Caring for our environment

Is this article for you? If you have heard a lot of global warming and wondering if it needs real attention, read on. Often there are many articles, videos which depict the bad effects of industrialization, release of carbon oxides etc. If you don’t know how to understand this deeply serious topic, read on to know facts. If you are a person who doesn’t like to think about future and plan for life day by day, stop here!

As a prelude to reading this article, I request my readers to watch the documentary video An Inconvenient truth. It is an absorbing presentation of facts from former US vice president Mr. Al Gore. The documentary aims to check effects of global warming by educating people in a methodical manner to this ever-increasing sensitive topic which is affecting everybody across the globe directly. This move is worth repeating in run-up to 12 day international climate change summit at Copenhagen in December 09 where decision makers will spend crucial days together.

Scientists have established that if global temperatures rise by more than 2° C, the resultant changes will irretrievably endanger life on this planet. Other environmentalists, climate scientists have observed that current reductions in emission of green house gases are not enough. At this level of emission, we will push global temperatures beyond tipping point by 2050. There are few grieve some probable scenarios which could visit us during our lifetime. It is now recorded that most affected lot will be ones who contributed to it in least manner i.e. poorer people, living mostly in developing parts of Asia and Africa. As I write this line, I hear of 200 people dead in floods affecting south India and about 1000 people dead in quake. Floods and quakes are not a recent phenomenon, however untimely and intensity of damage is increasing alarmingly. In this background, it is not surprising to hear people say “weather was never like this before…” “We could grow twice as much crop 5 years back…” “This is record rain in this part of the world…”. A rise in global temperature will see increase in sea levels, as polar ice caps melt faster in response to warmer air. Islands and low lying areas will be first to face threat of inundation as sea water level rises. Back in India, Sunderbans islands face risk of being submerged… one inhabited island is already lost! Other low lying close islands of Bangladesh could similarly go under water. Millions of people will lose homes and livelihood. The downside of such disasters is that when it hits such densely populated areas, the government can hardly act substantially and rescue lives. This is evident today in Andra Pradesh and Karnataka. After all, what can a chief minister armed with 20 odd helicopters do when floods have damaged thousands of homes other than announcing relief money for kin of the dead? Such reactive helplessness can be much avoided with proactive caring for environment. It needs a more systemic thought process at broader political level.

Maldives is under severe threat – and is taking insurance. As soon as Mohammed Nasheer was elected as prime minister last year, he announced to British media that he would set aside some of tourism revenues to buy homeland for his people (in case island is inundated). This is a strong statement of intent by a politician. I hope others will take cue and strengthen their commitment to reduce emissions.

Back in India, glaciologist studies have revealed that glaciers which feed rivers have been fast depleting. This is true even of Gangotri, which is considered as mother of all glaciers. It doesn’t take intelligence to realize sequence of events… As glaciers grow less in size, rivers like Ganga will recede… thousands of farmers who are dependent on steady inflow of water will have no crops. This will make life more and more untenable; ironically even on historically rich plains of the Ganga. This is not a fantastical projection; watch famous BBC documentary movie Future of Food, where global warming is seen as the root cause of degradation of food quality and quantity over past few decades. While this has led to starvation in developing countries, it has caused health problems and obesity in developed countries.

That’s just one part of the story. Scientists have predicted now that agriculture will be threatened in other ways also. They predict that patterns of rainfall will change. While absolute volume of rainwater will remain constant, it will be spread over fewer days and therefore will be more intense than before. This prediction is well corroborated by current floods affecting Karnool and Mantralaya. The world’s supply of food will shrink. With population growth outpacing growth of food production, more and more agricultural land is taken for industrial purpose. The present crisis is likely to deepen with food riots becoming part of life in developing countries. A change in rainfall patterns and melting glaciers will affect availability of water. Supply constraints will intensify competition for a diminished resource and could trigger water wars. Those who have tracked Cauvery waters conflict will not find it difficult to predict more animosity with neighbors. Another fallout is increase in frequency of freak weather events – storms, hurricanes, floods and drought. If America was battered by hurricane Katrina, so have Bangladesh and Bengal by cyclones in close succession. Parts of Rajasthan and Bihar have recorded untimely rains leading to serious flooding and are now in grip of drought.

