Uncategorized – Page 3 – Pertinent Observations

Should you stop flying Malaysian?

So Malaysian Airlines faced its second tragedy in four months when its flight MH17 was shot down over Eastern Ukraine yesterday. In response to this terrorist attack, stock prices of Malaysian Airline dropped sharply in today’s trading. Given that the airline has faced two tragedies in quick succession, the question is if you should stop flying the airline, and if the price crash is justified.

The basic question we need to ask ourselves before we book our next ticket is the probability of that Malaysian flight crashing vis-a-vis the probability of a flight belonging to another airline crashing. Now, one never knows what happened to MH370, but most reports (months after the disappearance) point to either sabotage or a terrorist attack. Based on analysis and reports so far, it is extremely unlikely that MH370 disappeared on account of any technical or security lapse on behalf of the airline.

Coming to MH17, which was shot down over Ukraine, again it must be recognized that the airline went down thanks to a terrorist attack. It must also be pointed out that the terrorist attack was from the ground and not from on board, and that there is nothing to indicate that there was any technical or security lapse on the part of the airline that led to the attack.

Moreover, given that neither Malaysia nor the Netherlands (MH17 took off from Amsterdam) has anything to do with either side of the Ukraine conflict, it can be assumed that the targeting of Malaysian Airlines in yesterday’s attack was just incidental. It is more likely that the terrorists wanted to either shoot down a Russian or Ukrainian airline for a particular reason and took down a Malaysian flight by mistake, or just wanted to show their intent by shooting down some airline. Based on this, we can say with very high confidence that the reason a Malaysian airline flight was targeted last night was purely incidental.

Based on this analysis, it is unlikely that there is something specific about Malaysian Airlines that has led to the two accidents in the recent past. In this light, fear of flying Malaysian is irrational, and there is no reason to believe that a Malaysian flight is going to be less safe than a flight of another airline. So if you are flying on a route that is served by Malaysian, after accounting for cost and time and other “normal” factors of consideration, there is no reason why you should prefer to fly another airline rather than Malaysian.

And should you fly at all? If it’s a route that you would normally travel by flight, you should most definitely should, for on a passenger kilometer basis, traveling by flight is definitely safer than traveling by car.

Then what about the markets? The stock price of MH has tanked because the market believes that people are going to fly MH less. Considering that most people are irrational, this is a fair judgment to make, and so one can say that the stock price crash is justified. However, unless something untoward happens (which can actually be traced back to incompetence on behalf of MH), it is likely that MH traffic fall will be much lower than what the markets expect, so it might make sense to buy the stock today – if you have the opportunity to do so. And as a passenger, MH fares are likely to get more competitive in the near term, so you might want to take advantage of that also!

Which political party to vote for/support/join

If you have any doubts on which political party to join (as a member) or simply vote for, fear not, for there is now a mathematical formula to help you. It’s rather simply, and is given by $A. B$ . Yes, that is it. Notice the dot – however. This is essentially the inner (dot) product of two vectors. So what are the variables here, and how do you construct it?

First of all list out all the “axes” that you think are politically important – anything that you think is relevant for a political party. These axes can include (but are not limited to) “capitalist-communist”, “secular-communal”, “internationalist-regionalist” and so on. Now that you have defined these axes (there is no limit on the number of axes you can define), describe your political position in terms of a vector in the N-dimensional space.

Let’s say that you have defined two axes – economically conservative-liberal and socially conservative-liberal. If you are extremely conservative economically and extremely liberal socially, your political persuasion can be described as say (-5,5). If you are economically centrist and socially conservative, you might be at (0,-5), and so forth (choice of the number 5 above is arbitrary).

Now, take every political party that is in your shortlist (or longlist, if you have that much patience), and define the vector of that particular party. Now, the magnitude of the party vector along each axis should reflect the ability of the party to execute along that axis – for example, if you think a party is socially liberal but is unable to execute on the socially liberal axis (either because of lack of conviction or because the party has minuscule chance of forming the government) you should ascribe to the party a small positive value along this axis. If another party is likely to have regressive views on the social liberal axis, and is very likely to achieve them (good chance of winning combined with conviction to get these policies done), it will have a large negative score along this axis. Once again, absolute numbers don’t matter – your axes may stretch from -10 to 10 or -1000 to 1000, as long as all parties have been graded using the same scale.

