Modiji

Ye Dil Maange Mo(di) The Things We Want From Modiji

Sanjeev

Sanjeev

Instead of addressing him as “Your Excellency”, since I can’t (yet) address him as Mr. Prime Minister, I think a simple Modiji is closer to his personality. So, Modiji As a self-proclaimed Behavioural Economist, who has systematically documented the behaviors that are effective in business, war, and other forms of competition, I notice that you have been ‘born right’, i.e. you naturally and instinctively choose the behavior that turns out to be courageous, painful at first but turns out (ultimately) to be the correct strategy to achieve superior results at the end.

Declaimer: This article written was originally in June 2014, and some of the data points may be outdated.

“Take the pain, wait for the gain”, started with the Bhagavad Gita. The difficult road is usually the right road, often simply because nobody takes it. In business (and in war), there is a disproportionate payoff to pursuing a path that nobody else has taken.

Often, a startup gets ahead while being seen as an underdog, in a niche product that the biggies are not interested in. The most famous case is of IBM, which gave Microsoft a monopoly in Operating Systems, while it focused on the hardware.

It is, however, rare for an upstart to be ignored consistently, to be considered as an underdog even after it has become a success. The real challenge is to outperform AFTER you have become a Google/ Apple, and you now carry the weight of expectations of a cheering multitude. Not just that, you have a pack of wolves (competition) baying at your heels, each one trying to outperform yesterday’s winning strategies, which may have got you ahead but are not going to be enough from now onwards.

Similarly, the ‘Gujarat Model’ was largely ignored by everyone, while it was being set up. It evolved, rather than was ‘set up’ by a carefully planned process. The “Gujarat Model’ is nothing but a fertile culture, which saw fruition under strong leadership….this is a potent combination, but remember, the driving force behind it is the fertile culture, the strong leadership is just a catalyst.

Blindly transplanting it to the rest of India, would mean making some very flawed assumptions. Let us take an extreme example: contrast the obstructionism of Mamata Banerjee, who won accolades in Bengal for her Singur ‘victory’, with the speed at which Gujarat enabled the same project to come up. The focus in Gujarat was to capitalize on an economic opportunity, while in Bengal, they were too busy scoring points. Now, when that kind of culture meets the same kind of leadership that got Gujarat ahead, who do you think will win…..Bengali (work) culture or Modi’s leadership? Don’t forget, Mamatadi won the Bengal elections with the same handsome margins that Modiji won the national elections…..so what does it say about the Bengali psyche? Now, how is Modiji going to turn around Bengal, for example?

I know I have said nothing new so far, just pointed out that “India is not all Gujarat, but (all) Gujarat is India”. The entrepreneurial drive, the high savings rate, the measured consumption, the huge investments…..all this cannot be assumed across India. Modiji will have to rework his strategy to take on a more nebulous and diverse ground reality. The good news is, I think he is already on the job…

Food/ Agriculture, Energy, Water, Infrastructure, Finance, Jobs/ Labour

 The list above is not exhaustive, but these are the big moves. I will try and lay out some pathways that I have not heard in the mainstream media, and which require the famed “Modi-courage”.

Corporate Farming: this would be very dramatic. It would start with a backdoor land reform: allow long leases of fertile agricultural land or even wasteland.

This would kick off a revolution in agricultural productivity if the Brazilian experience is any indication. Start will allow sugar companies to own their hinterland, so that they focus on cane development, increasing productivity through better seeds and superior agricultural practices, especially in water and input management. Back it up with equity available to those companies that are setting up solar facilities for water management, and taking the energy demand for agriculture right out of the system. The entire investment to take the energy cost in agriculture down to zero would be underwritten through the equity infusion from the Govt. The equity would be back-ended after the solar investment has been made.

This would help redirect India’s fuel subsidy into a solar (capital) subsidy. These investments could get recouped through a buyback scheme or an exit via an IPO.

It would be a very simple policy (freeing long-term leases to the corporate sector), after which everything else flows through the normal channels. Minimum wages are implemented by extending coverage to agricultural labor, like in the tea industry. Tax policies are made applicable, simply by extending the existing tax exemptions of agriculture to land leases (where the income is received in the hands of individuals). The tax exemption to individuals is a political hot potato, which is retained by keeping the lease rent out of the tax net, while the productivity improvements in agriculture are brought into the tax mainstream simply by making these companies taxable like plantation companies are just now. History will remember this as Modiji’s biggest contribution to a structural upturn in the Indian economy, affecting the maximum number of Indians.

