We keep hearing about the Indian growth story being intact and that the demographic dividend will keep the consumption story intact. Whilst there are a lot of flaws in the arguments but nevertheless, I do believe in the potential that India has to grow the economy better. As dictated by all historical examples, to build strong fundamentals for the economy, 2 elements are extremely crucial - first, a lot of investment in infrastructure; second, changes in governance to eliminate red tapes and facilitate business transactions.
India, unfortunately is far behind a lot of emerging nations when it comes to both these factors. That the strong demand for IT/ITeS has brought in a lot of transformations is a very positive and unexpected pleasant surprise, it masks the real challenges we face in India. Another point that should always be remembered is that the US, major European countries embraced technology and development but never at the expense of agriculture. India today has come to a stage where the same acre of a rice field that earlier had to produce food for 4 people has to produce food for 8 people. Yet, our development in agriculture has taken a backseat completely. We end up wasting about 30% of our agriculture produce by the time it reaches the end customer from the farms.
We talk about the Chinese dragon but there is absolutely no comparison between India and China. China has built its infrastructure well and is still continuing; at the same time, China is also very focussed on productivity of its farms; case in point - 1 hectare of a rice field in China is almost 4 times as productive as the rice field in India! 1 hectare of wheat output in the US is almost 6 times the output of 1 hectare of wheat in India! Without developing the agricultural setup, India is fast running into a major tsunami of food problems. On the other hand, our infrastructure still is about 2 decades behind where it should be - as shown in the rhetoric Bollywood movie Khatta Meetha last year - a simple thing like a small road keeps a contractor on-going for his entire life! [bas ek sadak ko zindagi bhar yahan se wahan, wahan se yahan karke dhera jamaa lete hain!]
Housing prices are appreciating way faster than incomes are - this at some point of time is going to create a lot of challenges. I am not saying that the housing market correction in India will be as severe as in the West but our real estate market is extremely over-heated. Whilst the upside pressure on prices do exist due to demand-supply imbalances, time and again it has been proven that housing prices escalating faster than incomes at some point of time create a potent bomb waiting to explode. One potential reason why the bomb is not very active in India is due to the fact that we don't have the concept of Mortgage Backed Securities and Credit Default Swaps in the housing markets - which is indirectly a very good thing.
However, the Indian governance is still not well poised to help the country really grow well - even for an enterprise with deep pockets, it takes anywhere between 100 days to 180 days to be able to start an enterprise and be functional [for the ones without deep pockets, this process could take even a decade - ok that is an exaggeration!] Compare that with Asian peers like Singapore or Hong Kong [no point comparing with the fiat currencies as they are on a different planet all together when it comes to these things!], by 35 days, everything is in place for running an enterprise.
Our politicians and bureaucrats want it that way; the lesser the transparency and greater the number of speed-breakers for new business, the greater is the potential for graft in all formats. Since the most debated and discussed section is on the telecom sector off late, allow me to illustrate the divergence that is on-going with our political and media circus.
That the procedure adopted for doling out 2G licenses was absolutely flawed is known to one and all. The BJP and Congress can keep mud-slinging against each other but that is absolute crap. On the other hand, there are advocates moving around trumpeting that the fixed fee method of doling out spectrum ensured access to low tariffs for consumers. Do our leaders think that their citizens are fools and have no common sense?
