Mar 17, 2018

Gigabattery factories - Engine of the renewables future

When we talk about electric vehicles, the battery technology that drives it cannot be left out. The success of Tesla stems from the ability to stack rows of Li ions batteries in dense modules that deliver sufficient power to run the car and system auxiliaries. The ability to pack rechargeable dense modules of Li ion will play out in the area of home energy too. The way we envision national grids and power distribution may undergo a paradigm shift with efficient solar modules generating and storing sufficient power in such batteries at individual home and even industrial units. This will accelerate as massive investments bring economies of scale in battery manufacturing consequently making them affordable, and viable alternative to fossil fuels as store of power. If that be so, any national policy that dreams of promotion of electric vehicle and renewables future cannot ignore battery manufacturing sector. 
image for Battery manufacturing capacity across the world - Bloomberg data
Battery manufacturing capacity across the world - Bloomberg data

The top Gigabattery factories under construction pan from Asia to Europe. It's not only Tesla which is investing heavily in such Gigafactories but all technology, hardware, energy and even mineral digging companies have now got interested. Even countries are waking up to this fact and are trying at policy levels to help attract such investments. 
Image of Economies of scale in battery manufacturing
Economies of scale in battery manufacturing

Today's news covered the item where British industrialist Sanjeev Gupta is building biggest battery at Australia. Such battery farms are the important linking chains between renewables and consumption points. 

Image of Manufacturing capacity and cost - the inverse relation - The Economist
Manufacturing capacity and cost - the inverse relation - The Economist

And that reminded me that I have not heard about any developments in the area of investments in India since the news item last year that Adani and Reliance are thinking on those lines. We don't have any gigafactory coming up as of now. The technology itself has not been mastered well here and we are dependent on imports. 

We need to seriously consider doing something about it in terms of policy push otherwise it would be sad for a country that is emerging as a leader in the area of renewables.  

Mar 11, 2018

The cooperative dairy sector of Gujarat - A case study in trade protectionism

This blog usually advocates free trade. However, a cautious approach is advised when it comes to sensitive sectors. Free trade doesn't mean zero tariffs everywhere. The costs and benefits needs to be balanced carefully. For example, when the dairy sector is protected, the milk and milk products might be sold costlier in domestic markets, leading to less consumption of an important source of nourishment in an otherwise poor low protein Indian diet. So it is important to understand the argument from both producers and consumers points of view. 

India sells milk at a price that is around 1.5 times the price in USA in absolute terms. So when we factor in the affordability (PPP) the figures become worse. Therefore the consumers are at a disadvantage in terms of price at which milk is sold in our country. India maintains steep import barriers to milk and the question is whether it is justifiable in light of the argument in previous paragraph. 

Gujarat and few other states in India run cooperative dairy model for collection of milk from farmers. This model depends on rural villages coming together to form village cooperatives, which then feed into district level cooperatives, and which uses an apex cooperative body for marketing purposes (GCMMF/AMUL, KMF/Nandini etc). The profits are shared back to the level of last farmer member of the cooperative after all operational expenses are accounted for. 

Overall, the dairy exports from India has been decreasing for the last few years, with a slight uptick during 2017. The below graph is self explanatory (UN Comtrade data: Reporter: India, Partner: World)

Image for Dairy milk product exports from India
Dairy exports from India

However, the above is not the complete picture. While India produces one of the largest amounts of milk, our share in world trade is quite low and we appear at 36th position in the list of exporters (2016 Comtrade data). In terms of imports, we appear at 94th position (with an imports of around 42 million USD per year), after countries like Latvia and Fiji. This is explained by the fact that dairy products (under ITC HS chapter 04) are heavily tariffed and the total duty on imports on these products range from 40 to 75%. So it's not easy to penetrate Indian dairy produce market from abroad. Apart from tariffs we have various restrictions and quality requirements which might be construed as non tariff barriers. 

I shall take the example of Gujarat now. As the Gujarat milk cooperative model is well studied, I shall leave the readers at the mercy of Google for further details. I shall focus on one such district cooperative (the 2nd biggest) in Gujarat and explain the operational model. Then I shall zoom out to bigger picture to make the argument. 

