May 2013 – Pertinent Observations

Rail track utilization, per Railway Minister

Now I guess you know how I work. I come across a data set and then torture it to extract as much information as I can before I let go of it. So continuing with the railway data put out by the EPW, in this post we will look at the track utilization. The metric is simple – how many passenger trains go over a piece of railway track each day?

We have numbers for the total route length and the total number of passenger train kilometers. Dividing the latter by the former gives us the number of trains that pass over the average piece of track in a year. Divide that by365 and you get the number of trains that go over the track per day. In 1992, this number was 16. An average piece of track was run over by 16 trains each day. By 2009, this number had gone to 25!

Data source: Economic and Political Weekly May 18, 2013 vol xlviII no 20

Note that these are average numbers. They hide the fact that there might be tracks on which no trains run, and other tracks on which maybe 100 trains run each day (even higher if you think of something like the Mumbai local train tracks). Yet, they give us a good indication of how the railways have utilized the infrastructure that is most scarce (tracks are the hardest thing to add, given the complexities involved in laying additional track – taking into account land acquisition, etc.).

Notice that though this is a largely linear growth, there have been times when growth has been faster than in other times. Next, let us look at how much utilization has been added each year. And let us look at it in terms of who the railway minister was in that financial year!

Notice that the outlier years are the first two years of Nitish Kumar’s occupation of the Ministry. During his unbroken 5 year tenure, Lalu Prasad Yadav also consistently added significantly in terms of track utilization. Unfortunately the data for passenger train kilometers ends with 2009, so here we are not able to see how Mamata Banerjee performed in her second stint in the ministry.

Strain on Indian Railways

In my last post I looked at some railways data that was put out by the Economic and Political Weekly to show that the total addition in route length over the last 20 years is not much to talk about. The same data set also gives data on “passenger kilometers” and “passenger train kilometers” for each year. The latter gives the total distance all passenger trains in India have run, while the former gives the total distance traveled by (ticketed) train passengers in India each year.

Now, the ratio of these two numbers gives us the number of passengers per train. It is interesting to note how this has moved in the last 20 years.

In 1990 the average train used to carry about 800 passengers. That number has almost doubled to 1400 in 2009 (data on passenger train kilometers not available after that).

While some people might see this as a measure of higher efficiency by the railways, I see it more as an inability by the railway infrastructure to keep up with passenger demand. With little track length having been added, there is no surprise in that.

Why The Congress Party is Pro Big Government

Back in 2009, just before the general elections, I had advised people to vote for the NDA. My argument there was that irrespective of the relative merits and demerits of the parties leading the two coalitions, the BJP was a more likely candidate to lead a reformist government for it was not the incumbent. Incumbent governments tend to get cozy with unelected people who are in power (for example, leaders of PSUs, unions, civil servants, etc.) because of which they are loathe to take up policies that cut the power of such people. In other words, they are loathe to take up reformist steps that decrease the size of government.

The same argument can be extended to argue why the Congress is inherently a pro-government party. The fact of the matter is that it is the party that has been in power at the Union government for most of our history. This means that a large part of the unelected government organization has its loyalties with the party. Consequently, the party too sees itself as being loyal to this cadre, and will not pursue policies that cut down their power.

This explains why the Congress-led UPA1 government decided to reverse the earlier NDA government’s decision to repeal the Essential Commodities Act. It explains why the Congress-led UPA1 government did not pursue the reforms in the APMC act that had been set in motion by the earlier NDA government. This also explains why the Congress-led UPA2 government is trying to push through the Food Security Bill, which seeks to increase the role of the government in the agricultural supply chain.

The reforms that the UPA governments have been trying to pursue are those that do not significantly impact its unelected-government-organization constituency. Foreign investment in retail, for example, will only affect the retail industry, and the government doesn’t have much skin in the game there. The Indo-US Civil Nuclear Agreement again doesn’t trample on government feet. Conversely, nuclear energy is a field where a compelling argument can be made in favour of a government monopoly, so that agreement will only increase government participation in the energy sector (note that I’m not against the deal. I’m only trying to explain why it is acceptable reform for the Congress). The MGNREGA again brings in several thousand more people into the government folds. The only exception in the list of UPA-led reforms that might challenge big government is the Right to Information, but that act was passed in the infancy of the UPA1 government when it was much more beholden to the National Advisory Council (NAC) than it is today.

