Category Archives: economics

Market forces

This morning I refused to board an auto rickshaw since it had one of those old analogue metres. Most autos in Bangalore nowadays use digital metres, which is the regulation. Except a few like the one I saw in the morning.

Now, given that most autos have digital metres people have a choice to choose only such autos. I’m sure the driver I met this morning will realise soon enough that he’s not getting as much business as he can due to his old metre, and make the switch.

It’s similar with usage of metres. In some parts of Bangalore it’s the norm for auto rickshaws to ply by metre. In such areas any driver who tries to make a quick buck by negotiating a higher fare is likely to lose customers. When a customer knows that after letting go of an auto which asked for excess fare, he had a good chance of finding one that will go by the regulated fare, he is less likely to heed to the demand for excess fare.

You can think of this being a case of what Malcolm gladwell calls the tipping point – once markets have tipped to one side (let’s say using regulated fares for auto rides) there is positive reinforcement that leads to an overwhelming move in that direction.

To get back to the metre example, when the fares increased a few months back traffic cops in Bangalore ran a drive where they checked for auto metres and fined those who had not made the switch by a particular date. Maybe that’s led to about 95% of the metres getting recalibrated. The beauty here is that market forces will take care of pushing this 95% to 100% and cops need not spend any more time and energy on enforcing this! Similarly if cops want to enforce usage of regulated  fares they would waste time by doing this drive in areas where most rides are by metre – the focus should be on tipping the other areas over!

To summarise, some parts of regulation gets enforced by sheer market forces, and regulators should not be wasting their energies there. Focus should instead be given to those areas where market failure is extreme – for that is where regulation has a role to play.

Why Keynes’s prediction has not come true

Writing in the 1930s economist John Maynard Keynes predicted at at the “time of our grandchildren” (figurative term since he himself had no kids) people would live a life of leisure and work for an average of fifteen hours a week. Yet, it’s been eighty years since and we still slog away, putting in anywhere between forty and sixty hours a week as we earn our living. And it doesn’t look like things are going to change soon

So why did this happen? I propose two reasons. When I quit my first job almost eight years ago within three months of joining I complained that the workload was way too high. I added that I didn’t need all the money that job paid me and wouldn’t mind taking up something that paid half the money and where I had to work only half the time. No such thing materialized and I slogged away, before going freelance two years back.

Now why does this little anecdote matter? I’m using this to show that the returns to work are not linear. If you were to plot the number of hours worked per week on the x axis and the total value added on the y axis you are likely to get a convex function. In other words the marginal benefit out of every additional hour you work per week is an increasing function of how much you’ve already worked.

The question is why this is so. One simple answer is that in jobs with a high degree of learning by working longer you end up learning faster. Then within the job you can have network effects where the work you do in one part of the job can help you do another part better (I constantly see this in my freelancing where I work on several projects at a time). If there is a steep learning curve it is easier for the firm to appoint one worker to work sixty hours a week than two to work thirty each – since the starting costs get saved. And so forth.

So this increasing returns to effort (in terms of the hours worked) is that the trade off between work and leisure gets resolved in favour of leisure only at a very high level of work – where you are working close to capacity and don’t want to risk burnout and want to maintain your sanity. Before that the increasing returns to effort means that you are likely to put off leisure in favour of “just a little more work”.

The question is if all jobs work this way, and why an economist as brilliant as Keynes didn’t see this concept of increasing returns to work. The answer is that increasing returns to work applies only to a certain kind of jobs – jobs that require a high level of skill and learning and which can be broadly classified as “knowledge jobs”.

Back in Keynes’s time such knowledge jobs were few – far fewer than they are today. Most workers were in jobs that didn’t require a high degree of skill or learning. In unskilled jobs or jobs that are physically demanding the expanding returns to effort part of the curve is extremely short. Once you have figured out the best way to bolt together two metal pieces doing more of this job is not going to make you much faster in bolting together two metal pieces.

