Frameworks, mental models, and fresh perspectives on Indian public policy and politics. This feed is an audio narration by Ad Auris based on the 'Anticipating the Unintended' newsletter, a free weekly publication with 8000+ subscribers.
In a year when countries as diverse as India, the United States, the United Kingdom, Russia, Taiwan, Pakistan and Palau go for their elections, it is tempting to go for an overarching theme for the year while looking ahead. Unfortunately, like these aforementioned elections and the many others that will see about 50 per cent of the human population exercise their democratic choice, there seems to be only a messy mix of political signals emerging from them. Illiberal forces are rising in some places, and autocrats are rubber-stamping their authority in others. Democracy is blooming afresh in a few, while the trends of deglobalisation and closed borders are resonating among others. Of course, there are the wars old and new and, maybe, a few more round the corner to complicate any attempt at a broad narrative for the world. To add to the woes of anyone trying to write a piece like this, the economic macros globally look volatile and inchoate. There is increasing talk of a soft landing of the US economy while the EU and the UK stare at another lost year. Depending on who you speak to, China has either put its economic issues behind it and is ready to charge back with its investment in future technologies like AI, EVs and hi-tech manufacturing, or it is at the “Japan moment” of the late 80s. Japan, on the other hand, is itself having a brief moment of revival, and no one knows if it will have legs or if it is yet another false dawn.
It is foolhardy to purvey macro forecasts in this environment. But then this newsletter won’t write itself. No? So, I guess the best course then is to make more specific predictions instead of taking big swings and hoping those come true while the macros swing wildly. This will also satisfy Pranay’s pet peeve about generic predictions that I mentioned in the last newsletter. So, let me get going with 10 somewhat specific predictions for next year.
* President Biden will decide sometime in early February that he cannot lead the Democratic Party to power in the 2024 elections. He will opt out of the race and give possibly the most well-backed Democrat, financially and otherwise, a really short window of four months to clinch the nomination. In a way, this will be the best option for his party. If he continued to run for the 2024 elections, it would have been apparent to many in the electorate that they are risking a President who won’t last the full term. If he had opted out earlier, the long-drawn primary process would have led to intense infighting among the many factions of the party, eventually leading to fratricide or a Trump-like populist to emerge perhaps. A narrow window will allow the Party to back an establishment figure and reduce the fraternal bloodletting. Who will emerge from this is anyone’s guess. But whoever it might be, if (and it is a big if) they have to come up against Trump, they will lose. To me, the only way Trump doesn’t become the next President is if he isn’t on the ballot. And the only way that looks possible is if he loses his legal battles. Otherwise, you will see a second Trump term which will be worse than the first one.
* There’s way too much confidence about the Fed having piloted a ‘safe landing’ for the US economy despite the many odds that were stacked against it. I think this is fundamentally misplaced. The fiscal deficit is unsustainable, and much of the soft landing is thanks to it. The GDP growth has been supported by an almost doubling of the federal fiscal deficit. This won’t last. The higher rates that haven’t yet led to any real string of bankruptcies or asset bubble collapses will begin to make an impact. The geopolitical risks that have only been aggravated in the last 12 months and the increasing protectionism worldwide will make it difficult to sustain growth at 2023 levels. My view is that the real landing will be in 2024, and it won’t be soft.
* China will get more adventurous geopolitically as it weakens economically. Look, the property market crisis is real in China and given the influence it wields on its economy, it is difficult to see any return to the ‘normal’ 8 per cent growth anytime soon. The local government finances will worsen, and there is a real possibility of a few of them defaulting. There will be more fiscal support to prop up the numbers and more packages for sectors in stress. Foreign inflow will continue to be anaemic, though it won’t be negative, as it turned out late last year. The Chinese customers' long-awaited consumption spree isn’t coming in 2024. All in all, China will stutter while still wowing the world with its progress in tech.
* BJP will come back to power, but it will fall a bit short of 300 seats. This will surprise many, considering the continued electoral success of its machinery and all the Ram Mandir ballast it plans for itself from this month onwards. There are a couple of reasons for it, largely driven by electoral arithmetic across the states where it did very well in 2019 and where a repeat showing will be difficult. Also, the sense of complacency about winning it hands down will mean a letup in the door-to-door mobilisation model that it has perfected. All of this will mean a decline in 30-40 seats across the board. The new Modi cabinet will be a surprise with new Finance and Defence ministers and a whole host of new faces as it goes for a generational change in leadership.
* The somewhat surprising trend of record US deficit going hand-in-hand with the relatively strong showing of the dollar in the past two years will eventually come to a face-off. And my guess is 2024 is when the dollar will blink. As other emerging economies start to trade in currencies other than dollars - who wants to risk more exposure to the dollar? - and its economy doesn’t have a soft landing like I predict, US dollar will be hit. My guess is that 2024 will be the first year of a 3-4-year dollar down cycle. In the next year, I predict the dollar to fall by 10 per cent against most world currencies. This might not hold with India because we are a bit of a unique case. But a dollar slide looks inevitable to me.
* I had predicted a more aggressive anti-trust stance and significant moves against Big Tech by the FTC. It didn’t pan out. So, I will repeat the prediction. Lina Khan, the FTC Commissioner, has a nine-month window to go after them, after which it isn’t certain she will continue to be in her post. I predict a big scalp during this time, which will then be legally challenged. But expect a tough couple of quarters as she and her team do their best to leave a mark for the future.