There are ways to avoid a catastrophe – only if developed world acts responsibly. The developing world, although contributes only 1/10^th will need to do follow soon. The World economic and social survey report 2009 re-affirms that the developed countries need to work on more stringent emission and green house related targets. The developed world has been sending up harmful emission over past 200 years in form of automobiles and industry. They must implement stringent emission norms for developed countries to follow. This principle was agreed in Kyoto protocol, which runs out in 2012. This is reason why meeting at Copenhagen is all the more important to firm up Kyoto regime. If developed world refuses to cut down on emissions until India and China sign up, the resultant stalemate will be disastrous. While US emits 20.4 tonnes per capita, UK and Germany emit 9.7; China emits 3.8 and India 1.2!

The report reveals some of world’s most populous cities at risk. Just want to list them down here, maybe your city is in this list!

Manila – 16 million

Perth – 16 million

Mumbai – 14 million

Shanghai – 14 million

Karachi – 13 million

Sao Paulo – 11 million

Istanbul – 11 million

Jakarta – 8 million

New york – 8 million

Kolkata – 5 million

I will close with tales of couple of cities.

Tell tale of Mumbai – The inter government panel for climate change says that by turn of this century, large parts of this metropolis will be under water. Even now, the sea level is just few feet away from buildings during high tide. Mumbai is commercial and entertainment centre of India, generating 5% of country’s GDP, accounting for 25% of country’s industrial output, 40% of maritime trade and 70% of capital transactions to India’s economy. If city is inundated, billions of dollars worth real estate will be lost. Rising sea levels will make it unusable as a port.

Tell tale of Shanghai – The largest city in china is slowly sinking into the sea. Over exploitation of ground water, underground construction of subways, basements below skyscrapers and overpasses have led to ground sinkage. A study in China has revealed that caving in of bedrock is also contributing heavily to sinkage. The rising sea levels will just be a double whammy which will disrupt world’s fastest growing economy, the tremors of which will be felt across the world.

Auction of 3G spectrum in India

Preface: If you are telecom professional, this article is for you. If you are not working in telecommunications domain and want to know for personal interest about regulatory happenings, pricing decisions of spectrum or want to know why politicians have affinity towards telecommunications ministry portfolio, you can read on. For rest of you, it can be is dry, boring!

3G spectrum auction

With mobile phone industry adding ~10 million subscribers consistently every month, it has become a spotlight of modern Indian expansion. To the media, it is a way to express and show the world how dramatic the economic scene is changing in India. Barely 15 years back, people could think of reaching their near ones located in other towns only by placing trunk call requests with post office and had to wait for a callback to get connected. This apart from hefty, often scary prices of making long-distance calls! This compared to today… where enterprises, SMEs, individuals can make local & long-distance calls for affordable prices has in a way changed the way business is done. The multiplier effect of mobile growth has altered social fiber, media has used this to show to outside world with media-multiplier... on how students have hooked on to messaging… on how pan wala, construction worker and common man on street have changed way they communicate and go about their jobs.

In India, DoT is arm of government which controls the allocation of spectrum. Strategy and pricing is done in close inter working with telecom ministry. The commercial spectrum is allocated to 2G licencees from 1996. The rest of spectrum is large and closely guarded and used for military purposes. The allocated spectrum to large commercial players has been used up. There is an upper limit to the number of subscribers which can be serviced by allocated spectrum to mobile service providers. With number of subscribers rising exponentially, mobile operators need more spectrum to maintain same quality of service. Although mobile technology has been long researched and has now reached a point where it is wide commercial deployment, it is spectrum which is scare resource blocking launch of newer services. For 3G and BWA services, the additional spectrum can come by way of using existing spectrum in a better way or by allocating spectrum meant for the military. It is no surprise that since spectrum is scarce, by demand and supply theory its price is soaring. It is also not surprising that real estate players are entering business of buying spectrum license in hope that they can sell it for higher price later (like real estate).

Mr.Pranab Mukherjee has recently increased estimated value of 3G/BWA auctions from Rs.20,000 crores to Rs.35,000 crores in latest budget. Since then, finance and telecom ministries are debating reserve price for 3G auction. Telecom ministry wanted reserve price to be Rs.2,020 crores whereas finance ministry wanted it to be Rs.4040 crores. The prime minister has reacted firmly by setting up GoM (group of ministers) to decide on the issue. The GoM will create checks for telecom ministry which has been under fire for several questionable decisions in past. The GoM is a welcome move to ensure quick decisions, especially issues like annual revenue-share licenses have to be decided. It will also decide on how many number of revenue slots will be recognized etc. GoM would do well by keeping couple of things in mind.

