Wednesday, 23 September 2015

Bihar Elections: Jungle Raj and All That

As the Bihar Assembly elections approach, claims and counter-claims have begun to fly thick and fast.  Chief Minister Nitish Kumar has projected the development work that he has accomplished in Bihar[i] while the BJP has sought to counter this with the report of its think tank which debunks his achievements.[ii] Of course, the BJP has to walk a thin line since it was Nitish Kumar’s JD(U)’s partner till as late as June 2013. Hence, the main force of BJP’s attack is that Bihar has suffered since it split with the JD(U). Arun Jaitley delivered what he thought was a coup de grace when he said “What is there to debate? This debate is over. Gujarat is number 1 and Bihar stands at 21”.[iii] This is almost like the USA telling India “Your per capita income is barely 3% of my per capita income. Debate over”. Such statements, while they grab headlines, are generally devoid of any substance.
There is no doubt that Bihar starts with a massive disadvantage. It has been quite easily one of the worst performing states. The question to be asked is whether the state is showing signs of progress. If there has, in fact, been some progress, it might be good strategy for the BJP to claim some credit since it was in alliance with the ruling JD(U) for much of Nitish Kumar’s tenure. It has been opposed to JD(U) only for the last couple of years. Is it possible that all that the alliance might have achieved over so many years would have unraveled in the last two? If it has, indeed, unraveled in the last two years, then it speaks pretty poorly about the governance structures and institutions that the BJP would have helped put in place. Surely, that cannot redound to the credit of the BJP. But the BJP and, indeed, all political parties in India, work on the principle of voter myopia. It is the belief of political parties that voters will not remember anything that happened in the distant past and would be entirely swayed by claims and counter-claims being bandied about here and now.
In this note I will present some facts about Bihar and compare these to two states: Gujarat and Maharashtra. In many ways, Gujarat and Maharashtra are the best performing of all Indian states. Gujarat is the showpiece state of the BJP, while Maharashtra has had a Congress-led government till the recent change. At first blush, this comparison seems unfair. Even without looking at the facts, most people are likely to conclude that Bihar is bound to perform worse than Gujarat and Maharashtra. But this note will show that sometimes data can spring some surprises. Bihar has been a victim of bad press for decades, some of it fully deserved but, as we will see below, things are changing.
State of the Economy
I first look at the size of Bihar’s economy relative to that of Gujarat and Maharashtra as well as India as a whole. See Table 1.
Table 1: Total Production in Three States and India
                                                                                                (Rs. Billion)

Bihar
Maharashtra
Gujarat
GDP: India
2004-05
1,212.10
3,822.04
1,867.91
29,714.64
2005-06
1,375.39
4,154.80
2,033.73
32,530.73
2006-07
1,343.14
4,709.29
2,337.76
35,643.64
2007-08
1,480.66
5,346.54
2,533.93
38,966.36
2008-09
1,651.51
5,948.32
2,812.73
41,586.76
2009-10
1,775.41
6,101.91
3,003.41
45,160.71
2010-11
1,903.98
6,669.44
3,341.27
49,185.33
2011-12
2,196.62
7,420.42
3,675.81
52,475.30
2012-13
2,370.70
7,777.91
3,957.38
54,821.11
2013-14
2,594.32
8,258.32
4,272.19
57,417.91
Note: Figures for the states are Gross State Domestic Product, the state-level equivalent of GDP
Clearly, Bihar is a much smaller economy as compared to the other states. It seems reasonably clear that Bihar has lagged behind Maharashtra and Gujarat. In 2004-05, Bihar’s GSDP was 32% of Maharashtra’s GSDP (65% of Gujarat’s GSDP) while in 2013-14, it was 31% of Maharashtra’s GSDP (61% of Gujarat’s GSDP). The gap between Bihar and other two states seems to have widened in absolute terms.
Is there hope for Bihar to catch-up with Maharashtra and Gujarat? The convergence hypothesis[iv] states that if a poor economy is to catch up with a relatively richer one, it should, at the very least, grow faster than the richer states. Does Bihar show any sign that this minimum requirement of convergence is being met?