* The Indian economy will continue its trend of surprising on the upside, though I think global headwinds will temper the overall growth. I expect a 6.5 per cent growth with the inflation at the 4.5 per cent mark through the year. The much-awaited capex cycle will not be broad-based and will show up in select sectors led by large Indian conglomerates or global platform players. I expect FII inflow to be among the lowest in many years in 2024, and much of the equity market will be buoyed by domestic fund inflow into the market. The Nifty will remain flat or be up 5 per cent because of global weakness and the relative overvaluation seen already.
* The Israel-Hamas war will end faster than people think. Maybe by April. Not because there will be some solution agreed between the parties. There’s nobody to fight any more in Giza. The Hezbollah won’t get involved, and the Houthi insurgency will be a mere storm in the teacup. On the other hand, the Ukraine war will continue with no real end in sight during the year. A Trump (or Republican government) in 2025 will likely stop funding the war, and that will pressure Ukraine to negotiate with Putin. But that’s for 2025.
* Two specific corporate predictions: One, AI will continue to impress us with its capabilities without making a dent on real business. So expect to be surprised by a best seller written by an unknown author that will later revealed to be an AI-trained algorithm. Or a music album, even. There will be many conferences and papers, but AI's wider impact will still be distant in 2025. Two, I think Novo Nordisk will be well on its way to becoming the most valued company in the world in 2024. It might become the most valued in Europe during the year itself as it will struggle to produce enough of its weight loss drugs to keep up with demand.
* I forecast one of two contentious pieces of legislation will come into play after the elections are over. We will see a real move on either the Uniform Civil Code or on one-nation one-election (ONOE) at the back end of the year. These are issues close to this government; they will get these going right after the elections.
That’s that, then. We will see how they go during the year.
India Policy Watch: The Services vs Manufacturing Debate
The authors challenge the dominant narrative that India should imitate the manufacturing-led growth strategy followed by the East Asian countries. They instead point to India’s comparative advantage in low-end and high-end services, making a case for a policy reprioritisation to double down on these strengths. The book argues that replicating China's manufacturing success is neither possible nor desirable.
Not possible because manufacturing supply chains are shortening due to increased protectionism and higher rates of automation, making the conditions far more difficult than what China faced. Moreover, China hasn’t gone away; it remains a formidable competitor in manufacturing.
Replicating that success might not even be desirable, they contend, as the value added in a product’s manufacturing stage is dwarfed by the value captured in the upstream R&D stage and the downstream services (branding, marketing, content production, etc.) stage. And hence, they are against the kind of subsidies on offer for electronics and chip manufacturing assembly. The Micron chip assembly plant is a particular thorn in their eye because it will cost Indians $2 billion and produce a mere 5000 direct jobs with no R&D spillover.
They argue that services and Services for manufacturing are the sweet spot for India to focus on. The money splurged on manufacturing and assembly should be ploughed back into education and health, priming India’s human capital for global success.
In sharp contrast, international trade economist Devashish Mitra makes the case that low-end export-led manufacturing (such as in textile, apparel, and leather) is the only way out for India. In his book review for the Economic Times, Mitra writes:
“India is a labour-abundant economy. This abundance is in low-skilled labour, given that almost 80% of its working-age population does not have even a higher secondary education, with only an eighth of the working-age population having studied beyond high school. While India adds 8-10 million people to its labour force annually, roughly 2 million are college-educated or beyond. There is also a wide variation in the quality of degree programmes across India, most of which cannot impart marketable skills. Thus, high-skilled workers are scarce.Standard international trade theory tells us that an economy abundant in low-skilled labour, when open to international trade, will specialise in low-skilled labour-intensive production activities, which are the ones in which such a country has its inherent comparative advantage. Furthermore, India's technology-driven comparative advantage is also expected to be in low-end manufacturing activities, as those would be the ones in which India's productivity disadvantage relative to advanced economies would be the least, for example, textiles, apparel and footwear. Thus, high-skill specialisation for India, as envisioned by Rajan and Lamba, would have to defy standard international trade theory.”
Mitra also points out that the government should prioritise solving the unemployment problem, the only way around which is low-end manufacturing because IT and IT services have historically had comparatively low levels of employment growth.
Reading these two perspectives over the past few days has been rewarding. This is precisely the debate that needs the attention of our policymaking elite. At this stage, I have three initial observations.
One, the services vs manufacturing is a false binary. Both views are actually quite similar in their essence because they both advocate capitalising on India’s comparative advantages. That advantage lies in high-end services such as chip design and in low-end manufacturing such as textiles and footwear. There is no need to choose just one of them. Success in both areas needs the same ingredients—eliminate self-defeating policies, improve skilling, pass trade-friendly reforms, and invest in health and education.
Two, I feel the criticism of low-end chip and electronics assembly misses an important consideration. If chips are the building blocks of the Information Age, it makes sense for India to begin the journey at the lower end of the chip manufacturing supply chain and climb up that ladder over two decades or so.
