Water Shortage: Lack of Water Storage Facilities is the Real Problem


Every week the Central Water Commission (CWC) puts out the total volume of water that it has in 91 storage reservoirs all over the country. These reservoirs have a total storage capacity of around 157.8 billion cubic metres(BCM). This amounts to around 62% of the total storage capacity of 253.4 BCM in the country.

Hence, the data put out by CWC is a good representation of the total water stored in the reservoirs across the country.  For the week ending April 13, 2016, the total amount of water stored in these reservoirs stood at 35.8 BCM. Given that the total storage capacity of these reservoirs is around 157.8 BCM, the total amount of water currently available amounts to around 23.3%. This is less than one-fourths of the total storage capacity.

How does the situation look if we were to compare it with the same time last year? As on April 16, 2015, the total amount of water in these 91 reservoirs had stood at 50.9 BCM. This amounted to around 33% of the total capacity of these reservoirs.

Further, the total amount of water currently available is around 70.3% of that was available last year. Hence, the situation has deteriorated since then. This can be explained by the fact that the country has had two bad monsoons.

In 2015, the monsoon rains had stood at 86% of the long period average (LPA). In 2014, the monsoon rains had stood at 88% of the long period average(LPA). Two bad monsoons have essentially ensured that the total amount of water available in the CWC reservoirs is currently very low.

The good news is that this time around the monsoon rains have been predicted to be at 106% of the long period average. Unless, the India Meteorological Department goes badly wrong, the monsoon rainfall is going to be much better than the previous two years. This should help building up the water levels in the CWC reservoirs.

But that is just the short-term solution.  The per capita water availability in India has been falling over the years. The average per capita availability of water as per the 2001 census was 1816 cubic meters. This fell to 1545 cubic metres as per the 2011 census. The number must have fallen further by now.

In fact, data from World Bank suggests that in 2014, the renewable internal freshwater resources per capita in India stood at 1,116 cubic metres. This had stood at 1,226 cubic metres in 2007.

As the Economic Survey of 2015-2016 points out: “India has much lower levels of water per capita than Brazil, one of the world’s leading agricultural countries. This constraint is exacerbated because, while Brazil and China use approximately 60 per cent of their renewable fresh water resources for agriculture, India uses a little over 90 per cent.”


So what is the way out of this? The simple answer is creation of more water storage capacity to start with. As Akhilesh Tilotia of Kotak Institutional Equities and author of The Making of India writes in a recent research note titled Dam It: “India’s consumption of water was estimated to be 1,030 BCM per year in 2010 and is expected to rise to 1,498 BCM by 2030E. The current consumption of water would hence be around 1,100 BCM (of which ~80% of the water is used for agriculture and rest is split between housing and industry). For a country that even in a failed monsoon gets 2,640 BCM of rain, servicing a requirement of 1,100 BCM should not ideally be a challenge – so what gives?

Further, there are rains, other than the monsoon, and then parts of India get snow as well. This leads Tilotia to conclude that India “receives a precipitation of ~4,000 BCM of rains (and snow) every year.”

So the consumption of water stands at 1100 BCM. Even a bad monsoon gets 2640 BCM of rain, so where does the real problem lie? As Tilotia writes: “It should be obvious that if the bulk of rains fall in a few months of the year, the only way to get water through the year is to bank it. There are two ways in which water can be banked: a natural process of water seeping underground which is then pulled out over the course of the year or by holding back the water in artificially created storage areas or dams. As we have noted above, India has the capacity to store only 253 BCM of water (or less than 10% of normal monsoon rains). It is no surprise that we annually find ourselves without water in summers!

The point being that if India’s water problem needs to be solved, then first and foremost we need to create more water storage capacity to start with.

Further, efficiency of water usage in agriculture also needs to improve. As the Economic Survey points out: “Although water is one of India’s most scarce natural resources, India uses 2 to 4 times more water to produce a unit of major food crop than does China and Brazil  (Hoekstra and Chapagain [2008]). Hence, it is imperative that the country focus on improving the efficiency of water use in agriculture.”

