Anupam Manur

Anupam Manur is a Research Fellow at the Takshashila Institution. He was previously working as a Research Associate at the Indian Institute of Management – Bangalore. His policy research areas are at the intersection of economics, technology, and public policy. He is currently working on digital payments, blockchain and bitcoins, urban transport, and unaccounted income in India.

Why do Liberals Drink Lattes?

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The term latte liberals has been used as a derogatory term for a while now in the US. The phrase came about to describe “liberals who sit around and drink overpriced diluted Starbucks coffee while lamenting the plight of the poor.” This is quite similar to the term “wine’n’cheese”, which caught on in India for those who oppose Aadhaar. Though we do not have any conclusive proof of whether Aadhaarophobics truly consume large quantities of wine and cheese, a study has been conducted in the US to establish the link between liberals and lattes in the US.

Using a large-scale survey, researchers Diana C. Mutz and Jahnavi S. Rao did find a positive relationship between being a liberal and preference for lattes. However, undoubtedly, this relationship is not causal. Being a liberal doesn’t make you drink more lattes or drinking lattes won’t make you a liberal. The interesting aspect is to then find out the reasons behind the positive relationship. The authors provide four explanations, which they have empirically tested:

  1. Their first assertion is that this relationship occurs because latte consumption is a function of the sheer availability of coffee shops. Although chain coffee shops are everywhere in America, they are more prevalent in urban areas, where liberals are more likely to live.
  2. A second possibility is that the cost of purchasing one’s coffee beverage at a coffee shop means that both latte consumption and liberal ideology are functions of income. According to a 2015 survey, consumers will spend $3.28, on average, for a cup of regular coffee at a coffee shop; for barista prepared beverages, the cost can run much higher. As a result, those with higher incomes find it easier to afford lattes than those with limited incomes and it is also empirically proven that liberals tend to have higher incomes.
  3. Their third assertion is linked to gender. It is almost well established in American politics that women tend to be more liberal than men. Women are also more likely to drink lattes.
  4. The final assertion is that conservatives tend to have a disdain for globalization and will thus, avoid foreign sounding products (even though lattes are made in the US).

The paper gives other interesting examples of when the fourth point has stood out in the US.

On the other hand, the name of a product may be as important as, if not more important than, its actual country of production. For example, in 2003, when the US conflict with France over whether to invade Iraq escalated, there were calls from people including Bill O’Reilly to boycott French products. Even the US House of Representatives cafeteria temporarily renamed its French fries and French toast, “freedom fries” and “freedom toast”

Since latte is an Italian word and almost definitely does not have linguistic roots in American English, conservatives tend to believe that it is a foreign product and will avoid it.

Are EU Markets More Competitive than Those in the U.S.?

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In a really interesting paper in NBER, authors Germán Gutiérrez and Thomas Philippon argue that US markets have gradually become less competitive and markets in the EU have seen the opposite trend.

In many cases, the EU markets exhibit lower levels of industry concentration and excess  profitability, as well as fewer regulatory barriers to entry.

They suggest that divergence in market competitiveness between the U.S. and Europe is related to the powers granted to EU regulatory institutions at their inception. They note that both the European Central Bank and the Directorate-General for Competition were given more political independence than parallel institutions in the United States and thus have been able to pursue more aggressive antitrust enforcement in recent years.

In almost areas of competition law, they find that there was increasing enforcement in the EU and decreasing enforcement in the US, which has also seen more number of cases registered and higher penalties imposed in the EU. This has had a direct impact on consumer welfare in terms of prices. Prices for many products and services (such as broadband internet) which are under the scrutiny of the anti-trust authorities are significantly higher in the US than in the EU.

A large reason for this is also the lack of political independence for the regulatory authorities in the EU. They note that there is “higher levels of both lobbying and campaign contributions in the U.S. than in the EU. Political campaign contributions are 50 times higher in the U.S. than in the EU”. 

