India’s Big Government

by Vivek Kaul

  So what does this mean in the context of robots destroying human jobs? If robots destroy too many human jobs, many people won’t have a regular income. If these people do not have a regular income, how are they going to buy all the products that robots are going to produce? And if they are not going to buy the products that robots are producing, how are the companies driven by robots going to survive?

  This is a basic question that none of the analysts who are predicting doom on the basis of robots taking over human jobs have bothered to ask. For capitalism to survive, it is essential that human beings work and earn an income; only then can they go around buying everything that is being produced.

  The basic problem with the robots taking over human jobs argument is best explained through this example. As Bergman writes: “When Henry Ford’s grandson [Henry Ford II] gave labour union leader Walter Reuther a tour of the company’s new, automated factory, he jokingly asked, ‘Walter, how are you going to get those robots to pay your union dues?’ Without missing a beat, Reuther answered, ‘Henry, how are you going to get them to buy your cars?’”270

  Also, another point that most analysts seem to miss is that if and when robots actually do start destroying many human jobs, it is stupid to assume that the governments will sit around doing nothing. There will be huge pressure on them to react and make it difficult for companies to replace human beings with robots.

  Hence, the case for robots completely taking over human jobs is a tad overblown. Having said that, this trend is likely to hit India sooner rather than later, and is likely to make the manufacturing game to create economic growth a little difficult, to put it mildly.

  At the same time, India should not try to become another China. As the then RBI Governor, Raghuram Rajan, warned in a December 2014 speech: “Export-led growth will not be as easy as it was for the Asian economies… [which] took that path before us…. Slow-growing industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future. Other emerging markets certainly could absorb more, and a regional focus for exports will pay off. But the world as a whole is unlikely to be able to accommodate another export-led China.”271

  In this scenario, the government should first encourage companies to make products in India for the Indian market. Given India’s huge population, this could be a viable strategy. This would be different from import substitution, because the Indian consumer now has access to quality products from all over the world. Hence, anything shoddy would not pass muster.

  Another reason why this makes sense is because of the huge trade deficit that India runs with China. This basically means that India imports significantly more from China than it exports to it. In fact, over a very short period of time, China’s share in India’s trade deficit has jumped up majorly. In 2009-2010, China formed 18 per cent of India’s trade deficit. This jumped to 35 per cent in 2014-2015 and 43 per cent in 2015-2016 (April 2015 to February 2016).272

  India’s exports to China, on the other hand, have barely moved over the years. In 2005-2006, they stood at $6.8 billion. This moved at a snail’s pace to $8.3 billion in 2015-2016 (April 2015 to February 2016). During the same period, the imports had jumped from $10.9 billion to $56.9 billion. The reason for this huge difference lies in the fact that a bulk of India’s exports to China are low-value-added products like cotton, copper alloy and iron ore. On the other hand, India imports high-value-added products like electrical equipment, machinery and mechanical appliances as well as electronic products.273

  Consider my personal situation. I am writing this book on a Lenovo laptop, which is Made in China. The Kindle book reader which I use to refer to many books that I have quoted here was assembled in China. My internet connection is provided by Reliance 4G Wi-Pod. The device has been made by the ZTE Corporation, which is based out of Shenzhen in China. I use the Moto g4 PLUS mobile phone, which is Made in China. I own the most basic model of a Hewlett Packard printer, which is Made in China. I own a Toshiba television, which also happens to be Made in China.

  The larger point is that a large section of the products that the Indian middle class uses these days is ultimately Made in China. As mentioned earlier, even products as quintessentially Indian as Holi colours and pichkaaris, or Lakshmi and Ganesh statues for Diwali are now Made in China.

  Some of these products are not high on technology and are now Made in China simply because, given the economies of scale, it is just cheaper to manufacture them there. India can achieve the same economies of scale if it has the right labour laws as well as physical infrastructure in place.

  While it is important to encourage companies to make in India for an Indian market, at the same time, it is important not to lose focus of the export market. One major reason for this lies in the fact that China’s cost advantage is fast eroding. In fact, the cost of producing goods in China is now just marginally better than in some of the developed countries. Its wages, adjusted for productivity and natural gas costs, have more than doubled over the period of the ten years up to 2014. At the same time, electricity costs have risen by more than 60 per cent. The Chinese yuan has also appreciated against the dollar, making Chinese exports expensive.274

  The argument that is often made is that India can capture the export-oriented industries that China is vacating, and will surely have to vacate, because of a labour cost disadvantage in comparison to India. But the point is that, if cost were the only parameter, then there are other cheaper countries, like Bangladesh, that could be used as a manufacturing base.275

  In fact, if we look at the cost factor, India has the second lowest manufacturing cost (Indonesia is lower) among the top 25 exporting countries in the world.276 Nevertheless, it is important to realise here that companies set up a manufacturing base in China not just because of the low cost, but also because of the very good infrastructure that was available. And such an infrastructure is clearly not available in India right now.

  Indeed, almost all countries in East Asia offer an easier working environment than what is available in India.