This will start to happen once state governments price power for agriculture at the right price, instead of selling it cheap or giving it away free. As the Economic Survey points out: “It has long been recognized that a key factor undermining the efficient use of water is subsidies on power for agriculture that, apart from its benefits towards farmers, incentivises wasteful use of water and hasten the decline of water tables.”

The solutions to the water problem are well known. The question is do the government(s) [state governments as well as the central government] have the political will and the necessary money to go ahead and implement them.

The column originally appeared on the Vivek Kaul’s Diary on April 20, 2016

Piketty’s Tax Plan to Lower Inequality in India is Slightly Rickety

thomas piketty
This is something I wanted to write last week but could not given that Satyajit Das’s three part interview took up all the space.

The French economist Thomas Piketty was in Delhi recently to launch the Hindi edition of his book Capital in the Twenty First Century, among other things. During the course of an interview to The Hindu, Piketty said: “I hope the Indian elite will behave much more responsibly [in paying more taxes] than the western elite did in the 20th century.”

Piketty wants India’s elite to pay more tax to ensure that the income inequality in India comes down. In another interview to the Mint newspaper Piketty said: “India is a relatively high inequality country with a very strong legacy of extreme inequality for centuries between groups.”

Piketty feels that India’s income inequality is close to that of Brazil and South Africa with the top 10% making 50-60% of the total income. Piketty also feels that the income inequality in India may have gone up in the recent past. As he told The Times of India in an interview in November 2015: “The share of India’s national income going to top percentiles declined in the decades following independence, but has been rising since the 1980s-1990s, and is now back to pre-Independence levels, or maybe has surpassed them. The problem is that we do not really know, because it has become impossible to access income tax statistics.”

This income inequality can be addressed by taxing the rich more, feels Piketty.

[In fact, everyone does not agree with Piketty’s view of income inequality in India. Here is another view.

As Tim Harford writes in The Undercover Economist Strikes Back: “There simply isn’t enough money in India yet for it to be unequal.”

Harford explained what he meant by this in an interview to me where he said: “The World Bank economist Branko Milanovic has this idea of the “inequality possibility frontier”. Imagine an extremely poor subsistence society. Then imagine some class of plutocrats, who somehow confiscate wealth and spend it themselves. How much can they take? The answer is: not much if the society is to survive, because the poor cannot dip below the average income because the average income is barely enough to keep you alive. Now imagine a much richer society. This, in principle, could be far more unequal because the poor could still survive on a tiny fraction of the average income. Milanovic and co-authors were interested not only in how unequal a society is, but how unequal it is relative to how unequal it could possibly be. My point was that despite important gains over the past twenty years, India is still a very poor society. There’s a limit to how unequal it can get until it gets richer – which should make us worry about the inequality we do see.”]

Let’s get back to Piketty. Taxing the rich more was one of the main points that Piketty made in his book Capital in the Twenty First Century. As he writes: “The historical evidence suggests that with only 10-15 percent of national income in tax receipts, it is impossible or a state to fulfil much more than its traditional regalian responsibilities: after paying for a proper police force and judicial system, there is not much left to pay for education and health. Another possible choice is to pay everyone—police, judges, teachers, and nurses—poorly, in which case it is unlikely that any of these public services will work well.”

How do things look in India’s case? If we look at the annual budget of the government of India for 2015-2016, it’s tax revenue amounts to around 6.5% of the nominal gross domestic product (or national income). This is well below the limit that Piketty talks about.

It is very clear that the central government needs to collect more taxes than it currently is. There is no denying that. Piketty feels that it is time that India’s rich pay more taxes. He also suggests that India’s rich should be taxed more. It is important to realise here that the rich are not going to pay higher taxes on their own and hence, they need to be taxed more.

As Piketty told The Hindu: “India has zero wealth tax,” with the underlying message being that India needs to tax those who have wealth.