* Keeping lower revenue sharing for 3G is not great idea – we know how few large well known firms are being investigated for alleged disguising earnings to fall into lower revenue slab.

* Distinction between 3G and BWA services is very thin. Voice traffic also can be transported as data. Once a firm gets BWA license, there will be enough devices in market to provide voice services on the same spectrum.

Why would telecom ministry want to have different reserve price for 3G and BWA services? (Proposed rates for 10 MHz of 3G is Rs.2,020 while for 20 MHz of BWA is Rs.1,010). The lower rate for BWA is justified since BWA devices cannot be used seamlessly for voice. However since number of phones sold are much more than computers sold, more and more of broadband traffic will get diverted from computer to mobile devices. A faulty government policy prevents providing voice services on BWA platform since it doesn’t allow full fledged internet telephony. However in future, when government allows internet telephony completely, BWA licensees will have additional voice capability for no additional costs! They can terminate calls to landline and other mobile phones over BWA spectrum which was bought for lower costs during this auction.

A peek into history - 3G spectrum auction at Britain in 2000

$34 billion was raised by British government for auctioning 3G telecom licenses which concluded in Apr 2000! It was biggest ever auction (till then) in history. The amount of money obtained by selling air to 5 telecom companies raised eyebrows and also doubts in many economists. Till then, there were 4 2G operators viz. Cellnet, One-2-One, Orange and Vodafone. The state owned British telecom eventually bought Cellnet after it was privatized by Margaret Thatcher. Britain had seen an exponential rise in use of cellular phones and was eager to see high speed data, internet access on mobile phones. 2G licenses had been sold by way of beauty contests involving a published set of criterion; not strictly through an auction. It was only after US successfully auctioned off 2G licenses in 1994 did it want to try same for 3G licenses. Rather than selected few bureaucrats judge a beauty contest, auctions were a better method to allocate resources to businessmen who could put their prized bids to best use.

The most common fear in auctions is that end consumers like us will be pushed with higher prices. Like all businesses, telecom companies will charge prices that maximize their profits while keeping competing in mind. At this stage, telecom companies cannot gauge how much an end consumer would be willing to pay for 3G services. Consequently there is a tendency that auctions will be hard fought tending to keep prices low. However during the auctions, bidders will be forced to increase prices in view of competition. Here is where governments should be well aware of ceiling prices; which will ensure that telecom companies survive at end of ordeal and continue to fuel growth of economy in multiple ways.

The published aims of auction were

* To assign spectrum efficiently

* To promote competition

* To ‘realize the full economic value’

Like in India, there were similar regulations that no bidder would be allowed to own more than 1 license and no winner would be allowed to own a license and not put it into commercial operation for more than a year. One of issues which auctioneers felt is that incumbent 2G operators had advantages over new entrants due to established consumer base, brand value and cross optimization possibilities with existing 2G infrastructures. The incumbent operators would be willing to shell out more money for same air. However it will not satisfy 3^rd objective of government to realize full economic value by having a set of colluded incumbent bidders. So like in India, they also mandated ‘roaming’, which would allow an entrant access to incumbents’ network at a regulated price. Another concern of auctioneers was to decide on number of licenses. It is an established theory that 4 players can profitably operate in any business (5^th,6^th and more players erode profit levels, eventually destroying incumbent players). Again like TRAI did in India earlier, they decided to restrict number of licenses to 5. However telecom ministry is now awarding more than 6 licenses in different circles. Bundling of spectrum in various packages was also tried:

* License A – 2 X 15 MHz of paired spectrum plus 5 MHz of unpaired spectrum

* License B – 2 X 15 MHz of paired spectrum with no unpaired spectrum

* License C,D & E – 2 X 110 MHz of paired plus 5 MHz of unpaired spectrum

Incumbent operators were allowed to bid only for B, C, D and E licenses where A was reserved for new operators. 2 A-licenses were on the tender, ensuring that one of them would go to a new operator. An Anglo Dutch auction was used to find best bids (refer to wikipedia for more details on what is Anglo Dutch auction).

