The scene at the Indian parliament was very chaotic - even by its own standards - in the first nine days of winter session last year. The reason was to block one of the far reaching reforms; allowing 51% FDI investment in multi brand retailing. The government had to give up this proposal due to vociferous demonstration by the opposition in the parliament. It was hard to believe the same BJP led NDA government, that opposes the current reform, accelerated the pace of economic liberalisation between 1998 and 2004. It looked as though the opposition would oppose anything that comes to debate.
Some of the comments and observations were absolutely stupid. Some parties claimed that it would accelerate farmer suicide. Anna Haraze compared these international companies such as Wal-Mart and Tesco to the East India Company. He also spoke about how they would rule our country if we let them in.
To understand economic liberalisation, we must go back to 1991. Preceding this period, brands like Nike, Pepsi, and Sony etc were unheard of. On a normal weekend, an average Indian living in cities would watch a regional movie on a Doordarshan channel in a Solidaire TV sipping a bottle of gold spot purchased from local kirana shop. Maruti 800 was considered a luxury car. The richest had telephone. However, the usage is limited as not a lot had telephones at their homes.
Fast forward to current times. An average Indian living in cities goes to a mall, watches ESPN on a Sony television, sipping a Coke and talking on a Samsung mobile using Vodafone spectrum. Such is the quantum of change due to the liberalisation. Some people still say that the pace of liberalisation is too slow and more reforms need to be done to maintain or enhance the growth rate.
In the late eighties, there was a severe strain in the Indian balance of payments. India almost went bankrupt and was expecting IMF to bail out by providing soft loans. India had to pledge several tonnes of gold. IMF also enforced some economic reforms in exchange for the bail out. Indian politicians were so reluctant to make changes to the economic policies until this time. A lot of people in India believe that economic liberalisation is one of the biggest achievements of the congress government. That is not true. The changes were enforced on India in exchange for money. Indian politicians never had the will to reform in a large scale until a deep crisis hit normal life.
The fruits of liberalisation is still can be seen in India. The average GDP growth rate more than doubled and almost 300 million Indians (More than the population of USA) came out of deep poverty. However, one big problem remains. Managing food supply chain. For the most part of previous year the food inflation was well into double figures. India has a few inherent problems in terms of infrastructure and technology. More than 20% of fruits and vegetables rot before it even reaches the market, which puts a lot of pressure on the supply side of economics.
The retailers and middlemen that serve India do not have the money to invest in technologies and infrastructure to move fruits and vegetables to market before it rots. Food value chain in India is one of the worst in the world. From farmland to household, the value chain is long. In such a scenario, the farmer is unable to sell the products directly to the market and hence was paid lesser by one of the bigger middlemen who are a part of the value chain. Almost all the middlemen in the value chain do not add any value to the product. These middlemen do not have the expertise and technology to preserve the food items from rotting. Most of the food inflation in India is due to these structural inefficiencies. Without addressing these inefficiencies, manipulating supply and demand would only give temporary relief. For most of last year, RBI was using monetary policy tools to contain inflation rather than reform the food value chain structure.
This is exactly why the entry of multi brand retailer is essential. They have the money to create infrastructure and the technical expertise to preserve the food until it reaches the market. Multi brand retailers deal directly with the farmers and hence time to market reduces and structural efficiency increases. Therefore, the accessibility of food items to common man at affordable prices increase.
In rich countries, such as UK and EU, multi brand retailers play a crucial role. Also, many small retailers also co-exist. Hence the fear of Wal-Mart and Tesco trashing all small retailers is not true. Multi brand retailers increase the efficiency of food value chain, provide more jobs, provides technology and better price for farmers, and most importantly reduce the cost to end customers. The only people to lose out is the middlemen who made a lot of money without adding any value.
The government of India must decide whether they support shoppers and farmers or they support the middlemen who have served the country and its people poorly over the past decades. Or, they should wait for another deep crisis to push more reforms.
Friday 6 January 2012
Thursday 5 January 2012
The EU and aviation emission
Aviation business was brought into the EU Emission trading scheme (EU ETS) from the New Year. This essentially puts a cap on the amount of fuel the airlines can burn in a given time and if they want to burn more fuel, then the airlines have to buy carbon credit from other companies that managed to save from their carbon emission limits. While there are certain questions still being asked about emissions allocation and carbon pricing volatility in the past years, the inclusion of aviation industry was largely debated in the courts of law and was finally given an approval.
Even though, aviation accounts for less than 2% of world carbon emission, the economics of this emission is little different to that of others. Carriers from other continents that are forced to pay for carbon emission within EU are not happy about this extra cost for their operation. But, for this writing I would like to argue for the case of EU carriers only.
Aviation business is unique in a few ways from other business as it is very high fixed cost intensive and fuel is the biggest cost for running the business. Also, the type of fuel required for running the business is one of the most expensive ones. Hence, whether EU laws are in place or not, airlines must control their fuel cost to stay competitive. A thermal power station can control the coal input to create electricity based on the forecasted demand. In other words they can convert all their fuel into money. However, in aviation, no matter whether the flight is full or almost empty, the fuel cost remains almost the same. Hence, the amount of fuel burnt is not tightly coupled with the revenue made from the flight. This may not be true in other participating industries in the EU emission trading scheme. Hence, this gives added incentives to airline industry to reduce their carbon emission naturally without any EU emission laws.
The cost of creating one ton of carbon from aviation fuel is far greater than cost of creating one ton of carbon from coal powered business. Also, the revenue earned by burning one kilo of aviation fuel is different to that of revenue earned by burning one kilo of other fossil fuels. In such a scenario, how can a single price for carbon across all industries using different fossil fuels work? Surely, the emission trading scheme would favour one industry over other.