There are two issues here essentially: taxes and inequality. Let’s talk about inequality first. As Satyajit Das, an economic commentator and the author of The Age of Stagnation put it to me: “There are several sides to inequality. There is a moral and ethical dimension. There are arguments of fairness. There are arguments of proper incentives for achievement and skill. Each person will have a different view on that.”

But the economic argument is simpler. And what is that? As Das puts it: “First, empirical research suggests that an increase in income inequality by 1 Gini point decreases the annual growth in GDP per capita by around 0.2 percent.” Gini coefficient is a measurement of inequality where a gini coefficient of zero expresses perfect equality whereas a gini coefficient of one expresses maximal inequality.

To put it in simple English greater inequality of income leads to slower economic growth. And why is that? Das has an answer: “Higher income households have a lower marginal propensity to consume, spending a lower portion of each incremental dollar of income than those with lower incomes. US households earning US$35,000 have a marginal propensity to consume an amount from each additional dollar of income which is around three times that of a household with an income of US$200,000.”

Inequality comes with a huge social cost as well. As Das puts it: “Widening disparities in income level also impose direct costs such as life expectancy, crime levels, literacy and health. Rising inequality is associated with higher crime rates, particularly violent and property offences, poorer health, as well as family breakdowns and drug use. Unequal societies are affected by diseases of poverty, such as TB, malaria and gastrointestinal illnesses arising from poor nutrition and hygiene, inadequate housing, and a lack of
sanitation and access to timely health services

What all this clearly tells us is that income inequality is a problem. Is taxing the rich more really a solution to this?

It is worth asking here in the Indian context who are the rich when it comes to paying taxes? It is worth remembering here that in his February 2013 budget speech, the then finance minister P Chidambaram had estimated that India had only 42,800 people with a taxable income of Rs 1 crore or more.

As Piketty said in one of his interviews it is next to impossible to get hold of income statistics in India. Nevertheless, some progress has been made in the recent past. Akhilesh Tilotia of Kotak Institutional Equities, who is also the author of The Making of India, has done some excellent analysis on this front.

As Tilotia writes in a research note titled How Many Crorepatis in India released in early December 2015: “As e-filing of income taxes becomes the norm and the government gives out glimpses of data, it is now possible to estimate the number of entities in various slabs of incomes. Data suggests that over the four-year period of FY2011-14, the number of non-corporate entities reporting incomes > Rs10 million [or Rs 1 crore] has gone up 3 times to 63,589.” A non-corporate assesse includes “individuals, Hindu undivided families, partnerships, association of persons, etc.” This is around 0.5% of India’s population writes Tilotia.

What does this tell us? This tells us very clearly that very few of India’s rich actually pay taxes. So increasing the tax rates, as Piketty suggest, is really not a solution because the government will end up taxing the same set of people who are already paying a major part of India’s taxes.

Take the case of wealth tax. The finance minister Arun Jaitley abolished the wealth tax in the budget speech he made in February 2015. As Jaitley said during the course of his speech: “The total wealth tax collection in the country was Rs 1,008 crore in 2013-14.”

This basically means two things: a) Very few people in India bothered paying wealth tax. b) The income tax department was not in a position to get more people to pay wealth tax.

Also, it is worth remembering here that many Congress finance ministers since independence drove a substantial part of the Indian economy underground by having very high rates of income tax. The marginal rate of income tax even reached 97% at a certain point of time.

So a higher income tax rate is clearly not a solution to reduce income inequality in India. The solution is to bring more and more Indians who should be paying income tax, but do not, under the tax bracket. This means simplifying the income tax system. It also means making the income tax department more efficient through the use of information technology. And finally, it means reducing corruption in the department.

That is the solution to reducing income inequality in India. Higher tax rates are clearly not the way to go about it.

This column originally appeared in the Vivek Kaul’s Diary on February 1, 2016.

