Must-reforms for civil aviation in India

Not unexpectedly, airlines are in cut-throat competition and bleeding each other with the government stepping in to set the house in order. Ajay Shah has written a good insightful piece on the need of competitive markets in Indian aviation sector at Revel in Competition. Read other related articles at his blog here.

Ajay Shah has suggested three reforms which I will interpret as follows

1. Disband Ministry of Civil Aviation
2. Open-skies foreign policy
3. Competition (Unlimited) Commission
   

There are two more crucial points that could have been added to the reforms on the basis of market allocation of resources.

Dismantle route dispersal guidelines
Commercialize aviation infrastructure

Allow private airports to be set up or speed up the process of airport siting and private financing. Let the rule of law handle the issues of environment and noise. Next, commercialize the Air Traffic Control Systems. As of now, both airports and ATCs are managed and funded by the government. Let them move into the private sector. In the short term, opt for peak-load pricing at congested airports.

A lesson from the deregulation of the airline industry has been that airlines followed the hub-and-spoke model. Development of satellite airports in India can hugely increase airline performance by facilitating this model.

For further understanding of the problems affecting the civil aviation sector in India read the Road Map for the Civil Aviation Sector which does come across as illuminating.

Veni, Vidi, Vinci - I came, I saw, I banned

There have been a lot of protests in the blogosphere about the Da Vinci Code ban. Nothing much anew. Most of them take the familiar line of attack on the "freedom of expression." One good situational reason why we shouldn't ban is provided by Nitin's Laughingstock. That you are adhering to fair principles provides high competitive value to nations (And their consequent economic development) in today's scenario. And of course Gawker puts across the sheer irony of it as only he can.

But there is a larger lesson behind the event. The difference between the rule of law and rule by law.

A rule of law will impose restrictions on the powers of the state on certain non-negotiables like freedom of expression. A rule by law may be fair in the sense that it is applicable to all but may still falter on the premise that it curtails non-negotiables. And gives powers to certain groups to exercise it. China is an extreme example of rule by law. India may not have it as bad as China but is very often on the slippery slope leading to the same route of rule by law.

What may be little understood is the over-riding importance of economic freedom over civil freedom. Freedom of expression is a civil freedom. The ability to do (in this case, screen) what you want on a private property is an example of economic freedom. Only economic freedom can allow sustain civil freedom. I am reminded of the Indian Express story during the Emergency days when it was sought to be curtailed on economic grounds (something to do with regulation of newsprint) thus effectively muzzling civil freedom. But apparently, Indian Express acquired newsprint from other sources and continued its tirade. For a more elaborate account of economic freedom and civil freedom in the media during theemergency days, read the Indian Mass Media System: Before, During and After the National Emergency.

A civil freedom will give you the freedom of expression. But without the economic freedom to sustain your "voice" you will lose your civil freedom. And I see that story again being repeated in the less-known case of community radio in India. Read a gutsy tale about it here. And now they have a blog about it as well.

For a good overview of how economic freedom, civil freedom and rule of law intertwine, the article Central Role of Economic Freedom in Democracy should be helpful.

Update
Gaurav Sabnis's deceptively subtle post A Bit About Reservations shows how rule by law over-rides rule of law. In this case, how a decision of the government is exercised in denial of private property rights. Though applicable to all and sundry, it still violates a fundamental freedom. I wasn't aware of the 104th amendment. Must look it up. But do read Gaurav's post here.

Microeconomic policy reforms needed in India

Much policy reform debate in India is often focused on the BIG issues like macro-stability, privatization and capital markets. These are only the tip of the iceberg of desirable policy reforms. The real action of enabling markets is often at the microeconomic policy level.

The report Industry level analysis: the way to identify the binding constraints to economic growth by Vincent Palmade captures this succintly. Their abstract runs as below.

There are many economic diagnostic tools available which are trying to identify the constraints to economic growth in a given country. Unfortunately these tools tend to provide inconclusive and often conflicting answers as to what the most important constraints are. Even more worrisome, they tend to overlook the many industry specific policy and enforcement issues which, collectively, have been found to be the most important constraints to economic growth. This is the key finding from more than ten years of economic research by the McKinsey Global Institute (MGI). The MGI country studies have been uniquely based on the in-depth analysis of a representative sample of industries where clear causality links could be established between factors in the firms’ external environment and their behavior, in particular through the analysis of competitive dynamics. They showed in details how industry specific policy and enforcement issues were the main constraints to private investment and fair competition – the two drivers of productivity and thus economic growth. This finding implies that governments and international financial institutions should rely much more on in-depth industry level analysis to uncover product market competition issues and set reform priorities. These analyses should include the often overlooked but critically important domestic service sectors such as retail and housing construction.