The auction design ensured that if new players had only been interested in the 2 large licenses, the competition would have spilt over to smaller licenses also. There were many similar designs within auction which helped government to provide structure to high revenue event. E.g. Incumbent operators who could try to prevent ‘roaming’ were strategically prevented from doing so during the auction. One loophole was that bidders were not asked for a large enough corpus security deposit. Bidders didn’t feel heat of pulling out of race mid-way which could tactfully lure competitors to put in more money than workable price.

It is another issue that this auction worth $34 billion is believed to have led to telecom bubble bust in 2002!

Closing words

There is a clear need for an auction design in India. Auctions are not a matter of ‘one size fits all’ but is more ‘horses for courses’ where auction design needs to be elaborated based on current situation. In India too, a repeat of British 3G auction is not desirable. A well crafted auction is required, not just based on plain economic gains. The result of auction should create an environment where all players work towards creating efficient data services rather than all players limping in economic debts.

Pitfalls in Life Insurance

Dear Readers
Thank you for huge response for my first blog post. I installed a reader count on blog page and result was a tremendous positive surprise! I received lot of comments through email; will appreciate if you insert your comments at end of posts.

This article was written couple of years back for a different context. It is relevant fully today, copy-pasting it here for my blog readers.

Preface: If you want to buy an insurance policy but are not able to reason for yourself and take an informed decision, this article is written for you. If you already are a policy holder and want to analyze whether you made right choice, this article is for you. This article is aimed at sharing with you pitfalls with various insurance policies based on my experience with different insurance agencies. This article is not intended to guide you on which insurance policy to buy, however it will tell you pitfalls which exist in insurance sector, various sales strategies from insurance agents. As an individual, you either have access to too much information over internet etc. or get skewed information from insurance agents. If you are want to get unbiased views, read on.

Definitions

(Note: If you know these basics, skip this section)

· Premium – Money which you pay to insurance company in regular intervals.

· Sum assured – This is corpus money which you have decided that insurance company will give your nominee in case of an unfortunate eventuality of death.

· Term policy – In this kind of policy, you pay premiums for insuring life. In an unfortunate eventuality of death, nominee will be paid a particular sum assured. At maturity of policy, you will not get back money.

· Endowment policy – In this kind of policy, you will get back sum assured along with returns upon maturity of the policy.

· ULIP (Unit linked Insurance policy) – In this kind of policy, the premiums which you pay are distributed towards insuring your life and investing in stock market. Upon maturity of policy, you will get back money depending on stock market performance.

· IRDA – Insurance regulatory and development authority (governing body for insurance sector)

· SIP – Systematic investment plan

Introduction

After deregulation of insurance sector in India, lots of companies now offer life insurance policies. Unlike the past when our parents had only Life Insurance Corporation of India for buying a life insurance policy, there are lots of private insurance companies offering competitive products for insuring your life. Earlier government of India used to guarantee the premiums you pay to LIC I.e. you can feel comfortable even if one corner of your mind might think that LIC might run away with your money. However after deregulating this sector, the government has offered a level playing field to private companies. LIC does not enjoy this special benefit from government anymore. IRDA has ensured that private insurance companies offer as much safety to your money as offered by LIC.

Understanding endowment

Insurance is simply a financial cushion for nominee in eventuality of death, then why is it so complicated? Why are there so many policies?

Insurance planning is often mixed with savings plan. Other than having an insurance policy, you need a sound savings plan to cover for your own pension and future family responsibilities. Insurance companies capitalize on this thought and have different policies insurance and savings needs. They have a different plan for people with different ideologies.

Person X thinks like this “I need to have a life insurance cover. I don’t want to lose my money which I invest regularly as premiums, they have to give back something to me” – An insurance agent will sell an endowment plan to person X. But what is the pitfall in an endowment scheme?

Assume X’s age is 30 years. X chooses an endowment policy for a sum assured of Rs.2.5 lakhs for next 20 years. LIC can offer this policy for an annual premium of ~Rs.6500.

There are two possibilities:

1. Assume that X dies after 19 years - A sum of Rs.2.5 lakh will be paid to X’s nominee. The value of Rs.2.5 lakhs after 19 years would have depreciated to a lesser value.

In today’s value, it will be equivalent to 250000/(1+.06)¹⁹ ~= Rs.83,000.