Some New Lessons on Jobs from an Old Economist

hyman minsky
Many economists do not write in a language which is easily understandable. While John Maynard Keynes was a terrific writer (he is possibly the only economist who actually came up with one-liners), his magnum opus The General Theory of Money, Interest and Employment, which was published in 1936, isn’t such an easy read.

Believe you me! I have tried reading it several times over the years.

Just because the book isn’t an uneasy read, doesn’t mean that the points it is trying to make are not important. As Paul Samuelson, the first American economist to win a Nobel Prize, wrote about Keynes’ book, in a research paper titled Lord Keynes and the General Theory. As he wrote: “It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his five shillings…It is arrogant, bad tempered, polemical and not overly generous in its acknowledgements. It abounds in mares’ nests and confusions…In short, it is a work of genius.”

Another economist whose work is not easy to read is the American economist Hyman Minsky, who died in 1996. The world discovered Minsky and his work in the aftermath of the financial crisis that started in September 2008 and so did I.

I tried reading Minsky’s magnum opus Stabilizing an Unstable Economy but could only read it half way through. I have been lucky to have since discovered other authors and economists who have tried to explain Minsky’s work in a language that I have been able to understand.

Over the last few days I have been reading L Randall Wray’s Why Minsky Matters—An Introduction to the Work of a Maverick Economist. Other than discussing Minsky’s views on banking and the financial system in great detail, Wray also discusses what Minsky thought of unemployment. Minsky’s interest in unemployment primarily came from the fact that he was brought up during The Great Depression, when the United States saw never before seen levels of unemployment and a huge contraction of the economy.

And what did Minsky think of the unemployment problem? As Wray writes: “His argument [i.e. Minsky’s] was that simply increasing the “employability” of the poor by providing training without increasing the supply of jobs would just redistribute unemployment and poverty. For every better trained worker who got a job, a worker with less training would become unemployed. Minsky was not arguing against better education and training—he was arguing that to reduce unemployment and poverty we need more jobs, too.”

Minsky also argued against the idea that “if the economy grows at a sufficiently robust pace, the jobs will automatically appear.” As Wray writes: “The notion that economic growth together with supply-side policies to upgrade workers and provide proper work incentives would be enough to eliminate poverty was recognized by Minsky at the time to be fallacious. Indeed, evidence suggests that economic growth mildly favours the “haves” over the “have-nots”—increasing inequality—and that jobs do not simply trickle down.”
How do things stack up in the Indian context? First and foremost, let’s look at the youth literacy number and how it has changed over the years. As per the Human Development Report, in 1990, the youth literacy rate (i.e. individuals in the age 15 and 24) was at 64.3% in 1990. This improved to 76.4% in 2003. In 2013, the youth literacy rate for men was at 88.4% and for women at 74.4%.

What these data points tell us clearly is that the education level of India’s youth has improved over the years. But has this led to more jobs? Answering this question is a little tricky given how bad Indian data on jobs is.

Nevertheless, as the Economic Survey released in February 2015 points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labour force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent.”

Hence, even though the youth education has improved over the years, this hasn’t led to an adequate number of jobs. This is clearly visible in all the engineers and MBAs that we produce without having the right jobs for them.

As Akhilesh Tilotia writes in The Making of India: “An analysis of the demand-supply scenario in the higher education industry shows significant capacity addition over the last few years: 2.4 million higher education seats in 2012 from 1.1 million in 2008.” In 2016, India will produce 1.5 million engineers. This is more than the United States (0.1 million) and China (1.1 million) put together.
The number of MBAs between 2012 and 2008 has also jumped to 4 lakh from the earlier 1 lakh. As Tilotia writes: “India faces a unique situation where some institutes (IITs,IIMs, etc.) are intensely contested while a large number of the recently-opened institutes struggle to fill seats…With most of the 3 million people wanting to pursue higher education now having an opportunity to do so, the big question that should…be asked…are all these trained personnel required? Our analysis seems to suggest that India may be over-educating its people relative to the current and at least the medium-term forecast requirement of the economy.”

This explains why many engineers and MBAs cannot find the right kind of jobs and have to settle for other jobs.