Also, the basis of carbon allocation for industries is flawed. All emitters are given same amount of carbon emitting licenses that they emitted in the previous years. This favours large emitters and cripples small emitters from expanding. When the same is applied to the aviation industry, it would surely cripple small airlines from expanding due to high emission costs. The emission trading scheme should stop this 'Cap and Giveaway' scheme and should study the carbon reduction potential of each industry and also the carbon reduction potential of each fuel type. With a single code across the continent, the business landscape would be tilted with aviation industry in the wrong side of it.
Another flaw from the previous years was the over allocation of the carbon credits. However, EU claims that the carbon allocation problem is sorted from the 2012 period; there are two possible scenarios. If the carbon were priced lower in the market due to over allocation, then the industry would prefer paying lower for carbon emission instead of investing in carbon reduction. If the carbon were priced higher in the market due to under allocation, then the companies which wants to invest in carbon reduction would find it difficult to fund it. In either ways, the emission trading scheme is not encouraging companies to invest in carbon free technologies. Instead of paying for carbon emission, the airline industry could do better by investing in low emission aircrafts and technologies. It is inevitable for the airlines to move in that direction due to the cost of fuel and prevailing competition. EU ETS is a major distraction for the airline industry.
On top of all this, there is another severe danger. The danger of moving quickly towards bio fuel. Bio fuel emits very less carbon than the kerosene based aviation fuel. However, it has many other consequences. The population of the world has reached 7 billion last year. We do not have enough land and fresh water resources to feed all people three times a day. If Bio fuel picks up, then farmers might be forced to use their farming land to create bio fuels. This will cripple the health and safety of people, especially to those living in poor countries. The cost of malnutrition and other human costs should also be factored into, in the pricing of bio fuels. Again, EU ETS is a major distraction. It encourages the usage of bio fuels, instead of encouraging investing in genuine technologies that reduces carbon footprint.
Investment in renewable energy such as wind and solar is the way forward for most of the industries. It is a very long distant dream as far as aviation industry is concerned. Aviation industry should invest in technologies and aircrafts that reduces carbon emission. Any other laws or treaties such as EU ETS is a distraction towards that path.
Even though, aviation accounts for less than 2% of world carbon emission, the economics of this emission is little different to that of others. Carriers from other continents that are forced to pay for carbon emission within EU are not happy about this extra cost for their operation. But, for this writing I would like to argue for the case of EU carriers only.
Aviation business is unique in a few ways from other business as it is very high fixed cost intensive and fuel is the biggest cost for running the business. Also, the type of fuel required for running the business is one of the most expensive ones. Hence, whether EU laws are in place or not, airlines must control their fuel cost to stay competitive. A thermal power station can control the coal input to create electricity based on the forecasted demand. In other words they can convert all their fuel into money. However, in aviation, no matter whether the flight is full or almost empty, the fuel cost remains almost the same. Hence, the amount of fuel burnt is not tightly coupled with the revenue made from the flight. This may not be true in other participating industries in the EU emission trading scheme. Hence, this gives added incentives to airline industry to reduce their carbon emission naturally without any EU emission laws.
The cost of creating one ton of carbon from aviation fuel is far greater than cost of creating one ton of carbon from coal powered business. Also, the revenue earned by burning one kilo of aviation fuel is different to that of revenue earned by burning one kilo of other fossil fuels. In such a scenario, how can a single price for carbon across all industries using different fossil fuels work? Surely, the emission trading scheme would favour one industry over other.
Also, the basis of carbon allocation for industries is flawed. All emitters are given same amount of carbon emitting licenses that they emitted in the previous years. This favours large emitters and cripples small emitters from expanding. When the same is applied to the aviation industry, it would surely cripple small airlines from expanding due to high emission costs. The emission trading scheme should stop this 'Cap and Giveaway' scheme and should study the carbon reduction potential of each industry and also the carbon reduction potential of each fuel type. With a single code across the continent, the business landscape would be tilted with aviation industry in the wrong side of it.
Another flaw from the previous years was the over allocation of the carbon credits. However, EU claims that the carbon allocation problem is sorted from the 2012 period; there are two possible scenarios. If the carbon were priced lower in the market due to over allocation, then the industry would prefer paying lower for carbon emission instead of investing in carbon reduction. If the carbon were priced higher in the market due to under allocation, then the companies which wants to invest in carbon reduction would find it difficult to fund it. In either ways, the emission trading scheme is not encouraging companies to invest in carbon free technologies. Instead of paying for carbon emission, the airline industry could do better by investing in low emission aircrafts and technologies. It is inevitable for the airlines to move in that direction due to the cost of fuel and prevailing competition. EU ETS is a major distraction for the airline industry.
On top of all this, there is another severe danger. The danger of moving quickly towards bio fuel. Bio fuel emits very less carbon than the kerosene based aviation fuel. However, it has many other consequences. The population of the world has reached 7 billion last year. We do not have enough land and fresh water resources to feed all people three times a day. If Bio fuel picks up, then farmers might be forced to use their farming land to create bio fuels. This will cripple the health and safety of people, especially to those living in poor countries. The cost of malnutrition and other human costs should also be factored into, in the pricing of bio fuels. Again, EU ETS is a major distraction. It encourages the usage of bio fuels, instead of encouraging investing in genuine technologies that reduces carbon footprint.
Investment in renewable energy such as wind and solar is the way forward for most of the industries. It is a very long distant dream as far as aviation industry is concerned. Aviation industry should invest in technologies and aircrafts that reduces carbon emission. Any other laws or treaties such as EU ETS is a distraction towards that path.
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