  So what does India need to do in order to be able to attract businesses which want to move away from China because of high labour costs? As Rajan puts it:

  This means we have to work on creating the strongest sustainable unified market we can, which requires a reduction in the transactions costs of buying and selling throughout the country. Improvements in the physical transportation network will help, but so will fewer, but more efficient and competitive, intermediaries in the supply chain from the producer to the consumer. A well-designed Goods and Services Tax will help by reducing state border taxes and will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come.

  Hence, there are many things that need to be done in order to get India’s manufacturing sector going.

  ****

  In 2012, the World Bank published a report titled More and Better Jobs in South Asia. In this report, it asked Indian entrepreneurs the major constraints that they faced. The report categorised states in which the entrepreneurs were working into two groups—high income and low income. For the low-income group, electricity, or rather the lack of it, was the number one concern. For high-income states, electricity was the number three concern. Their number one concern was corruption, which happened to be the number two concern for the low-income states.

  In fact, the other major concerns were as follows: 1) tax administration; 2) transport; 3) labour regulations; 4) government policy uncertainty; 5) access to land; 6) inadequately educated labour; and 7) courts.

  As the report pointed out: “The top three constraints (corruption, electricity and tax administration) are the same for low- and high-income states. Firms in low-income states complain more about inadequate physical infrastructure (electricity, transport, access to land) and crime; firms in high-income states complain more about policy uncertainty and labour regulation.”
<
br />   In fact, the World Bank releases the Ease of Doing Business Rankings every year. In 2016, India came in at 130 out of 189 countries. In 2015, India had stood at the 134th position. What needs to be mentioned here is that India is represented in the rankings only by the cities of Mumbai and Delhi. Hence, the Ease of Doing Business Rankings published every year are a representation of the ease of doing business in Mumbai and Delhi, and not the entire country.

  Table 6.1 shows ten parameters along the lines of which the Ease of Doing Business rankings are determined. As is clear from Table 6.1, India’s performance has been disastrous on many fronts.

  Discussing all the ten parameters would go beyond the scope of this book, but I will discuss a few of them as well as a few of the shortcomings pointed out by the World Bank jobs report.

  Table 6.1: The World Bank Ease of Doing Business Rankings parameters as applied to India.

  Source: http://www.doingbusiness.org/data/exploreeconomies/india/.

  Take the case of electricity, one of the parameters in which the country has done relatively well. Its ranking has jumped from 99 to 70 among the 189 countries. This was primarily because the electricity utilities in Delhi and Mumbai made the entire process of getting an electricity connection easier. As the report accompanying the rankings points out: “The utility in Delhi made the process for getting an electricity connection simpler and faster by eliminating the internal wiring inspection by the Electrical Inspectorate. The utility in Mumbai reduced the procedures and time required to [get an electricity connection] by improving internal work processes and coordination.”

  There are a couple of points that come up here: a) The Ease of Doing Business ranking takes into account only the ease with which an electricity connection can be got in the two Indian cities of Delhi and Mumbai. It has nothing to say about the ease with which an electricity connection can be got across the length and breadth of India. b) The Ease of Doing Business ranking has nothing to say about the reliability of the electric supply. The electricity supply across large parts of India is at best erratic, and this means that around 40 per cent of the firms generate their own power, as per the More and Better Jobs in South Asia report.277

  The question is: Why is the power supply so erratic? Until very recently, India did not produce enough power, i.e., it was a supply issue. There was only so much power going around, and this meant that state electricity distributors had to resort to load shedding. This also meant that manufacturing units had to make their own electricity generation arrangements, which added to the cost of what they were producing.

  The electricity shortfall, or power deficit, as it is referred to, has been narrowing over the years. It was at 8.7 per cent in 2012-2013 and was down to 2.1 per cent in 2015-2016.278 In July 2016, the Central Electricity Authority projected that India would have a power surplus in 2016-2017. For the period from April 2016 to March 2017, the country is likely to have an excess electric supply of 1.1 per cent.279

  This power surplus comes with a few caveats. As the Load Generation Balance Report 2016-2017 points out: “Surplus energy is anticipated of the order of 3.3 per cent and 6.9 per cent in the Southern and Western Regions, respectively. [The] Northern, Eastern and North-Eastern regions are likely to face energy shortage[s] of 1.8 per cent, 10.3 per cent and 8.3 per cent, respectively. The peaking shortages are likely to prevail mainly in the Northern, Southern and North-Eastern Regions to the tune of 1.6 per cent, 10 per cent and 3.8 per cent, respectively.”

  Hence, the entire country will not have a power surplus in 2016-2017. Only the Southern and Western parts of the country will have a surplus. The Northern, Eastern and North-Eastern regions will see deficits. In fact, even within regions there is a huge variation. Like in the Northern Region, Uttar Pradesh is likely to see a deficit of 9.7 per cent. Jammu and Kashmir is likely to see a deficit of 15.8 per cent. In comparison, Haryana and Himachal Pradesh are likely to see a surplus of 7.9 per cent and 3.5 per cent, respectively.

  In the Eastern region, Bihar and Jharkhand are likely to see a deficit of 18.4 per cent and 7.2 per cent, respectively. The power-deficit states need to buy power from the power-surplus states in order to ensure that there are no power cuts.