Jobs generated per rupee of money spent is not the only criterion that should motivate economic decision-making. For example, India’s nuclear energy sector is not evaluated primarily on the number of jobs it creates. Similarly, the primary goal of building the intellectual and manufacturing capability for making chips is to reduce critical vulnerabilities in the future. India can pursue the twin goals of doubling down on comparative advantages and reducing vulnerabilities simultaneously. In any case, attracting a single 65-nanometre specialised fab (which would cost around ₹10,000 crores) doesn’t come at the expense of a better university education system. India can do both.
Third, the book brilliantly emphasises that the services sector needs a lot more policy focus. Trade economists propose that we are heading towards a future where manufacturing supply chains will become shorter (because of protectionism and China-related fears) while services supply chains will become longer (because of better technology). This implies that services as a percentage of global trade will only rise. When that happens, nation-states will start imposing trade barriers for services, too. So, the Indian government needs to champion trade frameworks that bring down services trade costs.
An analogous case is that of the Information Technology Agreement (ITA) of the WTO. Signed in the nineties, the ITA substantially brought down tariffs on information technology goods and their intermediate products. This move immensely benefited multinational companies and consumers worldwide, including in India. Similarly, it’s time for India to champion a Global Services Trade Agreement that lowers barriers that Indian service providers face in participating in global trade. It also becomes clear why data localisation policies that hamper services exports will have a disproportionately negative impact on India’s economic future.
Finally, do read both the book and Devashish Mitra’s paper linked in the HomeWork section. And yes, check out our Puliyabaazi with Rohit Lamba, which discusses some of these themes.
PolicyWTF: How Pro-Business Protectionism Hurts Indian Women
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
— Pranay Kotasthane
By now, it’s widely known that Bangladesh has eaten away at India’s share in textile and apparel exports. This industry is labour-intensive and employs a significant proportion of women in the formal labour force—46% of all Indian women in the manufacturing sector are employed by apparel and textile industries taken together. Hence, it’s important to diagnose the reason for India’s decline.
As with policy success, policy failure can also have multiple causes. Bangladeshi exports received preferential treatment in the West as part of the latter’s policy to help poorer countries. This is one important reason that helped Bangladesh. However, this reason alone doesn’t explain India's decline in fibre production.
It turns out that the reason is our favourite villain: pro-business protectionism. I learned about this causal linkage from an excellent 2022 paper, Reigniting the Manmade Clothing Sector in India, by Abhishek Anand and Naveen Joseph Thomas.
This is how I understood the story that Anand and Joseph narrate. India has been losing global market share in textiles and apparel since 2011 to Bangladesh and Vietnam. The global demand for artificial fabric-based cloth (such as polyester) is far higher than that for natural fabric-based cloth (such as cotton) for cost and durability reasons. Thus, India’s underperformance is largely due to a decline in its exports in the artificial fibre segment.
And why is that the case? The most important input for the polyester fabric is a chemical called Purified Terephthalic Acid (PTA). The villain enters the scene. In October 2013, the two major domestic producers of PTA (Reliance Industries Ltd. and Mitsubishi Chemical Corporation India Ltd.) petitioned the government to impose anti-dumping duties on imported PTA. The government agreed. The anti-dumping duties were supposed to remain in force for six months. But they were kept in force for over six years! To make matters worse, the government imposed additional import tariffs on PTA in 2018 as part of its atmanirbharta driveoverdrive.
This rise in PTA costs had a cascading effect on the downstream fibre-making and apparel industries, making their products costly even as Bangladesh continued enjoying preferential tariff treatment in the EU. Vietnam benefited from trade agreements with Australia, Canada, the EU, and also the RCEP. The productivity of India’s textile sector declined, and many potential jobs vanished in thin air, disproportionately impacting women.
There’s an even uglier face to this fiasco. While large sections of Indians lost out, the position of a select few protected businesses improved. Vertically integrated firms with a presence in the entire supply chain from PTA to polyester yarn, and finally, apparel, benefited immensely as their competitors had to pay higher rates for the imported PTA. Protected from the cost of imports due to their in-house PTA production capabilities, these companies cornered a bigger domestic market share. Notably, their lower productivity means that even these protected firms can’t compete in the global market.
This a canonical example of how pro-business policies hurt markets and people. Even though the government dropped the anti-dumping duties on PLA in 2020 and started a Production-linked Incentive (PLI) for textiles, it simultaneously increased import duties for the downstream polyester to now protect domestic yarn producers from foreign competition! Talk about learning from past mistakes. PolicyWTF indeed.
In any case, do read the entire paper. It’s written lucidly, without the jargon and the scary Greek alphabet.
HomeWork
Reading and listening recommendations on public policy matters
* [Article] Martin Wolf has an excellent column in the Financial Times on liberalism and its discontents. It cites the Inglehart-Welzel Cultural Map to argue that even if there is no ‘clash of civilisations’, there seems to be a ‘divergence of civilisations’ on freedom-related questions. As an aside, I observed that there is no data for India in the seventh round of the World Values Survey, which covers the period 2017-21. Does any reader know why? Is it a story similar to India pulling out of the PISA rankings?
* [Video] This is a good conversation on Devashish Mitra’s paper Manufacturing-fed, Export-led Growth for Gainful Employment and Skill Creation. The presentation has no scary equations, and the discussion is insightful.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit publicpolicy.substack.com
#239 Of Screws and Racquets
Sunday, January 7, 2024 • Duration 25:33
Happy New Year
— RSJ
Happy 2024, dear readers!