Instead since it is physical after you’ve put in a certain number of hours in a day you begun to tire and become less efficient (notice this point occurs at a later stage for knowledge jobs). And the returns to hours curve starts flattening out much sooner. If you were to do the trade off with leisure using such a curve the equilibrium might occur much earlier than for knowledge work – perhaps at Keynes’s predicted value of fifteen hours per week.

Now even today while the proportion of non knowledge jobs is smaller than eighty years back the number of people doing such jobs is not small. So if the work-leisure equilibrium happens at fifteen hours a week why do people work longer?

The answer is that work-leisure is not the only equilibrium one is solving for. You also need to work enough to be able it fund your living. And it has happened that fifteen hours of non knowledge work pays nowhere close tO what is required to fund a reasonable living. For this reason non knowledge workers are forced to work much longer than their work-leisure equilibrium rule permits!

So why didn’t Keynes see this? I think what he missed was the boom in the knowledge economy in the postwar period. With the rise in the knowledge economy what you had was a set if jobs that had increasing returns to effort. Moreover these returns, on an hourly basis, were far larger than the returns on a non knowledge job. The boom in the knowledge economy meant that people working in such jobs impacted general prices and this forced the non knowledge workers to work longer!

So we have the unique situation now that those people who can afford to work for only fifteen hours a week have no incentive to do so. On the other hand people who have an incentive to work no more than fifteen hours a week are forced to work longer because otherwise they cannot find their lives!!

Landmark mismanagement

Yesterday’s Landmark Quiz in Bangalore was a major waste of time. No, I’m not talking about the quality the quiz here – the prelims was among the better Landmark Quiz prelims I’ve sat through, and given that we just missed out on qualification for the finals (AJMd, as we say here in Bangalore) I didn’t sit through the finals though I was told the questions there too were pretty good.

I’m talking about the transaction costs of attending the quiz. The overall management of the event left much to be desired. First of all, we had to show up at the venue at 11:45 for a quiz that was supposed to start at 1:45 pm. Teams with confirmed seats were let in at around 12:30 and only around 1 o’clock were us “waitlisted” teams let in. There too, the organizers did a major show of letting in waitlisted teams, calling them in order and taking over half an hour to let everyone in.

The point is that even after all the waitlisted teams had been let in, there was plenty of room in the auditorium. This makes me wonder about the wisdom of waitlisting so many teams, and then making such a big show of letting people in. Given that the total turnout was much smaller than the hall capacity, things would have been much simpler if people had been simply left in, with volunteers only ensuring that the seating was efficient (without leaving gaps).

Before the quiz yesterday i started writing a blog post on how the quiz registration process was itself flawed, and gave incentive to people to register zombie teams because the option of registering a team came free. So while the hall had been theoretically filled up many days ago, most of these registrations were zombie registrations thus leading to a long wait list and thus calling people early. Given that the quiz doesn’t have an entry fee, I can’t currently think of a good way to price this option.

But reaching the venue early was not the only waste of time. The written prelims of the quiz finished around 3 pm, including calling out the correct answers. The results, however, weren’t announced till close to 6 o’clock. In the interim time period there was the finals for school students, but that still doesn’t explain why they had to wait until 6 o’clock to announce the results of the senior quiz.

The way I see it, it was sheer disrespect on the part of the organizers of the time of the participants. Yes, Landmark might be a much sought after quiz, rated among the best in the country. Yes, most people come there for the questions and not just to win – and so stay on to watch the finals even when they haven’t qualified (it is indeed commendable that Landmark quizzes have managed to be great spectator events while not dropping quality). Yes, many participants have traveled from other cities and so having traveled the cost of their time might be “cheap” – in that they have little else to do in the rest of the day.

Even taking into account all these, the wastage of 5 hours of each quizzer’s time (2 hours for early reporting; 3 hours gap between prelims and results announcement; 4 if you consider that watching the Junior finals wasn’t a waste of time) is not a done thing. Given the quiz’s unparalleled reputation it is unlikely that market forces are going to tell the organizers that they are wasting people’s time, but the message has to go through.