Table 2: Rates of growth of GSDP
                                                                        (%)

Bihar
Maharashtra
Gujarat
2004-05
0.08
7.70
13.78
2005-06
12.64
8.35
8.50
2006-07
-2.37
12.53
13.93
2007-08
9.75
12.69
8.06
2008-09
10.92
10.67
10.44
2009-10
7.23
2.55
6.56
2010-11
6.99
8.89
10.66
2011-12
14.30
10.67
9.54
2012-13
7.63
4.71
7.38
2013-14
9.01
5.99
7.65
Since 2007-08, Bihar has been growing, atleast, as fast as Maharashtra and/or Gujarat (with the exception of 2010-11). In fact, Bihar had the highest rate of growth among all states of India in 2013-14. The rates of growth for Bihar since 2007-08 are truly impressive even if one allows for the small base from where the state is starting off. Of course, it still has a very long way to go before it can catch up with the other two states. But, in the meantime, the government of Bihar can take some credit for the performance of the state’s economy.
In per capita terms as well, Bihar has been performing well. See Table 3.

Table 3: Rate of growth of per capita GSDP
                                                                   (%)
Bihar
Maharashtra
Gujarat
2004-05
-1.03
6.59
12.67
2005-06
11.53
7.24
7.40
2006-07
-3.48
11.42
12.83
2007-08
8.64
11.59
6.95
2008-09
9.81
9.56
9.33
2009-10
6.13
1.44
5.45
2010-11
5.89
7.79
9.55
2011-12
10.33
8.56
6.72
2012-13
-1.53
0.69
1.36
2013-14
7.91
4.89
6.55
Since 2007-08, Bihar has performed commendably in all years except 2012-13. But, to be fair, even Maharashtra and Gujarat performed poorly on 2012-13. Once again, much credit is due to the government for pushing the state out of its low-level equilibrium trap in which it had found itself for many, many years.
Jungle Raj?
Prime Minister Modi, while campaigning in Bihar, called for the end of ‘jungle raj’ that has thrived under the Nitish Kumar government.[v] Bihar had, indeed, become synonymous with violence and corruption at the time that Nitish Kumar took office in 2005. See Rohan Mukherjee’s article for a good description of the steps taken by Nitish Kumar to tackle this problem.[vi] Mukherjee describes the success that was achieved over the period 2005-09 as a result of the measures taken. BJP’s Policy Research Centre, however, points out that Bihar suffered after the JD(U) split with the BJP in 2013.[vii] It is claimed that Bihar’s rate of growth fell in 2013-14 and that crime increased.[viii] Tables 2 and 3 above show no evidence of a decline in performance of the state after the BJP parted with Nitish Kumar. Let us see if there is any evidence of increase in crime.
I first consider all cognizable crimes. Table 4 presents rate of cognizable crime.[ix]
Table 4: Number of Cognizable Crimes per 100,000 Population
1995
2004
2014
Bihar
121.8
122.4
174.2
Gujarat
276.9
197.3
213.3
Maharashtra
273.3
173.3
212.3
All States
181.9
165.8
220.5
Quite surprisingly, for each of the three years for which data have been presented, only Bihar has a rate below the all states average. There has been a disturbing rise in the rate from 2004 to 2014, but this is true for Gujarat and Maharashtra as well.
Focusing on all cognizable crime can be misleading since it includes violent as well as non-violent crime such as cheating, criminal breach of trust and counterfeiting. It makes sense, therefore, to focus on violent crime. In the next few tables, I present information in specific violent crimes.
Table 5: Number of Murders per 100,000 population
1995
2004
2014
Bihar
5.32
4.47
3.34
Gujarat
3.21
2.08
1.82
Maharashtra
3.38
2.65
2.27
All States
4.09
3.10
2.73
Clearly, Bihar does worse than the other two states as well as the all states average. But is the rate of murder in Bihar the worst in India? Not at all and numerous states do worse than Bihar in 2014: Chhattisgarh (3.9), Haryana (4.1), Jharkhand (5.0), Odisha (3.5) and Telangana (3.6).
Table 6: Number of Attempted Murders per 100,000 population
1995
2004
2014
Bihar
4.84
3.39
4.30
Gujarat
1.72
0.88
1.23
Maharashtra
1.56
1.44
2.22
All States
3.21
2.56
3.36
Once again Bihar does worse than Gujarat and Maharashtra and, barring Odisha (5.6), it is the worst performer in this category in 2014. 
Table 7: Number of Rapes per 100,000 population
1995
2004
2014
Bihar
1.38
1.57
1.11
Gujarat
0.69
0.63
1.37
Maharashtra
1.59
1.36
2.92
All States
1.48
1.65
2.83
There has been a persistent decline in rate of rapes in Bihar while the trend has been in the opposite direction for Gujarat and Maharashtra, both of which show a poorer record than Bihar. There are many states with a worse record than Bihar in 2014: Andhra Pradesh (1.9), Chhattisgarh (5.7), Goa (5.0), Haryana (4.4), Himachal Pradesh (4.0), Madhya Pradesh (6.7) and Rajasthan (5.3).