We hope 2023 was good for all of you. If it wasn’t, we are glad that it’s behind you. We didn’t have too bad a 2023 ourselves. This newsletter went along swimmingly (or so we think) and we had our book ‘Missing in Action: Why You Should Care About Public Policy’ published on 23 January 2023.
Why haven’t you bought it yet?
Anyway, it seems to be doing well based on the modest expectations we had of it. I’m yet to see the pirated versions of it peddled at traffic signals. Heh, that will be the day. But then I see it on shelves of all decent bookstores and that’s quite reassuring. That apart, Pranay had another book (one productive chap, I tell you), When The Chips Are Down on semiconductor geopolitics which is an area that’s going to get more interesting and contentious in this decade. All in all, we ended up writing 44 editions during the year totaling up to over a hundred thousand words. A good year, I guess.
On to 2024 then. Like in the past, we will indulge ourselves a bit in the first edition of the year. First, looking back at our predictions for 2023 and seeing how badly off we were and then next week, I will be doing a bit of crystal ball gazing for 2024.
“The role of cultural attitudes—specifically, of Enlightenment ideals that had a progress oriented view of scientific and industrial pursuits—in Britain’s economic takeoff and industrialization has been emphasized by leading economic historians. Foremost amongst them is Joel Mokyr (2016), who states that the progress-oriented view of science promoted by great Enlightenment thinkers, such as Francis Bacon and Isaac Newton, among many others, was central to what would become the “Industrial Enlightenment,” and ultimately Britain’s Industrial Revolution. In this paper, we test these claims using quantitative data from 173,031 works printed in England in English between 1500 and 1900.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit publicpolicy.substack.com
#122 Naya Paisa, Purana Qissa 🎧
Sunday, April 11, 2021 • Duration 20:21
While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways.
The People’s Bank of China (PBOC) has been trialling a form of digital Yuan for the past year. Last week the trials entered their second phase. (Umm, they seem to have more phases for this than for developing their Covid vaccines).
“A thousand years ago, when money meant coins, China invented paper currency. Now the Chinese government is minting cash digitally, in a re-imagination of money that could shake a pillar of American power.”
What’s not to like an article that begins with hyperbole?
But there’s some grain of truth there. Before we go further we need to make sense of sovereign digital currencies or what’s now being called Central Bank Digital Currencies (CBDC).
What’s Money?
Like we have written in an earlier post, money performs three roles for us: it is a store of value, it is a medium of exchange, and it is a unit of measure. Through it we save for the future, pay for goods and services and measure the value of very different things using a common unit. These roles mean anything that aspires to be a currency (the usable form of money) should have a relatively stable value over time and should be widely acknowledged as a store of value and unit of account among people. If it does so, the network effect takes over after a while and it becomes a widely used currency.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit
#121 Mundell's Trilemma; Sumption's Dilemma 🎧
Wednesday, April 7, 2021 • Duration 05:54
This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.
📣📣📣 Announcement: Admissions are now open for the summer cohort of Takshashila Institution’s 12-week Graduate Certificate Programme in Public Policy. Visit takshashila.org.in/courses to find out more.
- RSJ
A couple of short takes for the mid-week edition.
An Obituary
Robert Mundell, the Noble Prize winning Canadian economist, died at his Italian home on Sunday. He was 88.
I had mixed feelings when I read that line. Sure, you could argue Mundell’s works provided the intellectual foundation for the Euro and Reaganomics. But there are many other economists who might be ahead in the queue for claiming credit for those two phenomena. And then these aren’t exactly the greatest of times for either Reaganomics or the Euro.
Mundell’s greatest contribution to me was to set up a branch of economics singlehandedly. He theorised about international monetary policy when the idea itself was inconceivable. It might appear a bit odd today but notions of free cross-border movement of capital and a floating exchange rate weren’t anywhere near mainstream in the early 60s. Mundell almost presaged the future interconnected global economy and the monetary theory that would underpin it.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit
#120 Narrative Dominance
Sunday, April 4, 2021 • Duration 16:11
While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways.
PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.
📣📣📣 Announcement: Admissions are now open for the summer cohort of Takshashila Institution’s 12-week Graduate Certificate Programme in Public Policy. Visit takshashila.org.in/courses to find out more.
Global Policy Watch: A Short History Of The Breitbart Doctrine
Bringing an Indian perspective to burning global issues
- RSJ
In edition #117 where we covered the resignation of Pratap Bhanu Mehta, we had a polemic by Edward Skidelsky as suggested reading in our homework section. We specifically quoted this line:
“The ‘woke’ left is currently pursuing this goal by way of a Gramscian “long march through the institutions” — a progressive co-option of the schools, universities, state bureaucracies and big corporations.”
What’s this ‘Gramscian long march’ that’s mentioned here? That’s the first question for this post.
Separately, I was drawn to a U.S. national survey done by Cato Institute last year on freedom of expression. The results weren’t surprising to me (including the stupid graph that I have copied below from their site):
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit
#119 That 2008-like Feeling
Wednesday, March 31, 2021 • Duration 09:11
This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.