The Economics of Forts

I had first planned to write this post back in February 2012, when I visited the magnificent Kumbalgarh Fort in Southern Rajasthan (this was part of my bike ride around that state). However, I didn’t have a typing device handy, so I postponed the post, and it got postponed indefinitely until I visited the equally magnificent Chitradurga Fort in Karnataka recently.

The fort in Chitradurga is famous possibly because of the early 1970s Vishnuvardhan movie Naagarahaavu (cobra) which is set in that city. A lot of the action in the movie takes place in and around the fort, and there is a famous song which is picturized in the fort. The song goes back in history, too, to the battle between Nawab Hyder Ali of Mysore and Madakari Nayaka of Chitradurga back in the 1770s, when after multiple attempts Hyder Ali finally managed to capture the fort. The heroine of the song is one “Onake Obavva” who slays a number of Hyder Ali’s soldiers entering the fort through a small gap in the rocks using her pestle, until she is attacked from behind and killed.

The fort at Chitradurga is popularly known as the “yELu suttina kOTe” or “seven layered fort”. This is not entirely correct. The fort has seven “layers” of walls only on the front side. At  the back, where it is bordered by another hill, there are only two layers of walls. However, the terrain meant that the back was not easily approachable for invaders so most invasions happened through the front. In that sense, the name wasn’t so wrong.

I could write this post about the design of the fort itself (and there is a lot to talk about it -from the rain water harvesting to feed the moats, to the L-shaped design of the gates to the attention to detail in the positions of the soldiers and guards, and arrangements for their camps, and so forth). However, I would prefer here to talk about the economics of building the fort.

The Nayakas of Chitradurga initially started off as a vassal state to Vijayanagara. When Vijayanagara fell in 1565 following defeat at the Battle of Talikota, Chitradurga and the Nayakas became independent. The Nayakas ruled for over 200 years until they were defeated by Hyder Ali in the 1770s. During that period they built this magnificent fort. The question that arises, however, is about how they were able to finance it.

Building a fort with seven layers is no joke. Stones had to be quarried, cut and raised to build each wall. Considerable engineering and architectural acumen also went into the design of the fort itself. It apparently took several generations for the fort to get completed. Considering that there was little economic activity in and around Chitradurga those days apart from agriculture, one can only suppose that the state that built the fort was extractive.

On a visit to Bikaner last February, someone pointed out to me about the quality of the craftsmanship that went into creating the stone carvings in the palace there. “You will never get such quality nowadays”, this person surmised. I agreed with him, and my reasoning was that nobody is willing to pay for such intricacies nowadays. It is only in an extractive state where the taxpayer has no control over the state’s finances that a ruler can spend thus to beautify his own residence rather than spending on the development of the state itself. Where there is a “large coalition” whose support the ruler draws to stay in power, he is forced to invest in projects that benefit this large coalition at the expense of those that just benefit himself.

Wandering through the Chitradurga Fort on Sunday, I thought the expenses on developing the fort could be justified as simply a “large defence budget”. However, the problem with this hypothesis is that a fort doesn’t really provide ‘national security’. What a fort instead does is to make the capital city strong and defensible, but this comes at the cost of securing the borders. People outside the fort are perfectly susceptible to plunder and pillage by the invading party. All the fort does is to protect the capital and the treasury, and thus the king.

The next time you see a magnificent palace or a fort, think of the economic conditions in the state that built it. Think of how the structure might have been financed, and if so much could be spent on a structure such as this what the total size of the royal budget might have been. Then imagine what the tax rates might have been if the royal family managed that large a budget, especially when the kingdom in question was a rather small one like the ones at Chitradurga or Kumbalgarh. Then decide if you would have wanted to live and do business in that age.

After two hundred years of solid resistance, the Chitradurga Fort finally fell to Hyder Ali, in the old fashioned way. Hyder Ali simply bribed some of Madakari Nayaka’s officers, and got them to switch sides. A path through the back that was normally used to supply milk and curd to the fort was discovered, and with the complicity of some of Madakari Nayaka’s officers, Hyder Ali invaded through this route. And the fort fell.

Radhakrishna, the tourist guide who showed us around the fort on Sunday put it best. “Of what use is two walls or seven walls”, he said, “if you can’t exercise control over your own officers?”

