Category: Policy

I spent the weekend attending the Young Investigator Meeting in Boston (YIM). Held at the Harvard-MIT Broad Institute and organized by a group of energetic and enthusiastic scientists, YIM Boston brought together scientists, policy makers and the heads of some of India’s top science and technology institutions. Among those in attendance were leaders from institutions like the newly-established Translational Health Science & Technology Institute, IISERs, Bangalore’s NCBS, Tata Memorial Centre-affiliated ACTREC and senior representatives from the Government’s Department of Biotechnology. There were attendees from all over the US and India, and even a few who had flown down from Europe just for the 3-day conference.

Dr. Raghunath Mashelkar, former director-general of the Council for Scientific and Industrial Research, set the tone by delivering a rousing and inspirational address about India’s rise as a scientific powerhouse. Young scientists interested in moving to India presented their research to some of the best researchers in the world, and got an opportunity to meet with potential future colleagues and peers to help them make decisions about making the move – and they were not just Indians.

Peter Zwart from the Lawrence Berkeley National Laboratory in California said it was exasperating to be asked the question why he wanted to go to India, saying that it was becoming a destination to do cutting-edge work and there were compelling professional reasons to shift base. Yamuna Krishnan from NCBS, a young scientist who moved back to India 5 years ago, narrated her experience of setting up a research laboratory from scratch. She spoke with infectious enthusiasm and passion for doing top-notch science, and her talk found resonance with the audience. Dr TS Rao from the Department of Biotechnology took a number of questions on funding availability and described the government’s plan to fund scientific research.

The event ended with a session on commercializing science and moving inventions from the laboratory to the market. MIT’s Jeff Karp spoke about what it takes to build startups, outlining breakthrough science, a seminal published paper and a blocking patent as the key ingredients that can make for a successful venture. Shiladitya Sengupta of Harvard Medical School, who has co-founded three companies, talked about wealth creation via technology commercialization as a way to attract the best brains into scientific research and the importance of developing a cogent business plan before approaching venture capitalists.

There were several researchers who expressed an interest in starting companies, and this is very exciting news. The quality of talent considering moving to India is simply mind-blowing. For the first time in the history of our nation, we have the combination of well-funded research institutions, top-notch human capital and the availability of financial capital to back innovation-driven ventures. This makes for a very potent mix. The stars are aligning, and if our government continues on the path of higher-education reforms and economic liberalization, the sky is the limit for what Indian science and technology can achieve both in terms of fundamental research and technology commercialization.

Originally Published: http://navam.in/UaMX0s

Every Independence Day, one’s thoughts inevitably veer around to the abject poverty and destitution that consumes most of India. After more than 60 years of Independence, why do we continue to have widespread poverty? Watching “Peepli Live” — a fantastic satire on the state of politics, the mainstream media and the urban-rural divide in India — crystallized those thoughts even more, giving a vivid visual representation to what most urban citizens of India only see in passing on news channels.

As the film shows, much of the poverty is caused by the poor incentives and choices enforced by India’s socialist economic system. Year after year, decade after decade, the government creates more and more schemes, and they all fail to uplift the poor. In fact, the schemes keep poor people poor.

Clearly, there is need for a new approach. We all know what that approach is, but the execution is lacking because there is no political will to follow up on it — India has seen no substantial reforms since 2004. There has never been a more pressing need for economic liberalization.

Recently, Bill Gates and Warren Buffett have been personally reaching out to the world’s wealthiest individuals, requesting and cajoling them to join the Giving Pledge. The Giving Pledge, initiated by the two, has been attracting a lot of media attention thanks to its high-profile backers. The Pledge requires billionaires to publicly commit to “give away” half of their wealth during their lifetimes.

Both billionaires plan to visit Asian nations over the next year to convince billionaires in the region to take the Pledge. Gates and Buffett are redefining the standard for philanthropy by their example, and they have been compared to Andrew Carnegie and John D Rockefeller for the sheer scale of their charity.