Picture this
The population of US is 30% that of India; the population of UK much lower as compared to that of India; likewise for rest of Europe. Vodafone, AT&T, British Telecom, Verizon etc paid at least 4 times the amount for the 2G/3G [and now 4G] auctions than the license prices of India [even if we were to take the auctions route - if we compare with the fixed license fees, the amount these companies paid could be anywhere between 6 to 8 times the price paid in India - officially.....] The average post-paid bill in US/UK/Europe for a post-paid bundle of voice + data with 3G works out to USD/EUR 50 per month [approximately INR 3000 per month] And let us not forget that with these average post-paid bill, the customer need not incur any expense for owning a mobile handset. It comes free with the contract with a 24 month binding period [i.e. the customer can avail these benefits and a free handset provinded s/he stays with the same carrier for 2 years and terminating the contract prior to 24 months would mean an extra penalty to recover the cost of the handset]
Now, these very suckers say that the auction route would increase costs for the end-consumer. First and foremost, even with the auction route [had it been implemented] the license cost is about 60% lower in India. Taking the middle class group brings forth 300 million customers ready and another 300 million people in the lower income bracket who will utilize the mobile phone. There is absolutely no need for service providers to give a handset to the customer in India. The data access is pathetic to put it mildly. Hence, the entire argument that low license fees provided for better tariffs in India is a farce. Even with the auction prices, the amount of revenue that Indian customers generate for telecom operators [and considering the fact that no handset needs to be provided] is far ahead of revenues that are generated in the western world. So what else do these telecom companies have to spend on to recover the cost of licenses - bingo it is the graft to be paid to the entire bureaucracy from babus to all political parties right upto the PMO - perhaps, if one starts accounting for costs incurred in these grafts, perhaps, the cost to telecom companies to acquire a license is even greater than the cost to acquire a license in western countries!
Our political and bureaucratic machinery is least bothered about losses to the exchequer or benefits to the citizens of India. All that they are bothered about is how much can they shove into their coffers - and this is precisely what makes things difficult in India. To summarize, even if the auction route was adopted or will be adopted in future for 2G/3G licenses, Indian [official] license costs are far lower than those in the west. India's potential to recover those costs and make the business worthwhile is far longer ; it is the indirect fixed costs in the form of graft that make things worse. The Indian conusmer is worse off because even with a commitement of INR 3000 per month [at par with the middle class of the west], the Indian customer gets pathetic data service; s/he has to buy his/her own handset and yet get less than accepted global standards service.
Politicians are just using these license issues for their votebank politics; whether it is the party in power or parties in opposition - literally every single leader has extracted his/her own pound of flesh and we, the common people have to bear the brunt of their misdeeds.
For the main article, unless we do not work out the infrastructure aspect of India and bring more transparency, eliminating bureaucracy and multiple layers of taxation, the Indian growth story will go for a toss. Last but not the least, no matter how much people criticise the RBI, IMHO the RBI has done its best within its powers to reign the money markets and I hope it becomes better in due course of time. For now, a major problem it needs to resolve is that of fake currency notes that are floating around the entire system - that is going to be a big pain that RBI needs to ingeniously work out.
India, unfortunately is far behind a lot of emerging nations when it comes to both these factors. That the strong demand for IT/ITeS has brought in a lot of transformations is a very positive and unexpected pleasant surprise, it masks the real challenges we face in India. Another point that should always be remembered is that the US, major European countries embraced technology and development but never at the expense of agriculture. India today has come to a stage where the same acre of a rice field that earlier had to produce food for 4 people has to produce food for 8 people. Yet, our development in agriculture has taken a backseat completely. We end up wasting about 30% of our agriculture produce by the time it reaches the end customer from the farms.
We talk about the Chinese dragon but there is absolutely no comparison between India and China. China has built its infrastructure well and is still continuing; at the same time, China is also very focussed on productivity of its farms; case in point - 1 hectare of a rice field in China is almost 4 times as productive as the rice field in India! 1 hectare of wheat output in the US is almost 6 times the output of 1 hectare of wheat in India! Without developing the agricultural setup, India is fast running into a major tsunami of food problems. On the other hand, our infrastructure still is about 2 decades behind where it should be - as shown in the rhetoric Bollywood movie Khatta Meetha last year - a simple thing like a small road keeps a contractor on-going for his entire life! [bas ek sadak ko zindagi bhar yahan se wahan, wahan se yahan karke dhera jamaa lete hain!]
Housing prices are appreciating way faster than incomes are - this at some point of time is going to create a lot of challenges. I am not saying that the housing market correction in India will be as severe as in the West but our real estate market is extremely over-heated. Whilst the upside pressure on prices do exist due to demand-supply imbalances, time and again it has been proven that housing prices escalating faster than incomes at some point of time create a potent bomb waiting to explode. One potential reason why the bomb is not very active in India is due to the fact that we don't have the concept of Mortgage Backed Securities and Credit Default Swaps in the housing markets - which is indirectly a very good thing.
