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Choosing channels à la carte

Would you be better off paying only for those channels that you watch?

The advent of digital set-top boxes and satellite televisions in India was extremely exciting at first. The ability to choose and pay for only those channels that individuals preferred was an appetising offer and held the promise of decreased cable bills for families. Many were under the impression that one could pick and choose exactly those channels that one regularly watches. However, the satellite television companies such as Dish TV and Tata Sky took the established American route and bundled the channels into certain packages. This actually resulted in increased costs for families for different reasons. The most obvious reason is that there is enough heterogeneity in preferences in a family and thus, multiple packages had to be selected. While, hypothetically speaking, one member would want a regional package (kannada movies+news package, for example), another member would want to have a sports package, while a third preferred English entertainment. This diversity leads to most families choosing all channels package, which would cost significantly higher.

The more prominent reason for increased costs, however, lies in economics. Providing such packages is called bundling, which is prevalent in imperfectly competitive markets. Bundling refers to the offering of several products for sale as one product. The reason for doing this is to capture all of the consumer surplus.

Take a hypothetical example: There are two customers and two channels. Amit prefers to pay Rs.75 for the Zee TV, but Rs.50 for Star World. Manjunath, however, prefers the opposite: Rs.50 for Zee TV and Rs.75 for Star World. If the cable company offered the channels individually, it can charge only Rs.50 for each channel and will receive Rs.200 as total revenues. If it charges anything more than Rs.50 per channel, say Rs.75, one of the customers will not buy it – Amit will not subscribe to Star World, while Manjunath will not subscribe to Zee TV. The cable company ends up loosing revenue (Rs.75*2 = Rs.150). So, by charging at Rs.50 per channel, the cable company maximises profits and total consumer surplus is Rs.50 (Each customer gets the channel at Rs.50 when they were willing to pay Rs.75 for one of the channel and thus, enjoys a consumer surplus of Rs.25)

Imagine now that the cable company offers a package for Rs.125, a pure bundling strategy, where individuals cannot choose the channels separately. Now, both consumers pay exactly according to their willingness to pay (thus, eroding their consumer surplus) and the cable provider increases its profits to Rs.250. This extraction of consumer surplus by the cable company is known as price discrimination.

Bundling channels into packages might not be as harmful to the consumer as economic theory suggests.

Bundling channels into packages might not be as harmful to the consumer as economic theory suggests.

Given this scenario, it would be tempting to clamour for a regulation where cable companies should provide à la carte option to the consumer where he gets to choose only the channels that he prefers. While economic theory suggests that the consumer would be better off doing so, it is not evidently clear that this might be the case in practice.Content providers, like Star and Zee, also have high degree of market power and would then renegotiate the price with cable companies. Imagine that, under the bundling offer, Star and Zee, received Rs.120 each as revenue from the cable company (who retains Rs.10 profit). Now, if the cable company offers each channel individually, chances are that Star and Zee will increase the rates of their respective channels to Rs.75 to capture all of the consumer surplus, since they are loosing one of the customers. Thus, both Amit and Manjunath will end up paying a price equal to their maximum willingness to pay for one of the channels and they might be worse off as they are loosing the choice of the other channel. Microeconomic Insights has some interesting research on this and found that “consumers bought and watched fewer channels, and their average spending was estimated to rise by 2.2%.”

Anupam Manur is a Policy Analyst at Takshashila Institution and tweets @anupammanur

 

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The Chinese Debt Burden

By Anupam Manur

There is a bond market bubble brewing in China as investors seek a safe haven. 

The global financial markets did not enjoy a particularly happy new year. Most markets across the world tumbled on news of Chinese economic slowdown. The Chinese stock market led the way, experiencing 11.6 percent slump in the first week of 2016. It had two emergency stoppages, i.e., trading was halted as the circuit breaker was activated. This spread across the world with Dow, Nasdaq, and even the Sensex having bad days.

There is another interesting thing happening in parallel. Chinese investors are spooked and are retreating from the equity market. They are looking for safer investment options and usually, in times of stress, the flow of funds is usually directed towards the bond markets, especially government bonds. After a prolonged stock market bubble in China in the past few years, there is bond market bubble brewing and it may be headed for a major correction and this is not particularly good news. The Chinese bond market is worth RMB 47 trillion ($7.3 trillion), more than 50% of Chinese GDP.

