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Category Archives: Economics

Is the sky falling down on the aviation sector?

We all fall down ?

You don’t have to follow Vijay Mallya’s tweets to know that the aviation sector is in trouble.  There is trouble brewing everywhere in the industry which had shown great signs of promise since the liberalization of the sector in 2003.

Let’s look at the state owned Air India first.  Sometimes I watch things on the news and I hear Ron Paul’s words ringing in my head. I don’t even believe in his kind of economics, but the state of the public sector in India is such that sometimes you’d think even a homeopathic dilution of the kind of libertarian thoughts I see around me now would be a welcome change in the scenario.

I am looking at Air India’s financial statements as I speak, and really folks it is not all about high fuel prices , what I have with me is the Annual Report from 2009-10. I do not know why later versions are not available on the site.

This is a quote from the annual report for 09-10, which makes it clear that the problems run deeper than high fuel prices. It is mismanagement coupled with deception.

“Operating expenses declined by Rs 23,157.8 million due to a decrease in fuel prices by 29%”

They go on to say how this and other declines in operating expenses were offset by increases in expenses largely due to interest paid on newly acquired aircrafts and borrowings for working capital.

It’s true that fuel prices have since shot up, but it is also clear that while fuel prices are exacerbating Air India’s problem, they are also serving as a carpet under which more endemic defects are being swept under.

Attached with the Annual report is the Comptroller and Auditor General Review of the Annual Report.  Back in 2010, the CAGR has stated that AIR India understated their losses by around 54 percent. A couple of instances have been highlighted by the Auditor.

1)      Air India has been recording its maintenance expense as prepaid expense. That is, the lump sum the company pays for maintenance is recognized as expenditure and deducted from the revenue only when the maintenance work is actually carried out. While this may seem fair at the first glance, the auditor points out that as the need for maintenance is accrued for the hours already flown by the aircrafts, and not when the work is actually carried out. This is an expenditure that has already occurred and should be recorded as such.

2)      Deferred Tax Assets – These are assets which would be recognized as tax credits on future income, but to claim them as assets, there has to be a possibility of taxation in the future, that is the company should have some profits in the future which are taxable. There was no reason to believe that such profits would arise making the entire deferred tax assets phony.

Which brings us to the question of why the government is in the business of running an airplane business in the first place? Many arguments are being made including one that Air India connects remote areas of the country which private operatory wouldn’t cover.

Does such coverage have to come at the expense of huge losses to the tax payer? Does the entire badly managed business which has never known how to survive any kind of competition let alone the fierce competition seen in the civil aviation sector today have to maintained for this purpose? If a certain route is indeed that important, wouldn’t subsidizing a private player to fly that route be more efficient an idea? About the employment Air India generates, remember that the employees haven’t been paid for over quarter of a year now. How long are these operations going to be maintained on the shoulders of a purely welfare claim which also they fall short to achieve?

Looking at the entire market place, we see that it isn’t just the public sector but also the private sector which is in trouble.  Since the liberalization in 2003, which allowed private players in civil aviation, competition in the sector has been intense, with each player looking out for itself by slashing prices despite rising fuel prices and vying for the most profitable routes (except Air India ? )

Air India does not have the same incentives to maintain profitability as the private sector has, so it isn’t surprising that the government has been accused of pulling Air India out of profitable routes and allowing the private sector airlines to fly them. If there is no incentive to run a profitable business, why run it at all? Just for a few under the table deals and kickbacks that the collusive moves provide to someone high up in the bureaucracy? The tax payer money being lost here, in all probability belongs to an honest lower middle class Indian who may never even see the skies from the comfort of a plane seat.

Kingfisher’s troubles are a well-known fact. A luxury airplane in a price sensitive economy where competition was driving abnormal profits to zero! I guess nobody cared about in-flight entertainment or ‘personally selected’ airhostesses for their two-three hour flights; they just wanted to get going at a low price.  The highly leveraged buy-out of Air Deccan to create simultaneous low-cost operations did not work out too well either. It was badly timed with competition from Jet which acquired Air Sahara, sky rocketing fuel prices and the 2008 recession which did not bode well for any of the players. Indigo has stood through in this environment as a lone example of success, driven by well thought of strategic decisions in fleet acquirement and slow and steady expansion into the market. These however are examples of a competitive market doing what it does best, rewarding better decision making. What Air India which doesn’t even pretend to be interested in a profit is doing flying around with these players is beyond me.