Table 8: Number of Kidnappings per 100,000 population
1995
2004
2014
Bihar
2.18
3.86
6.44
Gujarat
2.51
2.12
4.42
Maharashtra
1.35
1.03
3.22
All States
2.12
2.06
5.73
Kidnapping is certainly a major issue in Bihar and its rate is well above that of Gujarat and Maharashtra. But it is worth pondering over why the rate has doubled in Gujarat between 2004 and 2014 and tripled in Maharashtra over the same time period. There are states which perform worse than Bihar 2014: Chhattisgarh (7.9), Goa (7.9), Haryana (11.5), Madhya Pradesh (10.3), Odisha (7.3) and West Bengal (6.6).
What can one conclude after looking at the data on crime in Bihar and comparing this with other states? The proverb “give the dog a bad name and hang him” comes to mind. Bihar has acquired a reputation as a lawless state and, even though the situation is changing, and even though other states have been performing worse than Bihar on some indicators, jaundiced views are difficult to overcome. Hence, there is hardly a murmur of protest when the pejorative “jungle raj” is hurled at Bihar. With such high rates of rapes and kidnappings, why is the epithet “jungle raj” not applied to Madhya Pradesh or Haryana or Odisha?
Conclusion
The main conclusion that I draw at the end of this note is that entrenched prejudices do not die easily. Certainly, Bihar had a well-justified reputation as a basket case in terms of economic performance and crime and it is still not a state that is performing well consistently. However, it is important to recognize the efforts that have been made in the last decade to improve the situation.
Separately, I am uncomfortable with Union cabinet ministers jumping into the fray and making strongly partisan statements directed at elections in Bihar. When the Indian Finance Minister gloats that Bihar is ranked number 21 in terms of ease of doing business, it is a bit disturbing. Should it not be his responsibility, as Finance Minister of the entire nation, to work along with the government of Bihar (whichever may be the ruling party in the state) to improve the situation? It is a similar situation when the BJP fields Narendra Modi as its star campaigner. I realise that BJP needs to do all it can to win elections and Modi is its best bet. We saw what happened when Modi stayed away from campaigning during the Delhi elections. So, when Modi labels Bihar as jungle raj, is it not his responsibility, as Prime Minister of the country, to help improve the situation, given that the state is a significant part of the nation he rules over? Is it too much to expect Union ministers to rise above partisan politics?
In some ways the recent complaint by the Congress to the Election Commission about the Prime Minister’s radio show “Mann ki baat[x] captures the point I have raised above. Of course, the Congress was more concerned with muting the oratory of Narendra Modi against which the party was quite helpless. The Congress had absolutely nothing in common with the issue that I am concerned about. The Election Commission allowed the radio show to go on with the proviso “…nothing is said [in the radio show] that may be construed as inducement to voters or having an impact on poll-bound Bihar where model code of conduct is in force till November 12”.[xi] In effect, the Election Commission was reminding Narendra Modi that only his persona as Prime Minister was to be revealed during the radio show and not his persona as BJP’s election campaigner. When Narendra Modi addresses an election rally in Bihar, exactly the opposite situation should prevail: only the persona of BJP’s star campaigner should be revealed while that of Prime Minister should remain hidden. Does this happen? Does anyone believe the fiction that a mere BJP functionary is addressing the rally and not the Prime Minister? How does a voter distinguish the two personas of the same individual, Modi as Prime Minister and Modi as BJP campaigner? At the very least, the security that surrounds Narendra Modi would remind the audience that the Prime Minister is present at the rally. The Election Commission’s diktat about keeping the two personas separate just does not work at an election rally and the audience listens to and reacts to the Prime Minister’s criticism and diatribes directed at Nitish Kumar and JD(U). This, as I have stated above, I find deeply disturbing. Is it possible to imagine a law that prohibits a Union minister, including the Prime Minister, from campaigning in assembly elections?