They point out much-needed reforms in these arenas in order to jumpstart product market competition. Non-tariff trade barriers; Licensing restrictions; Price/ Product restrictions; Inadequate regulations of quasi-natural monopolicies and social sectors; Land market issues and the Unequal enforcement/informality trap. The last one is especially relevant for the distortions it introduces in markets to the disadvantage of both informal and formal enterprises: underdeveloped informal enterprises and absence of fair competitive field.

Once you start talking of microeconomic policy reforms, you cannot ignore legal reforms in the economic arena. There are studies in selected sectors in India which show that 20% of the selling price is incurred as additional transaction costs imposed by legal and infrastructural ones. Of course the true cost is what they deter in the long-term. For a rare study of much-needed legal reforms in India do read Bibek Debroy's Reforming the Legal System. He argues that market-oriented reforms cannot succeed without legal reforms and points out glaring loopholes in a host of laws. His analysis clearly brings out a paradox afflicting India: over-legislation and under-governance. The last 16 pages in fact are a list of laws that show how over-regulated is India. For a more fundamental understanding of legal reforms this post of mine may be helpful.

Both studies are recommended for their high IP (Insight/Pages) ratio!

Cross-posted on the Indian Economy blog.

A personal note on school boards and schooling monopolies!

Most of our lives is occupied by these four factors in various proportions: pride, money, love and the skill of learning. Each is further framed by the context of people and issues that it addresses. As much as lack of money and love hamper our life, an absence of pride/ achievement/ self-satisfation can lead us to an unfulfilled life. And today, it is not only what you learn but how good are you at learning that could set you apart. Here is my take. How much of the education doled out in schools leads to an increment in the contribution of those factors to our lives? I am afraid little and there is huge room for improvement. A privileged few do have access to them but not the majority. But more on it later.

Let me concretise my take through an example of each.

Money is my favourite unschooled subject so let me start with it. Financial literacy or more concretely concepts like compound interest can be far valuable than the exact location of Ganges on the map of India. Pride - the pride of building something or even teamwork with complementary skills of people. Love - an idea of it starting from why to love or how to love and the different kinds and no, sex education is not all about love. The skill of learning! There are good and bad ways of learning and more importantly, individual learning styles. How does one acquire knowledge of them? Ultimately what you may retain from your schooling is the art of learning. My guess and challenge is that the essence of what is taught in schools in India can be taught faster and better, and you don't need all of it. This leads to a Pandora's Box about competitive examinations, parents' aspirations and etc. But let me keep the message simple.

The very subject of education will elicit a different operational concept in your mind. And what I have elaborated may be proved wrong or unsuitable! But there is only one way to test it. It is unjust to subject students to your belief of schooling. You need choices of schooling to evaluate your option of schooling.

What does that imply for public policy?

For me, school boards are one of the worst forms of territorial and state-mandated monopolists in India. Each has a well-defined territory, near-exclusive rights to customers and high entry barriers for competitors. Most schools are hugely constrained by the state and lack of options to affilate to a school board. No wonder there is no competition among school boards to better their schooling services like curricula and pedagogy, and set benchmarks of performance. Neither will you have heard of them testing their own tests and using feedback from past tests to improve the design further. As far as I know, you cannot set up a private board for schooling in India. The ISC board gets away with it because of their minority-status. All grant-in-aid schools except of minority status have to affilate to the state board. If you set up a private school and refuse to follow any of the school boards, you will not be granted recognition. Which implies that your transfer certificate will not be valid. There are a few exceptions but they are far and between.

There will be bleeding-heart concerns for the poor. I agree they matter. But you cannot always solve a problem at its point of location. One should think of indirect ways of addressing the problem and which though invisible matter hugely. Schooling quality because of competiton among boards would be an important factor in decreasing the drop-out rate in government schools.

The point is simple. Deregulate schooling board sector in India.

Maps in India!

Many of us are in the knowhow about the sheer absence of map-based information in India. Here is an analytical process for the Indian government to ask themselves about their rationale for with-holding crucial information that can be used to make maps and other information like weather reports accessible to the private sector. This is part of a larger report that RAND Corporation produced for their study America's Publicly Available Geospatial Information: Does It Pose a Homeland Security Risk?