It is not just China that is experiencing increasing debt. Asian debt has increased exponentially since the global financial crisis: from around 110 percent of GDP in Mar-2009 to 160 percent in Mar-2015. The non-financial private debt in Singapore and Hong Kong is as much as 200 percent of GDP. Normally, It is not uncommon in today’s financial world to see such high debt levels. However, the worrying aspect is that all of these Asian economies are also slowing down considerably, which implies that the ability to repay the debt is considerably reduced.

China debt

Back to China, two major reports in the past week have highlighted the bond market bubble and the slight possibility of a correction – by UBS and Macquarie. Total Chinese debt – government + non-financial corporate + financial institutions + households – account for as high as 282 percent of GDP. In 2001, it was 121 percent of GDP and  158 percent in 2007. Again, the debt problem is compounded by the fact that the Chinese economy is slowing down. Another important aspect is the reduction in Chinese foreign exchange reserves. As the Fed raised interest rates in December, there has been an outflow of foreign currency reserves from China to the tune of $500 billion. A large part of the new bond issuance is coming from Chinese local governments. There has been an explosion in municipal borrowing in 2015 and much of it has been to refinance the previous debt burden.

Local (municipal) government debt in China has increased exponentially

Local (municipal) government debt in China has increased exponentially.

China’s debt numbers are not anywhere close to Japan or Greece or even the US. It is not an alarming figure yet. Growing debt is usually ignored in fast growing economies. However, now that China is slowing down, analysts have just begun to get the Chinese debt on their radar.

Anupam Manur is a Policy Analyst and macroeconomics enthusiast at the Takshashila Institution and tweets @anupammanur

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Brazilian Economy in the Doldrums

By Anupam Manur

Brazil is staring at a lost decade of economic output, with political upheavals, domestic economic crisis of falling output, debt and inflation and a stagnant external sector due to falling commodity prices internationally.

While the world is gripped with stories of Chinese slowdown, another economy is staring down the barrel of deep economic and political crisis and faces the possibility of a lost decade for economic growth. Brazil has had another contraction in the previous quarter and according to The Economist, by the end of 2016, the Brazilian economy may be 8% smaller than it was in the first quarter of 2014. The Economist’s GDP forecast for 2016 is particularly dire for Brazil, the largest economy in the downside projections, with over 2% contraction in real GDP.

The last time that the Brazilian economy saw positive growth was in the first quarter of 2014. So, Brazil is officially in a recession in 2015, going by the NBER definition of recession as contraction of output for two consecutive quarters.

 

Brazil's GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Brazil’s GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Amidst the economic downturn, Brazil is also facing a political upheaval. Dilma Rousseff  and many of her party members, who are part of parliament, face very serious corruption charges against them and are presently being investigated. They are alleged to have accepted billions of dollars in bribes in exchange for bloated contracts with Petrobras, the State controlled oil and gas company. Also, Joaquim Levy, the Finance Minister who was known to bat for greater fiscal austerity and structural reforms resigned last week. When the need of the hour is urgent economic reforms and a plan to kickstart the economy, the Parliament Is obsessed with the impeachment of President Rousseff. This implies that Rousseff does not enjoy the political capital to initiate any reform agenda, assuming she has one, to get the economy back on track.

Falling commodity prices have a big part to play in Brazil’s misfortunes. Brazil’s commodity exports, and with it, its GDP, had a spectacular rise along with China’s growth story. However, with China slowing down, demand for commodities has fallen and so have its prices. Oil, iron ore and soy beans account for more than half of the Brazil’s export basket and their prices have been depressed for quite some time now. Brazilian commodities index has slumped 41% since 2011, according to Credit Suisse. The average price that Brazil used to receive for a ton of iron ore has slumped from about $125 in 2011 at its peak to about $40 currently. Among the big commodities exporters of the world, Brazil has been hit the hardest.