But there is a small difference — Carnegie and Rockefeller built institutions of lasting significance, like the University of Chicago, Carnegie Mellon University, Rockefeller University, the Council on Foreign Relations and the Carnegie Endowment for International Peace. Andrew Carnegie is still remembered for building countless libraries. Rockefeller built institutions that continue to push the boundaries of research in medicine, natural sciences and social sciences, and define the public discourse in matters of government policy. The impact of their philanthropy has been outsize, transformational and incalculable.

In India, the Tatas have played a seminal role in giving to the nation institutions such as the Indian Institute of Science, Tata Institute of Social Sciences, Bhabha Atomic Research Centre, Tata Memorial Hospital, Tata Institute of Fundamental Research and National Centre for Performing Arts. For over 100 years, Tata scholarships have helped meritorious students fulfil their academic potential. Without the Tatas, India wouldn’t be the India we know.

The best way to support charity in India is to always buy Tata products, for the primary holding company of the group has been majority-owned for several decades by the philanthropic Tata trusts.

While Gates and Buffett have noble intentions, their strategy can be made more effective. In many cases, the Gates Foundation and other foundations will be allocating billions of dollars to solve political problems with charity. Charity cannot fix what are essentially failures of governance. Billions of dollars of aid cannot get rid of AIDS, malaria and other infectious diseases in African countries, just as government support for farmers has failed to uplift them in our country.

What is the solution — how can a rich person be charitable, support market economics and yet help the poorest of the poor?

Stanford economist Paul Romer has been the most vocal proponent of an idea known as charter cities, also called startup countries by some. In a nutshell, a charter city is governed by its own rules, laws, regulations and institutions — its own “charter”, rather than those of the parent nation. A charter city would be much like a new business development unit within a large company. Leased by China to the United Kingdom for 99 years, Hong Kong may be taken as an example of the first-ever startup country. While China suffered under Chairman Mao, Hong Kong prospered because of the different rules adopted by its government.

We have made massive strides in wealth creation, and now we are at a stage where individuals are wealthy enough to lease land from nations and build them with new rules and institutions as a strategy for economic development. Creating charter cities and startup nations maybe be among the most effective ways to improve the standard of living of vast swaths of humanity who are trapped in nations governed by inept and corrupt leaders.

The model allows for a way to circumvent politics and regime change via war while promising economic development — and it may be the 21st Century equivalent of the kind of philanthropy that Carnegie, Rockefeller and Tata have pursued.

Originally Published: http://navam.in/1tHjOnQ

I think we have gone through a period when too many children and people have been given to understand, “I have a problem, it is the Government’s job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing!

These words were spoken by British Prime Minister Margaret Thatcher in 1987. My fellow panelist Harshal Shah has called for government support to realize India’s economic potential.

I’d like to make the case that the apt thing for the government to do is to get out of the way. India’s entrepreneurial ecosystem can grow best by evolution, not the design efforts of bureaucrats and ministers.

The role of government is widely misunderstood. Government exists for providing strong national defense and internal security, investing in essential physical infrastructure, setting policies to allow markets to flourish and designing effective regulatory mechanisms to ensure that markets remain free, fair and competitive.

This does not translate to the government dedicating itself to ensuring jobs for everyone or world-class education for all. There is a compelling case for providing a social safety net for the lowest income-groups, but this should be executed in ways that empower those groups to increase their income and economic ability over time, instead of making them dependent on government handouts.

There is rampant and deep-set confusion about the cause, effect and remedy for India’s economic problems, most of which are self-inflicted. Driven by political calculations, India’s government has landed it in a morass where a nation which claims to be a global superpower in the making has the closest rendition on Earth to the Biblical vision of hell.

Economist Niranjan Rajadhyaksha crunched the numbers recently about the meaning of that staggering figure, calculating that over six decades, government spending has outpaced GDP growth by 3% annually on average. While the Indian economy had grown 578 times since 1950, the government’s expenditure has grown by 3020 times.