Filter	Key Questions
Usefulness	Is information useful for target selection or location purposes? Is information useful for attack planning purposes?
Uniqueness	Is information readily available from other geospatial information sources? Is information available from direct observation or other nongeospatial information types?
Societal benefits/costs	What are the expected security benefits of restricting public access to this geospatial information? What are the expected societal costs of restricting public access to this geospatial information?

Their study concluded that "although publicly accessible geospatial information has the potential to be generally helpful in selecting and locating a target, potential attackers, such as terrorists, are likely to need more reliable, more detailed, and more up-to-date information to plan and carry out a strike than is typically publicly accessible. There is abundant geospatial and nongeospatial information on U.S. critical sites that adversaries can obtain to select and locate targets. In comparison, planning an attack requires detailed and timely information, such as information on the target’s internal features (e.g., control centers), potential vulnerabilities, and current security practices. Here, attackers confront a situation of relative “information scarcity” because such details are not normally made publicly accessible. Thus, attackers are more likely to turn to nongeospatial sources — including direct observation, academic textbooks, trade journals, and individuals familiar with the operations of a particular type of facility — to satisfy their information needs." In fact, less than 1% of the federal datasets surveyed appeared to be both potentially useful and unique.

The conclusion is not important for us but the process used to reach the conclusions. Any lessons for the Indian government?

Addendum: About the "How do you stop a rape?" post, how about claiming that you have AIDS or youn rog to the attackers? Would that substantially decrease the chances of a rape if not abuse?

Rule of Law in India and its Economic Implications

If one were to look at the factors of production (land, labour, capital and enterprise) and look at the corresponding cases pending in Indian courts, one can have a very good understanding of the performance of the institutions arranged around these factors. It is no wonder that any task of economic reforms will have to take cognizance of the improvement of the legal institutions. But it is sadly under-rated. As of now, there are no standards for determining the quality of judgments passed by courts. Case pendency itself is taken as a sign of performance though I would argue that it is not a good enough indicator.

Read Wolfgang Koehling’s study on Economic Consequences of a Weak Judiciary: Insights from India for an elaborate study. An user-friendly abstract is stated below.

This paper examines the empirical relationship between the quality of the Indian judiciary and the economic development of the Indian States and Union Territories…The data indicate that a weak judiciary has a negative effect on economic and social development, which leads to: (i) lower per capita income; (ii) higher poverty rates; (iii) lower private economic activity, (iv) poorer public infrastructure; and, (v) higher crime rates and more industrial riots. The results are robust and the correlations are strong and negative.

You can also read Matthieu Chemin’s study Does the quality of the judiciary shape economic activity? Evidence from India.

There were 3.1 million cases pending in India’s 21 High Courts and 20 million in its subordinate courts in 2000. This paper examines the consequences of a slow judiciary on the contracting behaviour of firms in India…I [then] examine how the case pendency rate in state courts in India affects the contracting behaviour of 170,000 small non-agricultural informal firms. … My estimates suggest that a slow judiciary implies more breaches of contract, discourages firms from undertaking relationship-specific investments, impedes the access of firms to formal financial institutions, and favours inefficient dynasties. The negative implications of having an inefficient judiciary are large - moving a firm from the highest to the lowest pendency state would result in a 10% improvement in firm performance.

According to Amir Ullah Khan of the India Development Foundation, “the Government is a litigant in most of the cases. In a study carried out by the National Law School in 1993, it was found that the Government is the single largest litigant in Indian civil courts. The Government is plaintiff, defendant, appellant or respondent to appeals in 60% of the suits. Bulk of the civil litigation pertains to just five areas - taxation, credit, rent control, urban land ceiling and labour relations. … Government here includes central, state and Government owned institutions. That there is confusion on the definition of the State is another story for another study to tackle. … In any case the success rate of Government appeals is said to be as low as 5%. And cases that involve Governments on both sides of the table are by and large futile and time wasting exercises. The incentive to Government appointed lawyers to prolong cases and earn a bit more leads to further delay.”

Need more be said?

Cross-posted on the Indian Economy blog.

Reality of Indian Realty!

Shekhar Gupta in his article Who’s afraid of the bulldozer does point out to one true bottleneck affecting India.

Have you sometimes wondered why reform in some areas of our infrastructure proceeds much faster than in others? You will see a clear pattern there. Anything that does not involve real estate, moves much faster. Telecom is a good example. Anything that involves land takes much longer.

However his diagnosis is faulty. It indicts politicians instead of the regulations that provide those powers to politicians. Politicans are people like you and me and react no differently to their incentives. And land planning and regulations by governments in India provide huge incentives for a status-quo.

