Tag Archives: infrastructure

Investigating Investment


Published in The Telegraph, Kolkata on 30 December, 2015.


Listening to the acrimonious debates surrounding West Bengal’s inability to attract high profile investments, an economist ought to ask two important questions; ques-tions which might even appear to contradict one another. First, why are investors reluctant, if they indeed are, to invest in the state? Second, will a surfeit of investment help to eradicate the scourge of unemployment afflicting this economy?

Before proceeding to address these questions in turn, it is worthwhile to ask a third investigative question pertaining to the factual scenario. Is West Bengal truly lagging in terms of investment? The Annual Reports of the Department of Industrial Policy and Promotion (DIPP) published by the Ministry of Commerce and Industry can help resolve this issue. The latest report for 2014-15 throws up data on investment expenditure in the country during the period 2009 through December, 2014, listing in detail the number of investors and the corresponding total investments undertaken annually in the different states as well as the country as whole. For the sake of simplicity, however, it is helpful to study an average figure, investment per project, for the entire economy and that for the state of West Bengal. As the graph illustrates, West Bengal trails behind the country in terms of this average and that the gap appears to be increasing. The figures are not corrected for inflation of course, but the character of the picture is unlikely to change even if the calculations were to be carried out at constant prices.

Although West Bengal is worse off, it is suffering from a relative disadvantage at worst. In absolute terms all parties are affected. It is in this context that the first question assumes relevance. Why are potential investors shy at all, of investing not merely in West Bengal, but elsewhere as well? The science of economics, sadly, has no straightforward answer to the question, except to point out that entrepreneurs as a class cannot foresee with clarity whether the potential produce flowing out of the factories and machineries they set up will be matched by a demand for it. An unwillingness to install equipment results then from gloomy expectations about the future. And this, irrespective of the availability or otherwise of adequate infrastructure, cheap labour or what have you. Indeed, a shortage of infrastructure could not possibly have unleashed the sub-prime crisis in the US or the financial crisis of the far east in the late nineties. Infrastructure, such as electricity, roadways and ports are surely necessary to attract investment, but they cannot guarantee that investment will actually arrive.

Of course, one need not consult a trained economist to come up with this conclusion. However, the converse question is less easy to answer. What is it that does induce entrepreneurs to invest? It is interesting to recall John Maynard Kenyes’ views on the subject. In his classic, The General Theory of Employment, Interest and Money, he observed that the uncertainty facing an investor is hard to resolve by means of a mathematical calculation of probabilities. To quote from Chapter 12 of the book, “… a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits … Enterprise only pretends to itself to be … actuated by the statements in its own prospectus … Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. … This means, unfortunately, … that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man.”

If Keynes was right, and nothing noteworthy has happened to the world’s economies in the course of the 80 years or so since the publication of the book to prove him wrong, then large entrepreneurs, foreign or local, are possibly viewing the prospect of setting up shop in West Bengal (as well as in a few other parts of India) no differently from arranging a cricket match in Antarctica. Politicians travel far and they travel wide, governments create single windows, hold business summits and rope in stalwarts from the world of entertainment or sports to anchor reality shows, and ministries are said to be at their wits’ end to convince Central Banks to lower interest rates. But whether these campaigns will touch the right chords in entrepreneurial hearts and arouse their animal spirits remains as obfuscating a query as the mystery of the Holy Grail. So much then for the colour of the carpets being rolled out to invite private investment.

The stage is ready now to face up to the second question. Can a growing investment expenditure path serve as a panacea for every possible economic malady, in particular one as painful as unemployment? Although it is generally believed that investment cures unemployment problems, modern technology, which is moving rapidly towards automation, appears to suggest otherwise. Except for the super-skilled, labour is being relegated progressively to the status of a superfluous factor of production. Uninterrupted growth of investment in modern technology may then be accompanied by a concomitant growth in traditional labour intensive production processes. This is apparent from the way unregistered manufacture has been behaving in West Bengal for the last few years, its annual rate of growth being consistently higher than that of registered manufacture.

Quite apart from the automation question, a steady rise in investment expenditure, as Evesy D. Domar had pointed out in the distant past (1947), impacts the economy in two distinct ways. First, the expenditure creates incomes, and expenditure out of incomes create further incomes and expenditure. The total expenditure so generated represents a growth in demand for produced commodities via the so-called Keynesian multiplier channel. Second, investment in plant and machinery brings about an expansion in the capacity to produce more commodities. The stream of demand is determined by the propensity to spend out of investment led income growth. The second effect, viz. the expansion in capacity is a technology driven matter. There is no reason why capacity expansion should be matched by the demand expansion. If the former should exceed the latter, then excess capacity would emerge, which in turn may dampen the flow of investment. And the latter could end up throttling the growth in demand too.

