is high complacency we have some of these fancy theories - the last time we had a roaring bull run there were people who declared that the business cycle was dead. Hence, such thinking that the commodity prices are now less correlated to currencies or are not likely to be correlated to currencies may just turn out to be typical of exuberance before the bursting of a bubble.

Second, a more important consequence of the views expressed in the article are likely to mean a major change that may lead to lesser financialisation of the commodity markets going forward. This is important because it may mean a change in trend after nearly two decades - if it happens. Personally, I do not think the process of financialisation will end any time soon. On the contrary, the process is likely to gather steam. However, if correlations between commodities and currencies are likely to end, we are likely to witness lower volatility and with it probably more predictable commodity prices. That would have a significant impact on the lives of consumers.

Attempt to Understand Why Congress Lost badly

Unlike in the past, the comprehensive loss in a national election (this time that of the Indian National Congress or INC) has not received as much attention it probably should have received. Instead, the debate centres around the failure of a few leaders.

Undoubtedly, there is no doubt that being in power for 10 years arrogates a party and persons in power. However, critics of the Gandhi's miss one critical thing: the fundamental nature of INC. Congress has always been (since the Indian National Movement) a kind of sum parts make up the whole sort of party. It is quite loosely knit unlike other parties like say TDP, YSRCP, TRS, BSP, etc. This is not to claim that Sonia and Rahul are like Mahatma Gandhi or any of the leaders before the 1970s. 

1. Wrong Central Representatives 

All the wrong leaders from Delhi controlled the levers of power in the States. 

Avoiding names and without giving too many examples, it is clear that the Delhi bosses' were a disaster not because they were bad for the party leaders but because the voters found their statements repulsive. Central observers are a boon when they can build bridges with the local factional leaders. A salient characteristic of an election is that they are won or lost because of the voting behaviour of independent undecided voters - most of them make up with their mind in the last 15 days in the run up to the elections. Moreover, research in psychology proves that the most recent experiences are the most important in the behaviour of a person. A middle class voter was invariably put off by their statements and flip flop on a number of issues. Basically, the statements of these leaders in the last 15 days were shocking for their lack of political finesse. 

2. Congress has indeed lost the communication channel - not only with the Voters but with its own grass root organisation. The disconnect was remarkable. In the past, there was this two way channel that communicated the thinking at the grass root level to the leaders and vice-versa. This was one of the reasons for its success in 2004, at least in AP (an important state that helped them come to power and stay in power: in 2014 out of 42 states they managed to get 2 seats). Reviving this is probably going to be their only chance for recovery. I saw this problem clearly in AP and read about this even in VIP constituencies. 

3. Congress has to bury its paranoia of the YSR (their AP leader who helped it win two elections) phenomenon: The rise of YSR and the revolt of his son (Jagan) seems to be the greatest fear that continues to haunt Jagan. YSR's rise was accompanied by a systematic decimation of local level leaders of the party- expect those who were loyal to YSR. Before his rise, each district had a number of strong congress leaders - each one acting as a check on the other.Often there were many more than two: example Krishna and Guntur had more than four. Each leader would win his seat and the seat of at least another two or three seats in the district or they would have no chance of even a berth in the ministry. There is a need for congress to go back to such a state. It is because of such a large base of leaders that INC could survive the onslaught of TDP. The rise of TDP posed a formidable challenge because it was able to rework the socio-economic and political relations right down to the village level. 

Fast forward to 2012-14: Congress has at best one or two leaders in each state. I doubt if there are any strong congress leaders in the districts. So lack of alternatives mean that people who dislike a congress leader have no option but to move to another party. Moreover, one state level leader means that there is no incentive for people to think about the local issues in an elections. It becomes a referendum on policies on which local level leaders have no control. A 'good' local level leader has a good chance of convincing people in his/her segment that a vote for them will mean accessibility over larger issues. 