So now, for each party, you have an N-dimensional vector which reflects its overall ability to execute. You have your own N-dimensional vector, which represents the combination of policies that you want to push.

All you need to do now is to take the inner product of your vector with each party’s vector. You should vote for / support / join the party with whom the inner product has the maximum value.

The mistake a lot of people do is that they ignore magnitudes, especially that of the party vector, and instead choose the party whose vector forms the smallest angle with their own vector (inner product can also be written as $|A| |B| cos theta$ where |A| and |B| are the magnitudes of the vectors and $theta$ is the angle between them. The mistake people do is to optimize $cos theta$ even if the magnitude of the party vector is small.). This leads to them spending much valuable energy supporting unviable parties (either ones that have a low chance of winning or those that lack conviction to execute on just about anything).

Quite simple, right?

The de facto state

There was a good profile of India’s labour laws in Mint last week. Apart from some absurd regulations, what stood out was the fact that while on paper India’s labour laws are strict, implementation is lax, and that provides flexibility to employers. What that also means (strict rules, lax availability) is increased power and rent seeking capability of the government, since they can choose when they want to throw the rule book at you (and if they choose to, it can hit you very hard).

On a similar note, the Chief Justice of India has slammed the incumbent government for “unilaterally blocking” the appointment of lawyer Gopal Subramanium to the Supreme Court. Here again, it is within the capacity of the government to “unilaterally” block the appointment of a Supreme Court judge – there is nothing to bind the decision of the judicial college on the government. It just so happened that in the past the government would usually not reject the recommendations of the college.

A good place to start reforms (though will to reform these might be weak) would be to get rid of these discretionary measures. If it is prudent that the government and the Supreme Court consult over appointment of new judges, put that down in writing. If it is “known” that labour laws are not going to be enforced, change the laws so that the letter of it is something that is easy to enforce.

One of the reasons we are seeing some friction on these counts is that perhaps for the first time we have an “outsider” government. It is likely that more such frictions will come to the fore in the coming days. From this perspective, it would be prudent of the government to change the laws as necessary so that the letter is in line with the spirit.

Analyzing IIMA Admissions

In response to an RTI query, IIM Ahmedabad has disclosed the cutoff percentiles across various categories for getting a seat in IIMA. Before we analyze further, there are two points to be noted. Firstly, what has been disclosed is the “minimum cutoff percentile”, which means that at least one student with that percentile score was admitted to IIMA in that year. It gives us no information on the “average percentile score” for admitted students belonging to that particular category. Secondly, CAT percentile is only one of the criteria used for admission into IIMs. A response by IIM Bangalore a few years back to an RTI query showed that the CAT percentile has only a 15% weight in the entire admission process (the rest going to 10th and 12th standard board exam scores, college CGPA, performance in interviews and the like). Given these two conditions, we should look at the following analysis with a bit of salt.

First up, here is a graph showing the minimum percentile among admitted students of various categories over the years:

There are a few things that stand out from this graph:

1. The cutoff percentage for general category students has been consistently high. Despite a comprehensive set of factors being used for admissions, if you belong to the general category, a high CAT percentile is a necessary condition to join IIMA

2. Reservations for Other Backward Classes (OBCs) happened in a phased manner. In the first year (2008) only about 5% of the seats were reserved for students from these classes. This has been gradually ramped up to the statutory 27.5%. In the initial years, after reservation for OBCs was imposed, commentators mentioned that their cutoff was not much lower than that for general category students and so there would be no dilution in quality. However, the data above shows that it was a function of the extent of reservation that the cutoffs were similar. If CAT percentile is to be taken as a general statement of an MBA student’s quality, reservation for OBCs has definitely led to dilution.

3. There is massive volatility in cutoffs for SC/STs. It must be noted here that the percentile scores are national – percentiles for students from different categories are not disclosed separately. It seems like the quality of applicants belonging to SC/ST categories has been varying significantly over the years. One year (2008/09) SC/ST students need to be in top 10% of all applicants to gain admission into IIMA. In another (2013) students belonging to ST category need to beat only 40% of all applicants to get in! This is bizarre, and it brings us to..

