A few weeks back a friend during the course of a conversation asked, “What if Google goes paid?”. “I will pay for it,” pat came my response, even before he could finish asking his question.
As a freelance writer, who has ambitions of writing more books in the years to come, Google is a huge source of information for me. Research papers, data (Indian as well as international), news (both old and new, Indian as well as international) and so on, keep me going.
At least that is how I use Google on most days. But there are other uses as well. People use it to find out restaurants, electricians, plumbers, and so on. The uses of Google for an individual who has access to internet (either through a smart phone or through a computer) are simply way too many to put down in a 600-700 word column.
So, the question is will people pay to subscribe to Google, if it ever decides to go paid i.e. only those who pay a certain amount of money every month or every year, will be allowed to access it. While this sounds like an interesting question to ask, it is not the right question to ask.
Or so I figured out, after the conversation I was having with my friend came to an end. The right question to ask is will Google ever become a paid website, instead of asking will you pay for it, if it becomes one.
Before I go any further, it is important to explain the concept of network externality in economics, which applies in this case. This is a situation where one person’s purchase of a good or a service, makes it more valuable for other prospective consumers.
Take the case of a telephone (or a mobile phone). If only one person is on the network, it is essentially useless. For it to be of any use, at least two people need to be on it. Of course, if only two people are on it, then it is not financially viable. So the network needs to attain a certain size.
Or take the case of a social networking site like Facebook. I am on Facebook because most of my friends and people I may want to be friends with in the future, are on Facebook.
This, also explains why Orkut, lost out to Facebook, and ultimately had to shutdown. There just weren’t enough people on it, for it to continue attracting more people. Everyone had moved on to Facebook. This also explains why Google Plus never really took off. Most people were happy being on Facebook and did not move to Google Plus.
As Ray Fisman and Tim Sullivan write in The Inner Lives of Markets in the context of network externality: “The bigger a company gets, the more valuable it is to each successive customer, there’s a huge premium on expanding your customer base.” Now look at this in the context of Google. It fits the bill totally.
As Fisman and Sullivan write: “Why, for example, does Google let you search the web for free, even though maintaining its primacy in the search engine market costs the company a fortune in R&D [and] computing infrastructure.”
The answer lies in the fact that more users that Google has, the more viable its business model gets. As Fisman and Sullivan point out: “A bigger user base allows Google to extract ever-higher revenues from the other side of the market—the advertisers, who pay for search listings.”
Hence, Google is free because that is the only way to ensure that it will continue to have the kind of following that it does. And if it is in that situation, it can continue to charge advertisers a good amount of money. The fact that Google is free, ensures that its business model continues running. Given this, it is highly unlikely that in the near future, Google will ever turn paid.
Not, at least, till its current business model keeps running.
One of the themes I have regularly explored is the mess that public sector banks are in. Some fresh data coming in shows that the situation continues to be hopeless. The following table shows the loan-write-offs of the various public sector banks over the last decade.
(in Rs crore)
Source: Reserve Bank of India
The above table clearly shows that the loan write-offs of public sector banks have clearly gone up majorly over the last ten years. Banks essentially raise deposits to give out loans. These loans are typically (though not always) given against a collateral. This is done, in order to ensure that if the borrower stops repaying the loan, then the collateral can be seized and the outstanding loan amount can be collected.
But things don’t always turn out like that. Banks are not able to collect every loan that is defaulted on. In the end, they need to write-off these uncollected loans. As can be seen from the above table, the write-offs of public sector banks in India have gone up dramatically over the years. What this tells us is that over the years, banks have been unable to collect a greater amount of loans that have been defaulted on. Indeed, this is a worrying trend.
Now take a look at the following table. This shows that the banks are able to recover some amount of loans that have been defaulted on.
Recovery (in Rs crore)
Source: Reserve Bank of India
What the above table tells us is that the recovery of defaulted loans has been lower than the write-offs in each of the last four financial years. What this clearly tells us is that the ability of public sector banks to recover defaulted loans is limited. In fact, between 2013-2014 and 2015-2016 the ratio of write-offs to recovered loans has gone up from 1.02 to 1.51. This is not a healthy trend.
Let’s look at the numbers of the State Bank of India group (i.e. the State Bank of India and its associate banks).
Write-offs (in Rs crore)
Recovery (in Rs crore)
What the above table clearly shows us is that write-offs as a proportion of recoveries have gone up over the years. What is true for the public sector banks as a whole is also true for the SBI group.