Also why are taxes on fuel as high as thirty percent with an additional surcharge when the sector is clearly struggling? Why is Foreign Direct Investment ok in retail but not in aviation? It is easier to see why FDI in aviation would be a good thing. Another area worth looking into would be the high charges paid by carriers for using airport facilities.  Unless the private sector is given the leeway it requires, the liberalization of the aviation sector may come to nothing and people will once again be faced with air travel being a luxury for the very rich.

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Posted by on April 2, 2012 in Economics, India, National, Politics

 

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Dinesh Derailed

Dinesh Trivedi just presented a Railway Budget. He also got fired. What happened? Well, he wasn’t ‘populist’ enough that’s what happened. He apparently did not keep the best interests of the ‘aam admi’ (common man) in mind while deciding to hike fares.

Didi wants Dinesh to step out.

Mr Trivedi proposed a series of increases in Rail fares cutting across classes. The increases he proposed were given out as paise per kilometer. The opposition accused him of misrepresenting in paise what would actually be sizeable increases in passenger fare. Well here is the truth behind it, a paise/kilometer increase makes a lot of sense! The increase in rates has not been uniform across classes, for the suburban trains most indispensable for the common man, the increase comes up to Rs 2/100 kms. How many people use suburban trains to travel a 100kms? Only those people would face even a Rs 2 increase in their fares.

One thing that stands out clear is that while many support Mr Trivedi’s budget given its strong emphasis on safety , modernization and a reduction in the operating ratio, all dire requirements for the railways, very few oppose the fare increases as a whole. Not even Trinamool Congress Leader Mamta Bannerjee or her sidekick Derek O’Brien (He should have stuck with his know it all school kids at the Bournvia Quiz Contest) are opposed to fare hikes in the classes above the sleeper class, that is, the AC 2nd and 1st class. They oppose the increases in the lower classes as only that would affect the aam admi. This shows that everybody, even the hardcore communists, recognize the need to increase revenues within the railways. Before going into ways in which revenue can be increased, let’s look at why it needs to be increased.

1)      Operating ratio has to be decreased, currently 95 rupees are spent for every 100 rupees earned by the railways. The railways are owned by the government, ruining its financial health would not be in the best interests of the aam admi.

2)      SAFETY! – The Indian Railways transports a large sea of humanity. Around 30 million people travel by train every day!  Given this figure the number of accidents may seem like a relatively small percentage, however is being a part of small percentage any consolation to those who lose their lives? Small percentages translate to large numbers in India, making safety a major priority. The list of accidents can be seen here on wiki.  Safety costs money, Trivedi’s plan includes modernization of tracks, signaling systems and manning all level crossings.  The Aam admi values his life.

3)      Modernization-Hygiene- More Safety – How many of us who have travelled by our beloved Indian trains (even that really cool looking Shatabdi tween Chennai and Bangalore often preferred over flights) can call them hygienic ? The stench that accompanies  the railways is so characteristic that its considered ‘un-Indian’ to complain about it. Some of us have noticed recently with glee that the open-toilet systems are changing; many of the trains now have greener toilets (Lalu Prasad Yadav initiated this venture). Under Trivedi’s plan 2,500 more coaches would have green toilets by 2013. The open toilet system is dreadfully unhygienic, especially for those with homes near railway tracks. It also corrodes the tracks and costs the railways around 350 crores of rupees per year.

4)      Capacity! – Despite being such a large network serving countless number of people, there is always more demand for railway tickets. (We all have at some point woken up at 8am and  restlessly hit the refresh button on the tatkal bookings site of IRCTC with our fingers crossed hoping to get lucky).  Trivedi has set aside Rs 4410 crores to augment capacity.

5)      RnD (Design) – The Indian Railways don’t really look like the ones in Japan do they? The railways are a solid system and do their job well, it could do with a revamp in design though. Trivedi plans to put money into a dedicated Railway design wing at the National Institute of Design.

6)      Many more reasons can be found in the budget highlights.

To do all of the above Dinesh Trivedi has proposed borrowing from the market Rs 15,000 crores and also a nominal hike in the fares (after ten long years!).

The opposition thinks that fares should be increased only in the upper classes and not in the lower. I’d like to talk about why this is not such a great idea.

The Indian Railways is a price discriminating monopoly. Prices are different based on whether you are a student/senior citizen/physically handicapped/female senior citizen etc. Prices are different across different trains even for the same classes. The Indian railways also forces consumers to reveal their preferences by offering a range of products. All this is done with the differences in price elasticities in demand across the categories kept in mind. That is acknowledging the fact that increasing the prices have an impact on the quantity of ticket sales, and thereby on the revenue, but this impact is different across different categories.