It is no coincidence that the sectors which have the most entrepreneurial activity and dynamism, mobile value-added services and Internet, also have the least government interference. In other sectors, entrepreneurs run into India’s infamous red tape sooner or later, even today. Valuable time and resources are wasted in managing the environment. Moreover, sectors such as agriculture and mining which are heavily regulated are also highly inefficient and unproductive.

The level of mergers and acquisitions activity in India is disproportionately low relative to the size of the economy. Only recently have founders and promoters sold their companies to larger corporations or investor groups. Low M&A is also a reason we have dynastic succession in businesses – when owners can’t exit the business, they have no choice but to bequeath it to their children, forcing them to manage those companies even if they don’t want to and breeding massive industrial inefficiencies due to fragmentation.

Those who have earned money lawfully through business have every right to bequeath their property to whosoever they deem fit – that is the very essence of the concept of private property. Some of them, such as the Tatas, have voluntarily made sustained contributions over the last century to nation building perhaps of even greater impact than Rockefeller or Gates. Nearly 70% of Tata Sons Limited, the main holding company of Tata Group, is owned by charitable trusts which have helped established institutions such as the Tata Memorial Hospital, Indian Institute of Science, National Center for Performing Arts and several scholarship schemes which have continued to help Indians study abroad.

It is true that the government investment has successfully facilitated a dynamic entrepreneurial culture in countries like Israel and Singapore, but India has a vast population among other factors, making it almost impossible to emulate those models.

Recently, Minister of State for Communications Sachin Pilot said that the government was focused on maximizing revenue via the 3G auction, claiming that the spectrum belonged to the people of India. This is typical of the government’s socialist mindset, and that it comes from a Wharton-educated Minister who is often projected as a visionary young leader is certainly alarming.

The spectrum is best used to provide the lowest-cost 3G service to Indians, not to maximize the government’s revenue as a custodian of the spectrum which would only result in investors in the sector re-pricing their product offerings higher to make up for the payout to the government. Mr. Pilot’s ministry is effectively taking money from the people of India and helping price a potentially transformational technology out of the reach of many Indians. His government intends to take that money and redistribute it through questionable social sector programs.

Mr. Pilot needs to be reminded that there is no such thing as society – there are only individuals, as Ms. Thatcher had eloquently said:

There is a living tapestry of men and women, and the beauty of that tapestry and the quality of our lives will depend upon how much each of us is prepared to take responsibility for ourselves. And each of us, by our own efforts, is prepared to turn round and help those who are less fortunate.

The day the majority of Indians realize the wisdom of this philosophy, is when India will break the shackles and emerge as an economic power to reckon with.

Originally Published: http://navam.in/S7HWnm

“This Budget belongs to ‘Aam Aadmi’. It belongs to the farmer, the agriculturist, the entrepreneur and the investor. The opportunity is great. The time is right. I have placed my faith in the hands of the people who, I know, can be depended upon to rise to any occasion in national interest. I have placed my faith in the collective conscience of the nation that can be touched to scale undreamt of heights in the coming years.”

With these words, the Finance Minister concluded the much-ballyhooed budget speech, which my fellow panelist Mahesh Murthy believes doesn’t matter any more.

While there are plenty of schemes and sops for farmer and agriculturists – over $25 billion, about 10% of the budget, has been allocated to various schemes for rural development – there’s not much that is enthusing for entrepreneurs and investors. In his second budget after a conclusive election victory, the Minister has continued to reward his party’s core constituency and vote bank, not necessarily in ways that would actually empower or ameliorate them.

The Minister said that disinvestment would allow people to participate in the profits of public sector companies. What he fails to recognize, or chooses not to believe, is that the current program of disinvestment is a misnomer – “monetization” would be a more accurate characterization. The government proposed to sell minority stakes in public sector units to pay for the social sector schemes believed to help the bottom of the pyramid. Privatization and strategic sale of government-owned companies is what is actually beneficial to the economy.