In Delhi, the archaic property rules and Master Plans do not take into account "natural markets" like the locations of office spaces and shopping destinations. It is easy to blame offices for encroaching onto residential space but not easy to see that property regulations and Plans by constricting supply of legal real estate (I mean land with infrastructure for commerical usage), push rates artificially higher. The Master Plan of Delhi in a self-diagnosis in the 1960s acknowledged its faulty foresight regarding the demand for office space and consequent transportation issues. However the powers granted to legislators and bureaucracies in Delhi regarding land mean that reforms will not happen soon. Incidentally the Master Plans and the Delhi Development Act serve as models for the other urban centres in India.

The demand for commercial space has also been magnified by the up-trend in the Indian economy.That only means more money for those willing to supply commercial property. Andy Mukherjee in his article Missed India's Software Boom? Try Real Estate writes on this.

The entire country has a little more than 70-million-square feet of A-grade office space, less than Shanghai and Beijing put together. Technology services account for as much as 85 percent of India's office space demand ... An undersupplied market means that the net yield on office property in India is 11 percent ... That yield is among the highest in Asia. Add to that a 20 percent to 40 percent price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class. Supply is expanding, though demand is rising at a faster pace.

A few caveats are in order. There are more than hundred (yes, 100!) 19th century rules and regulations governing various aspects of land in India.

A few Central laws governing real estate are

• Indian Contract Act, 1872
• Transfer of Property Act, 1882
• Registration Act, 1908
• Special Relief Act, 1963
• Urban Land (Ceiling And Regulation) Act (ULCRA), 1976
• Land Acquisition Act, 1894
• The Indian Evidence Act, 1872
• Rent Control Act (state law)

Taxes and Stamp Duty Rates

• Stamp Duty
• Property Tax
• Entertainment Tax

These and other issues are covered here in the Planning Commission document on real estate in India, an unusually useful document, I must admit, given the scarcity of such information. Another useful article is here.

Deregulation of real estate will increase supply of housing as well. However this depends on the government's initiatives in the supply of roads. This artificial scarcity of land is the prime reason for our problem of overcrowding. Again, our problem is not population but overcrowding. But that is fodder for another blog note.

Cross-posted on the Indian Economy blog.

Highway to educating India

Here is a colourful thought experiment. Colour blue every buck that leaves from the government’s pockets for the purposes of education. Yes, every single note, from the education departments; the social welfare departments; the public works departments and a plethora of others involved in education. After you track the flow of money, categorise where they end up. Amounts spent on teachers; schooling materials; mid-day meals and others.

Some of the results may be surprising. Read here.

However, this is not news. Mismanagement of government funding and low achievements of government schools are old hat.

Why spend so much money on a system that is not working well? Obviously because there does not seem to be a plausible system that can replace this entire education structure. Is that the case?

Let us turn to the purported success of the government in building the highway. There is a world of difference between the Indian government embarking single-handedly on building 15,000 miles of highway and educating 192 million children. There are issues of building and then of maintaining in either of them. And even if you are efficient in physical engineering, it doesn’t mean the same as being efficient in social engineering. However, the cinch is this. The government has employed private sector partnership in building the highway but still desists from it in educating its students. Can one learn from some of the successful principles employed in this highway building task? There were incentives for early completion and penalties for late execution. Apparently the interest shown by the private sector in the highway project was due to the three major factors of ensured revenue repayment, fair bidding and speedy execution.

What they did was to set up an environment of accountability and incentives and executed it well. Would it be possible to replicate a similar environment in education?

You could have one or more of the four kinds of accountability in education.

1. Bureaucratic accountability (sarkar will take care through rules and regulations)
2. Professional accountability (teachers and principals are educated and they will take care)
3. Performance-based accountability (the sarkar will take care through measurements of performance in tests)
4. Market accountability (if you don’t take care, I will take to somebody who cares)

These are the factors that determine the quality of your money, the bang for your buck. It is not a surprise when you read James Tooley’s report where he finds that there is a sector of “private budget schools” that is catering to the poor, and students in these “private schools achieved at or above the levels achieved by their counterparts in government schools in both English and mathematics.”

The education system for long has been under the strangle-hold of the first two factors which obviously haven’t worked in our country. This has hence led to a decline in quality and access. Isn’t it time to move on to the next ladders of accountability? This would involve thinking of the schooling sector as a market and not as a government sector. Which are the regulations that impinge from an explosion in the supply-side of schooling? Here is a hint, think licence!