A major reason for the lack of enough jobs is the fact that Indian firms start small and continue to remain small. As Economist Pranab Bardhan writes in Globalisation, Democracy and Corruption: “Take the highly labour-intensive garments industry, for example. A combined dataset [of both the formal and informal sectors] shows that about 92 per cent of garment firms in India have fewer than eight employees.”

It’s only when small firms start to become bigger, will jobs be created. As the Economic Survey points out: “A major impediment to the pace of quality employment generation in India is the small share of manufacturing in total employment…This is significant given that the National Manufacturing Policy 2011 has set a target of creating 100 million jobs by 2022. Promoting growth of micro, small, and medium enterprises (MSME) is critical from the perspective of job creation which has been recognized as a prime mover of the development agenda in India.”

And this, as I keep saying, is easier said than done.

The column originally appeared on the Vivek Kaul Diary on January 20, 2016


Why post graduates and PhDs want to be peons

At a recent literature festival two well-respected veteran journalists were a part of a discussion. During the course of the discussion one of them said that he was travelling through Bihar recently, in the run up to the state assembly elections held in October and November, earlier this year. And he was surprised to know that in Bihar a job actually means a government job. To this the other senior journalist added that it means the same in other parts of the country as well.

This at a very basic level explains the fascination a large part of India has for government jobs. It is another extension of what we like to call a mai-baap sarkar.

In fact, over the years, reports have regularly appeared in the media about people with post graduate degrees, engineering degrees, MBAs and even PhDs, applying for jobs at the lowest level in the government.

Take the recent example from Uttar Pradesh. For a 368 posts of grade IV staff (peons) at the state Secretariat, the Uttar Pradesh government received 23.25 lakh applications. This included around 250 PhDs, 25,000 post graduates and 1.52 lakh graduates. “If we start interviewing such large number of applicants, it will take more than two years to complete the process,” a state government official told The Indian Express.

If 23.25 lakh people are applying for 368 jobs, it clearly shows the sad state of job creation in the state of Uttar Pradesh. What is even more surprising is that people with good degrees have applied.

Nevertheless what happened in Uttar Pradesh is not an isolated example and has been happening in other parts of the country as well. Take the case of Rajasthan University which sometime in 2011 wanted to employ 15 peons. It got 3000 applications for it. The Vice Chancellor of the University told NDTV that the university had received applications from: “candidates who’ve done PhD, MPhil, MBA and Msc…We are really surprised to get applications from such highly-qualified people.”

Or take the recent case in Chhattisgarh where 75,000 applications were received for 30 posts of peons in the Directorate of Economics and Statistics of the Chhattisgarh. The applicants included post graduates in arts and sciences and engineers as well, a news-report said.

What explains this trend? Lack of jobs is one answer. The fascination for government jobs and the job security that comes with it, is another. The fixed hours that government jobs have to offer is another possible reason. But there is a fourth answer to this as well. At lower levels, the government jobs are much better paying than the private sector. And there is data to back it up.

As the Report of the Seventh Pay Commission points out: “To obtain a comparative picture of the salaries paid in the government with that in the private sector enterprises the Commission engaged the Indian Institute of Management, Ahmedabad to conduct a study. According to the study the total emoluments of a General Helper, who is the lowest ranked employee in the government is Rs 22,579, more than two times the emoluments of a General Helper in the private sector organizations surveyed at Rs 8,000-9,500.”

Hence, the IIM Ahmedabad study “on comparing job families between the government and private/public sector has brought out the fact that…at lower levels salaries are much lower in the private sector as compared to government jobs.”

This explains why so many people end up applying for jobs of peons with the government. The economic incentive is at work. It also explains why so many people with degrees end up applying for low-end jobs with the government. Over and above the salary, any money from corruption can also be added to the kitty.

