Cost of climate change

A changed climate, with intense rainfall, severe droughts, extreme temperatures will require adaptation measures by countries that will entail significant costs. The World Bank initial study estimates the costs for developing countries "between 2010 and 2050 of adapting to an approximately 2 deg C warmer world by 2050 is in the range of $70 billion to $100 billion a year".

While the exercise is intense, inclusive of all scenario analysis, required measures and the related costs, I have made a feeble attempt at estimating the amount the Indian Govt. spends currently, on adapting to climate change. This comes to about USD 3 bn a year. Following figures (in Rs crs) of all activities:

Some numbers and charts, analysis and review follows.

India is the third largest emitter of CO2 or equivalent gases. China the larges and USA second. The gap is incredibly large, China emissions amounted to over 6500 mil metric tonnes. USA 5800 MMT and India 1600 MMT in 2007!

India has one of the lowest per cap emission rates. More significantly, an improving energy efficiency, with the output produced per 1000 metric tonne of CO2 emission falling.

Funding Political Campaigns

Various reasons that suggest against the state funding of political campaigns. For one, political campaigns have become excessively costly. A less compelling, why should the taxpayer take the burden of funding campaign of those its ideologies do no jibe with? But voters do need to be aware of each one’s manifesto to be able to decide.

Corporate funding could, idealistically, could reduce the under-table black transactions. It could be Pro-Reforms, given that corporates would now have to earn funding, based on work done in past, policies and promises to deliver. However, corporate funding continues on an anonymous basis and a ‘quid pro quo’ basis. It lists towards support of more networked individuals, and are a natural bane to independent or new candidates.

Numerous examples right at home, right from Enron-Dabhol Power project, to the Reddy Brothers in Karnataka, the Maytas Infra group and the allotment of 2G Spectrum licences!

The various touted policy options include placement of spending limits. These of course would be unfair to the new candidates. In early 2010, it was promulgated by the US Supreme Court: “corporate funding of independent political broadcasts in candidate elections cannot be limited pursuant to the right of these entities to free speech’.

The more effective less easy solution seems to be increasing disclosures.

A thought crossed my mind, that some of the campaign expenses should be made evenly, equally free for all candidates. Possibility in terms of print material, airtime, fuel costs, and paid for by the respective corporations. Presumably this will lower the demand for additional funds. Of course, the brunt will be borne by the limited Media and Fuel industries.

The corporate funding to political parties, from a purely practical point of view, cannot be eliminated, not now when we are on our way to fiscal consolidation, and yet far from FRBM targets.

550 Years!

The annual average rate of gross deforestation is a little under 3.5 bn metric tonnes (2005-2009). India is responsible for ~10% of this. USA and China for another 11% and 9% respectively.

Following table: Percent share of countries (top 50%) in gross 3.3 bln mtrc tn deforestation in 2009:

The forest cover has depleted at a much higher rate of over 85,000 Sq Km between 1990-2000. This has moderated to close to 70,000-75,000 Sq Km in recent years. Nevertheless the rate is not innocuous. It is not just deforestation that contributes to green house effect and climate change, the effect is compounded also by the derived wood fuel that is burnt.

At this celerity, the forest land will completely disappear in ~550 years!!

the market solution to slum rehabilitation

I was recently introduced to the concept of market based solutions for slum rehabilitation.

At the fore: slums are not a result of market failure, rather a result of markets. The solution therefore, lies embedded in the working of markets.

The solution is provision of low cost housing to the slum inhabitants, who were too poor to afford extant housing. A prerequisite: inexpensive land. The current demand supply mismatch in the real estate market seems large. Authors suggested accelerated clearance of disputed land, conversion of unused public lands and conversion of agricultural lands at city periphery for urban use.

Following calculations based on cheapest available land around Bombay (Thane district?) at Rs 2,500 /sq ft show ~1,000 acres of residential land needs to be made available (further, land for infrastructure will also need to be made available) to meet demand. There may still be some people who may need titling benefits or subsidies.

Releasing this kind of land should not take much, it is only about 1% of Mumbai’s total land.