- RSJ
We have been trying to make sense of the three key trends dominating the global financial markets over the past 12 months - the excess liquidity in the system driven by loose monetary policies and stimulus announced by central banks the world over, the persistence of the central banks to keep interest rates at historic lows without worrying about potential inflation, and the booming equity markets that seem to be completely divorced from the ground economic realities during the pandemic.
You can read some of our previous posts on these here and here.
How long can these trends sustain? Who knows?
The perpetual optimism on which the wheels of finance move shows no signs of abating. Now, history has shown these are trends that are neither sustainable nor safe for ordinary investors. But optimism is the opium of the masses. “This time it is different” is what you usually hear as a record new stimulus is passed or markets touch new highs. But like Scott Sagan wrote in his book, The Limits of Safety:
“Things that have never happened before happen all the time.”
Three Strikes And…
The world is full of surprises and three events in the past quarter should give regulators and investors a pause.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit
#117 A Resignation
Wednesday, March 24, 2021 • Duration 05:40
This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.
Let’s take the issue of ‘shrinking liberal space’ in the public discourse and how this is another example of it. All politics is a contestation of narratives. The primary motive is to have your narrative dominate while diminishing the rest. So, from a realist lens, this is what every political party aspires to while few achieve. Therefore to expect any different from any dominant political grouping is to live under a delusion. You might desire a secure and self-assured dispensation that lets a thousand different and often dissenting ideas bloom. But that ideal state of affairs is rare anywhere in the world and in history. India is no stranger to a narrative dominating its body politic for decades. Good or bad is beside the point here. There’s another narrative in town now and, naturally, it wants to dominate forever.
Questions
That brings us to a couple of questions. Isn’t good or bad that was conveniently brushed aside above, an important point in this context? If this narrative dominance is what is to be expected, should this be a worry for India?
Well, narrative dominance of any kind is an unstable equilibrium. For three reasons.
, we aim for dominance but once we achieve it, boredom sets in. No one likes to watch games where their team is so dominant that there is no contest. Over time we lose interest or we create two versions of our team to play against each other. Soon it is “us” versus “them” again. Either way, the narrative dominance is broken. This is also the reason there can never be a successful conservative-only or liberal-only social media platform in the long term. People crave to argue. To go one up on others. They will invent enemies if they have to. We have written about in politics before here.
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#116 India's rajamandala
Sunday, March 21, 2021 • Duration 18:35
This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.
India Policy Watch #1: Choose Your Nationalism Wisely
Insights on burning policy issues in India
- RSJ
A short note on nationalism to think about for this edition.
There was the usual brouhaha in media last week over a few international agencies downgrading India on some kind of global ‘freedom index’. The usual reactions have followed.
For some, it is a validation of all they see happening around them. Our freedoms are being eroded and we watch silently, they claim. As Majrooh wrote (in that Guru Dutt romcom ‘Mr & Mrs 55’):
“मेरी दुनिया लुट रही थी, और मैं खामोश था”
On the other hand, the establishment and its supporters view this as another ‘left-liberal-woke’ attempt to malign a new, confident India. To them, there is freedom in India to freely express your dissent and criticise anyone. The old order of the privileged elite who feel left out in the present order is keen to paint India in poor light. They have been discredited and rejected by the masses, yet they persist. This is the argument made by the ‘nationalists’ (or atleast that’s what their Twitter handles claim).
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit
#115 Anti-State, Anti-Government Or Anti-Nation? 🎧
Sunday, March 14, 2021 • Duration 19:12
This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.
India Policy Watch #1: Sedition, Blasphemy, Defamation
Insights on burning policy issues in India
- Pranay Kotasthane
A Delhi Court Session Judge’s admirable order granting bail to activist Disha Ravi in the #ToolKit case made me reflect on sedition as a concept. Here are a few initial thoughts emanating from that exercise. Fair warning: this is a conceptual discussion and not a legal one. If detailed legal critique interests you, head over to these two articles by Gautam Bhatia (1 & 2).
The “crimes” of sedition, blasphemy, and defamation lie along a continuum. They are categorically similar in that they punish the written or spoken word directed at some other entity. Where they differ is the targeted object. Defamation laws punish verbal or written attacks against a person or a group of people. Blasphemy laws punish utterances against something considered sacred by a group of people whereas sedition laws punish utterances that can threaten the State.
A Few Definitions
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A textual analysis resulted in three salient findings. First, there is little overlap in scientific and religious works in the period under study. This indicates that the “secularization” of science was entrenched from the beginning of the Enlightenment. Second, while scientific works did become more progress-oriented during the Enlightenment, this sentiment was mainly concentrated in the nexus of science and political economy. We interpret this to mean that it was the more pragmatic works of science—those that spoke to a broader political and economic audience, especially those literate artisans and craftsmen at the heart of Britain’s industrialization—that contained the cultural values cited as important for Britain’s economic rise. Third, while volumes at the science-political economy nexus were progress-oriented for the entire time period, this was especially true of volumes related to industrialization. Thus, we have unearthed some inaugural quantitative support for the idea that a cultural evolution in the attitudes towards the potential of science accounts in some part for the British Industrial Revolution and its economic takeoff.”
2023 Predictions Scorecard
I had 8 predictions across the global economy, Indian economy and Indian social and political order. So, this is how does the 2023 report card looks like.