So what explains 1991? Two things. Firstly, it was a whole bunch of low hanging fruit. Though government was reduced, the resulting incremental growth increased the size of the pie so much that the proportion of the enhanced pie that the unelected-government-organization had access to was enhanced. So from a rational tradeoff perspective, it was the right thing to do. Secondly, and more importantly, the reforms were inevitable. The Indian economy was in such bad shape that there was no way out but to do those reforms. So holding up 1991 as proof of the Congress Party’s reformist credentials is wrong.

But what is the guarantee that a non-Congress government will pursue reforms that could reduce the size of the government? They fully recognize the fact that large parts of the unelected-government-organization cadre are beholden to the Congress party, and they will want to cut this constituency down to size. Hence, they will work towards reforms that will reduce the size of government. Yes, there is no guarantee that they will not open up other fronts that will increase the government’s footprint, but they are unlikely to do worse than a government involving the Congress.

The Problem with Unbundled Air Fares

Normally I would welcome a move like the recent one by the Directorate General of Civil Aviation (DGCA) that allows airlines to decrease baggage limit and allows them to charge for seat allocation. While I’m a fan of checking in early and getting in a seat towards the front of the flight (I usually don’t carry much luggage on my business trips), under normal circumstances I wouldn’t mind the extra charge as I would believe it would be offset by a corresponding decrease in the base fare.

However, I have a problem. I don’t pay for most of my flights – I charge them to my client. And this is true of all business travelers – who charge it to either their own or to some other company. And when you want to charge your air fare to someone else, one nice bundled fare makes sense. For example (especially since I charge my flights to my client) I would be embarrassed to add line items in my invoice to ask for reimbursements of the Rs. 200 I paid for an aisle seat, or the Rs. 160 I paid for the sandwich. A nice bundled fare would spare me of all such embarrassment.

Which probably explains why most airlines that primarily depend on business travelers for their business don’t unbundle their fares – that their baggage allocations remain high, that they give free food on board and they don’t charge you extra for lounge access (instead using your loyalty tier to give that to you). Business travelers, as I explained above, don’t like unbundled fares.

Which makes it intriguing that Jet Airways, which prides itself as being a “full service carrier” has decided to cut baggage limits and charge for seat allocation (they continue to not charge for food, though). Perhaps they have recognized that a large number of business travelers have already migrated to the so-called low-cost Indigo (it’s impossible for Indigo to have a 30% market share if they don’t get any business travelers at all), because of which Indian business travelers may not actually mind the unbundling.

Currently, Indigo flights have a “corporate program”, where the price of your sandwich and drink is bundled into the price of the ticket. I normally book my tickets on Cleartrip, so have never been eligible for this, but I can see why this program is popular – it prevents corporates from adding petty line items such as sandwiches to their invoices. On a similar note, I predict that soon all airlines will have a “corporate program” where the price of the allocated seat and a certain amount of baggage (over and above the standard 15kg) will be bundled into the base price of the ticket. Now that I charge my flights to a client, I hope this happens soon.

Mike Denness and WTC Bombers

Professors who are insecure with respect to their ability and competence demand, rather than command respect. They institute complicated procedures which ensure that students need to suck up to them. Professors who know they are good don’t care. For example, the better professors who taught me at IIT never took attendance (everybody would be marked present), and would yet lecture to a full house most of the time. Lesser professors would get finicky about attendance. And other such trivial things. By forcing students to do things in a certain way, by “being strict”, they assumed, that students would respect them. It is a wonder that none of them thought this might be counterproductive.

In our third semester at IIT, we had this course called “Digital logic and VLSI Design Lab”. It was a decent and useful course. You would build digital circuits and test them out. No rocket science to it, but something that was useful in the long run. And because there was no rocket science to it, the faculty (one of the more insecure professors) had instituted a complicated process so that he gets some respect (or attention at least). Actually it wasn’t that complex. Before an experiment, we had to write up about the circuit and how we go about the experiment and get his signature on our write up. The lab assistant had been instructed that we should be issued components only after our report had been countersigned by the professor. Nothing too complicated, but a small step to ensure we suck up to him.

Things were mostly smooth, but one day the professor was late to arrive. Or maybe he was there and we didn’t see him – I don’t remember correctly. I don’t know how it happened but we managed to get the components from the lab assistant without our report having been countersigned by the professor. In a jiffy (after all we were three bright IIT boys) we had finished the experiment. And we called the professor to show him the results.