• Households with annual income less than Rs 90,000 per annum will be eligible for subsidies.
• Given the magnitude of 'inexpensive' land required, converting agricultural land and developing satellite towns may actually be the best available option.
• Substantial investments would have to be made for provision of infrastructure, particularly transport.

Paper: "Working with the Market: a New Approach to Reducing Urban Slums in India"

the scintillating urban and the static rural

Higher urban wages attract rural poor, leading to migration, unemployment, emergence of squatter settlements etc.

Higher wages or the ‘expected higher wages’ in the urban sector drive the immigrants.

Of course migration cannot be stanched. Two pronged policies:

• Cities should expand to keep pace with immigrant population. Policies to integrate informal into mainstream economy, Govt provision of adequate physical infrastructure.

• Productivity in rural areas can be enhanced (for example through imposition of minimum wages).

In India, rural labour market seems to have settled at a low productivity equilibrium encouraging migration.

Productivity in Agriculture sector has not progressed over past few years:

50% of India's growth emanates from 5 states alone

What may be surmised: unequal growth, unequal opportunities, rural urban divide, rural to urban migration, slums. It is not a coincidence that these are the states with the metropolis.

Growth needs to be more equal, rather made to be more equal; to tackle the migration problem and increase urbanization [more in next posts.]

Integration of the rural into mainstream economy is essential! If the rest of India grows at 8%, from the current ~6%, it could add a whole percentage point to the national output.

Data not available for all states FY07 onwards.

Why land titling does not work? It doesn't teach you how to earn!

Land titling is an incomplete solution. It does give the inhabitants a house but not the assured stream of income to maintain the house. Government should extend the policy purview (Rajiv Awas Yojna for slum rehabilitation) to include establishment of vocational training institutes that will provide the dwellers with the skill set required for sustenance. This can be implemented through a government financed slum development authority or through involvement of private developers.

Land titling is successful in so far it eliminates the need for the presence of an adult member in the house at all times to protect eviction from property. Thus, property rights provided to an x number of households makes available a comparable number of adults and consequently an equivalent amount of productive labour. Since the households become registered and therefore legal, numerous other problems such as electricity theft are alleviated.

However, any significant increase in access to credit has not been recorded, as a study in Peru, the developing country with the largest land titling program revealed. Plausible reasons are the costs associated with small ticket credit approval process; determination of creditworthiness of a borrower which entails evaluation of individuals on accounts of land available for collateral besides employment and level of income, education level, counter-guarantee, purpose of loan (productive or consumption) etc.

A potential problem with the land titling policy: reversion of the targeted group to slum dwelling and renting out the newly possessed property.

Slum rehabilitation authority with an initial paid up capital allocated in the budget. This authority should plan, aid and oversee the construction of a complete township. The house area, if we assume to be of double carpet area of the initial slum houses, and three storied, will leave almost one-third area available for workshops and other commercial trade centers.

This authority should undertake the establishment of vocational training institutes. Depending on the supply side feasibility, each slum can create a niche in some craft. The onus of marketing and the brand building exercise should also be on the authority. This is analogous to the highly successful state emporia model, an initiative of the state governments to showcase and sell its state’s traditional handicrafts.

This would also bring a sizable number of taxable transactions or sometimes even the flourishing black economy under the government net.

The program can also be designed to involve private developers who can use the land available commercially, while also showcasing the crafts associated with the slum.

Slums are a large part of the informal economy.

The exponential rise of India's Black Economy

The rising levels of currency with public are an indication of the rising unaccounted transactions, out of the tax nets:

Currency is withdrawn from the banking system at some point during the multiplier process after which it falls out of the tax net. If after this point in time, it is assumed that money changes hand even once (i.e. multiplier = 2), size of transactions that are unaccounted have doubled to 16 lakh crores from 8 lakh crores in the short span of 2006-2010.

A case in point is the FCI procurement payments, which are made in cheques up to the middle men arthias, but ultimately reach the farmer in cash who further uses the currency and makes some more cash transactions.

Why we need the Food Security Bill? Part 2

Another argument, seemingly less compelling but legitimate nevertheless, in favor of food security:

While much needed and absolutely commendable, it is commonly understood that hike in diesel prices will feed into food inflation; slightly dated but diesel costs were 7% of agricultural input costs in FY09.