[iii] http://www.ndtv.com/bihar/debate-settled-gujarat-is-1-bihar-21-arun-jaitley-tells-nitish-kumar-1218747
[iv] http://www.ssc.wisc.edu/econ/archive/wp2003-06.pdf
[ix] All data in this section are from the National Crime Records Bureau (http://ncrb.gov.in/).  
[x] http://www.ndtv.com/india-news/ban-pm-modis-mann-ki-baat-till-bihar-polls-are-over-congress-to-ask-1218111
[xi] http://www.newindianexpress.com/nation/Election-Commission-Approves-Airing-Modi%E2%80%99s-Mann-Ki-Baat-During-Bihar-Elections/2015/09/18/article3034850.ece

Saturday, 11 July 2015

India’s Growth Performance and Prospect: Significant Weaknesses Still Present


The purpose of this note is to compare the performance of the Indian economy in 2014-15 with that in 2013-14. It may be noted that a large part of 2014-15 was under the rule of the NDA government while 2013-14 was entirely under the UPA rule.  This comparison will allow us to see what improvement has taken place in the Indian economy and where additional effort would be required in the coming years. My focus is on the real economy (that is, actual production or Gross Domestic Product, GDP) and not on prices. As far as prices are concerned, I would like to only note that the average rate of inflation (based on the Consumer Price Index), which was 9.5% during 2013-14, has come down quite significantly during 2014-15 to 6.4%. This is certainly a positive development and credit must be given to the Reserve Bank of India for achieving this.

It is now well-known that India’s premier statistical agency, the Central Statistical Organisation (CSO), starting from the base year of 2011-12, changed the methodology it employed to measure the GDP. This has meant that GDP data prior to 2011-12 cannot, at the moment, be compared to data from 2011-12 onwards. The CSO will have to convert all GDP data prior to 2011-12 to the new base year for long term comparisons to be possible. Fortunately, no such problem bedevils the comparison of 2014-15 with 2013-14. The CSO reports GDP data in two forms:[i]
  1. Gross Value Added (GVA) at basic prices. This is similar, but not equal to, GDP at factor cost that used to be reported before the change in methodology. Data for sectors of the economy, such as agriculture, mining, manufacturing, services, etc., will now only be in terms of GVA.
  2. GDP at market prices.

Even though the new methodology of the CSO is in line with world practices, as pointed out by Arvind Panagariya (Chairman, NITI Ayog), some aspects of it have left even Arvind Subramanian (Chief Economic Advisor) and Raghuram Rajan (RBI Governor) confused.[ii]

Given these preliminaries, as well as some caveats about the new methodology adopted by the CSO, what does the GDP data tell us about the performance of the economy? Figure 1 gives quarterly growth rates for 2013-14 and 2014-15 as well as growth rate for the entire year.



By and large the line for 2014-15 lies completely above that for 2013-14. However, for the whole year, the rate of growth for 2014-15 at 7.29% was only about 0.40 units greater than the rate for 2013-14 (6.90%) which was possibly the worst year of the UPA government. Does this increase in 2015-16 represent a trend? For 2015-16, the Finance Ministry expects the rate of growth to be as high as 8% to 8.5%, the RBI expects it to be 7.8%[iii] and the IMF expects it to be 7.5%.[iv] Where do I stand on this? My feeling is that the rate will be less than 8%, probably closer to 7.5%. I will elaborate on my reasons below.

Let us now look at the various sectors of the Indian economy. We first look at agriculture in Figure 2:


This sector has performed substantially worse in 2014-15 as compared to 2013-14. One important reason for this was that rainfall was only 88% of the long run average.[v] Barring Q1, every subsequent quarter saw massive decline as compared to 2013-14. Since agriculture accounts for over 16% of GVA, a problem with this sector does affect the overall rate of growth.

Manufacturing shows a much improved performance though there have been dips below the rate seen in 2013-14. See Figure 3.


 The full impact of the UPA government’s much criticized mismanagement of the economy was felt on this sector when growth rate was as low as 5.3%. There has been a recovery in 2014-15 and the rate for the full year (7.13%) was almost 2 percentage points higher.

Finally, the services sector, which has driven growth over the last few years, performed well in 2014-15. See Figure 4.


Is there enough in the growth rates that we have seen so far to suggest that India has escaped the low growth trap of UPA’s last year? Barring agriculture, there does seem to be improvement in the economy but it does not seem to be high enough to be put India on a high growth trajectory. I will reserve my judgment about 2015-16 for some more time.