Needless to say, an open economy will not depend on investment generated domestic demand alone. A surge in investment and capacity growth in China for example catered to large scale exports. Not that the multiplier led improvement in domestic demand was a silent bystander in China’s success story; but the fact that few or no commodities that do not display a “Made in China” stamp are sold in the US (or even in India, if one restricts attention to specified groups of commodities), proves that exports played a major role in lifting up the Chinese economy. And now that Chinese exports have weakened following the indifferent performance of world markets, even crude oil prices have assumed a wistful weeping willow appearance. China’s domestic demand has not been able to save the situation.
There is yet another major factor that needs to be borne in mind in the Chinese context. Keynes’ overt reference to political and social atmosphere is soaked in wisdom. One hears of incidents in China, such as waking up workers for Apple Industries in the middle of the night to ensure that a sudden arrival of order may be attended to with alacrity. A democratic society, however corruption ridden it may be, can hardly hope to replicate such tales.

Investment therefore, even if indispensable, can bounce back as well.



Presidency’s Dilemma

Published in The Telegraph, Calcutta on May 14, 2015


presidency dilemma

Intriguing things are happening in Presidency University once again. Students laid a night-long siege, demanding from the vice chancellor and other officials a uniform procedure across all disciplines for entry into the university. Having grown up in a world where infants barely out of their cradles are subjected to admission tests, their demand can hardly be described as unnatural. In fact, the very removal of an admission test itself may appear to them as a denial of a fundamental right. On the other hand, the right to “deny” clearly rests with the authorities in charge of running the institution. And the authorities do not appear too excited about the idea of admission tests. Nothing unnatural in this either. The institution lacks the necessary infrastructure as well as internal faculty strength to carry out the exercise.

As far as the scarcity of examination halls is concerned, the matter may presumably be attended to by renting in premises for the purpose. This procedure is not unknown, since it is a policy that many other reputable institutions follow. The faculty shortage difficulty is less easily addressed, especially since the university aspires to represent the quintessence of academic attainment. Academically outstanding people are usually not available on lease to evaluate admission-test answer scripts. Committed academics, with proven excellence, need to be located instead and shifted to the university as permanent employees. The university has succeeded to an extent in attracting such talent, though not fully so. Several faculty positions still need to be filled up and the VC cannot be held responsible for not being able to fulfil an impossible dream.

If media information is to be relied upon, the administration is engaged in discussions with the student body to find out possible ways of escaping the impasse. While that process is on, it is not entirely irrelevant to reflect upon the history of admission tests in the erstwhile Presidency College.

Prior to the mid-Seventies, the college did not conduct admission tests in a majority of departments. In particular, the science faculties depended solely on the “cut-off mark” criterion to determine the quality of students. At the same time, there were departments – such as economics, English and history – that did conduct admission tests. In this columnist’s perception, they did so primarily to judge the applicants’ command over the English language. Indeed, he was himself asked to write an essay on a subject quite unrelated to economics to prove his worthiness to being admitted to the economics department. It was a weighted average of the marks obtained in the admission test and the immediately preceding university or board examination that determined a candidate’s eligibility.

However, as noted earlier, most departments, including physics and geology that housed the cream of the student body, felt no need to arrange for admission tests. And neither students nor the faculty ever complained of any massive damage caused on that account. The college resorted to conducting admission tests for a majority of departments (possibly all of them) around the second half of the Seventies. As far as a teacher from that era can recall, the practice began in the year 1976 – that is, at the fag end of the Siddhartha Sankar Ray government and a year preceding the Left Front capturing the Writers’ Buildings. Thus, the Left Front, even though it has been accused of making a fetish of mediocrity during its tenure, was yet to take charge of the devastation of education in the state.

The state, however, was passing through a period of instability in the mid-Seventies and the Ray government will go down in history for precipitating a holocaust on teenagers of the time. How education suffered in those days is a matter of speculation perhaps, though many feel that the manner in which board as well as university examinations were run during the troubled times had little to recommend for itself. It is tempting to extrapolate from this observation that the college in its entirety began to question the merit of relying on the marks secured in higher secondary or similar examinations alone to judge the quality of entering students.