Further this is not a recent phenomenon and has been at work for a while now. As Professor R Vaidyanathan of IIM Bangalore put it in 2008: “Most of the discussion on the emoluments of the government employees focuses on the senior level positions like that of Secretary etc. But more important is the positions at the lower end of the hierarchy. There was an interesting news item sometime ago about there being over 11,000 applicants for just three posts of peons advertised by the Haryana Electricity Regulatory Commission.”

So what is happening in 2015 was also happening in 2008. As Vaidyanathan writes: “This is hardly surprising considering the lower the category of position in government the larger is the number of aspirants. The salary and perks in government are significantly higher than those of the private sector at the lower levels. Reports suggest that post-implementation of the Pay Commission report [the Sixth Pay Commission i.e.], the lowest-level worker will get more than Rs 10,000 per month as pay. In the private sector, a peon or similar-category position might fetch around Rs 3,000 or at best Rs 5,000. An important consideration is the hours of work involved.”

Another point that needs to be discussed here is that we are producing many more engineers and MBAs than can be possibly absorbed in adequate jobs. As Akhilesh Tilotia writes in The Making of India: “An analysis of the demand-supply scenario in the higher education industry shows significant capacity addition over the last few years: 2.4 million higher education seats in 2012 from 1.1 million in 2008.” In 2016, India will produce 1.5 million engineers. This is more than the United States (0.1 million) and China (1.1 million) put together.

The number of MBAs between 2012 and 2008 has also jumped to 4 lakh from the earlier 1 lakh. Also, the quality of many of these engineers and MBAs is not up to the mark. As Tilotia writes: “India faces a unique situation where some institutes (IITs,IIMs, etc.) are intensely contested while a large number of the recently-opened institutes struggle to fill seats…With most of the 3 million people wanting to pursue higher education now having an opportunity to do so, the big question that should…be asked…are all these trained personnel required? Our analysis seems to suggest that India may be over-educating its people relative to the current and at least the medium-term forecast requirement of the economy.”

And this to some extent also explains why people with good education degrees apply for jobs of peons.

The column originally appeared on The Daily Reckoning on December 9, 2015

Of prisoner’s dilemma and the discounting wars of Indian e-commerce

This week the ecommerce companies operating in India are at war.

Snapdeal had its electronic Monday sale on October 12, 2015.

Fllipkart has The Big Billion Days Sale between October 13 and October 17, 2015. This sale is limited to its smartphone app.

Amazon has the Great Indian Festival Sale during the same period. Amazon’s sale isn’t limited to its app, like Flipkart’s. Nevertheless, the company is offering higher discounts on the app.

Over the next few days you will see reports in the business press with senior executives of these companies saying that they have managed to sell this much and sell that much.

The trouble is everyone will talk about revenue numbers. No one will tell you that they are losing money on each product they sell and the more they sell the more money they will lose.

In fact, the business press is already talking about the positive impact of these sales. As Rahul Taneja of Snapdeal told the Mint newspaper: “We are well on track to reach $100 million sales on our Electronics Monday Sale.”

Nevertheless, things are not as simplistic as they are being out to be. The Indian ecommerce scene should be viewed from the lens of the prisoner’s dilemma.

The dilemma was first put forward by Polish mathematician Melvin Dresher while he was working at the Rand Corporation in the United States in 1950. It was given its name by Canadian Mathematician Albert Tucker.

And this is how the dilemma goes. There are two people who are suspected of a major crime. They are apprehended during the course of carrying out a minor offense and put in jail.

As John Allen Paulos writes in A Mathematician Plays the Stock Market: “They’re then interrogated separately, and each is given the choice of confessing to the major crime and thereby implicating his partner or remaining silent. If they both remain silent they’ll get one year in prison. If one confesses and the other doesn’t, the one who confesses will be rewarded by being set free, while the other one will get a five-year term. If they both confess, they can expect to spend three years in prison.”

The best solution here is for both individuals to remain quiet and get a prison sentence of one year. But the individuals are being interrogated separately and hence, one doesn’t know how the other will react. So what happens?