  Furthermore, this power surplus is only for the population that is connected to the electricity grid. As of mid-July 2016, only 9,085 villages across India remained which were not connected to the electricity grid.xiii

  This is an extremely small number, given that India has around 6.38 lakh villages. Nevertheless, a large number of households across the country still do not have access to electricity. Around six crore rural households, which form around one-third of the rural households, do not have an electricity connection.280

  What this means is that even though a village is put on an electricity grid, that doesn’t mean that all the households in the village are electrified. So India’s power surplus is to the extent of the fact that a large number of families across rural and urban India do not have access to an electricity connection. The situation is dire in states like Bihar, where 87 per cent of rural households and 33 per cent of urban households do not have access to an electricity connection. For Uttar Pradesh, the figures stand at a slightly better 71 per cent and 19 per cent, respectively. Having said that, there are some other states, like Gujarat, Maharashtra and Tamil Nadu, which have universal access to electricity.281 It needs to be pointed out here that these are estimates from the 2011 Census. The chances are that things would have improved since then.

  Getting back to the point, during 2016-2017, India should have a power surplus. Now does this automatically mean that Indian manufacturing can finally look towards an uninterrupted power supply? Not really.

  The governments over the years have aggressively promoted electricity generation without getting around to cleaning up the mess that the State Electricity Boards (SEBs) are in. The SEBs across the country have accumulated losses amounting to Rs. 4 lakh crore, or 3 per cent of the GDP.282 In fact, the total losses of the electricity utilities between 2011-2012 and 2013-2014 amounted to a total of Rs. 2,04,393 crore (as can be seen from Figure 6.1).283 This includes the losses of the SEBs as well as those of the transmission, distribution and generation companies, which the SEBs in many states have been broken down into, as per the Electricity Act of 2003. The major part of the loss is in distribution. Furthermore, these losses are after taking into account the subsidies paid by the state governments.

  Figure 6.1: The yearly losses of the State Electricity Boards between 2009 and 2014.

  Source: The Performance of the State Power Utilities for the years 2011-12 to 2013-14, July 2015.

  These losses are on account of two factors: a) A large number of consumers continue to be unmetered in many states. This basically means that many consumers use power, but they do not pay for it. Those who have lived in smaller towns or continue to live there would know that every locality has its own expert who specialises in hooking up an illegal electricity connection from the local grid. b) Power to agriculture is subsidised. The sale to agricultural consumers amounted to around 22 per cent of all the power sold in 2013-2014. But it made for only 8 per cent of the revenue. In comparison, the sale to industrial consumers amounted to around 29 per cent of all the power sold, while, nevertheless, it made up for 41 per cent of the overall revenue. This clearly tells us that the industry that pays for its power subsidises the farmer.

  This price distortion is a feature of several sectors of the Indian economy. The idea is to make things easier for the weaker sections of society (in this case, the farmer), but it ends up creating other problems. One of the things that has happened because of free electricity to farmers in a few states is the overpumping of water. (We shall look into this in detail in Chapter 12.) There are other repercussions as well, which we shall discuss.

  Those who use electricity and do not pay for it cause very high Aggregate Technical and Commercial (ATC) losses for the SEBs as well as the power distribution companies. Take a look at Ta
ble 6.2, which shows the region-wise ATC losses of the SEBs and the power departments of the states which sell power directly to consumers.

  A state like Jharkhand, where the SEB has not been split up into different companies, had ATC losses of 42.2 per cent in 2013-2014. In the case of Sikkim and Arunachal Pradesh, it was at 71.2 per cent and 68.2 per cent, respectively.

  Table 6.2 does not show the ATC losses of the states that have power distribution companies. Even in states where the SEBs have been broken up into multiple companies, the ATC losses are high. In the case of Bihar, they are at 46.3 per cent. In the case of Odisha, they are at 39.2 per cent.

  Table 6.2: Region-wise break-up of the ATC losses of the SEBs between 2012 and 2014.

  Region 2012-13 (in%) 2013-14 (in%)

  Eastern 42 38

  North-Eastern 38.3 33.9

  Northern 28.9 24.9

  Southern 17.4 19.1

  Western 23.4 18.4

  National 25.5 22.7

  Source: The Performance of the State Power Utilities for the years 2011-12 to 2013-14, July 2015.

  The idea behind breaking up the SEBs was that, while electricity transmission is a natural monopoly, the same should not be the case with electricity generation and distribution. Private sector companies were to be allowed into the generation and distribution space so that the large consumers would be able to buy electricity from multiple sellers.284 But nothing of that sort has happened. While private companies are entering electricity generation, the entire electricity distribution business continues to be more or less a state monopoly. And this is clearly not helping anyone.

  The ATC losses and the losses that the distribution companies incur on supplying cheap or free power to the agriculture sector has led to the accumulation of massive losses. At the same time, the accumulation of these losses continues. Hence, theoretically, if the SEBs and the power distribution companies want to limit their losses, then the best thing for them to do is to not supply any power at all. In that situation, their losses would be limited to the salaries they pay to their employees.