While I do not have any data to substantiate my claims, I shall consider a case where there is a high increase in prices in the upper classes and none in the lower ones. I broadly guess that given the high fares in the AC 1st and 2nd classes and presence of low cost airlines as close substitutes, these classes would have relatively more elastic demand, that is an increase in prices would cut down travel by AC 1st class a lot, Making them a lot less competitive when compared to airlines which have a great advantage of saving on time. (Make my trip allowed me to book tickets from Delhi to Chennai by a low cost airline at Rs 4,700 as long as I booked really early, the corresponding Rajdhani ticket price on a 1st class was Rs 4,500). Some of the current AC travelers may also switch to the already overwhelmed second class sleepers given the large difference in prices, again bringing no new revenue and putting the ‘aam admi’ in further trouble with regard to lack of capacity.

For short distances buses might substitute the sleeper class trains, however as far as I have seen, the buses are more expensive than the trains and do not work very well for longer distances. Therefore the most inelastic segment of demand would be that for long distance travel by sleeper class, which is where the revenue killing has to be made. The price hike here is pretty nominal a Rs 5 per hundred kilometers is not going to put anybody off traveling.

We would all like safer more hygienic travel even if it meant shedding an extra hundred rupees. The hue and cry is over nothing. Kudos to Mr Trivedi for standing upright through this whole mess and refusing to roll back his changes despite being threatened with ouster. Those who oppose his changes should take a look at this.

 
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Posted by on March 15, 2012 in Economics, India, Politics, Society, Uncategorized

 

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The invisible hand is evil.

“Intelligent life on a planet comes of age, when it first works out the reason for its very existence. If superior creatures ever visit earth, the first question they will ask, in order to asses the level of our civilization is: Have they discovered evolution yet ?” – Richard Dawkins.

Education today trains us with a variety of skills. People are equipped to program computers and make power point presentations about mergers and acquisitions etc. That’s right, education today, trains us, but we learn very little, to me, this is a fundamental flaw which has led to imbalanced poorly informed societies. Of course fear contributes to all this, what would I do without a job and all the world’s learning in my head if I don’t have a skill required by a corporate ?.

The problem is, we don’t understand Darwin. Darwin, gave us the key to understanding ourselves. Dawkins made things a little simpler, I would make The Selfish Gene mandatory reading in schools, if I could. Natural selection is a fierce competition for the gene to survive. If Dawkins’ superior creatures were indeed, despite all odds, to pay us a visit, they would say, “Why these primitives have discovered evolution, but do not fully understand its implications.” It is true, that Darwin’s theories have turned around biology, but they should have also turned around the social sciences, the impact here hasn’t been felt as much, largely because people are willing to be willfully ignorant.

Natural selection tells us about the survival of the gene, the selfishness inherent in such a struggle for survival and how even apparently altruistic acts can be broken down into the selfish protection of a gene. (By the way, don’t anthropomorphise selfishness, the genes aren’t consciously selfish the way I am sometimes, but it is selfishness that helps them survive.) As Dawkins says (yes I am a HUGE fan) let us learn to be altruistic, because we were born selfish.

It is very interesting to note, that incomplete understanding of the theories of early survival, especially how brutal a natural Darwinian world is, how savagely without mercy the weaker of the species got killed off by nature, leads people to fall into the traps of Darwinism in the social sphere. The main point here is, we are instinctively geared to be Darwinian survival machines, selfish and thoughtless, the mainstream too a product of primitive survival mechanisms,promotes these ideas.

The most important take away from learning about evolution is that it is still happening today, why that is relevant is not because we may evolve into some weird hyper-intelligent species tomorrow (no evolution takes time) its important because it teaches us that we are still primates, controlled at our deepest level by the same forces that created us, the same forces that makes the wild world full of pain and suffering and a crazy struggle for survival. We are still competing, struggling, and leaving out half the population to be losers in the struggle, left behind and forced to die out by the razor sharp scythe of natural selection.

Of course equilibrium could arise, whats so great about that, you could have a market with an equilibrium price, with a large chunk of people too weak to be a part of it, the voiceless with sunken eyes, left to their fate by market forces, the new economic name for ruthless natural selection. The invisible hand of the market is evil if left to itself as it chooses not to grab the neediest of the needy.

Libertarians are economic darwinists, they like everything to happen naturally, for things to equilibriate, but some of us will always fall behind in the race, and more importantly some of our needs will never be fulfilled by competition alone. If you doubt that markets are an economic manifestation of natural selection, think about how they fail every time the ‘good’ in question loses its competitive character. You don’t see a large multinational company in the business of cleaning up the air, do you?.

Darwinism is something we need to learn to understand how things are, so that we can change our fate with an awareness no species before us has possessed. It is not and never should be a guideline to build our society, do note, that it is so programmed into us, that we don’t have to consciously follow it, it is escaping from its throes that would require conscious action.