 

Gold: Currency or Commodity?

In today’s Hindu Business Line, S Gurumurthy of the Swadeshi Jagran Manch has an insightful article on the Indian affinity for gold. In this, he talks about gold being the preferred form of savings among the poor and mentions that the preferred form of financing for poor and/or rural households is the “gold loan” (loan issued keeping gold as collateral), often arranged by an informal moneylender. He argues that attempts to regulate gold imports are futile and what instead needs to be done is formalization and regulation of the gold loan industry.

The question one needs to answer when trying to regulate gold is whether it is a currency or a commodity. Or, to “segment along another axis”, whether it is a “conventional asset” or “financial asset”. The thing with “conventional assets” (as opposed to financial assets) is that demand decreases as price increases (most goods and services fall under this category). “Financial assets” on the other hand see the reverse relation – price increases are usually followed by an increase in demand.

Conventional wisdom which governs gold regulation in India (and elsewhere) is that it is a commodity, and a conventional asset. Gurumurthy’s argument is that it should rather be treated as a currency or a financial asset.

The concept of gold being a currency is not new. In fact, if you look at the way currencies were traditionally traded (by the “gold standard”) gold was a de facto currency. The gold standard can be described as gold being the only convertible currency, which could be converted to any national currency at a fixed rate. In the era of the gold standard, it can be argued that all international transactions were effectively priced in gold, and only notionally paid for by means of a national currency.

Despite this background of gold being a currency, however, in India it is regulated as a commodity. Take for example, the customs duty on gold. Drawing an analogy, think of what would happen if a “15% customs duty” were imposed on US Dollars. In other words, every time I converted my US dollars into Indian Rupees, I would have to pay 15% of the value of the transaction to the government as “customs duty”. You might say that is absurd. However, that is exactly what is happening with the customs duty on gold, with the result that gold has started being imported via illegal channels.

The problem with gold is that world over it now behaves like a commodity (after the abolition of the gold standard). In India, however, it behaves more like a currency. Because it internationally behaves like a commodity, standard modern economics treats it as one, and the Indian regulations also treat it such. However, given that gold is (I agree with Gurumurthy) more of a currency than a commodity in India, none of these regulations have worked.

It is time regulators started thinking of gold as a currency and financial asset.

 

Cartels, good and bad

This post is about two professional cartels in India, and why one is better than the other. The “better” cartel is the Institute of Chartered Accountants of India (ICAI). The “worse” is the Medical Council of India (MCI). As the names suggest, they regulate the profession of chartered accountants and doctors respectively. And the way the former works is better than the latter.

First of all, let me convince you that these two are cartels. The basic concept is that in order to practice as a Chartered Accountant in India, you need certification from the ICAI. And who does the ICAI consist of? Other CAs. So it is nothing but a trade guild, which tries to control who gets to join the guild. It is a similar case with the MCI and doctors. Doctors trying to control who else can be doctors. As the more perceptive of you might have figured out, it is in the interest of both these guilds to not admit too many new members, since that would lead to supply of their profession to a level that significantly affects profit margins for the incumbents.

Now that we have established why these two are cartels, and that they both have an interest in restricting membership, let us see how they go about the process.

The ICAI follows what can be described as “exit level testing”. There are no restrictions on anyone wanting to be a CA – all you need is a high school (12th standard) degree with mathematics as one of your subjects. They have three levels of examination – “basic”, “intermediate” and “final”, and one needs to clear all of these in order to become a member of the guild. And how does the guild control membership? By making these examinations super-tough, so that only a select few pass these exams every year. There are several “CA institutes” who train students for these examinations. And there is no restriction (AFAIK) on anyone opening one such institute.

The MCI does it differently. Anyone with a recognized degree in medicine is automatically a member of the MCI. They regulate the numbers instead by controlling the number of medical colleges, so that only a select few can even aspire to get into the MCI. More importantly, the entry to medical colleges is not strictly on “merit” – colleges are free to allocate a certain portion of the seats on discretion, and they do so based on recommendations, donations, etc. I’m not really saying any of this is wrong. Just describing the situation as it is. However, when you combine this with the fact that an entry into a medical college guarantees membership of the MCI (provided you pass your college exams, which shouldn’t be too hard), it effectively means that you can buy your way into the MCI.