As Paulos writes: “Given…human psychology, the most likely outcome is for both to confess; the best outcome for the pair as a pair is for both to remain silent; the best outcome for each prisoner as an individual is to confess and have one’s partner remain silent.”

So even though the best outcome is for both to remain silent and spend one year in prison, the most possible outcome is that both of them will confess in the hope that they will get away free. In the process they land up in jail for three years.

Now how is this linked to what we started with i.e. the discount wars of Indian ecommerce? As Paulos writes: “The charm of the dilemma has nothing to do with any interest that one might have in prisoner’s rights…Rather, it provides the logical skeleton for many situations we face in everyday life. Whether we’re negotiators in business, spouses in a marriage, or nations in dispute…If both (all) parties pursue their own interests exclusively and do not cooperate, the outcome is worse for both (all) of them; yet in any given situation, any given party is better off not cooperating.”

Economist Dani Rodrik explains the situation of prisoner’s dilemma in the context of advertising carried out by competing companies in his new book Economics Rules—Why Economics Works, When It Fails and How to Tell the Difference.

As he writes: “Assume that two competing firms must decide whether to have a big advertising budget. Advertising would allow one firm to steal some of the other’s customers. But when they both advertise, the effects of customer demand cancel out. The firms end up having spent money needlessly.”

What is happening here? As Rodrik writes: “When the firms make their choices independently and they care only about their own profits, each one has an incentive to advertise, regardless of what the other firm does: When the other firm does not advertise, you can steal customers from it if you do advertise; when the other firm does advertise, you have to advertise to prevent loss of customers. So the two firms end up in bad equilibrium in which both have to waste resources.”

Now replace the word advertise in the above paragraph with the sales that are currently on and the situation is very similar. Let’s say Flipkart (or Amazon or Snapdeal, it doesn’t really matter) announces a big sale over five days to acquire new customers as well as sell more to existing ones. It makes tremendous sense for Flipkart to do that as long as it is the only company doing it.

If Amazon and Snapdeal (and other similar ecommerce websites and aps) decide to ignore the Flipkart sale, they will lose out on their customers. So they need to announce their sales as well to prevent Flipkart from stealing their customers and retain their customers.

The moment they do this, Flipkart loses out on the advantage it would have had if it was the only sale in town. The vice versa is also true.

Now Amazon and Snapdeal also have a sale on just to ensure that they don’t lose out on their customers. A classic prisoner’s dilemma.

Also, each company now has to offer greater discounts on their products, to make it look like a sale. This means accumulating more losses than they currently are. The Indian ecommerce players don’t mind doing this given that they are currently looking to drive up their revenue.

The higher the revenue number they are able to generate, the higher the valuation they get. And this helps them raise more money from investors. This, in turn, helps them keep running the show given that their current operations are loss-making.

Akhilesh Tilotia of Kotak Institutional Equities in a report titled .com 2.0 – Value versus Valuation makes a very interesting point. As he writes: “It will be instructive to note that the proportion of people who have purchasing power in India is limited to the top 10% or so of the population.” So the number of people that Indian ecommerce companies can tap is limited and is nowhere near as is typically made out to be.

And this has important repercussions. As Tilotia writes: “It is important to consider whether India’s e-commerce GMVs[Gross Merchandise Values] and volumes are going to come from (1) a larger number of users doing more transactions or (2) a smaller base of consumers (say the top-end 100 million or so users) driving all the volume. If it is going to be the latter, customer engagement and retention will be more important than customer acquisition.”

If customer retention is more important than customer acquisition then any one company launching a sale will lead to others having to join in, in order to retain their customers, even though they may not want to do the same. The prisoner’s dilemma is at work.

As John Allen Paulos writes in Beyond Numeracy: “The parties involved will be generally better off as a pair if each resists the temptation to double-cross the other and instead cooperates…If both parties pursue their own interests exclusively, the outcome is worse for both of them than if they cooperate.”

But that’s not going to happen because that is what competition is all about. And it does work at some places.

The column originally appeared on The Daily Reckoning on October 14, 2015