(assuming depreciation of 6% p.a)

When X bought the policy for Rs.2.5 lakhs, it might have appeared like a good amount of financial cover. But after depreciation, value is not as good! Considering that the basic premise of life insurance is to provide financial cushion to nominee, will it really serve its purpose? (Pitfall)

Given a second chance, X would have revised his policy to take a cover of Rs.1 crore (lets say). However he would have been charged a premium of ~Rs.2.6 lakhs/annum (clearly an expensive, unviable proposition for X). What should he do? Did he think of right kind of policy? It is for you to answer.

2. Person X survives for next 20 years, so the policy lapses - Being an endowment policy, X will get back his premiums additional with a bonus. X would probably receive ~4.5 lakhs (with minor variations from different insurance companies).

What will be its value after depreciating for 20 years? Equivalent to 450000/(1.06)²⁰ ~= Rs.1.4 lakhs in today’s value. Is it a good return of investment over past 20 years? It is for you to answer.

(If the premiums were invested in PF with interest 8%p.a, X would have got ~ Rs.5.1 lakhs. If premiums were invested in a mutual fund giving interest 15% p.a, X would have got back ~ Rs.17.5 lakhs).

In any of above two possibilities, X will be forced to think if he made right choice. Is there a solution? Will X benefit by separating his insurance and saving needs?

Try an illustration: X buys a term insurance policy, decides to save separately with a mutual fund house.

For sum assured of Rs.2.5 lakhs in a term policy, premium charged from most insurance companies’ will be ~Rs.1500 p.a. Assume that he invests Rs.4000 p.a. in a mutual fund giving 15% p.a. returns, his returns after 20 years will be ~ Rs.10.8 lakhs.

Its value after 20 years will be depreciated to 1080000/(1.06)²⁰ =~ Rs.3.5 lakhs in today’s value. Knowing value of such returns, is it better to separate insurance and investment? It is for you to answer.

If benefit of separating insurance and savings (investment) is so evident, why have so many of my relatives/friends bought an endowment policy? There can be 2 reasons:

1. Endowment policy will force you to save regularly as part of your insurance premium (although returns are lesser). However if you are a person with a regular savings regime, this argument is not for you.

2. Insurance premium is exempted from income tax under section 80c. If X buys an endowment policy, Rs.6500 will be exempted from income tax, whereas a term policy would have given only Rs.1500 as income tax exemption. However if you already have savings up to Rs.1lakh p.a. from other investments like PF, PPF, NSC, MF etc which gets covered under section 80c, you have reached the limit for exemption from income tax. You will not get additional income tax benefit from insurance premiums; this argument is not for you.

In summary, insurance and investment are two different things. You need a sound reason to mix both to buy an endowment policy. After reading this article if an insurance agent wants to sell you an endowment policy because it will suffice your retirement needs, you know what to answer. If an insurance agent says an endowment policy returns will suffice your child’s education/marriage expenses, you know how to make an informed decision. Endowment policies are sold mainly as savings/retirement plans. Is an insurance policy meant for this reason? It is for you to answer.

Note: Insurance agents get paid more commission for selling ULIPs, less commission for selling endowment policies, even lesser for selling term policies (pitfall).

Understanding ULIP

In a Unit Linked Insurance policy, a part of your premium is invested in stock market (terminology used is “loading”), some part is deducted as administration charges and rest is marked for insurance. You can choose your risk profile debt/equity/balanced based on your risk appetite and insurance company will invest your money accordingly. In eventuality of death, sum assured is guaranteed to be paid. Additionally, the value of funds invested in stock market will also be given. When you ask an insurance agent for advice, the first policy he will try to sell you will be an ULIP. Based on IRDA guidelines, he will show you growth projections based on 6% p.a and 10% p.a. A premium of Rs.100000 p.a at 10% returns p.a will can give you ~Rs.52 lakhs at the end of 20 years! The power of money compounding over 20 years is enormous and results can be clearly seen/demonstrated on a spread sheet. I have evaluated ULIP products from ICICI Prudential, Birla Sun Life, MetLife and Bajaj Allianz (through agents from Standard chartered bank) and all products are similar in their objectives and conditions applied. However they vary in percentage of premium they allocate for investment or insurance, portfolio of investment and administration fees. The administration charges usually include mortality charges, which is calculated based on various parameters like life expectancy etc. You may want to evaluate your choice of policy based on administration charges.