One other way of looking at the performance of an economy is from the side of demand. Whatever is produced in the economy must be purchased by various segments of the economy or else it would result in unsold stocks leading to production being adjusted downwards at the next production cycle. Hence, total production in the economy i.e. GDP, should equal total demand for goods and services. Specifically,

GDP = 
   Demand by private individuals (Private Final Consumption Expenditure in Fig. 5)
+ Demand by government (Government Final Consumption Expenditure in Fig. 6)
+ Demand for investment goods in the economy (Gross Fixed Capital Formation in Fig. 7)
+ Demand from rest of the world (Exports in Figure 8)[vi]

Any shortfall in the various kinds of demands in the above expression has a tendency to pull down the GDP. Figure 6, dealing with private demand, shows no particular trend and the rate of growth for the whole year is more or less equal in 2013-14 and 2014-15. This is disconcerting since private demand is a major driver of GDP accounting for 57% of total demand in 2014-15 which has fallen marginally from 58% in 2013-14. Boost in private demand is especially important since the government has been trying hard to reduce government expenditure (which affects demand by government) in its efforts to reduce fiscal deficits.



Figure 6 shows a massive fall in government demand of almost -8% in the fourth quarter as the government tried to meet its deficits targets for 2014-15. For the year as whole, the rate of growth was 6.6% in 2014-15 as compared to 8.16% in 2013-14. By itself, this lower rate of growth is welcome since it improves government finances. However, when the government lowers its demand, other sectors must make up for this void. That does not seem to be happening.

One of the major accomplishments of the NDA government was to restore the confidence of the business sector though the magic seems to be waning one year into its rule.[vii] One indicator of improving business confidence would be investments in fixed assets (gross fixed capital formation in Figure 7). In terms of growth rate, the rate in 2014-15 at 4.65% is higher than the rate of 2.95% achieved in 2013-14. The question is whether a rate of 4.65% is good enough to boost production in the months to come. The disappointing part of the investment story is that the share of gross fixed capital formation in GDP is lower in 2014-15 (10.88%) as compared to 2013-14 (10.95%). If at all, the level of 2013-14 has been maintained but it does not seem anywhere enough to give a boost to the rate of growth of the economy in 2015-16.

The most disturbing picture, however, is that of exports (Figure 8). After registering a rate of 9.13% in Q1 of 2014-15, in every subsequent quarter, the rate of growth has been negative. For the entire year, the rate of growth was -0.76% as compared to 7.28% in 2013-14. This performance is especially dismal if we recognize that in 2014-15 the USA (a major market for Indian exports) was doing much better than in 2013-14.

The broad conclusion to emerge from the analysis so far is that, by and large, there has been an improvement in the performance of the economy in 2014-15 as compared to 2013-14. However, I have my doubts whether this improvement is significant enough to push the rate of growth to 8% or higher in 2015-16.

Looking to the Future

Having completed the first quarter of 2015-16, is it possible to anticipate how the economy might perform over the entire year? I am going to list out a set of indicators which provide some guidance in this task.

Purchasing Managers’ Index (PMI):[viii] PMI data have been known to be very useful in some of the industrialised countries for the purpose of predicting production. Its usefulness for India is still being debated. Bhattacharya and others[ix] put forward a skeptical view while Bose[x] finds the PMI useful in forecasting production. The PMI is based on a survey of purchasing executives in Indian companies.[xi] The magic number for PMI is 50. If the value of PMI is more than 50, an expansion in the economy is indicated while a value below 50 signals a contraction. Figure 9 below shows the PMI for India.


There has been a steady increase in PMI as compared to 2013-14 and it has remained above the critical value of 50. This should indicate an increase in business confidence and point towards an expansion for the future.

Non-food Bank Credit: One other factor determining business confidence and, hence, contributing to growth is non-food credit (NFC) by banks which is the lending that banks carry out to the industry. An expansion in the NFC is expected to precede increase in production. Figure 10 shows the state of NFC growth.


The data in Figure 10 shows that the NFC growth rate in 2014-15 has been continuously declining. Clearly, the information conveyed by Figure 9 and Figure 10 seems contradictory. Figure 9 suggests increasing business confidence which should have been reflected in greater demand for NFC but that does not seem to be happening as per Figure 10. Which is the better indicator of future growth? PMI or NFC? Being an economist, I would rather believe hard data (as shown in Figure 10) and be skeptical about survey data (on which PMI is based) since it is likely to be coloured by inaccurate responses due to biases and other noise.

Index of Industrial Production (IIP): This is the only information about production that is available on a monthly basis in India. However, information conveyed by IIP is not perfect and is subject to much revision. Figure 11 gives the path of IIP growth rates.


After attaining a high 5.2% in November 2014, the performance of IIP has been quite poor with declining growth rates. The data for the last three months, from March-May 2015, has been especially disappointing. There seems to be no obvious momentum that is discernible which is likely to push the IIP up in the near future. It is true that IIP covers only the industrial component of the GDP (excluding entirely the agriculture and services sector) but such a poor performance does point towards problems later in 2015-16.