I am not anti competition, competition has helped us a lot in both the natural and the economic world, it has brought out the best in us and kept our brains sharp. However, it will not serve the purpose of building a more equitable society, it will not remove the pain from the faces of the have-nots as they watch the haves whizz past them. For, nobody was born with the same abilities or in a level playing field. The forces that shaped us are impersonal, they may lead to our destruction with the same disregard they showed while creating us. If we do not learn to get over our selfishness and myopia, we will soon be another hapless species faced with imminent doom in the hands of natural selection and more dangerously the forces of nature.

 
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Posted by on February 10, 2012 in Darwin, Dawkins, Economics, Evolution, Society

 

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Honey, I love you, but I am an Economist !

Disclaimer: Views expressed on this blog are my own, when I express my views based on the reading of works of others, it is solely my interpretation that is expressed here and not theirs.

I know how much people hate it when abstract ideas and emotions considered to have special significance like love, hope, fear, the origin of life, matter and energy etc are explained in scientific terms. It seems to take away the touch of magic, the aura associated with these terms.

Today I was reading a paper which like many other of its ilk I feel, provides evidence that marriage is a contract entered into with considerations of associated costs and benefits and an increase in costs, like the economics costs of getting married would decrease the rates of marriage. Don’t get me wrong, I am a romantic at heart who believes in love and companionship for a lifetime. I do however see marriage as a contract that two parties enter into for economic, social and cultural reasons which can all be broken down into their costs and benefits.

A lot of work has been done in this area of economics, but the one I am referring to here is Changing the Price of Marriage – Evidence from Blood Test requirements (Buckles, Guldi, Price, The Journal of Human Resources , 2011).

A lot of us know about the Blood Test Requirements some countries and states have enacted with regard to marriage. These laws exist to decrease the spread of sexually transmitted diseases and reduce the number of  children born with complications due to stds. The focus here is not on the effectiveness of these laws on reducing the above rates but on whether the additional cost of complying with them decreases the rates of marriage registration. A natural experiment which presented itself as most states started repealing BTR requirements helps make this analysis possible.

The authors have presented evidence which I see as a resounding Yes. They used marriage licensing data across US states from 1980 to 2008 to figure out whether the change in price of marriage actually made an impact on people’s decision to get married. They used a within group estimator with state level fixed effects and time trends to arrive at their results. What this basically means is that they were aware that marriage rates could vary from state to state due to trends specific to those states and also across time due to other factors (a growing importance of career for women could be one I guess). So they separate out these trends in a way that what’s left behind gives us the impact of Blood Test Requirement (BTR) laws on the licensing of marriage. 

Whats to be gleaned from the analysis is that while marriage rates have been historically falling overall, the gap is much more between the states which had BTR compared to those which did not. The repeal of BTR also lead to a jump in marriage licensing rates. The authors found that BTRs result in a 6 percent decrease in marriage licensing rates of the state. Only a third of this was associated with couples moving to a non BTR state to get married. The other considerable chunk (3-4) percent of couples just chose not to get married! Presumably due to the monetary, psychological and time costs of BTR.There are numerous other papers which show that increases in price of marriage due to government policy or an increase in opportunity cost of marriage due to other available options decrease marriage rates.

This has got nothing to do with my position for/against marriage or for/against BTR. (I personally do think arranged marriages make a strong case for BTR though.) This however is considerable evidence that marriage like many other things glorified in life, is just a contract and slight changes in the cost benefit equations result in major changes in the willingness of parties to accept it.

 Buckles, K. , Guldi, M. , & Price, J. (2011). Changing the Price of Marriage. Journal of Human Resources, 46(3), 539-567.

 
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Posted by on October 1, 2011 in Economics

 

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Law of demand in the labour market ?

There was an interesting article on CNN-money today, on increasing the minimum wage to boost the US economy.  Whats interesting about this article is it goes beyond the problem of unemployment into the closely related problem of underemployment. Many Americans today are doing jobs which are very low paying.

Dr Paul Osterman of MIT argues that raising the minimum wage is the way to go to improve the economy, he is backed by Paul Sonn of the National Employment Law Project action fund and Alan Krueger potential new American chief economic advisor. (I find that encouraging). William Dunkleberg who represents the National Federation of Independent Businesses disagrees, he says raising wages will reduce the demand for wages and result in more unemployment. (I am strongly sensing a libertarian here, who the Keynesian in me tends to disagree with.)