Actually, thinking about it, this option of creating additional membership of the MCI “upon payment” is a masterstroke by that guild. The concept is that when people pay large sums of money to gain entry, they are not going to be in a hurry to look to slash profit margins (key here is the fact that the amount of work a doctor can do is constrained by his/her time, so doctors cannot play  the “volume game”). So the pricing of these seats ensure additional revenue for the MCI and their constituent colleges, while not compromising on the members’ margins.

Note, however, that it is not possible to buy your way into the ICAI. Yes, aspiring members who seeks to buy their way in might buy “training” and “apprenticeship” under the best CAs who are members of the cartel, but still, to get a membership they need to pass the examination, which is not easy at all. Contrast this with the MCI where either money or the right connections get you straight in.

I’m not saying that the ICAI is a wonderful guild. Cases such as the Price Waterhouse – Satyam case or the Deloitte-FTIL case have shown that the profession is deeply flawed, and doesn’t regulate itself adequately. All I’m saying that the entry criteria it uses, as opposed to the one used by the MCI, ensures a higher quality in terms of the ability of its members.

As for me, I’m happy that I’m involved in a profession (or professions) that don’t need any certification or guild membership.

Coase

In the wake of the passing of Ronald Coase, two incidents, both professional. The first was with an established company to whom I suggested a partnership – they are in a space where I don’t have much skill, but have access to companies who I would love to sell to, and they don’t have my skill and our skills are complementary. So I reached out to them (through common contacts) suggesting that we could work together. They came back to me saying they would love to work with me, but would want me to join them as an employee.

The second was an incoming lead. This was a rather small company doing something similar to what I’m doing but with bigger ideas. They want me to join this “innovation hub” they are trying to create. This is a loose federation they are creating including professionals from various fields. Nobody is obliged to work full time for the hub, but this gives people an opportunity to get together and work together on projects where their respective expertise can combine well.

As the more perceptive of you who would have read every Coase obituary in the last two weeks would have figured out, the piece of work that Coase is most well known for is about the theory of the firm. The question is rather simple – why should you and I get together and form a firm if we have to work together, if we can remain independent and just come together for projects. The answer lies in transaction costs.

The advantage of coming together as a firm is that you negotiate only once. Let us suppose you are a graphic designer and I’m a data scientist. If we decide to work together on a visualization project, how do we decide how much you get and how much I get? We will need to negotiate. Let’s say we negotiate and agree on a price. And complete a project and split the spoils. What would happen the next time we were to bid for a project? We will need to negotiate again on how we will share the spoils.

If on the other hand we were to form a partnership firm, then for every project that we do, our respective share is fixed! Thus we don’t have to negotiate before every single projects. Thus, firms exist so that you don’t have to repeatedly negotiate.

However, there is a downside to this. What if I form a firm with a graphic designer, and then we see a significant opportunity in projects that involve a lot of analysis but little visualization? In that case, I have no use of my partner, and would loathe to pay him his share of the profits. Or consider if I were to somehow become much better at my job, while my partner stagnates. There is little I can do, for we’ve been locked in into the financial arrangement.

These are only some of the complications that arise when you need to decide whether you want to become a firm. I just thought it is pertinent that I’m having some of these dilemmas (employee versus consultant versus partner versus member of federation) in the few weeks after Coase’s passing.

Levi’s Price Discrimination

So I’ve never managed to buy jeans on discount. Let me explain. Unlike most other people (if you go by what the store assistants tell you), I don’t like to wear faded jeans. It is perhaps an inherited hangover since my father used to consider jeans to be inherently dirty and would make me discard jeans as soon as they faded a little bit. It could also be more practical – since I sometimes like to wear jeans to official meetings, I want to wear jeans that look neat.