4. Students from ST category getting admission with 40 percentile in CAT in 2013 is plain absurd. What makes it more absurd is that more than half the students who attempted CAT in 2013 got ZERO or less (remember that CAT has negative marking). Maybe there was a real dearth of applicants from the ST category last year but what this tells us is that someone who got an overall negative score in CAT got admission into IIMA last year. Actually this is beyond bizarre.

5. Time for a personal anecdote. Close to 20 out of the 180 odd people who started at IIM Bangalore with me (2004-06) did not make it to the second year, based on their performance in the first year. About half of those were put on a “slow track programme” and finished their MBA in three years. The other ten did so badly they were asked to repeat the first year in full, without concessions. From what I remember all of them eventually dropped out. A large proportion of these twenty who did not make it past the first year belonged to SC/ST categories. I must also mention here that there was a significant number of students from these categories that did rather well and finished close to the top of the batch.

While it might be seen as an act of nobility to give admission in a premier college to someone with a low score but from a historically underprivileged background, the impact on their careers must also be taken into account. All said and done, the flagship course in IIMs is a rather tough course, and it is not difficult to fall behind. What is the use of giving someone admission only for him to fail and eventually drop out? Would he not have been better off continuing in his pre-MBA job rather than having his career disrupted by admission to a premier institute and subsequent failure?

All this said, it would make sense for someone in an IIM (a professor involved in admissions, perhaps) to do an analysis of correlation of CAT scores with performance at IIMs (I understand that one of the reasons the weight of CAT score was reduced was that one such study revealed CAT score was less of a predictor of IIM performance than high school and undergraduate scores). An analysis such as that might reveal that there is an absolute lower cutoff in terms of performance in CAT such that students scoring lower are extremely unlikely to do well. It might give a case for reassessment of the affirmative action policies.

Compounding and Foreign Policy

In today’s Business Standard, Nitin Pai writes about something he’s mentioned a few times before – that India’s best China/Pakistan/US policy is “8% growth”. Unfortunately a lot of space in his piece talks about appointments in ministries and cabinet formation, and he doesn’t directly touch upon why 8% growth is a viable foreign policy (it is possible he had mentioned this but got edited away).

There are two primary reasons why strong economic growth makes for good foreign policy. Firstly, a fast growing economy means that others will want to get their share in it. If you are growing at a rate much higher than the other big economies, other countries will want to piggyback on your growth. They will want to trade with India, invest in India and get India to invest in their respective countries. And for any of this to happen, the foreign country will need to have an overall good relationship with India – if they piss off India, they can get left out of partaking in India’s economic growth. And that will ensure good foreign relations.

The second reason has to do with compounding. Assuming that India can afford to spend only a fixed percent of its tax revenues on defence (being a democracy, the government will always have commitments towards welfare and infrastructure spending which cannot be touched), and assuming that taxes as a proportion of GDP are constant, this means that India’s defence spending is likely to be proportional to the GDP.

With 8% growth, India’s real GDP expected to double in about 9 years’ time. Or, our defence budget can double in 9 years’ time. With only about 5% growth (as we have now), in 9 years our GDP, and consequently our defence budget, will only increase by 50%! That is the power of compounding, and that shows you how increased economic growth can lead to greater defence spending, by keeping proportion of defence spending constant!

Market Share Of Indian Air Operators

Not so long ago, we had a CAG report that discouraged giving sixth freedom rights to Gulf-based airlines, the argument being that it was reducing the market share of Indian airline companies, and was reducing the chances of Delhi airport ever becoming a hub. In that report, the CAG had also claimed that the granting of these sixth freedom rights was hurting the financial performance of Air India.