In this scenario of increasing write-offs in comparison to recoveries, it is hardly surprising that the government has to keep putting money into these banks. Earlier this month, on July 19, the government decided to pump in Rs 22,915 crore, into thirteen public sector banks.
Name of Bank
Amount (in crore)
Bank of India
Central Bank of India
Indian Overseas Bank
Punjab National Bank
State Bank of India
Union Bank of India
United Bank of India
It needs to be pointed out here that the government has already infused Rs 1.02 lakh crore of capital between 2009 and September 2015 into public sector banks. For 2016-2017, the government has budgeted Rs 25,000 crore to be invested in public sector banks.
In fact, as the finance Arun Jaitley, said in his February 2016, budget speech: “If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks.” This was Jaitley’s way of saying that the government will do whatever it takes to keep these banks going.
Of the Rs 25,000 crore allocated towards recapitalization of banks at the beginning of the financial year, Rs 22,915 crore has been allocated to thirteen banks. Of this, the State Bank of India gets Rs 7,575 crore or a third of the allocated amount. 75 per cent of the allocated amount will be released immediately to banks and the remaining will be released later, depending on the performance of the bank.
As of March 31,2016, the total bad loans of public sector banks stood at Rs 4,76,816 crore or 9.32 per cent of the total advances. As of March 31, 2015, the total bad loans had stood at Rs 2,67,065 crore or 5.43 per cent of the total advances. This basically means that during the course of one year, the bad loans have jumped up dramatically. The only reason for this is that, the public sector banks up until now were not recognising bad loans as bad loans. Now the Reserve Bank of India is forcing them to do that.
As we have seen earlier the recovery rate of bad loans of public sector banks is very low. Given this, a significant portion of the bad loans will have to be written-off in the years to come. Hence, Rs 22,915 crore of recapitalization is not going to be anywhere near enough.
Further, as per the Indradhanush Reforms released in August 2015, the capital requirement of public sector banks up to March 31, 2019, has been estimated to be around Rs 1,80,000 crore. Of this, the government will invest Rs 70,000 crore and the remaining the banks are expected to raise from the market.
As the bad loans number of Rs 4,76,816 crore tells us, Rs 70,000 crore will turn out to be a terrible underestimate. In fact, some other forecasts, are way bigger than what the government is estimating.
The PJ Nayak Committee has estimated that the that banks will need a capital of Rs 5.87 lakh crore. The committee further assumes that if the government puts in 60 per cent of the amount then it will need Rs 3.5 lakh crore.
Another estimate made by Viral Acharya of Stern School of Business and Krishnamurthy V Subramanian of the Indian School of Business, in a research paper titled State intervention in banking: the relative health of Indian public sector and private sector banks, suggests bigger numbers.
The professors come up with three scenarios. In what they call the extremely prudent scenario they feel that the public sector banks will need around Rs 9,97,400 crore of capital. In the less prudent scenario, banks will need Rs 6,53,300 crore of capital. In the least prudent scenario banks would need Rs 5,12,300 crore of capital.
It needs to be pointed out that not all of this capital will be required because of bad loans. Basel III norms which require banks to hold greater amount of capital against the loans they give out, come into effect from April 1, 2019. Banks need to prepare to move towards Basel III norms.
In a recent research report Suresh Ganapathy of Macquarie wrote that banks need at least Rs 1.6 lakh crore over the next three years, compared to the Rs 45,000 crore that the government plans to invest.
If the government decides to fund this money out of its own pocket, the fiscal deficit is likely to go through the roof. Fiscal deficit is the difference between what the government earns and what it spends.
In the end the government will have no option but to sell some of these banks. The thing is it will take its own sweet time doing the same.
To conclude, the mess in public sector banks, is not going away any time soon.
In the column dated July 21, 2016, I had said that the Food Security Act does not really provide “food security” to the citizens of this country. And given that nearly three years have passed after the passage of the Act, it is time that the government took a relook at the functioning of this Act.
In case you haven’t read the piece that appeared on July 21, 2016, I suggest you do that, before getting around to reading this one.
Other than the fact that the Food Security Act does not provide food security, there is also a lot of wastage of rice and wheat that are distributed to the citizens of this country under the Act.
The food grains are distributed using the network of around 5,00,000 fair price shops located all over the country. The trouble is that this network is extremely leaky. Economists Ashok Gulati and Shweta Saini calculate this leakage in a research paper titled Leakages from the Public Distribution System and the Way Forward.