The experiment didn’t matter to him. He didn’t care one bit about the elegant circuit we had constructed. He only looked at our write up. His signature was missing. And he went wild. I won’t get into the details here but he went absolutely ballistic and threatened to annul our experiment, and possibly even fail the three of us in that course. “Such indiscipline is not to be tolerated”, he said.

“Sir, but this is not fair”, a teammate interjected. It only ensured that the professor went even more ballistic. “You guys must be reading the newspapers”, he thundered. “You see what is happening in South Africa? Is that fair? There is absolutely no fairness in this world, so you won’t get any brownie points by arguing that something is not fair” (the professor was a big cricket fan. The events in South Africa pertained to the one match suspension of Virender Sehwag and a suspended sentence to six other Indians, handed out by match referee Mike Denness).

“I don’t want my students to be this indisciplined”, he went on. “You never know where this will take you, if it is not nipped in the bud. One day you will do your experiment without taking my signature. When that is tolerated, you get encouraged to more indiscipline. And so it grows. And one day you will be bombing the WTC”. None of the three of us was able to react to this (this was in October 2001).

I don’t exactly remember how it ended. If I remember right, we had to dismantle our set up, take the professor’s signature on our write up, re-issue the components and re-do the experiment – but I’m not sure – maybe we were let off. But it was an important lesson for us – if indiscipline is not checked right up front, you could go on to be a terrorist it seems!

Rail length growth in India, or why you should not trust visualizations at face value

My colleague Nitin Pai extracted some data from the latest issue of EPW that shows the growth in total route length of Indian railways in the last 20 years. To get a better understanding of how the rail length has grown, I draw a simple graph. This is what I found:

From this graph, it looks like the growth in Indian Railways route length has been pretty impressive. You will also notice that the graph is not monotonically increasing – there are years where the route length is lower than that of the previous years. I would suspect that is due to conversion of metre gauge to broad gauge tracks.

But then if you take a closer look at the graph, you might notice that the y axis doesn’t start at zero. So you might want to see what the growth looks like if you were to start the y axis at zero. Here is what you get:

Now that the axis has been plotted starting from zero, you notice that the growth in rail length by the Indian railways is not all that impressive.

Moral of the story: If you are a user of a visualization, make sure you check things like axes, scales, etc. before jumping to conclusions. You never know what tricks the person who made the visualization might have been up to. If you are making a visualization, however, keep in mind that a lot of your consumers are not going to look at the visualization too carefully, so make use of axes, scales, etc. in a way that embellishes your story.

Betting against your co-investors’ misery

I don’t remember the name of the driver who drove me home that rainy night. I remember asking him, but it was almost three years back and I’ve forgotten. As was my usual practice then, I was sitting in the front seat of the cab, and chatted up the driver as we navigated the heavy Koramangala traffic. Our conversation would get interrupted by him getting calls asking him for money.

He had lost a considerable amount of money in chit funds, he explained. There was a chit fund in which he and his family members had invested. The fund gave them what he called “good returns” in the first cycle. The fund opened again for a second cycle, and once again he and his cousins all invested. This time, however, the fund manager had disappeared, taking with him his investors’ money.

While running a fund well for one cycle and disappearing with investors’ money the next is a classic fraud scheme in undocumented financial services, what intrigued me was that the driver and all of his cousins had invested in the same chit fund. The reason I was surprised is that in chit funds you bet against the misery of your co-investors. Let me explain how this works.

It is like a game played out by N investors over a period of N months (notice that the number of investors and the period of the cycle are equal). Each month, each investor contributes a fixed sum to the pot. And then the pot gets auctioned to the same set of investors, and goes to the investor who is willing to take the biggest “haircut”. Investors who are more desperately in need of money are likely to bid to take a larger haircut than those who need the money less. Once an investor has taken the discounted pot, he loses the right to bid for the pot in subsequent rounds (though he continues to contribute the fixed sum). Each round, the money left over after paying the “winning” investor is distributed as dividend among other investors (with the fund manager taking a portion as management fees).

Notice that this single instrument serves as both savings and loan instrument, with the catch being that it is all in-house. The “haircut” that investors are willing to take while they bid for the pot can be considered equivalent to the interest rate they are willing to pay on that loan (it is a loan – since they need to continue to pay the “premiums” for the full period of the fund). The assumption is that when you assemble a chit fund with a set of investors, each of them has different preferences in terms of when they need the money. Some see it as a savings instrument, and are liable to bid for the pot in later rounds. Others see it as a loan instrument, and bid for it in an early round. All the fund manager is doing is to facilitate this intra-group lending through a formal mechanism.