The Ministry of Civil Aviation, via the government data portal, has put out data on the market share (in terms of number of passengers and amount of cargo) of Indian and Foreign airlines for flights to and from India. While the data strangely refuses to mention the units for some of the variables, that doesn’t prevent us from calculating the market share of Indian carriers in the passenger and freight markets. The graph below summarizes this:

What is interesting is that the market share of Indian carriers in terms of both passengers and freight grew significantly between 2006 and 2011, slowing down a bit towards 2012 (wonder if Kingfisher’s demise adequately explains that). While this was the time when many of those sixth freedom rights (that the CAG was so opposed to) were granted, this was also the time period when privately owned Indian airlines started expanding globally and adding international routes.

This suggests that the reason for Air India’s losses lie less in the grant of the sixth freedom rights – which only grew the market, and more to do with the quality of service provided by the airline vis-a-vis both foreign carriers and privately owned Indian carriers.

What can also be seen from the above graph is that there is perhaps significant scope for expansion of Indian carriers when it comes to Air Cargo where their market share is minuscule compared to their passenger market share.

The WhatsApp Effect

On the national data site (data.gov.in) the Telecom Regulatory Authority of India (TRAI) has put out some data on GSM telephony in the last five years. This has aggregate all-India data, and one of the data points available is “Outgoing SMS per subscriber per month”. The following graph plots this data over time:

Notice how the number of SMSs per user which rose sharply till mid 2011 then started suddenly dropping off! There seems to be a minor revival between March and June 2012, but apart from that it seems to be a secular decline. I can’t think of any reason apart from the profusion of smartphones and messaging apps on such phones such as WhatsApp, WeChat, etc. for this decline.

The total number of GSM subscribers also shows an interesting pattern, going by the TRAI data. There is massive increase in the number of subscribers till 2012, and then the graph flatlines!

The only reason I can think of for this is that there might have been some sort of a subscriber clean up in 2012. If you remember, when telcos introduced “unlimited subscription” plans for prepaid mobiles back in 2006, these so-called “unlimited plans” expired sometime in 2012. This was on account of re-auction of telecom spectrum that year. It is possible that users who were “active” only because of possession of unlimited plans were weeded out after 2012, and hence the flatline. Otherwise, the above trajectory is hard to believe.

Finally, what about the telecom tariffs? The supplied data set has information on the Average Revenue Per User (ARPU) per month, and the number of outgoing minutes of usage per subscriber. Assuming SMSs don’t cost anything (wrong assumption – since they do), we can calculate the telecom tariffs (in Rs. per minute). The following graph shows that:

Back in 2009, tariffs were close to a rupee a minute. However, between 2009 and 2010, tariffs dropped sharply, to the range of about 60 paisa per minute, which comes down to a paisa a second! Interestingly, tariffs have remained constant ever since.

Internet subscribers in India

The government data portal has released data on the number of internet subscribers in India over the last 5 years.

Internet Subscriber Base & Market Share Of Top 10 Internet Service Providers http://t.co/0ZvDkUnAFW #OpenData #India

— data.gov.in (@DataPortalIndia) April 1, 2014

Going by this data, the number of internet subscribers increased steadily until 2012, but then decreased a bit between 2012 and 2013.

The market grew 19% from 2009 to 10, 22% from 10 to 11, before slowing down to a growth of only 13% between 2011 and 2012, and actually decreasing by 5% to 2013.

The question is whether the market share growth varied by provider. The next two graphs show the total number of subscribers per provider and the market share of major providers, respectively. All data here is from data.gov.in

It is interesting that while BSNL continues to grow, the number of subscribers of MTNL has gone down. This graph also helps put perspective on how small Airtel is!

What would add to this analysis is data on how much data actually passes through the pipes of various providers – once that is taken into account, I think we should see that market share of providers such as Airtel and RCom (which supply to businesses) would b e much higher.

Comparing inflation across states

Have you ever wondered which states see higher inflation in a particular period? For possibly the first time ever the government has released data on consumer price indices in various states in india via its open data platform data.gov.in (there are a lot of interesting data sets on that platform. Do check it out if you haven’t already). There is also another interesting data set on the same platform which gives the price indices of various commodities over the last ten years.

Coming back to consumer price inflation across states, let us first look at which states saw the highest and lowest Year-on-year inflation (year on year inflation is calculated by comparing prices in a particular month to the corresponding month of the previous year. This helps remove any distortions caused due to seasonality) in November 2013, the last month for which the data is available.