Other Factors: Earlier in this note I had highlighted some other factors which do not seem to augur well for the future. I will merely list these without going into more details:
  1. Exports: The performance of exports has been extremely worrisome. Will this change in the coming months? With Europe continuing to be in doldrums and China showing uncharacteristic weakness, the prospects for the world economy and, hence, Indian exports, do not seem bright.
  2. Private Demand: Compulsions of keeping fiscal deficit under control will mean that government demand (Figure 6 above) will remain depressed. This reduction in government demand has to be compensated by private demand (Figure 5 above). However, that does not seem to be happening and this will act as further dampener to the growth prospects in the coming months.

Taking into consideration some of the factors that act as (leading and coincident) indicators of GDP growth, I am unable to be very optimistic. At the beginning of this write-up, I had expressed some skepticism at the high rate of growth of 8%-8.5% put forward by the Finance Ministry. The various indicators that I have looked at lead me to believe that rate of growth of the Indian economy will, at best, be close to what we have already seen in 2014-15, that is, a rate of about 7.5%.


Sources of Data:
  • Most of the GDP data have been obtained from the Reserve Bank of India database (www.rbi.org.in)
  • IIP and CPI data are from Ministry of Statistics and Programme Implementation (http://mospi.nic.in/Mospi_New/site/Home.aspx).
  • PMI data from http://www.markiteconomics.com/Public/Page.mvc/AboutPMIData




[i] http://www.mospi.nic.in/mospi_new/upload/nad_press_release_30jan15.pdf
[ii] http://www.ndtv.com/india-news/new-gdp-numbers-based-on-scientific-methodology-niti-aayog-vice-chairman-arvind-panagariya-778355
[iii] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=34073
[iv] http://profit.ndtv.com/news/economy/article-india-to-clock-7-5-growth-in-2015-16-overtake-china-imf-754962
[v] Economic Survey 2014-15, p. 18
[vi] In fact, this should be Net Exports = Exports – Imports
[vii] http://www.livemint.com/Money/BrkZyAZ3VzeO5Vlzzy3hDN/Is-the-Modi-magic-over-as-business-confidence-falls.html
[viii] http://www.markiteconomics.com/Public/Page.mvc/AboutPMIData
[ix] https://macrofinance.nipfp.org.in/PDF/02_Pr_Pandey_nowcasting.pdf
[x] http://www.icra.in/Files/MoneyFinance/suchismita%20bose.pdf









Thursday, 23 April 2015

Net Neutrality: Some Economic Issues

A search for “net neutrality” on Google throws up more than 16 million results; “net neutrality in India” yields more than 200,000 hits. Quite clearly, the issue has got people talking. Even Rahul Gandhi spoke about it in Parliament![i] Almost a million emails in support of Net Neutrality (NN) have been sent to the Telecom Regulatory Authority of India (TRAI).[ii] Flipkart, after flirting with Airtel Zero which would have given preferential treatment to certain content providers, backed out of the deal under public pressure.
Whether one knew it or not, we were all so far living in a world of NN. No content provider was blocked, no content provider received preferential treatment; on the users’ side, no user was given preferential treatment or faster access than others who had paid the same subscription to the Internet Service Provider (ISP). This NN environment was not legally ordained; it was, in fact, the default setting of the internet. Of course, since it was not legally protected, it was not immune to attack, as started to happen in the USA with Verizon throttling Netflix but restoring speeds after Netflix paid up.[iii] The TRAI consultation paper also lists violation of NN by Reliance and Airtel.[iv] Hence, if NN is to continue, it would now need the protection of the law. This is where the matter stands and this is what has led to much passionate discussion on protecting NN.[v]
So, what is NN? Economists have made significant contributions to this issue. I strongly recommend the article by Niranjan Rajadhyaksha which provides a wonderful summary of the economics of NN.[vi] NN is understood as a regime that does not distinguish data delivered over the internet in terms of price, in terms of the identity of who is providing these data or who is using the data.[vii] The ISP connects its customer (users like you and me) to the internet (which includes all content providers such as Google, YouTube, Netflix, Skype, Whatsapp and so on) and the ISP gives content providers the “last-mile access” to its customers. Violation of NN would mean that the ISP offering the last mile access would charge a fee to content providers to reach the ISP’s customers. It will also allow the ISP to delay delivery of content from non-paying content providers or expedite delivery of content from content providers who pay a fee.