Global Economy
This is what I had written:
#1 The trend of securing your supply chain for critical products will get stronger.
….but it is clear to most large economies that on issues that concern national security, it will be foolhardy to not plan for worst-case scenarios any longer. And national security could mean anything, really, but I can see on energy and key technology, nations will opt for more secure supply chains with watertight bilateral partnerships than be at the mercy of distributed, multilateral chains. I won’t go as far as calling it ‘de-globalisation’ yet, but this ‘gated globalisation’ is a trend that’s here to stay.
This is playing out but a bit slower than what I expected. Disentangling and building domestic capabilities isn’t easy. And it is costly. But through the year we had increasing curbs on what hi-tech (GPU chips, AI research) and defence companies domiciled in the West could export to China. At home, we continued the push on PLI on electronics and tech equipment with debates on how much value-added manufacturing is really coming through in these schemes. Also, interestingly, we are continuing down the path of decoupling from global ‘default platforms’ especially in financial services. The Rupay platform is continuing to get bigger with a specific push from the government to derisk payment infrastructure from global networks like Visa and Mastercard. Also, in a recent statement, the central bank has suggested building a homegrown Cloud Computing infrastructure that will be used on regulated entities in India so that they aren’t tied into global Cloud service providers.
#2 The fears of elevated inflation and a recession in the US in 2023 are overblown. The recession is due, but it will come a bit later
My view is that as supply chain issues ease up with China opening up, energy demand going up and the US continuing to be at almost full employment, we might have a 2023 where for the most part, the US inflation will be higher than target, Fed will continue to remain hawkish, and the growth will hold up. This will mean the real risk of recession will be more toward the end of the year than now.
Turns out I was accurate. In fact, the US economy has held up even better than I expected. And the Fed almost softened their tone by their last meeting of the year.
#3 Big Tech will continue to be under the cosh
I half expect India to gradually move all payment and eCommerce arms of Big Tech into a structure that’s domestically controlled and owned in 2023. Third, FTC, with Hina Khan at the helm, will accelerate antitrust and competition law changes to reduce the dominance of Big Tech.
I think I got this right in a big way. Through the year, fintechs have offloaded ‘troublesome’ shareholders (read Chinese investors) and there is a real trend of what’s called ‘reverse flipping’ where unicorns that were domiciled outside of India for tax and regulatory reasons are coming back home. Reason? Well, if you ask them they will tell you because they believe in the India story. That’s very convenient. The real reason is domestic regulators are making it difficult for a non-domiciled company to get a full bite of the Indian apple. From data security and storage requirements to tax and fund transfer regulations, the entities that are essentially Indian but are registered outside India to avoid ‘regulatory inconvenience’ are now facing business inconvenience in following that model. Here’s more on this.
Indian Economy
I think I wrote more about the Indian economy in 2023 than any previous year. Much of it was about my surprise, in a positive way, on how much better it was doing than my expectations. Now as I read what I had written at the start of 2023, I think I had somewhat forgotten during the year that I was quite optimistic about the economy at the start of the year. Here’s what I had written:
#1 Greater optimism
I am a bit more optimistic about the broader numbers than most, and I will explain why. I think GDP growth will come in around 6.5 per cent for FY24, and inflation will be around 5 per cent. We might see a couple of rate hikes in the next few months, taking the repo rate to 6.75 per cent, but that will be it. I see domestic consumption to remain strong and exports, in the light of the shift away from China, to be good for manufacturers, and how much ever I might struggle to get behind the PLI scheme, it will yield some short-term benefits. IT exports might be a dampener, but on balance, I see more upside to these predictions.
Couldn’t have gotten it more right. I think the growth for FY 24 might come in at 7 per cent. Repo ended up at 6.5 per cent and domestic consumption and manufacturing have stayed strong while IT exports have gone worse over the year.
#2 Digitalisation: Wave 2
There will be a significant push on digitalisation in lending and eCommerce. The UPI infrastructure has revolutionised payments and, along with GST, has accelerated the formalisation of the economy..... Also, as I mentioned in an earlier point, doing this will also mean shifting the balance of power from Big Tech-owned entities to an open platform or domestically controlled entities. I sense a strong push in this direction in 2023.
This was a no-brainer, really. I expected a bit more traction on platforms like OCEN and ONDC which haven’t taken off yet. The digitisation of the financial services sector has made low-value credit much easier for people to access. And UPI and digital KYC have enabled that to an extent that unsecured individual lending saw its biggest year ever in 2023. In fact, by the end of the year, we saw the central bank intervening to increase risk weights on these advances for banks and NBFCs and trying to bring down growth rates. The risk of an asset bubble because of faster and easier access to credit seems to become real based on the data they were reading.
#3 The expected capex cycle push from the government will not come.
There are a couple of reasons for it. First, this government has always been careful about fiscal deficit, and it is particular about the risk of the fiscal space. The government has committed to a 4.5 per cent target for the union government deficit in the next 3 years from the current levels, that’s expected to be 6.4 per cent. I see a tightening in the fiscal stance during the year with a gradual reduction in some of the pandemic-related subsidies and better targeting of the benefits improving distribution efficiency. The other reason for a muted capex spend is the likely belief that the private sector credit capex cycle seems to be picking up.