It is possible, therefore, that the college authorities decided, and decided rightly, to initiate admission tests in most departments, to ensure internally as well as externally the quality of the students being admitted. And this practice has continued ever since. In the meantime, with a stable government in place, the lawlessness surrounding board examinations was gradually brought under control, but this did not impact the authorities’ decision at Presidency College to conduct admission tests. There were two reasons it would seem why the college did not feel over-constrained to carry out the task. First, it had not yet graduated to a university and second, there was no shortage of faculty. The size of the institution was, therefore, substantially small and the size of the faculty adequately large. Consequently, there were few difficulties surrounding the handling of admission tests.

A pertinent question might nonetheless be raised in this connection. If indeed the school leaving or other examinations had turned into a peaceful affair, why did Presidency College not revert to the earlier cut-off point system in the science departments at least. And the answer probably lies in the Left Front government’s morbid decision to view academic excellence as a form of exploitation by the so-called elite class. Means were devised to remove the potential sharpness of examination questions to distinguish the bright from the non-bright. These devious machinations engendered the all-too-familiar tutorial homes that not only substituted for classroom instruction, but even made the latter irrelevant.

A solid drilling in tutorial homes was a sine qua non for students to perform with so-called brilliance, though the brilliant performers were practically indistinguishable from one another, a phenomenon reminiscent of a scene from Satyajit Ray’s Parash Pathar, where each participant in a dance show was awarded a gold medal. Unfortunately, a similar flattening out process was underway among the ranks of the faculty at the college too. It is a wild guess perhaps that the college perceived that higher secondary marks secured by a candidate seeking entrance into it were not adequate indicators of quality and, hence, an admission test was in order. Alternatively, the continuation of admission tests even after social violence was well under control could be an indicator of bureaucratic inertia induced largely by an unimaginative faculty.

In any case, given the mediocrity of average faculty members (though not all of them), one wonders how promising candidates were picked out of the flock of tutorial-home-trained indistinguishable students. One suspects that admission tests were not serving any purpose at all. This does not mean that the college did not have its pool of competent students. It was a case of serendipity perhaps that ensured that a reasonably large number of meritorious students continued to graduate out of the college.

Whatever the true state of affairs might have been, there is little doubt that conducting admission tests for the much larger Presidency University now is a Herculean task. Whoever might be advocating that cause needs to realize that admission tests for all the departments cannot possibly accomplish the purpose for which the tests are designed. Till such time that infrastructure issues, and this includes faculty recruitment as well, are resolved, there will be no way of judging if an admission test supplementing a cut-off criterion will be more potent than the cut off alone.

Of course, tutorial homes still thrive merrily. Hence, a simple cut-off score may not solve problems either. Moreover, the issues motivating the students’ admission tests agitation continue to remain a grey area. All these confusions notwithstanding, Presidency University needs to view as well as project itself as a centre for super-excellence.

And therein, alas, lies the rub.

The author is former professor of economics, Indian Statistical Institute, Calcutta


Train to Promised Land

The latest debate surrounding the government’s decision to hike passenger fares and freight charges for the railways has dragged a skeleton out of the closet making the country turn white with fear.

As any undergraduate student of economics should be able to explain, the price of a commodity is the sum total of payments needed to induce service providers to transform the raw materials they have paid for into final products meant for different uses. The services in question tend to flow towards the production of commodities that yield the best return for them and markets function in the nature of sluice gates that ensure free economic activity. Preventing the free functioning of markets amounts to closing the sluice gates during a flood or not opening them during a drought.

Of course, when the government itself assumes charge of production, the market law may not apply. The returns that attract the government are hard to measure in financial terms. The government’s much lauded objective is the generation of social welfare. And once social welfare takes the driver’s seat, dry economic logic begins to sink into long lasting coma. The disastrous impact of the economic coma is invariably perceived in the long run and this is exactly where violated economic principles have the last laugh as they watch the economy crumble.

The railways in fact are a case in point. It appears that the branch of the Indian Railways that is concerned with freight transport earns substantial profits. On the other hand, the passenger service division has been merrily generating losses, thereby making it next to impossible for the authorities to keep things in healthy shape since time began. It is not hard to observe here a conflict between the two goals, monetary returns and social welfare. As far as freight traffic goes, the railways are mostly serving the private business sector that is engaged in profit oriented ventures. Consequently, even though run by the government, profit seeking through freight transport need not be inconsistent with welfare motives.