Also notice that the larger the haircut your co-investors are willing to take, the bigger is the profit that you stand to make. If nobody in the group is desperate for money at any point in time, the bids for the haircuts are going to be rather low. So if you invest in a chit fund and hope to make money off it, you must have reason to believe that there are other investors who are much more desperate for the money than others. So if I invest in a chit fund along with you, I’m betting that at some point in time you’ll need money so badly that you are willing to take a large haircut, so that I make a good dividend. So in effect, I’m betting against your misery!

So if a chit fund investor is actually betting against the misery of other investors in the same fund, there is no point in two people from the same family to invest in the same chit fund – they stand nothing to gain by betting against each other. It was a long drive home that day, and I explained it to the driver, and told him that it doesn’t make sense for him to invest along with his relatives in the same fund. He understood, he said, and added that he didn’t want to invest in the fund that he had lost money in (where the manager decamped), but his relatives accused him of being a “traitor” for not investing along with them, and so he complied! And they all went down together.

Surveying Priorities

Earlier today the Lowy Institute put out the results of a survey it conducted on “India’s views of the world ahead”. While the report contains some excellent insights (including Indians’ perception of various countries), the problem is that it doesn’t establish what people’s priorities are.

For example, there is a question that asks people how important it is that “India has the largest navy in the Indian Ocean”. Some 94% of respondents think it is important, but neither the question nor the answer acknowledges the cost of being the largest navy in the Indian Ocean. Of course, having the largest navy in the Indian Ocean is a great thing to have, but what about the cost?

This is the problem with “uni-directional surveys” – where questions are independent of each other and no relation between factors is established. For example, everyone wants low taxes, high level of government-sponsored welfare, full employment, good wages and a strong military. The reason differences between political parties occur is because it is impossible to have all of it at the same time, and different parties have different positions on the trade-offs.

Table 24 of the Lowy survey illustrates this. The question is about domestic policy goals, and respondents are asked about the importance of each. Is it of any surprise that over 90% of respondents think each and every one of these goals is important?

Extracted from the Lowy Institute report on Indian Views of the World Ahead (http://www.lowyinstitute.org/files/india_poll_2013_0.pdf)

In order to capture trade-offs, I propose a different kind of survey. One where the respondent is told “The government suddenly gets an extra Rs. 100 which it has to spend on either strengthening our military or providing food security. What do you choose?”. The survey I propose will have a series of such “binary” questions, where respondents have to allocate the government budget between various programs. That way, the true preferences of the respondents can be captured.

One last point on the presentation of the above table. The survey uses a “4 point Likert scale” (“not at all important”, “not very important”, “fairly important”,”very important”) to record responses. First off, marketing research theory recommends that such scales have an odd number of choices (3 and 5 are the recommended numbers). Secondly, the report has chosen to group the first two choices under “total not important” and the latter two under “Total important”. As you can see from the table, these “total” columns are presented in boldface, thus drawing attention. Consequently, given the amount of information in each table, no one really looks at the columns not in bold face. In other words, the Likert scale could have had only two points (important – not important)!

Water Subsidy in Bangalore

Pavan Srinath yesterday wrote about the water subsidy in Bangalore, arguing in favour of “crisis pricing” of water in order to tide over the current water shortage. To support that he has produced the chart produced below which shows the total subsidy a household gets as a function of consumption.

The interesting thing to note is that there is “indefinite subsidy”. Ideally you would expect to get subsidy only up to a certain level of consumption. However, the data here shows that irrespective of how much you consume, you still get a significant subsidy for the marginal liter of water that you consume.

Pavan’s own comments on this chart can be found on his post at The Transition State

Revising the Food Security Bill Numbers

Mohit Satyanand replied to my earlier post on Food Security Bill with a couple of comments. He mentioned that only about 40% of the beneficiaries are going to get rice while the other 60% are going to get wheat. He also pointed me to the site of the Food Corporation of India where they give the official “all in” costs of rice and wheat (Rs. 27 and Rs. 19 respectively). I still believe that the wholesale market price is a better measure of the all-in price, but it would be useful to see what the subsidy number works out to given the official government numbers on prices.

Notice that the total subsidy has now come to about 6% of the budget, which is still massive. There are of course other problems with the bill – such as distortion of markets, but those are outside the scope of this blog so I’ll stop here.