Another important trend here is the level of profits for EU and US firms. US firms have had significantly higher profits, on average, than EU firms. My question is this: does the excessive regulation in the EU prevent profits for firms? Will this have a negative effect on innovation and new firms starting up?

UDAN May Come Crashing Down

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The government’s low cost, regional connectivity scheme is facing massive turbulence on route (Do excuse the terrible airline puns). Though it initially led to the development of a few airports and the introduction of new routes, three out of the four airline carriers relying on UDAN are set to shut shop.

Except TruJet, the other three regional airlines – Zoom Air, Air Deccan, and  Air Odisha – are in a terrible financial state. While Zoom Air has not flown a single passenger since July, Air Deccan and Air Odisha have managed 3,000 and 1,000 passengers, respectively, in these four months. This is despite the government providing viability gap funding – a fancy term for subsidising low fares.

Unfortunately, the seeds of destruction were sown in 2016 itself, when the scheme was announced and the 4 companies started operations. Since established commercial airlines deemed it commercially unviable to fly on the routes that were proposed by the government, UDAN tried to bring in newer airlines. A company with paid up capital of Rs 5 crore could apply for a regional airline permit. Further sops followed- airport charges and taxes on fuel would be waived off and the government would even pay the airlines to sell half of the seats at Rs 2,500. The 4 airlines in question were enticed by this offer and decided to take up on the offer.

These regional airlines were quite aggressive when bidding for routes. Air Deccan and Air Odisha bagged 84 routes- 60 percent of those on offer. However, just one year later, these airlines are operating in only 10 out of the 84 routes. Basically, though it was easy to enter the sector, operating and sustaining business in it was really hard. The ecosystem was just not conducive.

This excellent piece in Business Standard by Arindam Majumdar explains why the scheme failed for the regional airlines:

Start-up airline operators in India, without any credible background, pay around 10 months of lease as a security deposit. Then the aircraft remains grounded for at least 2 more months waiting for clearance from DGCA and other regulators.

ZoomAir had to wait 5 months for the required license and lost out 6 crores in the process. Also, as the government had put a deadline for registering under the scheme, the airlines did not have the required time to plan the routes and choice of aircrafts. They bought small aircrafts (19 seaters), though it is much more expensive to run. Add to this the problem of finding pilots who are trained to fly these outdated smaller aircrafts and the entire thing is an operational mess.

The smaller the plane, the more expensive it is to operate. Cost of pilot, crew — everything remains the same. If you divide that over a lower number of seats, it becomes more expensive.Without pilots and spare parts planes are frequently grounded leading to high cancellation. Data from aviation regulator DGCA shows that the two airlines had an average cancellation rate over 50 percent since starting operations.

Then, there was the problem of infrastructure. Large airports in the metros did not want to waste precious real estate on the small regional flights and the airports in rural areas did not have the adequate infrastructure to be functional, even though they were inaugurated with pomp and show.

But electoral compulsion meant that the first flight could not wait. After all, an airport gives a government bragging rights in election season.

So, Bastar Airport in Chattisgarh was inaugurated by PM Modi in June. Nothing like getting air connectivity to a Maoist hit area in a poll bound state. Except that the airport was not ready for a landing in monsoon. Bastar is a VFR (Visual Flight Approach) airport meaning if visibility drops below 5,000 metre, landing is cancelled. “We used to prepare every day for take-off from Raipur and then cancel it as Bastar was not ready for landing,” said an Air Odisha executive. Then the aircraft remained grounded for maintenance which meant more cancellations. “Imagine the loss of revenue and public confidence in the service”.

Since July, the airline has cancelled flight for at least 30 days. It flew only 45 passenger in entire July- that’s barely one per day.

The entire scheme seems to be in shambles for the regional carriers. Some of the big carriers who have the ability to scale and can take advantage of the scheme are doing well though. However, they will still not fly on all the routes that the government wants them.