However, the Indian governance is still not well poised to help the country really grow well - even for an enterprise with deep pockets, it takes anywhere between 100 days to 180 days to be able to start an enterprise and be functional [for the ones without deep pockets, this process could take even a decade - ok that is an exaggeration!] Compare that with Asian peers like Singapore or Hong Kong [no point comparing with the fiat currencies as they are on a different planet all together when it comes to these things!], by 35 days, everything is in place for running an enterprise.
Our politicians and bureaucrats want it that way; the lesser the transparency and greater the number of speed-breakers for new business, the greater is the potential for graft in all formats. Since the most debated and discussed section is on the telecom sector off late, allow me to illustrate the divergence that is on-going with our political and media circus.
That the procedure adopted for doling out 2G licenses was absolutely flawed is known to one and all. The BJP and Congress can keep mud-slinging against each other but that is absolute crap. On the other hand, there are advocates moving around trumpeting that the fixed fee method of doling out spectrum ensured access to low tariffs for consumers. Do our leaders think that their citizens are fools and have no common sense?
Picture this
The population of US is 30% that of India; the population of UK much lower as compared to that of India; likewise for rest of Europe. Vodafone, AT&T, British Telecom, Verizon etc paid at least 4 times the amount for the 2G/3G [and now 4G] auctions than the license prices of India [even if we were to take the auctions route - if we compare with the fixed license fees, the amount these companies paid could be anywhere between 6 to 8 times the price paid in India - officially.....] The average post-paid bill in US/UK/Europe for a post-paid bundle of voice + data with 3G works out to USD/EUR 50 per month [approximately INR 3000 per month] And let us not forget that with these average post-paid bill, the customer need not incur any expense for owning a mobile handset. It comes free with the contract with a 24 month binding period [i.e. the customer can avail these benefits and a free handset provinded s/he stays with the same carrier for 2 years and terminating the contract prior to 24 months would mean an extra penalty to recover the cost of the handset]
Now, these very suckers say that the auction route would increase costs for the end-consumer. First and foremost, even with the auction route [had it been implemented] the license cost is about 60% lower in India. Taking the middle class group brings forth 300 million customers ready and another 300 million people in the lower income bracket who will utilize the mobile phone. There is absolutely no need for service providers to give a handset to the customer in India. The data access is pathetic to put it mildly. Hence, the entire argument that low license fees provided for better tariffs in India is a farce. Even with the auction prices, the amount of revenue that Indian customers generate for telecom operators [and considering the fact that no handset needs to be provided] is far ahead of revenues that are generated in the western world. So what else do these telecom companies have to spend on to recover the cost of licenses - bingo it is the graft to be paid to the entire bureaucracy from babus to all political parties right upto the PMO - perhaps, if one starts accounting for costs incurred in these grafts, perhaps, the cost to telecom companies to acquire a license is even greater than the cost to acquire a license in western countries!
Our political and bureaucratic machinery is least bothered about losses to the exchequer or benefits to the citizens of India. All that they are bothered about is how much can they shove into their coffers - and this is precisely what makes things difficult in India. To summarize, even if the auction route was adopted or will be adopted in future for 2G/3G licenses, Indian [official] license costs are far lower than those in the west. India's potential to recover those costs and make the business worthwhile is far longer ; it is the indirect fixed costs in the form of graft that make things worse. The Indian conusmer is worse off because even with a commitement of INR 3000 per month [at par with the middle class of the west], the Indian customer gets pathetic data service; s/he has to buy his/her own handset and yet get less than accepted global standards service.
Politicians are just using these license issues for their votebank politics; whether it is the party in power or parties in opposition - literally every single leader has extracted his/her own pound of flesh and we, the common people have to bear the brunt of their misdeeds.
For the main article, unless we do not work out the infrastructure aspect of India and bring more transparency, eliminating bureaucracy and multiple layers of taxation, the Indian growth story will go for a toss. Last but not the least, no matter how much people criticise the RBI, IMHO the RBI has done its best within its powers to reign the money markets and I hope it becomes better in due course of time. For now, a major problem it needs to resolve is that of fake currency notes that are floating around the entire system - that is going to be a big pain that RBI needs to ingeniously work out.
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