Cross-posted on The Indian Economy Blog

We don't want heroes like Manjunath!

I am your average Joe. The kind of person who wouldn't mind giving a lookover at a beautiful woman, and also the kind of person who would risk his hand (mind you, not my life, that is for my girlfriend or sister or mother, and not in that order, please) for a damsel in distress.

The average person thinks he is braver than the average person. On that count, I am below average! I hate being in situations where I have to compromise my integrity between the repair of a telephone connection and the payment of an extra baksheesh. And I would be paranoid of being in a situation where I had to take on a goon who threates the quality of my job with my life. However, there are a few men among us who would risk their life for what they believe to be the true worth of their duty. But why should they risk their life? I repeat the question to myself because it holds the key to the worth of a man, a noble man's valuable life. This world needs heroes alive and not dead.

During my graduation years in engineering, an apparently simple question tormented me a lot. Why don't people kill each other for their ends? And it is not as difficult as it is made out, most murders are on-the-spot decisions than pre-planned ones. You may shudder at the question but do believe my naivete in pursuing its answer. And it turns out that the average person's life was far more risky in the past than it is today.

Does our tacit knowledge of ethics answer our accordance to the value of life? Definitely to a great extent. Perhaps more importantly, the answer lies in the rise of institutions, especially of law and order and protection of contractual rights. Random killing of people breeds high insecurity and very costly for a society. And moreover, ascribing equal value to people's lives and punishing them for a transgression made murder less likely. And finally the fact that even if you did murder a person, you couldn't take away his rights. To give a crude analogy, in the past, Kingdom A could invade Kingdom B and subjugate the residents of B and it wouldn't be considered a human rights violation. Today that is not the case any longer.

A more sophisticated analogy would be this. If Corporation A invades the "customer territory" of Corporation B, and asks the customers of B to mandatorily be customers of Corporation A, we would laugh off it off. Now reverse the logic. If Corporation B does not allow Corporation A to enter its "customer territory" and makes its customers implicitly a captive customer base for itself, we begin to doubt. But then, this keeps happening all around us. From limiting certain kind of businesses to only preferentially granting allotments for particular businesses. Like petrol pump licences.

If you have not realised who am I talking about, read it here. The economics of the tragedy runs like this. You have oil much in demand. And it costs a bang. What you can do is add a cheap adulterant (kerosene) which costs one-third (approx.) of the price of oil, and sell it thus making a neat profit. There is a 53 paise profit per litre sold. A typical service station sells about 1 lakh litres of diesel every month. That makes for a profit of Rs 53,000 per month per service outlet. Maybe worth targeting a honest officer who treatens to ruin your adulteration process!

Two questions: Does kerosene really come so cheap? And if oil is being adulterated, why do not customers switch the diesel-providers?

Well, kerosene doesn't really come cheap. What makes it cheap is a government subsidy at Rs 10-11 per litre. And more importantly, every 1 of 3 litres Kerosene distribution intended for household consumption through PDS outlets flows back to industry in one form or the other.

The second question is more simple. Petrol pump allotment is a political process (remember the analogy of Corporation B "protecting" its customers from Corporation A) so you need a licence for it. On top of that you have a state-run corporation granting them, little wonder there is so much susceptibility to political machination and insulation from market discipline.

What does "market discipline" mean! Think of it as the relationship with your doodhwala. If he gives too much water in the milk, you threaten to go off to another doodhwala, or well, switch to packaged milk. Now imagine if the state decreed that you couldn't threaten or switch your doodhwala, what would be the outcome?

Transplant the same relationship to the oil company and the service outlet. In this case, the company cannot cancel the contract of the service outlet because the outlet has been selected through a political process and not a market process. If it were a market process, there wouldn't be licences with political strings, the oil company could easily disband the service outlets for null enforcement of quality standards. Again, under a market process there would be lots of oil companies and lots of service outlets, with the unadulterated outlets gaining customers and reputation and the guilty ones being discharged from the process. Again, the key is that political decisons regarding production (subsidised price of kerosene) and distribution (granting of licences for outlets) be in the institutional realm of competitive markets as much as possible. In a market it is more difficult to bully your employer or customer into submission, whereas in a political process one often finds that force works. The market process won't be so smooth, but the oil will be of better quality, those who deserve thrive and there wouldn't be need of a death like Manjunath.

When heroes are emerging, it implies that we need better institutions, NOT more heroes!

Educationalization!

We were given this problem recently as part of an Operations Research assignment. Given a number of students; distance between schools in a neighbourhood, and an objective to maintain a certain level of racial balance, work out the optimal distances to be travelled by the students. Seems a decent problem only that it starts on a completely wrong note.