What Explains the High Demand for Low Paying Government Jobs?

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We are increasingly seeing the phenomenon where there are an enormous amount of applicants for a few government postings. Take this story where a million people applied for 700 clerical postings in Telengana. Or where there were 302 applicants for each posting of railway gangman:

On 17 September, 1.9 crore applicants will appear for the Railway Recruitment Board (RRB) examination to fill 62,907 vacancies at ‘Level 1’, earlier called ‘Group D’.

That is, 302 applicants for every job — jobs that are at the lowest level in the railways, including posts such as gangman (those who maintain tracks), gateman, pointsman, helper in electrical/mechanical/engineering/ signal/telecommunications, porter etc.

A majority of applicants for these jobs are graduates, post-graduates and even engineers, according to RRB sources.

Or take this case:

3,700 PHDs, 50,000 graduates, and 28,000 PGs have applied to fill 62 messenger posts in UP Police; position like this requires the minimum skills and has the lowest bar of eligibility.

Stories such as these have become all too common and are perhaps the most accurate reflection of India’s ongoing jobs crisis.

The big obvious question here is regarding the inexplicably high demand for low paying government jobs by apparently overqualified job seekers. My hypothesis is that this can be explained by three factors:

  1. The number of private jobs available are obviously too few. Job creation has stagnated and even receded in the private sector. Thus, industry does not have the capacity to absorb the large number of graduates and post-graduates who are passing out of the system. Since supply of labour far outstrips the demand for labour, employees have increasingly stringent qualification requirements. Only the best of the lot get a good, high paying job in the private sector.
  2. There is also an obvious skills mismatch. A lot of the students who pass through the Indian education system are not as qualified as their degrees tend to signal. A typical Post-Graduate often has the skills of a person who has passed the 12th grade and thus, cannot obtain or at least retain a high paying job which would require the skills of a Post-Graduate (One report, for instance, finds that nearly 80% of the engineering graduates in India are unemployable as their skills set do not match the requirement of the industry). What further complicates this issue and turns it into a vicious cycle is the fact that a lot of individuals end up studying due to the lack of job opportunities. These are students who enter into an educational programme solely due to the signalling value and to differentiate themselves from the nearest competitors. However, while the degree gained has some signalling value, the skills gained are inadequate for industry standards.
  1. A person who has gained a degree but not the appropriate skills cannot get a job in the private sector which will assure a reasonably high salary and job security. The private sector option is typically a low paying job, which can be lost at any time and with no benefits. Given this scenario, a government job that is assured of job security, even at the cost of lower salary seems attractive.

 

Copping out on Privatisation

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The recent bank merger between Bank of Baroda, Vijaya Bank, and Dena Bank is essentially a move of cowardice, and not the bold reformist step it is touted to be. The original plan (for reforming the banking sector) was to have just 6 public sector banks, and while Modi has reduced the number from 26 to 19, there’s still a far way to go. Further, the plan was not to achieve the reduction in numbers by merging all of the public sector banks into 6 mega banks that are still in government control, but to privatise them eventually. However, the traditional governmental dislike for privatisation and the lack of political will in an election year resulted in this sub-optimal solution of merged banks.

The merged entity is set to become the third largest Indian bank, however the size is hardly important. In fact, it would actually deter any real progress in reforming the banking sector. Another move of cowardice was in giving the assurance that no jobs would be lost due to merger. Thus, the banks cannot really cut cost and achieve economies of scale in this aspect.

The history of such mergers is not reassuring. The merger of New Bank of India (NBI) with Punjab National Bank (PNB) in September 1993, of Global Trust Bank with Oriental Bank of Commerce in 2004, and the spate of merging the associate State Banks with the main State Bank have all worked poorly. The strong bank in the merger eventually ends up suffering considerable losses. The editorial in The New Indian Express comments:

“When a strong and weak bank merge, the combined entity loses competitiveness and the merger is counterproductive. An RBI working group recommended avoiding such events without first restructuring weaklings—a step now being bypassed.”