Sabar dairy is the second biggest dairy factory in Asia with a peak processing of around 30 lakh litres of milk per day, after Banaskantha Dairy in neighborhood dist which stands at no. 1 in Asia with a capacity of 60 lakh litres per day. Sabar dairy is one of the 19 district cooperatives dairies in Gujarat under the umbrella marketing brand of AMUL (GCMMF). The Sabarkantha Dist Cooperative Milk Producers Union consists of around 2500 village level societies (11000 such societies across Gujarat) which feed the milk into it. Sabar union owns 20% share in GCMMF. The sabar dairy plant employs around 1300 people on regular basis (including their Ice-cream plant at Rohtak Haryana) and around 4000 on contract basis. They have around 400 milk tankers on hire basis for ferrying milk from collection and chilling stations to dairy plant. The plant works all 3 shifts with varying load. A significant part of the plant is automated, with imported machinaries working along with manual packaging lines. There are around 10 lakh cattle (Buffalos + Cows) in Sabarkantha district as per 2016 census out of which two thirds are usually in milking stage. 8 lakh cattle are RFID tagged and insured. The jurisdiction of Sabar dairy extends to entire district. 80% of the farmers are small farmers owning less than 3 cattle per family. All contributing farmers are members of cooperative society. This way the majority of the rural population is covered by the cooperative.

The milk is procured at a price of around 40 Rupees/litre (Buffalo full 6% and above fat) and around Rs 35/litre (Cow, 4-5% fat). The total production and value additon costs make the price of milk go upto Rupees 72/litre on an average. The milk and various derived products are sold at around Rs 90/litre leading to a gain of around Rs 18 per litre of milk bought. The profits generated through the operations are used to support various rural initiatives and support services such as cattle feed plant, veterneriary services (Sabar union employs 120 veterinary doctors across the district), maintenance of chilling units etc. Whatever profits remain are redistributed to village cooperatives, retaining only enough for modernization purposes. Last financial year, Sabar union retained around Rs 18 crore and distributed the rest. The money is being used for procuring machinery and construction of new plant in the nearby premises.

Image for Leading Dairy Exporting States of India
Leading Dairy Exporting States of India - DGCIS data

The state of Gujarat has more than 11000 village cooperative societies. In a way, a major part of the entire gujarat rural farming sector relies upon this model for alternative source of income. While it is difficult to confirm officially, it is said that this source of income has help avoid rural distress in Gujarat to a great extent. But for this income, the situation of rural Gujarat could have been worse. 

Coming to consumer side of it, India is second largest milk producer in the world as per World Atlas

Image for Leading milk producing nations
Leading milk producers - World Atlas Data

However, when it comes to per capital consumption (FAO 2013) we appear at 72nd place in the list of countries in terms of whole milk availability and 97th in terms of skimmed milk. That's poverty among plenty especially in a country where sources of nourishment in normal meal is limited. Now, the good thing is that it has improved over last couple of decades (FAO stats) and appears to be stagnating (unfortunately) now. We need more data for later years to derive more insights. 
Image for Per Capital Milk Availability in India - FAOSTAT as on March 11 2018
Per Capital Milk Availability in India - FAOSTAT as on March 11 2018
Given that our children certainly need more milk (more proteins and more of everything) to get healthier, is it right to maintain such high tariffs on milk imports? Let's say we decrease the tariffs to zero. This might inundate world milk into India. In the process, it would depreciate the prices of milk in India and might dent rural incomes. But then, the amount of depression in milk prices may of the order equal to tariff decrease, that is around 50%. So the milk producing farmer would now get around 25 to 30 Rupees per Kilo of fat milk in place of 40 to 45 earlier. Would this lead to mass rural distress? I doubt. But then, it might just make the cooperative model unworkable. It might be the last pound that breaks the squatters back. 

I can go on making yada yada blah blah arguments for both sides...but you get the drift. It is a public policy nightmare. The policymaker is stuck between a rock and a hard place. Rural employment vs milk nourishment for children and citizens. 

The above are the facts. 

What would you do sir? Would you still advocate free trade with zero tariffs or keep Trumping this sector? And how do you defend it? 

Mar 1, 2018

In defence of selective protectionism

(This post was originally published at Swarajya online magazine at this link around a week ago)

Image of Selective protectionism is good for India

Arvind Panagariya (Feb 12 ET: Return of Protectionism) and Mihir Sharma (BS: Feb 26: Govt's move to protect industry ignores both economics and history) argue that Government's recent customs duty hikes on various products is not in the interest of development. Their main arguments stem from the traditional reading of international economics which favours free trade across borders for its own sake. The way a Government looks at free trade may differ from the way the textbooks look at it. Trade for its own sake has no meaning unless it generates employment and decreases inequality. Creating pockets of prosperity and masses of dissent through free trade would lead to political problems, a fact that politicians understand intuitively the world over. While some points in the articles command merit, most fail to stand up to closer scrutiny. It is important that we hear the counter-view to make the debate deeper. 