Loosening government-control over companies results in more efficient management and lower prices for consumers, also freeing up capital for investment in critical areas such as infrastructure. India doesn’t need to borrow money from the World Bank to build roads. The raison d’être for disinvestment is change in management control, which the Minister is not achieving by monetizing minority stakes.

There are no bold pronouncements and no liberalization. Mahesh is right when he says that in recent years budgets have been predictable and populist. Admittedly, this budget too is rather stale and devoid of vision.

I don’t think we should be content with a GDP growth rate of 7% or 9%. Our true potential is at 12%-plus, for two reasons – India’s GDP stands at about $1.2 trillion and we are starting from a low base. Secondly, India’s demographic profile is also very amenable to support high-growth rates. But the specter of government-control and short-sighted and politically-driven policy making year after year is holding the country back. We saw glimpses of what is achievable when we had truly reformist and visionary Prime Ministers P.V. Narasimha Rao and Atal Bihari Vajpayee guiding policy-making. They were supported ably by cabinet ministers like Manmohan Singh, Yashwant Sinha and Arun Shourie. Without those years of breakthrough liberalization, nobody would ever think of classifying India as a world-power, and we’ve just scratched the surface.

But this year’s budget did have some silver linings. I wrote earlier that India’s “offline” market has huge potential, and some of the budget announcements are bound to make the offline market even more attractive.

The Minister reduced personal income taxes, leaving more money in the pockets of consumers. He also spoke about (finally) allowing foreign direct investment in the retail industry. This can be transformational for the sector. The Indian consumption story looks very strong.

One of the major new announcements was charging a cess of Rs. 50 per ton of coal. India’s coal consumption, of both domestic and imported coal is over 600 million tons. The Rs 3000 crore ($600 million) revenue from the coal cess is proposed to be invested in a National Clean Energy Fund. The initiative should give a boost to clean technology in India, and while the purpose and goal of the Fund is still unclear, care should to be taken that the government doesn’t take on the role of kingmaker in clean technology.

I share Mahesh’s concern about how India risks turning towards oligarchic and crony capitalism, where special interests and members of the lucky sperm club are the only ones who get to participate in economic opportunity. The way to tackle that is through meaningful reforms and more liberalization.

Perhaps entrepreneurs and believers in individual freedom and the market system should organize themselves better, and then we can expect politicians to listen to the collective voice. Paul wrote yesterday that people might wonder if they should pay more attention to Nitin Gadkari, head of the main Opposition party BJP, if the government went too far on populism yet again. Mr. Gadkari has spoken out clearly in favour of free enterprise, but his party discredited itself by staging a walk-out in the middle of the Finance Minister’s speech.

In sum, Pranab Mukherjee could have delivered more, and the few features that stand out in this budget are mere consolation prizes. The Congress has the electoral mandate, but doesn’t have the political will. Once again, it chose expediency over principle. Another year has been lost, and we continue to be in the dark.

Originally Published: http://navam.in/1pEOzMs

Finance Minister Pranab Mukherjee will be presenting Union Budget 2010, the annual economic policy statement of the Government of India, on Friday. In most nations, this would be insignificant, but the Budget is probably the most significant annual event for Indian financial markets and economy analysts.

Most entrepreneurs are quite disconnected from the effects of the Budget, or government policy-making in general. It’s a non-event in the startup and venture world. According to conventional wisdom, weighty policy pronouncements and the politics of policy-making are considered more relevant for industrialists and established businesses, rather than a startup striving to build products, revenue and market share.

And nothing could be farther from the truth. India’s economy is still heavily shackled by state control despite the liberalization efforts of Prime Ministers P.V. Narasimha Rao and Atal Bihari Vajpayee. We are still far, far away from a true market system, which means that the government wields enormous clout in the economy. Though the effects of the Budget and accompanying policy might not be directly tangible to entrepreneurs, what the finance minister says and does can provide valuable clues to future opportunities.