Now I’ve managed to drive my wife crazy with my shopping (and we’ve known each other for barely four years, shopped together for three maybe). She thinks I’m way too fussy about clothes, and can’t make up my mind easily. I’ve explained earlier on this blog why I take a long time over shoes (my sandals are now wearing out, so I’m getting ready for another ordeal). But the more fundamental differences that my wife and I have is with respect to jeans.

The problem is that we fundamentally disagree on what purpose jeans serve. I have traditionally looked at jeans as comfort wear. Trousers I’m absolutely comfortable in (I sometimes even sleep in my jeans), which I don’t need to wash too frequently, and which can be worn even after they get torn in non-strategic places. I’ve always bought “comfort fit” jeans, and after I graduated to branded jeans towards the end of my teens, my staple had been the comfort-fit Lee Chicago.

The problem is that my wife thinks of jeans as fashion-wear – things you need to necessarily look good in. Some of the jeans she owns are so skinny that sometimes she takes a really long time to change. She looks great in them, no doubt, but the problem is that she expects that I too wear such jeans. And so after some ten years, I have given up my loyalty towards Lee Chicago, and instead have to try out various skinny fits (as things stand now, I own only one pair of Lee Chicago, bought in 2009).

Ok all this is besides the point of this post (and the point of another post which I never wrote). Coming back to the point of this post, the deal is that nowadays I find it extremely hard to shop for jeans. Of course it doesn’t help that I don’t live in Kathriguppe (with its dozens of factory outlets) any more, and that in my part of town (Malleswaram-Rajajinagar) the only place you can find decent branded clothes is in malls, which are a pain. The bigger problem, though, is that it is very hard to find stores that stock my kind of jeans.

In the last couple of years, our strategy for shopping clothes has been to visit a multi-brand outlet in one of the two malls near our place, so that we have a wide variety of choice. Except that I have no choice. Because stores such as Lifestyle or Shopper’s Stop or Westside (which now mostly stocks private labels) or Central don’t stock my kind of jeans. At all. If you happen to locate a store clerk and ask him for “mid blue straight cut non-faded jeans” he will look at you as if you have just landed from another planet. He can be excused for giving you those looks, for his store simply doesn’t stock non-faded jeans, because of which he has never sold them!

So I happened to be on Brigade road over the weekend, and I had a small gap of about half an hour between two meetings, and thought I should visit the Levi’s flagship store there. I must mention that the salespeople there were definitely significantly more polite than I’ve ever seen at a multi=brand store. However, as soon as I repeated my mantra (mid blue straight cut non-faded jeans), the first thing the salesperson who approached me told me  was “oh Sir, but there’s not discount on that!”.

It’s clever price discrimination by Levi’s, to not sell non-faded jeans on discount. For they know that people who buy non-faded jeans tend to be older (hey I’m only thirty), or will be buying them for office wear, and they are less price elastic than the typical college kid who buys faded stuff. So while the college kid needs discounts to be attracted during the “discount season”, the “formal jeans” buyer needs no such attractions, and will pay full price for his stuff.

It is interesting to note, however, that companies that make formal clothes (not Levi’s) also offer massive discounts during the “discount seassons” (one of which is on now). That, though, can be explained by the fact that most people need a few sets of formal clothes (even those that normally wear faded jeans), and discounts are necessary to attract customers.

Now I’m beginning to think that the market for “formal jeans” in India is extremely niche, and if I”m acting above my age because I prefer such jeans. I half-expect my wife to call me an “uncle” be cause of this.

What should we do about the falling rupee?

So the more perceptive of you would have realized that the rupee is falling. And fast. At the beginning of the year, fifty four rupees bought a dollar. Now you need over sixty rupees. That’s a fall of over ten percent in half a year.

People argue based on differences in interest rates and interest levels between India and the United States, and India’s current account deficit, that the rupee deserves to depreciate. Some argue that the rupee should actually trade even lower. That is correct. What makes the fall of the rupee worrying, however, is that it has happened so quickly. No theories on trade imbalance or rates imbalance or inflation can account for the fall of ten per cent in half a year.