Failures are the essence of capitalism, so before gaining size, we need measures that allow banks to fail safely without causing systemic shocks like Lehman Brothers. No math can correct errors made out of lack of self-discipline, and as we still fight the last NPA war, rather than planning for the next one, it’s time to act bold, taking haircuts and ceding control to private parties. For, in a growing economy, banks should lend without worrying about provisions or sacrificing profits at the altar.

 

Why Won’t You Accept My 10 Rupee Coin?

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The 10 rupee coin seems to be out of favour with the general public. It is getting increasingly difficult to use it as a means of payments. Vendors and customers are refusing to accept it. The Business Line reports: “From roadside vendors to even beggars, people have started saying a polite ‘no’ to the Rs 10 coin”. The problem is that many people believe that the coin is no longer legal tender. The RBI has issued multiple circulars and notifications urging people to accept the coin and reaffirmed the legality of the coin. Even banks have begun to refuse the coin as they have no space to store them, reports The Hindu.

Fiat money works on trust. Trust in this case takes two forms – trust in the government that has issued the currency and trust that the others in the system will accept the currency as a payment method. With the 10 rupee coin, both forms of trust are rather low. Social media and Whatsapp have had its role to play in spreading rumours about the coin. The RBI even tackled this in one of its notifications:

It has been reported that some less-informed or uninformed persons who suspect the genuineness of such coins are creating doubts in the minds of ordinary people including traders, shop-keepers, etc., impeding the circulation of these coins in certain pockets of the country causing avoidable confusion.

The Reserve Bank has advised members of the public not to give credence to such ill-informed notions and ignore them and continue to accept these coins as legal tender in all their transactions without any hesitation.

Payment systems and currencies have huge network effects. It gains value with more number of people using it. A currency in circulation gains acceptability based on its intrinsic value and the expectation that a large number of people will accept it as a form of payment. There are known instances where cigarettes have been used as currency in prisons because everyone else agreed on its value. In today’s fiat money system, the currency has no intrinsic value; only a government mandate declaring it as legal tender. The currency gains value because everyone else uses it.

However, in the case of the Rs 10 coin, no amount of government (RBI) assurances and orders has managed to infuse trust. Wonder if this is another side effect of demonetisation?

Consumer Confidence in the Economy has Diminished

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The Reserve Bank of India recently released the consumer confidence survey, which had some interesting insights. The survey was conducted in May with a sample drawn from the 6 major cities of New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad. So, we must be aware of the extreme urban bias of the survey. Nonetheless, consumer perception about their current state and their expectations about the future can sometimes capture what the statistical data cannot.

In short, 48% of the population believe that the overall economic condition has worsened from a year ago, while 32% believe that their situation has improved. The rest believe that there is no significant change.

These tables from an article in Mint captures the summary of the consumer confidence survey.

Similarly, nearly 44% believe that their job situation has worsened and a majority of people believe that their incomes have remained constant in the last one year. This should ring alarm bells for the ruling government. In a fast growing economy, it should be worrying if a majority of people believe that there is a worsening or even a status quo of their income, job prospects and overall economic conditions.

The perception of those surveyed are contrary to the data. While GDP growth in the latest quarter has been the highest in the past two years, people believe that the economy is siding. Inflation perception does not correlate with the data as well. People largely believe that the inflation situation has improved in the past year, though CPI has been rising continuously.

The question, then, is whether we can take the results of this survey seriously. The answer is yes. People make decisions based on their perception and expectations of the future. They do not necessarily follow data released by the Central Statistical Office. Those decisions can result in a self-fulfilling prophecy. If enough people believe that the economic situation will worsen, they will postpone investment and big consumption decisions, and will choose to save instead. This will result in reduced demand and slack in the economy.