While it may be convenient for Brazilian administration to blame global conditions for their weak economic performance, a closer look will establish Brazil’s home grown problems as the chief culprit. Australia is a bigger commodity exported and relies heavily on Chinese manufacturing industry for its GDP growth. The share of exports in Brazil’s GDP is 11.5 per cent while Australia’s is much higher at 21 per cent. Despite this, Australia is slated to grow at a 2 percent this year. Other major commodity exporters in Latin America such as Chile and Peru are also affected by the declining prices, but are yet slated to grow at 2-3 percent this year.

The reason for this is Brazil’s structural problems. While Australia handled the global 2008 recession with caution, Brazil followed an excessively loose monetary policy and uninhibited fiscal expansion. Brazil has been spending indiscriminately: the estimate of budgetary deficit for 2015 was 10 percent of GDP. The debt to GDP ratio in July 2015 was already 65 percent and was set to touch 70 percent by end 2015. Further, the government is running a primary deficit of $13.9 billion or roughly equivalent to 2.5 percent of GDP. Primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments, and excludes interest payments. This implies that Brazil is adding to the total debt at a far greater rate than it can afford to do. Rating agencies such as S&P and Fitch have already downgraded Brazil’s debt instruments to junk bond status, which will translate into even higher costs of borrowing.

Corporate debt has been on the rise as well for the past decade. It is presently as much as 63 percent of GDP. It does not help the government that much of this is from either state owned companies such as Petrobras or other companies who have the implicit backing of the Brazilian government.

Quite unfortunately for Brazil, the usual routes for recovery from a recession are unavailable to them. As aforementioned, public debt is far too high to accommodate a fiscal push to the economy. The need of the hour is, in fact austerity, but that is bound to depress the economy further.

Monetary policy does not have too much wiggle room either and the central bank is in a real fix. The SELIC rate, Brazil’s policy interest rate is at 15%. With 150,000 jobs being shed in the formal sector every month, there is a real clamour for reducing the rates. However, this might fuel inflationary pressures, which are already quite high and high inflation will drive away the investors further. The consumer price inflation is hovering around 10 percent and the real has been steadily depreciating.

Raising taxes is also going to be extremely difficult, as Mr Levy  found out. Part of the reason for him quitting the cabinet as Finance Minister was the political opposition both from the opposition and within his own party to raising taxes, cutting federal spending and general fiscal adjustment.

The only way out is unlikely to be popular. Ms. Rousseff needs to come out with a credible new plan for restructuring the economy. This will involve painful cuts to pensions and other social security measures along with slight increases in the tax rates. Finally, Brazil also has to look at improving its business environment. It is currently placed at 120th out of 189 countries in the Ease of Doing Business Report by the World Bank. Though it is definitely going to be a tough period for Brazil in the next few years, it must aim to reduce the duration and severity of the problem by following sound economic policies.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

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Ministry of Risk Management

By Anupam Manur

An expert committee to forecast risks in the short and long run and suggest measures to manage it.

Delhi’s alarming pollution levels and the ensuing chaos in attempting to mitigate the problem has lessons for all the other big cities in India. That Delhi waited for this long and for the problem to gain such magnitude before attempting a solution is by itself a telling sign of the ineptitude of our state government machinery.

Going by the present growth trajectory, it is not hard to forecast that Mumbai, Bangalore and few other cities will face the same problems that Delhi is presently facing in a few years time. Bangalore is about 5-8 years behind Delhi on all the negative signs: the rate of vehicular growth, population growth, reduction in green spaces, bad urban planning, etc.

Further, urban planning in Bangalore is known to have a terrible record with regard to the ability to foresee problems in the future and taking evasive actions. Officials in Bangalore have typically waited for the problem to be deep set before deciding that something must be done, after which it takes a few years to come up with a viable solution. The extremely slow pace of implementation of the solution implies that the problem would have compounded many times over by the time the solution is in place. The Bangalore Metro is a classic example of this. It is now slated to be completed only by 2032, by which time Bangalore’s population and traffic woes would have increased to such an extent that the Metro will be completely inadequate in addressing the issue. Though the problems of garbage disposal and water management has already reached a critical point, the administrators are just beginning to become cognizant of the problem. Many other issues are already imploding, which still hasn’t appeared on the administrators’ radar.