The TRAI Consultation Paper
The Telecom Regulatory Authority of India (TRAI) has also jumped into the debate with its 118 page long consultation paper. In its urge to cover all aspects of NN, and the internet in general, the paper bites off way more than it can chew and gets into areas well beyond its remit. Consider this statement from the paper: “But, the internet can also be a very dangerous place. Cyber-predators, bullies, stalkers and con artists are all online waiting to find their next victim. Children using the internet often don’t realize the risks they face online”.[viii] And this gem: “Facebook depression and sexual experimentation, that has given rise to problems such as cyber-bullying, privacy issues, and “sexting.” Other problems that merit awareness include internet addiction and concurrent sleep deprivation”.[ix] All that is missing is some sinister music from a horror film and an ominous voice-over which says: “Be afraid, very afraid”.[x] Hopefully, TRAI will soon realize that it is an internet regulator and not an internet nanny.
TRAI defines NN as: “Net neutrality (NN) is generally construed to mean that TSPs [Telecom Service Providers. In India, TSPs are ISPs] must treat all internet traffic on an equal basis, no matter its type or origin of content or means used to transmit packets”.[xi]
With this background, I will now discuss the main issues in the debate.

Issue Number 1: ISPs v. Content Providers
The interests of content providers conflict with those of the TSPs/ISPs. The main grouse of the ISPs is that content-providers free-ride on the investments of the ISPs. This conflict is best captured in the quote of Ed Whitcare, CEO of SBC, a communications company: “How do you think they’re [that is, Google, Microsoft Messenger, etc.] going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it”.[xii] The ISPs have the customers, but that is not of much value unless these customers consume something from the internet. Hardly any of the ISPs are content providers and, hence, depend on third-party content providers to provide content to their customers. Right now, ISPs get their revenues from charging only their customers for using the internet, but a change in that business model is what ISPs are looking for.

Issue Number 2: Externality of Streaming Video
Viewership of streaming videos has grown by leaps and bounds. It is estimated that, worldwide, 70% of bandwidth is consumed for video streaming; in India, the estimate is 36%.[xiii] In economics terminology, a person viewing streaming video imposes an externality (an unintended cost imposed on others by one person’s actions) on others since it reduces the bandwidth available for other customers and slows down the speeds available to them. This is much like congestion on highways where each driver’s individual decision to use the car adds to the congestion and reduces the speed for other drivers. Economics suggests that the person imposing the externality should be made to bear its cost.[xiv] On the other side, providers of video streaming (e.g. Netflix, Youtube) also consume a huge share of the bandwidth: Netflix accounted for 34.2% of all downstream usage during primetime hours, up from 31.6% in the second half of 2013.[xv] With such massive consumption, internet’s version of the Gresham’s law will operate: video streaming could drive out (or, at least, slow down) the content of other providers. Braham Singh makes a strong case for a “video track” which would involve payments from video content providers.[xvi] Can additional payment be extracted from consumers of streaming video?
ISPs already charge different prices for different classes of service.[xvii] For example, Airtel’s plans range from (a) 3GB data transfer quota at 2MBPS download speed at Rs. 799 per month to (b) no quota for data transfer but download speed of 16MBPS till 30 GB download and 512 KBPS after that.[xviii] Economides and Hermalin argue against even such differential tiers of service on the grounds that it violates NN and welfare is reduced due to such differentiation.[xix] The paid-for “video track” mentioned above could be imposed over and above tiered services that are already in place. But, who should make the additional payment for video content: users or providers? In a sense, since both “pollute” the internet by excessive use of bandwidth, the polluter pays principle should apply to both. Of course, being fewer in number, as compared to users, it would be easier to charge video content providers.  Besides, if a fee is imposed on, say Netflix, the content provider would, possibly, pass on these charges to its subscribers, depending on the extent of competition it faces.

Issue Number 3: Stealing ISPs Revenue
The interests of content providers who provide communication services (e.g. Skype and Whatsapp) conflict with those of the TSPs/ISPs. The TSPs provide calling and messaging services which are facing a losing battle with Skype and Whatsapp. With prices of Whatsapp messages and Skype set at zero in India, there has been a tremendous migration of users away from standard text messaging (SMS) and calls over the mobile networks. In India, Whatsapp has 70 million users leading to an 18% fall in SMS traffic over 2013-14.[xx] Likewise, Skype calling is eating into international mobile telephones revenues. Airtel, Idea and Reliance have lost international outgoing calls to Skype and Viber.[xxi] Despite this challenge from internet-based communication services, the revenues of ISPs are expected to grow by 75% by 2020, rising from a level of $28 billion in 2013.[xxii]
The TSPs fear that allowing unregulated communication services like Whatsapp and Skype will disrupt their businesses and “derail their investment capabilities”.[xxiii] The contention of the TSPs is that they have invested in building the infrastructure (capital costs) and incurred other costs associated with operation of the network (cost of spectrum, License Fee, Spectrum Usage Charge, etc.) but with the communication service providers free riding on their networks, the loss of revenues will adversely impact the rates of returns to ISPs.[xxiv] This has, of course, been disputed. Big telecom companies like Vodafone, which operates in Europe and India, have been seen to be quite profitable.[xxv]