In November 2013, by far the highest inflation was seen in Tripura. Manipur, interestingly, is at the other end of the spectrum. Now, the problem with the above graphic is that it could be hard to search for a particular state, and see if there are any patterns to which states have higher inflation compared to others.

In order to examine if inflation varies by region, we draw a choropleth. In the below map, the more red a state has been coloured, the higher its inflation is, the greener a state is, the lower is its inflation. Middling states are coloured yellow.

Source: http://data.gov.in/dataset/state-level-consumer-price-index-ruralurban-upto-november-2013

Offered without further comment.

Reforming Bangalore’s Public Transport Network

This is based on a twitter rant on the same subject a few weeks back.

Bangalore’s public transport network has traditionally followed a hub-and-spoke model, with three hubs – Kempegowda Bus Station (aka “Majestic”), KR Market and Shivajinagar. It can be modeled, however, as a two-hub system, for Majestic and Market are quite close to each other and thus quite well-connected. It was probably not originally meant to be that way – for bus number 1 (not sure it still exists) ran from Jayanagar 4th Block to Yeshwantpur – basically from the south to the north-west corner of the city. Of course, it passed through Market.

Over time, however, the bus system has moved to an increasingly hub-and-spoke model. The BMTC (Bangalore Metropolitan Transport Corporation) did one exercise a few years back, trying to rationalize routes (it was partly due to an effort led by Ashwin Mahesh of Mapunity). However, while adding useful additions such as the ring routes (the “big circle” and the “chikka (small) circle” routes) and one or two “trunk routes” (that run right across town), what this revised template does is to further increase the primacy of the hubs. For example, the much talked about Big 10 routes are essentially arterial routes running from a point in the middle of town to some place along one of the highways leading out of Bangalore (they are not strictly hub routes, though, since some of them stop a short distance from a major hub).

The increase in primacy of hubs combined with metro construction (the two metro lines will criss-cross each othe at – you guessed it – Majestic!) has completely overwhelmed the hubs. It is impossible (unless you sacrifice copious amounts of time) to change buses at Majestic now, for the amount of time it takes for a bus to get into majestic and for a bus to get out of majestic is too high a transaction cost.

Moreover, changing buses at a terminus is not efficient, given the waiting times involved and the extra transaction costs of getting out of the terminus. What works better is changing buses at an intermediate stop. To use an anecdote, for two years (1998-2000) I traveled to school in Indiranagar (east Bangalore) from my home in Jayanagar (south Bangalore). I would take a bus going to Shivajinagar (Jayanagar-Shivajinagar is well connected – being a hub route) and get off at Richmond circle, from where I would take a bus from Majestic to Indiranagar (again a hub route, so well served). I could change buses while standing at the same bus stop (made things easier), and the frequency of buses on the two hub routes meant I would get to school easily (again the traffic in the 1990s was nothing compared to what it is now). I had the option of changing buses at a hub, but eschewed it due to transaction costs.

Coming back, what we need in Bangalore is to reformat the bus network in a way that mimics the patterns in which people travel. Right now the assumption of the BMTC seems to be that they should connect every area to a major hub, and then let people take it from there. What they do not take into account is that 1. traffic has grown much worse and 2. People put a higher value on their time nowadays, because of which the transaction cost of the old hub-and-spoke model is way too high. What they need to do instead is to design the network based on people flows.

The first step of such reform is to understand the patterns in which Bangalore moves. One way to do this would be via smart ticketing. A few years back buses in Bangalore started introducing smart ticketing machines, and your ticket would be a printout. However, that didn’t take off. If that can be reintroduced (in all buses) and coupled with destination based ticketing rather than leg based ticketing (for example, if I’m going from Jayanagar to Indiranagar via Richmond Circle I get on to the bus in Jayanagar and buy a ticket to Indiranagar directly. The same ticket allows me to travel on any bus between Richmond Circle and Indiranagar. This introduces complexity but can be done). This will give the BMTC information in terms of the routes on which people actually travel. And once that happens, an effort can be made to reformat the bus network.