Can we predict the state of Bangalore traffic in the next 10 years? Can we address that issue now?

Can we predict the state of Bangalore traffic in the next 10 years? Can we address that issue now?

The solution to this is to set up an independent set of experts in risk management. Either the central government or the state government should appoint a ministry of risk management, whose task it would be to foresee possible threats and risk to the quality of life in Indian cities and suggest immediate mitigating and evasive actions. The exact scope and structure can be ironed out later, but the main idea is to attempt being ahead of the problem.

The scope for such a committee/ministry could be huge. It can cover issues such as environment (pollution, disappearance of lakes, green cover, etc), water shortage, contingency plans for natural and man-made disasters, etc in the long run and in the short run it could focus on the immediate issues that threatens the quality of life, such as power shortage, traffic problems, housing, garbage clearance, etc.

Corporations succeed when they are able to manage their potential risks and convert them into opportunities. It is time that Indian cities invested in risk managements as well.

Anupam Manur is a Policy Analyst at Takshashila Institution and tweets @anupammanur

 

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Karnataka’s confounding solar policy

BESCOM’s inability to purchase power has led to a bizarre solar policy which discourages and limits solar power generation.

The officials at the Karnataka Electricity Regulatory Commission (KERC) recently announced that it would reduce the amount paid to individual producers of electricity using solar panels, which will create disincentives for people from becoming self-sufficient for their energy needs. This has come at a time when Karnataka has been facing an acute power shortage, as was demonstrated by the interminable power cuts in Bangalore over the past few months.

The Union and State government has been trying to encourage citizens to install roof top solar panels and produce electricity for their household consumption. Further, any excess electricity generated can be sold back to the grid at a predetermined rate. This also ties in with Prime Minister Modi’s new thrust on solar energy.

Paying the right price is the only way to encourage households to install solar panels

Paying the right price is the only way to encourage households to install solar panels

The response initially has been lukewarm. Since 2014, when KERC released its Karnataka Solar Policy that envisaged achieving a minimum of 400 MW of grid-connected solar rooftop plants and 1,600 MW of grid-connected utility scale solar projects in the State by 2018. The target for 2014–15 and 2015–16 was 100 MW each. However, only 144 customers have come on board in Karnataka and together, they generate 2.4 MW of power, which is grossly inadequate.

It is in this context that the downward revision of tariff paid to solar power generators seems bizarre. Initially producers were paid Rs.10.5 per unit produced, which was reduced to around Rs.9.51 and is now slated to decrease to Rs.6.50 per unit. The stated reason is that capital costs for installing of the solar panels have reduced. Another absolutely confounding proposal by KERC is to set a cap on power generation per customer. The discussion paper actually states that consumers generating electricity “far in excess of the sanctioned load should not be encouraged”. Imagine a state starved for power and experiencing power cuts up to 8 hours a day in its capital city complaining about excess power generation.

The real reason however, is quite straight forward. BESCOM does not have the money to pay Rs.9.51 per unit generated. Consider the current cost of electricity: a normal urban consumer pays Rs.2.70 per unit up to 30 units, Rs 4 per unit for consumption between 31 and 100 units, Rs 5.25 per unit for consumption between 101 and 200 units and Rs 6.25 per unit beyond 200 units per month. Even for high tension commercial users, the maximum rate applicable is Rs. 7.65 per unit for consumption beyond 200,000 units. Given this scenario, how can BESCOM possibly buy power generated by individual users at Rs. 9.50? It is then no surprise that it wants to reduce the price paid per unit of electricity generated and that it actually fears a situation where there is excess production and distribution of electricity.

The solution is not to reduce the amount paid to people who incur considerable costs in installing solar power. The reduced amount will inevitable further reduce the incentives for consumers to use solar energy. Leaving aside an infinitesimal set of consumers who might want to opt for solar energy out of environmental consciousness, most people will react to financial incentives, even if it manages only to cover the cost of installation over a long period.