For instance, the government’s flagship job creation program, the National Rural Employment Guarantee Scheme (NREGS) announced in the 2005 Budget, has transferred tens of thousands of crores in consumption power to rural areas. Theboom in rural India, and the recent food price inflation, are both partly caused by the NREGS and the government’s other social sector schemes. While such schemes are mainly created for political benefits and winning elections, at the same time investors and entrepreneurs should try to anticipate opportunities presented by policy shifts. There are startups operating in the Indian hinterland in sectors such as solar power, education and retail which have capitalized on the NREGS-driven consumption boom there. Sometimes it makes sense to follow the money.

Financial inclusion and reforms are the buzz words for this Budget, though the Congress-led UPA’s track record suggests that the former is more important to it than the latter. The Unique Identification Authority of India, led by Infosys co-founder Nandan Nilekani, is slated to get a major funding boost this budget. The goals of the UID project gel nicely with the government’s desire to reach out to the aam aadmi, and the government can likely score some points by showing support for Mr. Nilekani.

The words reforms and liberalization may sound like economic mumbo-jumbo to most entrepreneurs, so here’swhat they mean: liberalization means minimizing government interference in the market. Telecommunications and the Internet are more liberalized than, say, agriculture that has far more government control and the government decides everything from pricing to distribution. When the market is allowed to function with government only setting and enforcing minimum basic rules, the best products win and the most innovative companies grow.

India’s economy is still at a developing stage, which makes good policy-making critical for achieving our economic potential. The most outstanding example of prudent policy-making in recent years has been in wireless telecommunications. As Sanjeev Aga, managing director of Idea Cellular, said recently, the New Telecom Policy (NTP) announced in 1999 was a “watershed event” which sowed the seeds for the themeteoric rise of India’s wireless telecoms sector.

Private equity firm Warburg Pincus invested $80 million for a 20% stake in Bharti Airtel in 1999. Warburg Pincus and Sunil Mittal spotted the opportunity early and the rest, as they say, is history. Bharti’s current market capitalization stands at over $20 billion. Over the course of the last decade, the company has grown by leaps, and has just announced a deal to acquire major telecom assets in Africa The NTP policy’s thrust on competition has ensured that consumers enjoy lower and lower service rates. Mobile telephony has been among the most dynamic sectors, creating wealth and generating employment. Mobile value-added services has been a hotbed for entrepreneurial activity and venture capital investment. None of it would be possible without 1999′s NTP.

It is important to note that the NTP was not a happy accident of fate. Finance Minister Yashwant Sinha referred to the NTP repeatedly in his budget speeches. Prime Minister Vajpayee and Telecoms Minister Pramod Mahajan deserve full credit for framing visionary policy for the then-sunrise sector, allowing competition and the growth of private enterprise to fulfill the telecom needs of everyone from rickshaw pullers to billionaires.

For entrepreneurs and venture investors, liberalization and privatization open up opportunities which are otherwise inconceivable. We are in the dark, and simply can’t say what innovation we are missing out on without liberalization. The UPA has been less enthusiastic about liberalization, but this budget may spring surprises. Moreover, the Finance Minister will achieve inclusive growth if he pursues liberalization, like the example of mobile telephony clearly shows. Here’s hoping that Finance Minister Pranab Mukherjee shows us the light on February 26.

Originally Published: http://navam.in/1nNVHGN

Harsh Gupta and I have co-authored a piece on why India should scrap the Securities Transaction Tax (STT):

A transaction tax on securities barely hurts the speculator, but makes several trading strategies that provide liquidity and depth to the market unviable because of the artificially introduced layer of friction. Frequent trading can result in so much taxation that all trading profits are swallowed up by the transaction tax.

STT contributes only around 1.5% of the government’s direct tax revenue, but its impact through destroying market liquidity and depth is outsized. The government’s net collection from STT runs into several thousand crores cumulatively since the tax was implemented. The absolute tax revenue collection through STT is small but significant, and widely dispersed but internecine for the market. While low taxes are always better for traders, consumers and citizens, the government can make up the shortfall by rationalizing the taxation across different types of equity investors.