Issue Number 4: Recovering from Spectrum Bidding Orgy
The recent auction of spectrum earned for the Government of India Rs. 109,874 crores ($18 billion).[xxvi] There has been much appreciation for this, especially when contrasted with the allocation of spectrum under the UPA. There were two problems with the allocation of spectrum by the UPA. The first problem was the process was opaque and open to manipulation, both of which led to massive corruption. The second problem was the feeling the spectrum was given away cheaply leading to a revenue loss of Rs. 176,000 crore as (over) estimated by the Comptroller and Auditor General of India.[xxvii] Of the two, the real problem was the corruption and manipulation of the allocation process and not the supposed loss in allocating the spectrum because making the spectrum available at a “loss-making” price led to the spectacular explosion of mobile telephony in India.[xxviii] The presumed losses to the exchequer need to be balanced out against the gains from the expansion of mobile telephony. An ICRIER study has shown that mobile phones have improved the productivity of agriculture in India.[xxix] Kathuria and others estimate that every 10% increase in mobile penetration rate raises economic growth rate by 1.2%.[xxx] [xxxi]
In view of the massive expansion witnessed by mobile telephony in India over the last few years, I am not convinced that raising $18 billion in the recent spectrum auction is unambiguously a good thing. The winning bids that were made by the telecom companies are likely to leave them with bloated debts for some time.[xxxii] A winning bid that cripple the winner is often dubbed the “winner’s curse”! It is expected that debt servicing is likely to go up as a consequence of the spectrum auction.[xxxiii] Naturally, the telecom companies would like to raise mobile call rates.[xxxiv] However, the Telecom Minister has warned the telecom companies that they should not raise call rates and that the quality of service should not suffer.[xxxv]
How is all this related to NN? The TSPs/ISPs find themselves in a bind: rising debt levels due to their winning bids for spectrum, the inability to raise call rates and the insistence that the quality of service not suffer. The way out for these companies is to (1) increase internet usage charges paid by its customers or push them to higher tiered service and/or (2) permit last mile connectivity to only those content providers who pay fees to the TSPs/ISPs. I have stated above that additional charges for customers of streaming video are efficient in an economic sense in view of the externalities involved. Charging streaming video providers, such as Netflix, might also have some merit given their excessive use of a scarce resource. However, charging other (non-video) content providers is likely to compromise customer welfare quite significantly as I discuss in the next issue.

Issue Number 5: Charging Fees for Last Mile Connectivity
Apart from the paid “video track” mentioned above, any further restriction on content providers, in the form of fees and, perhaps, slowing down the speeds of content providers who do not pay these fees, would amount to serious discrimination among content providers. It is possible that the big content providers e.g. Google, Whatsapp and Skype, might well be able to pay fees to all ISPs to be present in their bouquet of content providers, but smaller ones might be priced out completely or they may pick and choose ISPs where they would like to be present. So, you might find, say Flipkart, on one ISP but not another. From a consumer’s point of view this would be an added restriction (apart from the tiered service restriction) on their choices. Consumers would find that while they are able to get their fill of Google and Skype, availability of other content providers would be severely rationed and in some cases arbitrarily set to zero (when a content provider refuses to pay fees to the ISPs). Clearly, this violation of NN will wreak havoc with the choices of users, business plans of smaller content providers and development of new content providers. Fragmentation of the internet is the real danger here.



[v] The AIB group came in for much criticism for its roast of Ranveer Singh and Arjun Kapoor. However, this video on NN is getting welcome attention: https://www.youtube.com/watch?v=vxaFnc-MoVE
[vii] Nicholas Economides and Joacim Tåg: “Network neutrality on the Internet: A two-sided market analysis”, http://www.stern.nyu.edu/networks/Economides_Tag_Net_Neutrality.pdf
[x] A line from the film ‘The Fly’ spoken by Geena Davis’s character; http://www.imdb.com/title/tt0091064/trivia