Passenger travel on the other hand is a totally different story, if railways are run by a government instead of the private sector. The government’s objective in this case should be the generation of passenger comfort and safety. And for this to happen, the burden of the fare imposed on the public must not outweigh the latter’s perception of the value of the comfort. This is all the more true since a section of the passengers are daily commuters to workplaces in cities from suburban towns. Such passengers usually include a large number persons belonging to the lower echelons of society, viz. the informal sector labour force. These individuals are deprived of social welfare benefits, such as dearness allowance, provident fund and so on, that the so called formal sector takes for granted. A major reason why the passenger division of our railways runs at a loss relates to accommodating these passengers, whom the Indian Government, even after enjoying more than half a century of economic independence, has not been able to endow with economic liberty.

Hence the question of subsidizing the passenger section of the railways, that is charging a price for the service that falls short of the expenditure involved in producing it. The costs, being financial in nature, have to be incurred from some source or the other. In the case of the railways, the source is readily available in its freight division coffers. Freight transport generates profits and these are siphoned off to cover the losses incurred in passenger transport. According to the Finance Minister, the figure stands now at Rs. 26,000 crore.

Using the profit of one organization to meet the losses of another is referred to as cross-subsidization and cross-subsidization runs counter to the logic of economics. Profits earned by a producing organization is a major source for the enlargement as well as improvement of its capital base. In the case of the railways, the capital base consists largely of infrastructure. Maintenance and improvement of infrastructure, both its quality as well as quantity (the freight corridor being an obvious example), helps to reduce per unit cost of transportation. Even if other costs, such as the cost of fuel and labour were to rise, investment in infrastructure has the beneficial effect of keeping transport costs on hold and along with it the prices of the commodities transported. Needless to say though, infrastructure building is a time consuming process, and to that extent its favourable impact on prices cannot be realized overnight. A period of waiting is involved, after which prices might be tamed, but the immediate impact of a rise in freight rates can be inflationary.

Cross-subsidization, however, rules out even the delayed gains. It prevents adequate investment in the freight sector and this in turn clogs up avenues leading to cost reduction and inflation control. The government’s decision to remove cross-subsidization can therefore be easily defended, especially from the point of view of eventual price control. Indeed, not only has the government decided to do away with cross-subsidization, it has announced an increase in freight rates too by 6.5 per cent. Given that the freight division is making profits, it is not clear why the increase in freight rates was called for. It is possible that the government is planning for a massive improvement in freight infrastructure and this requires profits in excess of what the railway freight service is earning now. Hopefully, the upcoming Rail Budget will throw some light on the issue.

As far as the passenger section goes, the fare rise has to be justified, partly at least, by the decision to do away with cross subsidization. But the government has announced its intention to come up with world class passenger services as well. The extra fare to be raised from passengers is therefore expected not only to eliminate subsidies but also generate adequate surplus to create infrastructure. And it is here again that time plays a crucial role. The increased fare has to be shelled out immediately, but infrastructure investment will bear fruit with a lag.

The government wishes to initiate tough measures and make the railways follow market principles. This makes eminent sense provided the market logic is carried to its logical limit, which involves minimizing the time gap between payment by a customer and the delivery of the commodity. Quite clearly, the government needs the money right away and this is what lies at the root of its decision to increase fares. However, given that the fare increase (somewhat reduced now from the initial 14.2 per cent) is motivated by the need to improve infrastructure, it is essential to specify a time frame for its delivery. In the private sector, when a promoter accepts advance payment for constructing a new residential complex, there is a pressure on him to deliver the flats within a stipulated period of time. A government that believes in market principles and abhors subisidies cannot behave any differently from the promoter.

It is imperative therefore not only to announce a rise in fare, but also the time horizon chosen to deliver world class passenger comfort. The government itself admits that passenger services are in miserable shape and holds past governments responsible for their failure to meet international standards. The point is well taken and the government’s decision to raise fares to help Indian Railways reach the coveted destination makes eminent sense. However, till that destination is reached, passengers (and the less privileged in particular) will be paying more for a state of services that the government itself deplores.

If past governments have to be criticized for indolence, the present one needs to act with alacrity. The immediate escalation of fares ought not to yield results in the distant long run, when, as Keynes had observed, we are all likely to be stone dead.

(Published in Telegraph, Kolkata, July 7, 2014)