  • Energy: a decent Renewables policy will probably be Modiji’s biggest proof of the replicability of the ‘Gujarat model’. If there is one major contribution where he stood out, it was in the manner in which he turned around every aspect of the Power industry in Gujarat. The key metrics on which the industry has changed over the years:
    • It operates at full capacity
    • The industry is now profitable, a loss of >Rs.2000 cr has been turned into a profit of >Rs.2000 cr over 10 years
    • Capacity addition is above the national average
    • Electrification and power uptime are well above the national average, and rising
    • The State is among the top 3 in terms of solar capacity and is adding capacity at among the highest rates in the country.

This is a good example of the “Gujarat Model”. All this cannot have been achieved alone, but Modiji certainly facilitated it. However once the broad trends are in place, the energy sector has been the great accelerator for Gujarat’s growth and is at the core of its competitiveness.

The ‘fertile soil’ that I spoke about is the savings rate and reinvestment habit of the Gujarati population. Not only are these (power sector) investments enormously value-creating, but the wealth so generated is reinvested back into growth, creating a huge differential over the long term with, say, a West Bengal. So good behavior compounds, catalyzed with good leadership.

Modiji needs to set off several virtuous cycles in various sectors of the economy, with sustainable growth in one sector setting off a series of spin-off effects in other sectors. The Govt’s key role will be to kick-start such processes in a variety of areas, with low capital and surgically placed ‘equity’ that absorbs the initial pain of investing, till the returns start kicking in. This would be a far better way than the previous regime’s dole-based system, which only encouraged sloth and raised labor costs for the wider economy, even as it may have stemmed hunger at the bottom of the pyramid. That policy may have had some initial usefulness but has not outlived its time.

Notice that I have emphasized “Capital” subsides, rather than doles. They remain assets on the Govt Balance Sheet, with an articulated exit policy for these assets. Accompanied by some real courage in bringing down the doles the money saved can be used to fund these capital subsidies. Can you imagine what Rs.85,000 cr of solar subsidies can do? It can create 28,000 MW of capacity, even as we reduce our fuel subsidy bill. My calculations may be extreme, but we should at least set off in this direction. 10 years of this, and the spin-offs of solar capacity at Rs.3 cr per MW will be evident across the economy.

…..to be continued

Probably the biggest contribution by the Modi Govt would be if they were to turn into a ‘good investor’, with the courage to invest in PPP ventures. Many kinds of structures are possible, but the underlying philosophy would be that of ‘viability gap’ funding, creating a market where none exists. This could take the form of interest-free loans through bullet Preference Capital issuances, which are convertible into equity automatically, if not retired on the due date. Since the Preference Capital issuance takes place after the project is verifiably performing as per specifications, it ensures protection from ‘gold-plating’.

Just to repeat, first the sourcing of the investment capital, which would be domestically generated by cutting subsidies of a recurring nature, e.g. food, fertilizer, and fuel subsidies. The money saved would be used to create new assets, underlining capital subsidies with equity investments. An additional source of funding could come from PSU divestments, some of which should be sold completely.

A slimmer Govt that generates a revenue surplus, even as it focuses on regulation rather than running businesses….such a Govt would be both more efficient and financially more prudent.

Water: this is the area where I am expecting a Modi Govt to be most sensitive to the underlying reality, not just present problems but the potential disasters that are set to loom over us if we ignore Climate Change. The major dimensions are :

  • Waste Water recycling in urban areas. I don’t understand why this is not a huge industry, with regulations forcing almost everybody to recycle wastewater. In large cities, there should be clear laws and rules that force hotels, housing societies, builders, and RWAs, besides of course, all industries, to recycle water. It would create a huge (water) recycling industry, with its attendant spike in energy demand.

Water conservation would get a fillip on its own, and there should be clear standards for the proportion of virgin water allowed to be drawn from the city water supply. This should be a low and falling number, starting from 40% and going down to 5% over 10 years.

Here again, the PPP model can be tweaked to allow the Govt to provide free land and some important capex, in return for a big (say, 50%) stake in the service provider.` After that, a revenue-share-based bid could decide the actual licensee, and he would charge a certain regulated price.

  • Desalination in all coastal areas. This is already a big industry worldwide, with over 15,000 plants of different sizes across the world, about 60% of them in the Middle East. Energy costs are high, but they are falling steadily, down to about 5-6 paisa per liter already. New technologies are on the horizon, which could come in at an affordable 1 paisa per liter. That would make it viable even for agriculture.
  • Water transportation and piping. Just do more of it, especially replacing old pipes that account for the 30-40% leakage in water transportation.
  • Micro-irrigation networks and solar-water pumping. Both of these are small industries that should become very big, with huge demand coming from agriculture. This would be one big spin-off benefit of corporatizing agriculture.