However you may also want to check what would be the returns if you managed to invest that money on your own, say in a mutual fund SIP. However there are few arguments:

1. Insurance agents will argue that returns from ULIP is tax free i.e. you don’t have to pay income tax on the money which you will get after 20 years (pitfall). Although it is a fact, don’t buy this as an argument because capital gains from long term (>1 year) investments in equity is also exempted from income tax. i.e. Even if you invest in equity Mutual Funds, returns after 1 year is tax free.

2. There is no difference between ULIP and MF in terms of liquidity i.e. you can withdraw your funds anytime after paying an exit load.

3. Insurance agents claim that while ULIP charge ~1.5% as management charges, Mutual fund houses charge ~2.25% as management charges. If true, they also claim that returns from ULIP will beat returns from MF if investment period > 8-9 years. You may want to evaluate this point for making the crucial decision.

ULIPs also come in different flavors like:

1. Pay premium for first 3 years and don’t pay any premium for rest of 17 years – The argument is that returns from your funds in the first 3 years will pay premiums for rest of 17 years. However the premiums are exorbitantly high for 3 years, making it financially unsound in the long term. It is however suitable for people like film stars who have ability to pay high premium in the short term but don’t have assured income in the long term to pay for premiums.

2. Take premium holidays for 3 years during the term, while policy will still continue based on returns of your previous years. This is a sound argument in eventuality of an unforeseen inability to pay premiums in the future. However if you are assured of a regular source of income for paying premiums, this clause will not help additionally.

Your decision on whether to buy a ULIP OR Term policy+MF SIP should depend on all these considerations. In addition, there are few other points to think before taking the final call:

1. ULIP is sold by insurance companies who have expertise with insurance. However MF houses are experts in investment. If you are a strong believer of giving responsibility of your money only to the experts of that field, invest in MF houses.

2. If you are a person who keeps track of stock market and continuously evaluate MF performances, you might want to divert your investments to best available instrument at that moment. A ULIP will not offer this fine control. If you are a person who wants to have this fine control, invest in MF houses.

The choice of endowment/term/ULIP is largely dependent on your long term savings needs, income tax planning and thinking style. Before choosing a policy, avoid known pitfalls to make an informed decision.

Understanding riders

Apart from life cover, insurance companies offer additional, optional riders.

1. ADB (accident death benefit) – IRDA mandates a maximum sum assured of Rs.10 lakh for this rider. If you opt for this rider, you will be charged an additional premium. In case of death due to accident, sum assured of policy will be paid in addition to sum assured of the rider. Even without buying ADB rider, basic sum assured is guaranteed in case of death due to accident. In summary, this rider only increases total sum assured in case of death due to accident. The additional sum assured comes at a lesser price when compared to the actual life cover, which is the only reason why people will want to buy this rider. However if you go for a very high sum assured for life (example: 1 crore), you might not want to buy an additional sum assured in form of ADB rider.

2. CI (Critical Illness) – IRDA mandates a maximum of Rs.5 lakhs sum assured for this rider. If you buy this rider, it will entitle you for sum assured in eventuality of a critical illness (not death). You may want to check out list of all illness which are classified as critical by the insurance company, this is not a standard list mandated by IRDA (pitfall). This rider is considered expensive and some insurance companies like Birla Sun Life do not offer this rider since determination of critical illness is always open to debate and confusion.

3. WoP (Waiver of Premium) – In case of inability to pay premiums in future, you don’t need to pay premiums. Insurance company will however keep your policy alive. In summary, it is insurance for your premiums. Again, this rider is not offered by all insurance companies.

You may want to check on these conditions before making the choice of additional riders. Riders will be given on top of any kind of insurance policy. So your choice of insurance policy is independent of choice of riders.

Closing notes

To make it little simpler for those who want to take a term policy for life cover, I will summarize all relevant points:

1. Buy a sum assured which can suffice financial requirements of your nominee in real value terms at term expiry.

2. You are a person who wants to take control of investments; you have a sound savings regime for long term including pension, child education/marriage etc.

3. Avoid ADB rider since basic sum assured itself is good enough to cover financial requirements of the nominee.

4. You are in touch with the stock market performance; you know which funds do well and are sufficiently informed to make sound investment decisions.

Population of India! - boon or bane?