4. Congress has lost the fighting ability to go for a all or none kind of battle: Ten years in power has arrogated a lot of local leaders. So much so that they thought that they can buy votes. They forgot the simple logic: people take money but end up voting for whomever they like. Once inside the polling booth there is no control over the voting process - unless the booth itself is captured. That is why the rigging specialists in the 1990s were so successful. In contrast and in the past, leaders like YSR had it - clearly visible in the manner in which he decimated the major opposition in the state. Fast Forward to 2014: look at the candidates put up by INC in Telengana against TRS chief and other strong TRS leaders - they stood no chance of even getting their deposit. Tragically, some congress leaders seem to forget this is part of the problem - that is why one of them actually says that because INC did not have tie up with TRS they lost. The first question that the persons who offer such solutions should be asked is: Why should INC cede space (especially after granting statehood)? Strategically, ceding space by an alliance should be the last option - not the first. The party seems to have inverted the logic of an alliance. Unfortunately, for INC, unless they regain such an ability they don't stand a chance - Modi seem to have certain similar qualities like YSR like going full throttle after opponents. 

5. Congress' old habit of creating formidable opponent in the hope that it can align with the opponent is an old habit AND combine that with the fact that INC does not seem to understand that an alliance should only be a temporary phenomenon that should given them breathing space that can be used to recovery: In every state where they have gone into an alliance, the congress has gradually given up space and has gone into a decline. 

6. INC was in a hurry to claim that it had changed with the times. So its answer was to bring in bureaucrats and technocrats into the ministry and the party. Running a party is different from running the government administration/apparatus, especially the Congress party. Take the case of UIDAI and its head. It under scores an important historical reality in India: Business leaders, however successful. rarely make good politicians and vice versa. In this particular case, the ethos of a software company is the exact opposite of a party like INC. Then, there is the case of Aadhaar (dealt later in this post). I am sure INC lost more votes than it gained due to that scheme. I think Aadhaar number will be of great use for the banks and other businesses but, will not go down well with the voters. 

7. Importantly, INC lost simply because they did not understand the socio-economic change that they unleashed. Hence, they did not know how to deal with the consequences. Fundamentally, i think there is a major change. In the past, rising economic hardship would mean the rise of the left parties; 2014 seems to indicate that it could have inaugurated the process of the rise of the right wing parties. I wonder why? 

I doubt if any other government will ever or can ever give so many subsidies to its citizens. Yet INC lost! Why? One reason ascribed and, partly correct, is that while giving individual benefits they did not look at other important aspects like Infrastructure. I think there is some merit, especially when it comes to water and related issues. 

Entitlements also mean that there will demand for other things - a consequence of policy. Examples abound:

 

a) Case of education. It put millions of kids into school. But, in 10 years as they grow older the party did not have an answer to the demand for jobs or quality higher education. 

(b) Related aspect putting millions into schools also changed the composition of labour force: it could not answer critics who said that NREGA rather than migration or education affected the labour force. 

(c) There is a process of informalisation that is taking place in a number of areas: The party had no solution for this other than financial inclusion. Financial Inclusion is a good policy intervention but it went on at a snail's pace. 

(d) Take the case of the SHG movement. The SHG movement started in the TDP regime but it was during the 10 years that INC ruled that it exploded. The party gave huge benefits to its members. I doubt if anybody can give more benefits. Yet, the party could not take advantage. I wonder if the party is asking why it could not do so?

(e) The whole emphasis on Aadhaar was completely misplaced. Aadhaar is a good idea but bad politics - especially the way the enrollment was carried out and the manner in which the Oil companies tried to implement it. Unfortunately, LPG is not the preserve of the middle classes and the rich. In places, like AP, thanks to politics of the last 15 years a lot of people have a gas connection, at least officially. Literally, lakhs of people had a problem with transfers, etc. Each person who had to visit the gas agency more than once is unlikely to have voted for the INC. 

Another dozen such issues including indebtedness, destruction of rural industries, lethargic way in which government structures functioned, etc can be blamed for the loss. 

To cut a long story short, the comprehensive loss can be explained by adding up at least some of the above and other reasons. The last reason is the role of media. Media issue could have been dealt with them if INC had the mechanism to collect feedback - something that it had in the past and disappeared after 2010.

Time for the party to ask relevant questions, if it has to remain in the reckoning in 2019. Five years is a long time in politics so no point speculating about the future. Better option for the party will be to seriously look at why it lost the elections and if it can objectively answer the questions. This is essential because, unlike during the period 1999-2004, their opponent is more formidable.