The answer lies in BESCOM employing marginal cost pricing for the electricity it produces. The price of electricity in Bangalore (and most of India) is below the market price and thus, electricity supply companies (ESCOMs) have heavy losses in their balance sheets. This hampers the ESCOMs ability to purchase power, whether from private generators of solar power or distribution companies, and supply it to the end user. Raising electricity prices will ensure the supply companies have enough income to purchase electricity and provide uninterrupted power supply. Given the high costs associated with power outages (as this article points out), it is imperative to ensure continuous power supply.

Finally, it is high time that KERC introduced contestability and competition in the power sector. Allow private players into the market who can provide uninterrupted power to all at the market determined prices. Mumbai, for example rarely experiences power outages. This is because there are three suppliers of power: TATA, Reliance and BEST. Competition among private electricity suppliers along with the state electricity board will ensure that prices are market based and there are no interruptions in power supply to domestic, commercial and industrial units.

Anupam Manur is a Policy Analyst at the Takshashila Institution. He tweets@anupammanur

 

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Upholding Economic Freedom

Prohibition is conceptually against the very essence of economic freedom, apart from the various challenges in implementation. 

A hooch tragedy is on the way. It is unfortunate, but inevitable. A week after Bihar Chief Minister Nitish Kumar came to power, he announced the first implementation of his promises – prohibiting the production, storage, distribution, and sale of alcohol in his state with effect from 1st April 2016.

There’s a new wave of prohibition going around the country. Kerala declared prohibition a year ago, Bihar has just done it and Tamil Nadu might just witness it if the DMK comes to power. Interestingly enough, states in India which have had prohibition for decades are beginning to realize its folly and are lifting the ban on alcohol sales and distribution. Mizoram Finance Minister, Lalsawta, openly declared that ‘prohibition just did not work’ in his state. Manipur, which has had a prohibition for 24 years, is beginning to question its merits and might remove the ban some time soon. For a brief history of prohibition experience in various states in India, read this article in Mint.

The upcoming prohibition in Bihar is an unwise move on many grounds

The upcoming prohibition in Bihar is an unwise move on many grounds

Prohibition is objectionable on many grounds. Firstly and perhaps, most importantly, it is conceptually against the idea of economic freedom. Quite a few of us often celebrate the great strides in political freedom that this nascent democracy has made. Freedom of speech, human rights, universal suffrage, etc were achieved right at birth, notwithstanding the recent small bump on the road. However, when it comes to economic freedom, we are often shortchanged and we tend not to notice much. The idea of liberty that is enshrined in the constitution should inevitably contain within it, the idea of economic liberty. The Republic of India is not a nanny State and should not dictate our economic decisions. Yet, that is exactly the position we find ourselves in today. States impose high taxes on luxury goods and on sin products such as alcohol and tobacco, if not entirely eliminating the scope for its production, distribution and consumption. The very idea that an external entity should dictate one’s choices should be repugnant. Every citizen should have the freedom to spend her hard earned money in any way  they so please, subject to reasonable restrictions.

The second problem with prohibition is the state capacity to implement it. Every state in India that has tried to implement prohibition has failed miserably. Economics 101 tells us that supply will always creep up where there is a demand and that is exactly reflected in the ground in these states. Again, the experience of Manipur and Mizoram, states which have had prohibition for the last two decades can be telling here. Both the states have admitted that prohibition was a complete failure and that liquor has always made its way from the neighbouring states. Prohibition also leads to a law and order situation with several new ‘enterprises’ which will spring up in order to cater to this demand. Unfortunately, all these enterprises will be part of the underground economy and impossible to control and regulate.

By making it illegal, the states essentially lose control over its production and consumption. If it is legal, the states can monitor how much is consumed and can try to influence the quantity consumed through various policies. They give up this control the minute it is made illegal.

Even if the state can ensure that there is no illegal movement and trade of these commodities, it will give way to a much bigger problem. The inevitable consequence is the rise of illicitly produced liquor, which has led to far too many deaths in our country. Hooch tragedies are almost a direct result of prohibition and excessive taxation, as this article points out.

Finally, the state loses out on precious revenue streams generated by the alcohol industry. The Manipuri Chief Minister, Okram Ibobi Singh, made a case for removal of prohibition by stating that the government was unable to carry out many of its welfare schemes due to the lost revenue from taxing alcohol sales and all the benefits were being accrued by the neighbouring Assam government. The money earned through excise duty can be channeled into rehabilitation and counselling centres, as Narayan Ramachandran points out here.