On that note, it is slightly reassuring to note that people are quite optimistic about the future. A majority of the people believe that all 4 of the parameters spoken above will improve in the coming year. However, the article also points out that the numbers were higher in 2014.

Payment Chaos After Visa Card Crashes

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The Visa payment system had crashed on 2nd June due to a network error. This resulted in chaos in the UK and some other parts of Europe. Quite a few people were unable to make the necessary payments or make purchases.

This led to customers being stuck at long queues in departmental stores and even in front of ATMs while attempting to withdraw cash. Retailers were left unable to take payments in shops, bars and other outlets, forcing them to resort to only taking cash or not making sales at all. Petrol stations and toll booths were unable to process the payments, leading to huge queues again.

Apart from customers who use Visa cards, many other financial systems who have built products on top of the Visa infrastructure or retail stores who used Visa card machines were also affected by the network outage.

While the issue was resolved in a day and a half, this incident should give pause to the blind race towards a cashless society. Electronic systems can fail or be hacked, which can leave thousands stranded. Always good to have cash as an option.

The Indefatigable Chinese

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The US, worried about its increasing trade deficit with China, the decreasing number of jobs created at home, and the ailing steel sector in the US, decided to import a tariff of 25% tariff on all steel imports. It also decided to levy a special 200% import duty on import of Chinese steel and justified it by using the dumping argument.

Briefly, according to the WTO rules, a country cannot impose selective tariffs on goods based on geographical origin. Thus, in case a country is worried about increasing amount of steel being imported from China, it cannot selective put tariffs on only Chinese steel. Thus, the US imposed a tariff on all steel imports, which left many of its trading partners livid. It then made a few exceptions to Canada and Mexico, only to withdraw those later. However, there is one clause in the WTO, which allows you to target a country for tariffs – by showing that the country is involved in a process called dumping. Dumping is a case of price discrimination, where the producer is charging a different price to different customers. This is generally believed to be anti-competitive.

In China’s case, the allegation of dumping is based on the differential pricing of Chinese steel for consumers in China and the rest of the world. Since most Chinese steel companies are state funded, they charge a higher price at home and subsidises the export of steel, in order to conquer the other markets. China denies this, of course.

What is really interesting here though is that the Chinese have found a way to circumvent the additional dumping duties imposed by the US. China state-owned steel manufacturers are buying steel plants in other countries and then, shipping to the US, as reported in this WSJ article.

By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. But their factories outside China face few so-called antidumping tariffs.

“China is just moving whole industrial clusters to external geographies and then continuing to overproduce steel, aluminum, cement, plate glass, textiles, etc.,” says Tristan Kenderdine, research director at Future Risk, a consulting firm that tracks China’s overseas investments.

Hesteel, a Chinese state-owned manufacturer, purchased a dying steel mill in Serbia, invested millions of dollars, ramped up production and has started exporting to the US. Not only that, it also gets to circumvent the high tariff on steel by the EU. By producing within the EU common market area, it can export to the rest of the European Union, without any tariffs or customs. Similarly, China is already investing in steel plants in India, Pakistan, Indonesia, Brazil, and many other emerging economies.

What China has managed to do is put US in a very peculiar position. If it wants to stop import of Chinese steel, it would now have to impose higher duties on a whole host of countries. If it does this, it will face severe backlash from these countries, which would end up severely hurting the US.

The cleverest move perhaps is that China has now forged a joint venture with Pittsburgh-based stainless-steel producer Allegheny Technologies Inc. The joint venture is restarting a stainless-steel rolling plant in western Pennsylvania and is importing 300,000 metric tons of semifinished stainless-steel slabs from an Indonesian plant owned by Chinese state-owned companies. This puts the US in a real pickle.

 

India’s Economic Growth Rate is Overstated

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In a brilliant article in Mint, Rajeswari Sengupta, Assistant Professor at IGIDR, has shown that India’s real GVA growth rate is around 5% and not 7.1% as the CSO claims. The reason is the use of deflator in converting the nominal GVA to Real GVA.