Got it mostly right except for the private sector capex cycle bit. That didn’t show up in 2023 as I was expecting. Government capex actually slowed as it kept its glide path to a 4 per cent union deficit by 2026. The efficiency improvement in tax collections and subsidy disbursement also helped in broadly sticking to the fiscal plan for the year. And as I expected, this government doesn’t need to loosen its purse strings in an election year. It has multiple other tools in its armoury to swing people’s opinion in favour of it.
India: Political and Social
I had generally anticipated a more-of-the-same year despite some of the noise surrounding opposition efforts at the start of 2023. BJP with PM Modi at the helm, is possibly the most formidable political force in the world and it can turn its missteps too into its advantage. We saw this during the pandemic when its response was poor and too late. But that’s all water under the bridge now. It is also helped by a coincidence of circumstances where China has gone off-track and India is able to play its ‘swing power’ role to its fullest advantage in global geopolitics. All of this has meant it has a compelling domestic narrative to offer to the people of India rising in global prominence. This has tremendous capital at least among the middle class and the Hindi heartland. Back to what I wrote at the start of the year:
#1 More of the same
The expected consolidation of opposition forces to counter the BJP isn’t going to happen early enough for it to mount a credible challenge in 2024. There are eight state elections in 2023, and I suspect BJP will see reverses or very close fights in a couple of them where it is the incumbent (MP and Karnataka)....But it is hard to see opposition consolidation or a credible case that they can make to counter the electoral juggernaut of the BJP at this time. Congress, the other national party, isn’t capable of moving the masses either with its agenda or its leadership. The vacuum in national politics looks set to stay.
Ho hum. BJP lost Karnataka like I thought they would. MP was a surprise and it only shows how poorly Congress has performed through the year. Everything else is, as they say, same same.
#2 More Exit, Less Voice
I have made the point in the past about social fault lines tripping us up while we magically have a growth window that’s opened up for us again. This holds true. The space for opposition or dissent has shrunk; more importantly, even the fight for protecting or broadening that space has gone out....The state would be dependent on citizens if they value their loyalty and would then pursue a policy that listens to their voice. However, if the state doesn’t value it and the citizens know their voice won’t matter, the only option is to exit. For certain sections of our citizenry, they are possibly at this stage of engagement with the state. This scenario might not hurt the majority today, but we would do well to remember it has never been a good idea for the state to not value the loyalty of its citizenry in the long run.
Nothing has changed on this. I guess this macro trend has only exacerbated in 2023.
So there I am with my report card. Not too bad, I guess though Pranay may again complain that these were quite generic and unless we make very specific predictions, it all seems to come true at the end of the year. Well, I will try to do that next week with my 2024 predictions. But don’t hold your breath on that, Pranay.
A Framework A Week: Four Components of an Economic Strategy
Tools for thinking about public policy
— Pranay Kotasthane
Montek Singh Ahluwalia writes that any economic strategy has four components: slogans, targets, programmes, and policies.
Slogans refer to rhetoric employed by the government. Ahluwalia calls it the “front end” of economic strategy. Rhetoric is necessary in a representative democracy for communicating the government's position on an issue in a simple, catchy form without going into the details of the accompanying policy measures. Think Garibi Hataao, Shining India, Inclusive Growth, Sabka Saath Sabkaa Vikaas, and Minimum Government and Maximum Governance.
Targets are specific, measurable goals of an economic strategy. An example is the articulation that India will become a developed country by 2047. The World Bank comes up with a GDP per capita threshold for classifying an economy as a high-income one. So the target becomes a guiding light for policies and programmes and also serves as a tool for holding the government accountable.
Programmes refer to government-led measures involving public expenditure. Policies are government directives that allow or disallow specific economic activities. The difference can be understood using another popular three-fold classification which says that all governments do only three things — produce, finance, and regulate. This means programmes are government actions that involve producing or financing, while policies are about regulating. For example, bank recapitalisation is a programme where the government is financing public sector banks. In contrast, the Foreign Trade Policy 2023 lays down the rules that govern all exports and imports.
This four-fold classification is useful for policy analysts for two reasons. One, it doesn’t look at slogans cynically. Economic narratives are important. Slogans are often launchpads for powerful narratives.
Secondly, differentiating policies from programmes is crucial. The default government tendency is often to bat for government-run programmes. Think Production-linked Incentives (PLI) and export subsidies. There are enough and more programmes from the past to tinker with and regurgitate them into a new programme to “solve” the economic problems of the day. However, chronic economic problems might need a fundamental change in policies that cannot be fixed by programmes alone. India’s manufacturing underperformance is one such example. Though there have been many a programme for overcoming this challenge, the solution lies in changing trade, tax, labour, and doing business policies. Another example comes from the 1991 economic reforms. At the time, many politicians thought that India only needed a debt restructuring programme. However, the reformers successfully argued that India needed a change in tax, business, and investment policies; a new programme alone wasn’t good enough.
For an illustration of this framework, check this article by Montek Singh Ahluwalia on the problem with India’s public sector banks.