It would behove the Bihar Chief Minister to heed to the lessons learnt by the experiences of other states in India, if not national governments the world over. Further, Bihar would not want to lose the growth momentum it has gained in the past decade and would want to establish itself as a modern state which respects its citizens economic freedom.

Anupam Manur is a Policy Analyst at the Takshashila Institution. He tweets @anupammanur

Disclaimer: The author does not have any vested interest in arguing against prohibition.

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Primer on deficits

Today’s budgetary deficits are tomorrow’s taxes. Therefore, it is important to understand what deficit means, and how India has performed on this metric over the past few years. This post provides a primer on this topic.

Budgetary deficit occurs when the expenditures[1] are more than receipts (This is true for homes and nations).There are three types of deficits

  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit

deficit

Revenue deficit is defined as the difference between total revenue expenditure and total revenue receipts. The revenue deficit signals how much the government is spending when compared to its earnings to perform its day-to-day activities(like paying salaries etc.)

Revenue receipts are those government receipts which neither reduce assets nor create future liabilities. These are proceeds from taxes, interest and dividend from government investment, cess, and other receipts for services rendered by the government. Revenue expenditure includes those expenditures that neither creates assets nor reduces liabilities. These are expenditures on salaries of government employees, subsidies, grants (to state government and other entities), interest payments and pensions. These expenditures are short term and recurring in nature and mostly meant to ensure the daily functioning of the government.

Given this, revenue deficit shows how much the government is borrowing to finance its daily functioning. In the past few years, eliminating the revenue deficit has been the priority for both the Union and State governments. The Fiscal Responsibility and Budget Management Act, 2003 recommended elimination of revenue deficit by 2009.

Revenue deficit = Total revenue expenditure – Total revenue receipts

Fiscal Deficit is defined as the difference between total expenditure and total receipts (excluding borrowings) ie., any loans received as money are not counted as receipts.. Therefore fiscal deficit actually represents the amount of borrowing that the government must make to meet its expenses(this is the reason why the fiscal deficit is the most discussed number and a keenly observed number during the budget and by commentators.

Fiscal Deficit = Total expenditure – Total receipts(excluding borrowings)

Primary deficit is defined as the difference between fiscal deficit and interest payments ie., if the primary deficit is zero then, the governments borrowings will be used just to meet its previous borrowings. If the primary deficit is positive and significant, it feeds back into the interest payments in the following years, as fresh debt is created, for which interest has to be paid.

Primary deficit = Fiscal deficit – interest payments

 

deficit gdp

[1] There are two types of expenditures: Revenue expenditure and Capital Expenditure. Revenue expenditure is a cost that is charged to expense as soon as the cost is incurred.

Varun Ramachandra and Anupam Manur are Policy Analysts at Takshashila Institution. Varun tweets at @_quale and Anupam tweets at @anupammanur

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Costly Holidays

India experiences the most disruptions to businesses due to bandhs and public holidays and there are huge economic costs attached to it.

Public holidays are usually a cause for celebration. Workers get a day off to put up their feet, relax, catch up with family and pending chores. A study revealed that India holds the distinction of being the country with the most number of public holidays in the world with 21 days off and at times more depending on the state. Mexico comes in last with 7 holidays in a calendar year.

However, not everyone equally welcomes a public holiday. In August 2015, Victorian Premier Daniel Andrews pushed a legislation to declare October 2nd 2015, the eve of the grand Australian Football League Final, as a public holiday. Many Victorian businesses and ordinary citizens protested against this. Earlier, the draft proposal was put up for comments and review by the public and an overwhelming 90 percent of the respondents were against the move. One would normally expect jubilation instead of protests for an additional holiday. The reason for the protest is purely economical. The opportunity cost of an additional public holiday is staggering $852 million worth of lost production to the state, says accounting firm PricewaterhouseCoopers. Australia has a total of 9 national public holidays.