In nominal terms, GVA increased by 7.9% in the third quarter (October-December) of the fiscal year 2015-16, below its usual level of 10-15%. This increase translated into a 7.1% real growth, because the deflator reportedly increased by only 0.7%.

Could India’s inflation be so low? In effect, the CSO is saying that despite India’s booming economy, producer inflation is lower than that of the recession-wracked economies of the West, or even that of Japan, which has been wrestling with deflation since the 1990s. This is not plausible.

It does seem extremely fishy that an emerging economy, growing at 7% (5%?) can have an inflation of 0.7%. The article then goes on to explain why this might be the case. In the absence of a credible deflator figures for all sectors, the CSO approximates it by using Wholesale Price Inflation as a proxy. This can be extremely problematic as the WPI has been on a downward trend in India and there is also significant divergence between the WPI on one hand and the deflator and CPI on the other. This divergence has been occurring since 2014 at least and I had written about it earlier.

If we were to use better proxies for the deflator instead of the WPI, like the CPI in services and IIP for manufacturing, we get a real GVA growth rate for the third quarter at 5% instead of 7.1%. The figure of 5% seems a bit more in tandem with reality.

Elections and Rupee Volatility

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The rupee has tumbled to the lowest point in the last 18 months, when it crossed the Rs68/$ mark this week. Analysts have posited multiple reasons for this occurrence – India’s sluggish export growth and an increasing import bill due to rising oil prices, the dollar strengthening, rising US interest rates, and the inflation differential between India and its main trading partners. However, one other reason could be elections – both the just concluded Karnataka election and the upcoming 2019 Lok Sabha elections.

A chart from 2013 that shows strong correlation between elections and rupee depreciation. Source: The Economist

There has been a historical relationship between elections and the exchange rate. Election time is usually associated with greater volatility of the rupee. Investors generally fret about populist schemes leading up to the elections. They are also afraid of policy uncertainty if a new government is elected. Chances of policy reversals or abandonment of certain policies can create jitters.

Post liberalisation in 1992, the rupee had a bout of weakness in 1997, and then, just after the 2004 elections, again in 2009 before the elections, and the biggest one in recent memory was in 2013. These have coincided with the elections and also major global macroeconomic shocks. There was the Asian crisis in 1997, the global financial crisis in 2009, and the episode of the taper-tantrum in 2013. It is hard to isolate these factors and establish causality between elections and rupee weakness, but there seems to be a strong correlation.

Episodes in other emerging economies can give a clue. Mexican Peso and elections have followed a similar pattern. The Economist explains:

Between 1976 and 1994 the peso regularly suffered a massive slump roughly every six years, around presidential elections—even though the country was effectively a one-party state at the time. Mexico tried to create stability by pegging the peso to the dollar in 1988, but by 1994 suffered a full-blown crisis. The pattern of boom and bust was broken only when authorities reverted to a freely-floating exchange rate—but also, crucially, put in place sound monetary and fiscal policies. There is a lesson there for India.

The Cost of Privacy

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It is becoming increasingly difficult to purchase any good or service without giving up your mobile phone number. Most of the stores that you go to now will ask for your phone number when the bill is made and they later spam you with promotions. There is always a look of incredulity in the cashier when I refuse to give out my phone number. At times, I have tried to explain that it is an invasion of my privacy and that I like to avoid spam notifications, but it is extremely difficult to get across that concept. It is far easier to either give a fake phone number or just state that one doesn’t have a phone.

The reason that the bill desk is genuinely surprised by the refusal to share one’s personal phone number is that not many people do it. I am in the minority. In exchange for your phone number, they promise to put you in a loyalty programme that promises discounts on future purchases. Most people are happy to make that trade-off: give up your privacy and data in exchange for discounts. I am definitely willing to forego any discounts or offers in order to retain my privacy. That foregone discount is the cost of privacy and peace of mind.