In this research paper Gulati and Saini calculate the total amount leakage through the public distribution system. The union government supplies rice and wheat to states and union territories in order to meet the grain distribution commitments under the Food Security Act. Over and above the normal allocations, ad-hoc allocations are also made.
Further, the state wise monthly per capita consumption of rice and wheat is also available. This is used to calculate the consumption numbers of rice and wheat for every state. As Gulati and Saini point out: “The grains off-taken by each state gives the total grain supply in the year and the consumption figures give how much is received by the targeted consumer. The excess of what is supplied over what is consumed should reflect the extent of leakage of grain from the system. Our calculations show that in 2011-12, 25.9 MMTs or 46.7 per cent of the off-taken grain leaked from the public distribution system.” Hence, a little less than half of the grains distributed through the public distribution system do not reach those who they are meant for.
In fact, in 15 states, the leakage was more than 50 per cent. This included: Delhi (82.6 per cent), Gujarat (72.2 per cent), Haryana (70.3 per cent), West Bengal (69.4 per cent), Bihar (68.7 per cent) and Punjab (60.7 per cent). In fact, in some North Eastern states, like Nagaland and Manipur, the leakages were as high as 95 to 97 per cent. In absolute numbers, Uttar Pradesh comes at the top of the list. This is followed by West Bengal, Bihar, Maharashtra, Rajasthan and Madhya Pradesh.
Other estimates suggest that the leakage of the public distribution system is anywhere between 40 per cent to 54 per cent. Hence, the point is that the leakage of the public distribution system run through the five lakh fair price shops, is excessive. It means that a major portion of the food grains distributed through these shops does not reach the intended beneficiaries.
As the Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar committee report) points out: “Leakages don’t happen in a vacuum. There is connivance at several levels, breeding corruption. It is now time to think out of the box and find some alternative policy solutions that can plug such large scale leakages and associated corruption, and that can ensure that benefits reach directly to the neediest.”
And how can this be done? The answer lies in giving cash directly to the beneficiaries of the Food Security Act. There is this great belief among the well-off that giving money directly to the poor will mean that the men will simply drink it away. This argument only sounds true because it plays on a stereotype of the poor being poor because they waste their time drinking.
Nevertheless, as economist Joseph Halon points out: “Poverty is fundamentally about a lack of cash. It’s not about stupidity.” (Source: Rutger Bergman’s Utopia for Realists). Hence, if poor do get money under an unconditional cash transfer scheme, they don’t waste it on alcohol and tobacco. In fact, there is enough research from all over the world that proves that.
As Rutger Bergman writes in Utopia for Realists: “The great thing about money is that people can use it to buy things they need instead of things that self-appointed experts think they need. And, as it happens, there is one category of product which poor people do not spend their free money on, and that’s alcohol and tobacco. In fact, a major study by the World Bank demonstrated that 82% of all researched cases in Africa, Latin America, and Asia, alcohol and tobacco consumption actually declined.”
In fact, such an experiment has happened in Delhi as well, and the results were along similar lines. As Gulati and Saini point out: “It is worth noting that a study by the Government of Delhi and SEWA, under the GNCTD-UNDP project, tested the effects of substituting PDS rations by cash transfers for BPL families in a west Delhi region in the year 2011. It found that the consumption of the studied food items did not fall, and interestingly, the consumption of items like pulses, eggs, fish and meat went up. Contrary to expectations, the alcohol consumption did not increase; rather, the efficiency of PDS shops surely increased!”
The Food Security Act just distributes rice and wheat at subsidised prices. A nutritious meal is about consuming other food items as well. By giving cash directly to families, families can decide what is best for them. In fact, by moving to cash transfers, the country can save close to Rs 33,087 crore, Gulati and Saini calculate, and that is clearly a lot of money. This money can be better utilised elsewhere.
Given this, the Shanta Kumar committee has recommended that cash transfers should be introduced by starting with the “large cities with more than 1 million population; extending it to grain surplus States, and then giving option to deficit States to opt for cash or physical grain distribution.” The Committee has also said that the “cash transfers can be indexed with inflation” and “given to the female head of the family”.
The trouble is that the infrastructure that allows the government to do this (Jan Dhan bank accounts seeded with Aadhar numbers) is not yet ready. The sooner this gets ready, the better it will be for the nation as a whole.