We have all seen this argument before, allow the markets to deal with themselves and lead to the optimal wage. Any interference is counterproductive. What if I find more displeasing are some of the comments advocating frugality and saying you should be able to live off 7.5 dollars an hour without demanding more. So let me point out what I disagree with rather than just cribbing! (You should stop me when I go off on those rants).

Firstly, since when did we start thinking that wages should be determined by what people can live off ? I know people in Africa living off less than a dollar a day, so should that be the new wage ? Alright now that is done away with! I want to ask, why do businesses exist ? They exist to serve a demand. A demand which arises from the same workers they pay. Right now interests rates in the United States are very low, (yes I know the banks are still unwilling to lend, but that would change too if large consumer demand is perceived) I would suspect that the lack of  incentive to produce doesn’t arise from a lack of availability of funds but from the perceived lack of demand from the population. Out of work or underemployed people aren’t going to create the demand required by the economy.I know, it is very similar to the economics during the depression, that’s even better reason to not make the same mistakes again. YES, the solution is to raise their wages and give them the confidence to spend more, a perceived consumption demand coupled with low interest rates should boost confidence to increase investment too. This could also additionally lower the onus on government spending to drive aggregate demand. (Don’t the libertarians have a problem with that too ? , Well you cant have it all your way !) .

I am not saying raising the minimum wage is a sure shot solution to the slump in the economy and the debt crisis, but it definitely is a step in the right direction.

 
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Posted by on September 28, 2011 in Economics, keynes, labour market, Politics

 

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Macroeconomics Summarized

Mercantilism – Get more gold!

Classical – Do nothing and nothing will go wrong.

Keynesian – In the short run, SPEND. In the long run, you are dead.

Monetarists – In the short run, PRINT notes (following rules), In the long run, do nothing and nothing will go wrong.

Neoclassical – Whatever you do, Surprise them! or do nothing and nothing can go wrong.

New Keynesians – When jolted, PRINT! SPEND!

 
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Posted by on September 27, 2011 in Economics, Humor

 

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Inflation and the Indian dream

For a long time now, India has taken pride in being largely insulated from the global economic slowdown. True, Indian exports suffered, but it was also an opportunity for the exporters, especially software firms to diversify into markets other than the north american markets. India Inc was still hiring during the worst of the crisis. The Reserve Bank of India had a broad smile as the merit of years of regulation of the financial markets once thought of as unnecessary chaining of the economy was now vindicated. There wouldn’t be a sub-prime type crisis in India, despite exposures to North American markets India was still strong. Growth would not be badly affected. Then came news of the European slowdown and suddenly nobody was too sure anymore, India wasn’t going to stay immune to the global slowdown forever.
Indian growth is now at 7.7 percent. On an absolute scale a wonderful number, but not enough for the young nation to grow out of poverty. The RBI is not optimisitic.

However, can we blame the Indian slow down on international markets ? No doubt international effects are being felt in India, but it would be very dangerous to brush aside serious defects in the home economy by pointing the finger at the outside world. For one, Indian exports have been gaining momentum despite these slowdowns. New markets are being found in West Asia, Africa and South America. What is the problem then ? The answer is Inflation.
No, The RBI is not printing a lot of cash to fund government expenditure, infact the opposite is happeneing, monetary policy being followed is pretty tight. Where does the problem lie then ?
Maybe the traditional women of India who still do the bulk of the cooking will have an answer before the ones who meddle about with economics. The prices of commodities are increasing. India is suffering from severe supply side bottle necks. We must realize that despite everything that happened from the 1990s, India still has a large agrarian economy. A media or a middle class that ignores this fact doesn’t make it go away. The manufacturing sector too is ignored while focusing on the services boom. Growth has been dull in both these sectors. Food prices keep increasing, especially basic vegetables most used by the Indian middle class. India needs to wake up to the harsh reality that so much of its economy directly depends on the monsoons! Structural reform in agriculture and also manufacturing is what is required. Tighter monetary policy is what we get.
All economists agree that in the long run money is not a part of the real economy. Agreed short term monetary policy is essential, but what is the use if we do not combine it with a long run vision of improving the underlying problem ?
Demand is another key issue, demand has been increasing in India ever since the middle class got richer. This includes the demand for food. More Indians eat out today than ever before. Rising tomato prices havent stopped Bangalore from having a Tomatina of its own. Population doesn’t decrease either, neither does agricultural land increase. Monetary policy is not magic to solve a long term issue though it may ameliorate the temporary warning signals.
Bangalore needs to realize its a part of India, fed by Indian farmers.
I am totally for a booming service sector, but keeping in mind what is needed in the ground level to sustain it.

 
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Posted by on September 12, 2011 in Economics

 

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