Infrastructure: this is a big umbrella term that captures a wide range of areas, from institutes for vocational studies and sponsoring apprenticeship programs, to bridges, roads, and highways, from software and skill development to physical hardware for tertiary economic activity.

Cold chains for food storage come at the top of the list. With falling energy costs, there is a big trade-off between the (falling) cost of storing food vs. the rising cost of producing it, (thanks to Climate Change). The components of these costs will change over time (but energy and transport logistics are the big items in food storage just now) and the various costs attached to Climate Change are not even fully known just now. But food is precious and is going to get even more so, that is for sure.

Transport & Logistics. This is a big area, and when we think of this, we tend to think of road transport, but rail and shipping are very big game changers. The new thought process of inland water transport could be quite a dramatic new low-cost option. This is where the river-linking project, which otherwise sounds quite grandiose, could recoup much of its cost from the sharp reduction in transport costs that would accrue over the long term.

Shipping and ports. Not enough has been done in this area, and we must note that world shipping costs are going to drop by half in the next 10 years, as almost all the ships in the world have to be renewed with fuel-efficient ships. This process has already set in, with massive losses being put into European bank portfolios because they are stuck with ships financed during the 2006-07 boom. That financing has not recovered the monies lent, because freight rates dropped in 2008 and are still 40-60% below their all-time highs. Indian shipping, being relatively unlevered, will see big growth in demand and capacity, to take a bigger share of world shipping.

Urban Renewal Schemes. These would cover drainage and sewerage systems, which all need to be renewed with better piping. CI pipes need to be replaced with more corrosion-resistant hard plastics. Under-served towns need to see new installations. The 100-city program is a step in the right direction. This is mostly an implementation issue for the new Govt, rather than a creative new design. Most of these projects would be in the public sector; radical new ways of financing it with the public paying for such services, will not work well, because people are not amenable to paying for such municipal services.

Healthcare Infrastructure. Rural healthcare is the creative challenge. The country has a robust private healthcare industry, which can find the money to grow if there is a market in any particular location. But that is only in urban areas; rural and primary healthcare, especially healthcare insurance needs a huge fillip. Some kind of part-subsidy, or low-priced rural healthcare insurance that gives people access to superior facilities from the private sector, would be the right way. A fully public sector approach that tries to run hospitals for the poor will only make the problem worse. If malpractices in healthcare reimbursements (which are seen worldwide) can be controlled, it makes sense to subsidize healthcare insurance and let the market take care of the actual provision of services. This would require quite some courage, which needs to survive the periodic outbreak of small scams and frauds that will inevitably follow, but it is far better to avoid taking it all into the public sector, a vastly inferior option.

Education Infrastructure. We have already seen the first wave of growth in this, with a burst of poor-quality private schools that churn out unemployable graduates in a degree-selling explosion. Now we need to see the second wave of growth, where this infrastructure is used to build a higher level of quality skills. This will need regulatory intervention, with a focus on vocational programs, apprenticeship schemes, and on-the-job training. A pay-as-you-earn that incentivizes institutes to create employability, with them being paid a part of the graduates’ earnings, even as they teach modules based on actual requirements of industry, could be modeled on the German method of ‘leasing’ graduates to SMEs that provide skill-hubs.

Financial Infrastructure. So much has been written about this, that I can only mention the major topics. It would take a book to deal with the opportunities here. But a good example is the case of health insurance mentioned above. The creation of a market- where- there- is- none, like in the case of rural healthcare, is a good example. A system that cares for the risk embedded in healthcare for an individual, would ensure that he can afford the spikes in expenditure; this would create a market for rural healthcare, and the rest would be taken care of by the market.

There are many areas of financial risk, of volatility in earnings and expenditure streams, that need a financial intermediary to iron these flows for an individual: pensions, educational and child-rearing expenses, housing, unemployment (whether temporary or permanent), etc. Instead of handling this through ‘hole-filled doles’, it would make a lot of sense to create a (financial) industry that under-writes this risk for the populace. India could leapfrog the developed world in going straight to a market-based mechanism for the provision of ‘social schemes’ through subsidized payment schemes that leave the actual provision of services to the private sector.

All in all, an increase in economic productivity that does not use capital (or doles) and converts revenue deficits into capital subsidies (or direct equity investments) would be the ‘Modi factor’. It would need a better environment, and a culture of efficiency, which comes at no incremental cost. This is what the ‘Gujarat Model’ really is, it harnesses the spirit of the people without throwing public money down the drain. That is what would achieve incremental growth without much capital, especially Govt capital. It would simultaneously improve Govt finances, even as it increases growth.        

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