I had often wondered about the idea-divide between me and government officials in course of my policy research in Delhi, ostensibly when both of us want to do good. In reflection, the government (atleast the honest bureaucrat) tries to achieve welfare by the rules of optimisation. Given x money and y people, how do I fulfill z demands? If it employs rules it is only to achieve further fair division of the pie.

So when we had landline telephones being provided, the government thought of optimising the pie according to various factors: urban-rural; rich-poor; i knowu-idon'tknowu and the ilk. And then wireless came...an unforeseen market process, and the results are for everybody to see. I remember waiting for the virgin ring of the landline phone in my home on the 21st November 1992. Now none of us remember when we bought our cellphones last!

And you see the same optimisation game being tried out in the Right to Education Bill. This time the factors are: how to have a system of neighbourhood schools; the right salary for teachers; how to screen "bad" schools (licence permits); does food matter for students or does transport matter; does quality of teaching matter or is it schooling articles like blackboards; should I teach English or the mother language; is the curriculum overburdening and many more.

Governments ignore a powerful resource at their behest for increasing the size of the pie which is regulations. Instead, they concentrate on the actual production of goods because they see only the visible resources like money and people. So that makes them notch up a bill of 6 percent GDP for schooling India. If they could use rules which are usually not part of an optimisation process, they will find that they can generate so much more pie. Today there are rules galore that suppress the explosion of schooling. Number of schools in Delhi are decided 5 years in advance and you need a very expensive permit to open a school. There are minimum requirements for teacher salaries. You cannot make profit from a school and cannot plough funds from one school branch to another. Private boards cannot offer exams in India, ICSE is the only one which survived because of its minority status (am willing to be corrected if I am wrong on this). So if you are not part of a state or a national curriculum you cannot have your school affiliated, and hence cannot offer a valid Transfer Certificate.

And yet, you have a situation where for every increase of 100 children enrolled in urban India, 61 of them have been by private schools. In case of rural India, it is about 18.5. And these data are for the period 1986-1993, so the trend is arguably much higher now. Read the paper by Geeta Gandhi Kingdon here for a detailed analysis. Better, ask a government teacher where his/her children are studying!

The point is clear. The market process of private schoooling is rapidly gaining ground. However, the government, as usual, is blind to it and is still trying to optimise government resources and not incentivise private resources. Sooner or later this is what will happen. We will have private schooling for the rich only (if the government makes rules like 25% seat reservation for the poor and many other inhibiting rules) or private schools for all if the government deregulates the market for private schooling.

The government can do a decent job of rating these schools, ideas for which are provided here. Pratap Bhanu Mehta gives a good analysis of the Right to Education bill here but I guess he pulls punches to criticise it because he is trying too hard to think through all the various factors associated with schooling. Optimisation at the individual or organisation level doesn't work at the societal level. Ask Hayek!

Sachet-marketing for the poor!

If I am poor, I would buy as many wholesale products as possible because that way, I can get more for less. But if I am really poor and cannot afford even the threshold money for affording wholesale products, what do I do?

I was not too surprised to know that there are shampoo sachets in the villages of India where there is no water available (atleast frequently enough). Arguably, it seems so because of the private sector involvement on one hand and the government on the other. But the interesting fact is the emphasis of the companies on developing these small products. Obviously because the poor do not have enough money to buy a BIG shampoo bottle, though BIG does work out to be more cost effective in the long run. But American-poverty (for reasons of clear identification) enables one to buy wholesale goods much more-you won't find Walmarts near rich localities.

Add to that a tipping factor of good transportation facilities. Walmart would not have been possible (and succesful) without the transportation facilities (roads and vehicles) that enable its fantastic supply chain management. That makes it possible to have a strategy of warehouses. Contrast that with conditions like India where the only retailing possibility is the ubiquitous paanwala in rural India or the small self-employed kirana shop.

So what does this imply?

The private sector will endeavour more and more to make these sachet products for the poor, because of the sheer scale of returns. Read about Procter and Gamble's business model shift here! Developing markets for ultra-low cost products might be the next big "unseen" thing coming in a scenario where online markets seem to take all the attention from us. Policy implications? One, better and more roads and two, allow more business of manufacturing and selling. This would allow more Walmarts for the urban middle-class/poor and sachet-shops for the rural poor. Sachet-marketing may probably do more for the poor than all the ration-shops of the government, in terms of access, cost, quality and target audience.