The crowded spaces of Bangalore city is something which I experience whenever I am traveling to office. There is a dense crowd in almost all major street, people seem to overflow from footpaths onto the streets – of software engineers waiting for company bus, groups of students waiting for school bus, construction workers waiting for their route bus, men in yellow colored hats bustling overhead for Metro construction. And then there are people in cars, autos, hawkers selling cheap articles, smart poor kids selling news magazines near traffic signals shouting latest witty political headlines. And not to forget the people selling pirated movie CDs and latest management books, novels etc on footpaths. From my seat in my company transport, I look beyond the casual colleagues’ talk and odd dumb charades games... and wonder what this ever increasing population is doing to my country. If people are engine for India’s growth, our growth story should be on the ascent.

… Population scientists and demographic experts have made mockery in past of India’s (and China’s) massive population. It is common knowledge that East Asian governments had encouraged smaller families and promoted idea of smaller population. However with the waves of last 2 decades viz. technology, knowledge outsourcing, BPO, IT consulting and services, manufacturing hubs within SEZs (think of Shenzen/Peenya industrial town/ever-surprising neo townships on outskirts of Hassan town) hitting Indian shores, we are given to re-think the impact of population on India’s economy. It has forced decision makers of the country into debates on ways to leverage on existing census numbers.

Getting back into history books (a.k.a websites) to check origin of assumed ideology is both tickling and fun. Thomas Malthus, a clergy Englishman [1]* predicted in his academic essays that increasing population would lead to epidemics, famines or wars! In his time of early 18^th century, intellectuals in East Asian English colonies came from Britain. East Asians borrowed his idea as gospel truth from a white clergyman. India endured multiple famines between 1770 and 1950 – plagues when few provinces got wiped out in entirety. By 20^th century, prophets of Malthusian theory were sounding alarm bells that impacts of uncontrolled population growth in Indian and China will be felt by rest of world. Decision makers of the country bought these seemingly natural ideas and introduced slew of policies… whoever heard of “sterilization of unfit and disabled” and “killing of defective babies”. The coinciding famines in India of 1950s and 1960s leading to large scale farmer suicides and domestic shortages helped to push panic button [2]*. Consequently if you remember when you were at school in 1980s, there were various theories of how the end for this earth was so near. And it was so easy for us to believe considering what was happening around us - famines, ever increasing shortage of jobs, and growing mass of middle class. We know that Indian families are large within themselves - don’t you remember spending holidays at grandparents’ house? With host of cousins enough to form 2 cricket teams and too many to cram into same photo frame of family photo.

Growing global concern of population fuelled by domestic problems forced India also to control birth rates. Government tried “self-control” as method to influence people coupled with Gandhi’s towering preaching on abstinence [3]*. When this method didn’t work, government tried rhythm method and technique of colored beads. Rural men were expected to be educated about human body rhythm cycles… and expected women to signal yes/no to men with help of colored bead. Do people recognize color in darkness? Obviously these schemes failed. Not surprisingly, India’s population grew uncontrolled numbers through 1950s and 1960s even as fertility remained high while infant mortality and death rates fell… This is despite the flurry of advertisements by government to promote smaller families. We all remember different radio advertisements to promote smaller family and hummable number on doordarshan “Hum do, hamare do”.

People in power wanted drastic and quick workable remedies. Dr.S Chandrashekar, minister for health and family planning hinted at scale-on-knuckle measures and remarked “Our house is on fire”… “We can get blaze under control” pointing at sterilization. By 1970s, sterilization clinics were set up for citizens to avail free services. Indians didn’t get lured by any number of sops to compromise on possibility of giving birth to a son who is perceived as social and financial insurance. Government’s methods to persuade people to get sterilized backfired in many ways. E.g. Gowdas refused to take anti-TB BCG since it was rumored that BCG stood for “birth control government”! In 1975, Indira Gandhi imposed emergency rule, which suspended democratic citizen rights and empowered her with new powers of persuasion. Coercion, cruelty and corruption went rampant with rural masses denied rural credit without “nasabandhi” [4]* certificate! Parents of more than 3 children were refused school admission, prisoners were not given parole and employees didn’t get paid without going under knife. There were reported scenes of people being dragged into sterilization clinics after being rounded up like sheep. The emergency era saw 8 million Indians getting sterilized which was less than moderate success. Immediately after in 1977, Indira Gandhi was tossed out of power indicating dislike of masses towards power, persuasion games on seemingly private affairs of people. Janata party, which came to power eventually renamed program from “family planning” to “family welfare” to avoid stigma.