First, the allegation that all recent duty hikes are done with the objective of protectionism is wrong. Many duty hikes in the budget are to remove the anomaly of what is called the inverted duty structure. This is an annual budgetary affair where identified anomalies are rectified. When Mr Adhia stated that he would 'increasingly put more duties on final products', he was actually referring to this anomaly (Panagariya seems to have missed the point). For example, if a finished item has three components, and if the duties on the components are more than the finally assembled item, the consumers would prefer to import the finally assembled item over importing individual parts and assembling them locally. The local assembly shops would then shut down. Therefore, logic dictates the lower value added items to have lower duties over higher value added or finished goods. If India wants Foxconn to set up an assembly shop for cellphones here, the import duties on individual electronic parts should be less than the duty on the assembled cellphone. Otherwise it's economical to assemble the cellphones abroad and ship them to India. These assembly shops are important as they are stepping stones to greater value added manufacturing in future. 

Second, the argument that our industry should be opened up to the world to face the competition and rise up to the occasion is jaded. In a world where everyone follows rules, the natural comparative and competitive advantages would ultimately prevail. However, this is not an ideal world. For example, China is not an ideal competitor. China's credit policies and government support programs are at a different scale altogether. The non tariff barriers of many developed countries would put our duty hikes to shame. We need to be realistic about our industry's ability to compete in an unfair world. Therefore we need to protect our industries when the need arises. Whether we do it through non tariff barriers, anti subsidy measures, or a simple tariff hike is a call that the policymaker has to make keeping in mind the flexibilities available under different multilateral arrangements. The Indian auto industry is a success story exactly because of the defensive strategy we adopted while liberalizing during the 90s. The electronics manufacturing sector never took off after we signed ITA 1 agreement in the name of free trade. Each sector needs a calibrated approach, and there cannot be a fit all yay-free-trade argument. 

Then comes the question of consumer welfare. It is argued that consumers universally tend to lose when duties are raised. For example, the argument is that the duty hike on mobile phones may hurt digital India initiative. People who are pained to see a costlier iPhone due to duty hikes forget that it is less than 1% of our population that looks forward to buy anything priced at that level. And that elite 1% has demands that are price inelastic. Knowing this, Apple has simply marked up the prices already. The cheaper models of smartphones, the ones that are actually being bought by the broad consumer segment, sell from 4000 to 7000 rupees and the impact of hikes on them would be mostly absorbed by the producers, given the competition here. Thats how economics works. Somewhere, the policymakers have called the bluff correctly when they hiked the duties on finished mobile phones. 

In addition, some of the duty hikes have been in the area of employment intesive sectors. Kites and footwear fall in this category. When the economic conditions are tough, it is imperative upon the government to boost employment through all available policy measures. India is a big market for goods. If a certain amount of duty hike on certain tariff lines has the potential to boost domestic manufacturing and generate employment, the policymaker cannot be faulted for having endorsed it. Tariffs are the cleanest way of erecting barriers to cheap imports and propping up domestic industry.  The welfare loss that the economists rue is a minor trifle when juxtaposed against the employment gains. 

Another intersting argument is about getting cut off from the global value chains behind high tariff walls. Nothing can be farther from truth. It is an accepted principle in taxation that when it comes to export products,goods are exported, taxes are not'. Any policymaker worth her salt would take care of it. Any product coming for value additon into India for the purpose of re-exports has multiple legal ways to avoid tax,  from duty nullification schemes to operating out of an SEZ where no custom duties are levied. This is no miracle but a common trick out of policy practitioner's book, usually not found in the arsenal of economists. 

Finally, it is na├»ve to belive that free trade through low tariffs is the only way to go. The narration across the world has shifted to inclusive trade over free trade. There are discussions about redistributive policies to offset losers from free trade. Anyone arguing for 'free trade without caveats' has not kept up with speed. The political repurcussions arising out of mindless hyper-globalization is there for all of us to see. India's experience with various FTAs/PTAs has not been positive, to a point where the last commerce minister was talking about a rethink over the FTAs we have signed. Under such circumstances, we need to tread cautiously while advocating the policies that appear straight out of the book which was not revised after the 90s.