The issue, of course as everyone knows, is to do with capital flows. While India has run a persistent current account deficit, the continuous inflow of foreign investment into the Indian markets (either direct or indirect) had ensured that the rupee was relatively stable over the years. With India maintaining a high growth rate in the GDP over the noughties, the inflow was persistent. Things aren’t so good now, however.

India’s GDP is slated to increase at a paltry 5% this financial year. The growth story is seemingly over. And that is not all. Things aren’t looking great in other parts of the world also. Due to this concept of margin financing, sometimes when some of your holdings lose value, you are forced to liquidate other holdings in order to comply with “margin requirements” (we will not go into the technical details here). So with markets around the world not doing great, and India’s growth not as spectacular as it used to be, and with the country’s muddled policies (check out how difficult the government has actually made it to invest in India – irrespective of your nationality), investors started exiting. With some investors exiting, asset values dropped and the rupee dropped. Consequently other investors exited. And so forth. It did not help that there was nothing inherent in India’s government policies to hold them here.

So that’s the story so far. Question is what we should do going forward. As I mentioned earlier, there are two levers that can help shore up the rupee – the capital account and the current account. Within the current account there are two components – imports and exports. What normally happens when a currency depreciates is that exports become more competitive and go up further. Imports become costlier and thus reduce. On the current account front, thus, we have what is called as “negative feedback”.

Notice that in the past whenever an economy staged a recovery, it was generally preceded by a devaluation of the local currency. So since our currency is already devalued the stage is set for recovery, right? Unfortunately it’s not so simple. While it is true that our exports are now likely to be more competitive, fact is that Indian industry is not well placed to capitalize on that. Investment bottlenecks, labour laws and bureaucracy means our entrepreneurs haven’t been able to move fast enough to take advantage of the falling rupee and up exports. This can be borne in the fact that the Reserve Bank of India, which normally shies away from controlling exchange rates (as long as they are not too volatile), has issued several public statements on this matter in the recent past, and taken steps to prevent further fall in the currency levels. That the Central Bank has had to step in to protect the currency shows that we are in extraordinary times. The natural corrector to a falling exchange rate (increase in exports) is absent.

Matters are not helped, of course, by the fact that one of our largest imports is an asset – gold. Thing with asset prices is that unlike prices of “normal goods”, the demand for assets increases with price. When asset prices increase, people see “momentum” in the asset and want to get on to the bandwagon. So there goes part of another natural corrector to a falling exchange rate (less competitive imports).

So coming back to where we started off with – what should the Government do? While this is going to be a time-consuming process, what the government needs to do is to ensure that exporters can exploit the falling rupee. Reforms in this direction are not easy of course – since they require significant efforts in removing bureaucracy and making it easier to do business – which means we need significant administrative reform. There is also the small matter of possibly having to reform labour laws (while on the matter of labour laws, check out this paper by Takshashila Scholar Hemal Shah, who presents some easily implementable reforms in the labour law). While these are difficult things to implement, the fact that there is a crisis gives the government an alibi to push ahead with the reforms. PV Narasimha Rao had done that once in 1991. The problem now is that the government may not have political will given that elections are less than a year away. In this context, it would be advantageous to have early elections, for a new government with a fresh mandate might be more prone to taking tough short-term measures.

Currently, the government is trying its best to shore up on the other levers. Gold import is being curbed – except that it will be hard to implement since they will simply get diverted to the black market. The Finance Minister is traveling the world putting up a roadshow to get investments to India. That, however, is akin to putting lipstick on a pig since there is little in India’s fundamentals and current economic scenario to attract foreign investors. Even if some of these measures succeed, they will only lead to temporary respite to the currency. Fact is that for sustainable improvement in currency, tough reforms are mandatory.

Inefficiency of Restaurant Reservations

Quartz reports that restaurant reservations have been taken over by bots in San Francisco. Certain restaurants in that city are incredibly hard to get reservations at, so people have started letting lose bots that check for availability every minute and grab the table as soon as it’s available. In fact, there are enough bots out there that at a particular restaurant which opens reservations at 4 am, all tables are taken by 4:01. Every day.