Similarly, in the UK, many analysts subtly remarked about the economic costs of celebrating the Diamond Jubilee of Queen Elizabeth II (60th anniversary of accession). In fact, Sir Mervyn King, the then Governor of the Bank of England told the House of Lords that he expects a fall in output in that quarter due to the lost working day. A report by Centre for Economics and Business Research, suggested that each bank (public) holiday costs the UK economy about £2.3 billion and removing all ten public holidays in the UK could add up to £19 billion to the GDP.

These two countries debating the cost of additional public holidays have lesser number of public holidays than the global average and far lesser than India. In India, checking the documents by Ministry of Personnel, Public Grievances, and Pensions, there are about 15 compulsory national (gazetted) holidays, 3 additional holidays from a list of 12 and about 34 restricted (optional) holidays. In addition to this, there are numerous nationwide bandhs called by trade unions, youth organisations, political parties and any other organisation that seeks to disrupt daily life in order to achieve their objectives. Then, there are state-specific bandhs, which seek to register a protest against a regional problem. Karnataka has seen many such bandhs in the previous few years over the Kaveri issue.

What is the cost of these holidays and bandhs on the Indian economy? The CII, FICCI and Assocham have at various points come out with estimates of cost to the economy and the number ranges from Rs.10,000 crore to Rs.26,000 crores[i]. The cost of public holidays will be much lesser, as there is no complete cessation of economic activity, as it does in a bandh. The method of estimation might not be entirely correct and the actual number might be much lesser. Even if we assume a number that is a tenth of the estimated, it is deeply significant, considering the sections of society that are most affected by such disruptions.

Many businesses get adversely affected by public holidays and bandhs.

Many businesses get adversely affected by public holidays and bandhs.

A more pertinent question is: who is affected the most by these holidays and bandhs? The salaried employees of either private or public companies do not lose their wage for the day and would thus welcome a holiday. However, it is the small businesses and the poor who get most affected by these disruptions. The average daily wage earner has quite a lot to lose by ceasing his/her normal activities and losing a day’s wage.  The small canteen which relies on daily trade by the big office next door cannot make up that trade on another day. Contracted or casual factory workers often cannot afford to lose a day’s pay. Public holidays can also be severely damaging to business continuity and momentum.

Resolving the situation requires two acts:

First, implement Supreme Court’s judgement on bandhs, which held those who called the strike liable for the disruption or damage, and observed that organisations calling the strike will have to compensate for the loss. This should be expanded to include the opportunity cost as well and not just tangible damage to property. It should also be firmly established that bandhs are unconstitutional and should be banned from public life.

Second, reduce the number of public holidays and simultaneously increase freedom to choose holidays. The G20 average for number of public holidays stands at 12. That could be adopted here. However, except three national holidays (Independence Day, Republic Day and Gandhi Jayanti), the rest of the seven days should be a choosing of each individual, based on their preferences. Mandatory religious holidays do not make sense in a secular democracy.

Reducing the loss of business days can add significantly to the GDP, provide a stable environment for business and most importantly, can help the poor earn that extra day’s income.

Anupam Manur is a Policy Analyst at Takshashila Institution and tweets @anupammanur

[i] For a brilliant exposition of the calculations behind estimating the cost of a bandh, read this brilliant piece by Prof. Bibek Debroy

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Outrageous Outages

The economic cost of power cuts to India is as high as 1% of GDP. It is time to reclaim that through proper pricing, privatisation and better management of supply.

Karnataka is experiencing dark days. Many parts of Karnataka are experiencing disruptions in power supply, or outages, for 8 to 10 hours in a day. Bangalore, the capital of Karnataka and IT capital ofIndia, has been experiencing three hours of scheduled power cuts and a few more hours of bonus unscheduled ones. Starting from today, Bangalore Electricity Supply Company (BESCOM) officially extended the scheduled power cuts from three hours to four.

Night time satellite image  of power cuts in Karnataka

A slightly modified night time satellite image showing Karnataka in darkness due to the power cuts.

Power cuts of this nature in a major metropolitan area are nearly unheard of and Bangalore’s aspiration to become a global hub for business and innovation is under serious threat. Power disruptions are exactly that – they disrupt the everyday lives of citizens and businesses. There are plenty of news reports and stories of ordinary lives getting disrupted due to the power cuts. Inconvenience to citizens aside, power cuts have huge economic costs to businesses.