China also got bitten by population bug and emphasized on “right” sizing for better social harmony. Chinese government also launched “later, longer, fewer” program and Deng Xiaoping implemented “one child” policy in 1981. Back here in India, however people didn’t like idea of persuasion and toppled government for implementing nasabandhi and similar programs. Democracy made sure that voice of common man won over policies of a chosen few. China, in meanwhile used strong-arm tactics and Marxist hold to push more than 30 million/year to one-child result. Meanwhile the rumors on how the world would suffer due to over-population grew. In 1973, the Hollywood movie “Soylent Green” [5]* showed how overpopulated world suffers in lack for food for all and how people would resort to cannibalism. However nothing drastic happened even as population grew over the years. On the contrary, since 1900 - the world has witnessed rapid growth of industrial productivity which, with rise of industrial economy lead to remarkable growth in economy. Europe’s GDP doubled every 3 years after 1900. As labor became a powerful force, a larger working population became more valuable. Looking back at Malthus - he wrote essay during industrial era where human capital could achieve manufacturing results in linear proportion. That was the time when human capital did not posses kind of transformational role in economy as it does now. The idea of population as an asset rather than burden has gained currency with knowledge based industries such as IT, telecom, and BT. Infact information economy has now placed human capital as main driver of productivity and growth.

Word of caution – I am not suggesting that unhindered growth in population is way for economic growth. To keep our wits in mid path - our natural resources are no bottomless pool. A billion people may offer us huge human capital but will have detrimental burden on our environment, food and resources.

Economists found it difficult to explain why only East Asia witnessed high economic growth between 1965 and 1990. GDP growth had clocked ~6% pa for ~3 decades. During this period, infant mortality increased… from 181 deaths to 34 deaths per 1000 children. This caused fertility of every woman from 6 to 2 children. This increased number of children and decreased number of children borne by each woman… which increased chance that women were working instead of rearing babies. They were better able to work in fields/industry and contribute to economy rather than just consuming. We saw rise in manufacturing and technology including growth of Singapore in manufacturing and retail, of Hong Kong in finance and of Taiwan in electronics. The reduced mortality rates increased number of young, enterprising workers who in-turn fuelled economy. These young people had fewer children and therefore fewer dependents. East Asia’s working population grew 4 times faster than dependent population. This generation had lower social costs viz. costs to feed dependent population. This meant more savings and ploughing back into economy. In India, savings rate has grown to 34% of GDP and is projected to 40% by 2015. This additional savings create additional capital for investment and growth of economy [6]*. During Second World War, people were forced to postpone having children and they all had children in one big wave after the war. This created a baby boom of young workers and contributed to 20% GDP growth in US economy between 1970 and 2000. This article can go on, but this is logical point to end. where we can agree that population increase is not necessarily a bane.

Whats to come in my next blog (on top of my mind)?

- Differences in how China and India have handled population crisis.

- How democracy is key differentiator in giving India the edge for future?

Looking back at Indian situation, the “pigs have already passed through the python”… there is more to look ahead than backwards in Indian politics. The UPA government is in full power at center with dependable and eminent set of people handling top ministries. The prime minister has already started pet policy initiatives giving technocrats few responsible and decision making positions in administration. Lets wish they bring their hands together to “roll up red tape and roll out red carpet” for developmental initiatives and inclusive policies.

For those who are interested on topics of public policy and reforms, there are very informative books by today’s politicians’ viz. P.Chidambaram, Montek Singh Ahluwalia, Shashi Taroor, Veerappa Moily. Those also interested in visionary thoughts can read books from Narayana Murthy (collection of his speeches), Essential Gandhi, Ramachandra Guha (India after Gandhi), Nandan Nilekhani (Imagining India).

My data sources are various books, Wikipedia and Google.

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1* http://en.wikipedia.org/wiki/Thomas_Robert_Malthus

[2] * In 1960 India had consumed 1/8^th of US’s total wheat production. And it has grown to 1/4^th by 1966.

[3] * Refer book “Essential Gandhi” which is an anthology of his writings.

[4] * Nasabandhi is Hindi colloquial word for sterilization

[5] * http://en.wikipedia.org/wiki/Soylent_Green

[6] Theory of David bloom http://en.wikipedia.org/wiki/David_Bloom