In Kannada, there is an idiom that says “gubbi mEle brahmAstra”, which means using the weapon of Brahma (widely recognized in Hindu epics are the most powerful weapon) to annihilate a sparrow. Using a bot for restaurant reservations is a solution that falls under this category. However, that someone had to think up of this solution shows that there is something wrong with the restaurant reservation market. And it is not just in San Francisco (I guess this solution was first implemented there thanks to the penetration of online restaurant reservations and the high number of techies in the city. Bangalore fails on the first count).

The problem with the way restaurant reservations currently work is that the option is priced at zero. And thus gets allocated on a first come first served basis. Suppose I want to go out on a date tonight but am not sure what cuisine my wife is craving today. Anticipating crowds, given that it is a Saturday, I will make reservations in four different restaurants serving four different cuisines. There is nothing that currently prevents me from doing that. And it costs me nothing (apart from the cost of four phone calls).

A restaurant reservation is essentially an option to occupy a table of a certain size at a certain restaurant in a particular time period. If you show up at the restaurant at the appointed time, the restaurant is obliged to offer you a table. However, the way it is currently implemented is that you are not obliged to show up at that restaurant at that particular time. If you don’t show up, the table the restaurant had “reserved” for you will go empty for that evening, thus resulting in loss of business.

How can a restaurant handle this? One idea is to overbook. If you have 10 tables, allow 12 people to make reservations, in the hope that on an average day, 10 or less will show up. While this may lead to higher occupancy, problem is when all 12 show up. You then run the reputational risk of making a reserved guest wait, or worse, turning them away. Another option is to book only a fraction of the tables. If you have 10 tables, give out reservations only for 8, and let people know that you are open to walkins (if someone calls after the 8 are taken, you can say “I’m sorry, but we can’t take any reservations. However, we have some unreserved tables. You can come and check it out. If you’re lucky you’ll get it”). That way, by keeping yourself open for walkins, you can prevent loss of inventory- except that if you are a high end restaurant you are unlikely to get too many walk in customers.

Another option (which I believe is a method online retailers in India use for cash-on-delivery customers) is to maintain a list of people who called you along with their phone numbers and whether they showed up. That way, you can deny habitual offenders a reservation. However, considering that if you are a high end restaurant people are unlikely to visit you very often this may not work either.

The ideal economic solution, of course, would be to charge for reservations. People pay a small deposit when they make a reservation. If they do show up, this amount gets adjusted against their bill. However, given that most reservations happen over the phone (except in SF), you have no way to charge for it. So is the solution that you move your reservations exclusively online, so that you can charge for it? Then you could lose out on customers who are uncomfortable with making reservations online.

Even if all your reservations were online (like in SF), there is a problem in charging for reservations – you wouldn’t want to be the first restaurant doing that. One thing high end restaurants pride themselves on is their reputation, and charging for reservations can make them appear “cheap”, and they wouldn’t want to do that unless it is the done thing.

So how are restaurants managing the situation now? My take is that they are adjusting for it in the price. They are not overbooking, but assuming the cost of empty tables (as a result of no shows) in their overall pricing. This way, customers who are honouring reservations are effectively subsidizing those that don’t. While the market “clears”, the implicit subsidy towards customers who don’t honour their reservations leads to dead weight loss. There is also moral hazard – since desirable customers (the ones who show up) are subsidizing the un-desirable (the ones that don’t).

Is there a solution to this? One way to look at this would be for restaurants to centralize their reservations. I’m surprised no one has done it yet. You can have a website and a call centre from which you can take reservations for a large number of restaurants. The restaurants will pay for it since it will mean that they don’t need to have someone by the phone taking and managing reservations. And given that the same call centre manages bookings for multiple restaurants, they can identify duplicate bookings and overbook accordingly. Customers can be incentivized to use the same ID for booking for multiple restaurants by introducing a multi-restaurant loyalty card. And then – once there is a large number of restaurants that have moved their reservations to this call centre, they can start thinking of collectively moving towards a system of penalizing for unfulfilled reservations.

There – I’m giving a business idea away for free!