Incorporating the current 7% hike in diesel prices, a preservation of farm incomes (agricultural GDP, Estimate 3 in table below) would require 2.3% rise in value of output i.e. farm prices: - value of output in case there were a 7% hike in diesel price and costs were passed on in full, is 2.3% higher than actual value in FY09, implying food inflation would have been higher by 2.3 pct points.

Figures in Rs crores

In Why we need the Food Security Bill? Part 1: How food inflation eats away real income.

Why we need the Food Security Bill? Part1

A more compelling argument in favor of food security bill, all in numbers:

High food inflation led to higher than proportionate increase in food expenditure (assuming constant consumption), leaving lesser income for other expenditure
Total expenditure increased by ~11%, food expenditure increased by 16% and other expenditure only by 8%:

The table shows lower increase in non-essential expenditure in FY10 due to high food prices:

* Food expenditure growth assumption: constant quantity; expenditure increased by increase in prices (Food articles inflation = 14.6%) and population increase = 1.4%

In FY10 consumption of all commodities other than food may not have necessarily fallen given fall in prices and excise cut. However, going forward, a large rise in food prices would entail a larger than proportionate increase in food expenditure rendering the poor poorer.

Gone with the wind

For an economy, heres how its debt can become unsustainable.

Say at time 0, Revenues are x, lower than expenditure y. Then bonds are issued and debt is built up to the extent of y-x. next year, time = 1, say with no change in level of revenue or expenditure, bonds are issued to the extent of (y-x) plus interest cost on outstanding debt: i*(y-x) in our case. The dynamic problem gives the solution that primary balance should be higher than the debt financing cost. More formally, (D/Y)(i-g)/(1+g) = primary balance.

Caught on an explosive debt path, economies should raise tax rates and cut expenditure. Some back of the envelope calculations show India’s primary balance fell below the sustainable level in FY10. In FY11 although, it has reversed.

India actual and sustainable primary balance as percent of GDP:

With a 7% increase in expenditure (ex interest payment) and 20% increase in receipts, the Govt. has been able to cut primary deficit to 1.9% of GDP in FY11 from 3.2% of GDP in FY10. Of the total non debt receipts, Rs 40k crores is budgeted from disinvestment and Rs 35k crores from 3G and BWA auction proceeds.

Is this fiscal prudence? fiscal discipline? What of next year when crude prices are high? or crisis worsens? And Govt has no more spectrum to auction? Even at the risk of getting sovereign debt downgraded, auction and disinvestment proceeds should not be used for emergency expenditure.

If there is a bad harvest, there isn’t enough foodgrains. If there is a good harvest, there is wastage of grains!

Budget FY11 underlines the need for accelerated investment for the construction of warehouses and cold storage facilities. The Govt has now also allowed ECB for this purpose. Besides, various excise, customs and service tax exemptions are available on equipments used in agri produce preservation and storage. Subsidies already in place included Rs 1.3 crore per cold storage facility.

Why with all the subsidies to the private sector, why does the Govt also spend on FCI rentals? FCI has been hiring godowns from private parties for a guaranteed period of seven years.

The Govt should link the subsidy to each warehouse with two years of one third warehouse space let out to the Govt, for no cost.

For the entrepreneur, if with Rs x profit per sack of grain led to a breakeven in t years, the break even under the proposed structure increases by just two-third of a year. The govt in the meanwhile can save on rent and build godowns that it now needs to do given the revised buffer foodgrain norms following the introduction of Food Security Bill.

Outsourcing malnutrition

Per cap grain availability has averaged over 300 Kg/year between 2000-10. Yet we continue to see a high incidence of malnutrition and malnourished deaths. WHO estimates 178 million malnourished children around the world.

Clearly, food production is not yet a bottleneck, and hunger is perhaps a direct consequence of the utter poverty of the lowest income groups.

The increasing number of agricultural land acquisitions in the lower income economies, by the advanced nations, is incredible, and highlights the role of govt policies and safety nets.

India's Food Security Bill is a commendable step towards achieving food security. However, more than intention, it is implementation which will determine the success of food security.

Did you know...

In 2010, China will contribute over 40% to global GDP growth and India about 5%?