A study by Federation of Indian Chambers of Commerce conducted a survey on the cost of power cuts to businesses in India and the numbers are staggering. The study revealed that Indian companies are losing up to 40,000 rupees ($733) a day each because of power shortages, which are taking a toll on production. The survey, which covers 650 industries of various sizes across India, said that as many as 61% of the companies surveyed suffered more than 10% loss in production due to power cuts.

This 2009 report in India Today surveys the extent of economic costs to Indian companies. It quotes a study by Manufacturers’ Association for Information Technology (MAIT) and Emerson Network Power estimates that the cost of power disruptions to India Inc is to the tune of Rs. 43,205 crores (nearly 1% of GDP) per year. Manufacturing is, quite understandably, the worst hit sector, followed by financial services, Telecom, real estate and infrastructure. The estimate loss for firms in these sectors is a whopping Rs 54,434 per hour, as the report states.

Where is the light at the end of the Tunnel?

Every summer and sometimes during the post-monsoon period, the government has a pre prepared statement for the reasons for power cuts: shortage of rainfall, technical glitches in the power plants, thermal plants being shut for maintenance, etc.  However, the real reason for the constant power problems is the mispricing of electricity.

Comparison of average national cost of electricity. Source: http://www.theenergycollective.com/lindsay-wilson/279126/average-electricity-prices-around-world-kwh

Comparison of average national cost of electricity. Source: http://www.theenergycollective.com/lindsay-wilson/279126/average-electricity-prices-around-world-kwh

Electricity is cheap in India. A bit too cheap. The recently revised tariff for domestic consumers in urban areas in Karnataka will be Rs 2.70 per unit for 30 units, Rs 4 per unit for consumption between 31 and 100 units, Rs 5.25 per unit for consumption between 101 and 200 units and Rs 6.25 per unit beyond 200 units per month.

Further, there are two types of price discrimination that takes place in India. One is based on the type of consumers. Higher rates for industries and low rates/free electricity for farmers, etc. The second discrimination is based on the quantity consumed – per unit cost increases with higher number of units consumed.

The first type of price discrimination is done in order to enforce cross-subsidization of electricity. It ensures that industries pay for the farmer’s electricity. This has got to be stopped, just as diesel and cooking gas subsidies are being dismantled. All ESCOMs (Electricity Supply Companies) in India are under severe losses, which reduces their ability to ensure continuous supply of electricity by maintaining the plants, having a regulatory and enforcing structure to reduce theft of electricity and finally to reduce leakages in the distribution channels.

Price discrimination based on quantity consumed will ensure proper pricing of electricity. The higher number of units consumed, the more one pays. Big industries will naturally pay more than common households, but not as much as the present system. Small to medium enterprises may also end up paying more, but it would be significantly lesser than the opportunity cost of losing business due to power cuts plus the cost to arrange alternate modes of electricity production (diesel generators, etc).

Privatisation: It is time that the government realizes that more than half of India’s future power generation and supply should and will be done by the private sector. Incentivize the private sector to invest in power generation capacity.

Scientific management of power supply: ESCOMs in India should operate the way a private firm does: project production quantities, possibilities for production disruption, alternatives for mitigating the disruptions, predicting hike in demand, etc. It is surprising that the State Electricity Companies quote hike in demand as the reason for power shortages every summer. The meteorological department had announced well in advance that the monsoon this year will be below average and yet, it managed to catch the Power ministry and BESCOM by surprise.

Predicting increased demand and forecasting supply shortages will help the companies to prepare alternatives in advance. BESCOM can introduce special seasonal tariffs for summer or prepare for a weak monsoon by making arrangements to buy power in advance.

Reforms in the power sector have been in the public sphere for far too long without any concrete action. Smart cities, Make in India and any such ambitious projects will remain a dream until continuous supply of electricity is sorted out. It is time to reclaim the lost 1% of GDP due to power cuts.

Anupam Manur is a Policy Analyst at Takshashila Institution and tweets @anupammanur

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