PolicyWTF: Screws are Strategic
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
— Pranay Kotasthane
The Department to Ground Foreign Trade, or less accurately, the Directorate General of Foreign Trade (DGFT), is a gift that keeps giving. Their latest policy move is to restrict the import of cheap screws so that India can become a self-reliant vishwaguru of screws. A screwpower, maybe?
In a notification issued on 3rd Jan, the DGFT banned the imports of screws priced lower than ₹129/kg. Indian manufacturers used to import these from France, China, Australia, Bangladesh, Brazil, and Belgium.
So, the government wants to do an import substitution of a humble product that costs ₹129 per kg and already has a diversified supply chain. If this isn’t ridiculous enough, think about the impact on Indian manufacturers who relied on these imports. They are the ones getting screwed here because they will end up paying more for the same product.
Long-time readers might experience déjà vu as there was a similar policy restricting the imports of mosquito electronic racquets in 2020, to which RSJ had paid proper obeisance in edition #129.
In other news, one of the issues blocking the India-UK FTA is that Indian EV car manufacturers don’t want the high import duties to be dropped. Currently, electric cars priced above $40000 are slapped with a 100 per cent import duty, while those below $40000 are levied a 70 per cent duty. Domestic manufacturers argue that a reduction in import duty will stall the sunrise industry.
These two stories in recent months illustrate the slippery slope of industrial policy in low state capacity conditions. A domestic subsidy for manufacturers can still be justified because every other country is doing that. It’s become an entry pass of sorts to play the manufacturing game. But to couple domestic production subsidies with import restrictions makes these policies scarily close to the import substitution regime in the pre-1991 era.
Every government makes mistakes. However, low state capacity results in governments repeating the mistakes of the past as there is no institutional memory. We seem to be reaching that point with India’s industrial policies.
This observation also stands empirically. Check out the New Industrial Policy Observatory (NIPO) released by the IMF (hat-tip to Niranjan Rajadhyaksha for sharing the accompanying paper on X). The database classifies industrial policy actions over the last few years into eight categories: export barriers, import barriers, domestic subsidies, export incentives, FDI measures, Public procurement measures, Localisation content measures, and miscellaneous. This is by far the most detailed database of industrial policy measures I’ve seen—a fantastic tool for scholars working in economic policy.
Now here’s my initial analysis looking at the data for India in NIPO. Of the 195 industrial policy measures that India has taken, 55 are distortionary trade measures, illustrating that we are repeating import substitution ideas of the past. There’s more to this. In the database, one can also classify industrial policies sectorwise. Here again, we see that import tariffs feature across most sectors.
Such mindless import substitution will lead to export contraction, as Indian companies become uncompetitive and bow out of international competition. We have seen this movie before.
P.S.: Look at this chart of trade as a per cent of GDP for the world’s five largest economies. Trade is a higher proportion of India’s GDP than is the case for Japan and China. It’s been that way for the last ten years. Trade is far more important to India than we realise.
HomeWork
Reading and listening recommendations on public policy matters
* [Book] Vivekananda: The Philosopher of Freedom is a thoroughly enjoyable, myth-busting biography.
* [Blogpost] This post has a mind map of market failures and corresponding government interventions. A boon for anyone interested in public policy.
* [Podcast] Listen in to a Puliyabaazi with economist Rohit Lamba on India’s future economic trajectories. This is a fun episode.
* [Paper] A useful take on Foreign Trade Policy 2023 in Economic and Political Weekly.
Throughout history, a key feature of a sovereign state was its control over the supply and circulation of money that’s used within its boundaries. The royal mints, after all, have been around for more than two thousand years. As modern nation-states emerged through the 19th and 20th centuries and as global trade increased, central banks emerged to manage the monetary system and provide financial stability.
There are three forms of money in any modern economy:
* Banknotes: These are physical paper currency notes issued by the central bank that we all use in our everyday lives. This is a direct promise by the central bank to pay the holder of the note a specified sum of money. This promise is printed on all currency notes.
* Bank Deposits: Ordinary people and businesses don’t hoard banknotes to conduct their business. They deposit their money in commercial banks. These deposits are stored in electronic form by these banks. The banks offer two services to their customers. They convert these deposits to central bank money in the form of banknotes when you demand it at an ATM and they offer to transfer your money to someone else through a payment system that exists between banks. Unlike banknotes, your deposits aren’t risk-free. They aren’t backed by any sovereign guarantee. A bank will be able to convert your money into banknotes only if it is solvent and it is able to honour its commitments. We have seen instances of a bank failing to do so in India (Yes Bank, PMC etc).
* Central Bank Reserves (“reserves”): Commercial banks have their own accounts with the central bank where they deposit their funds. These deposits are used by banks to pay each other to settle transactions between them. The reserves are the other form of central bank money apart from banknotes. These are risk-free and therefore used for settlements among commercial banks.
Where does CBDC then fit in?
Simply put, a CBDC is a digital form of a banknote issued by the central bank. Now you might think we already use a lot of digital money these days. Yes, there’s money we move electronically or digitally between banks, wallets or while using credit/debit cards in today’s world. But that’s only the digital transfer of money within the financial system. There’s no real money moving. The underlying asset is still the central bank money in the form of reserves that’s available in the accounts that commercial banks have with the central bank. This is what gets settled between the commercial banks after the transaction.
This is an important distinction. We don’t move central bank money electronically. But CBDC would actually allow ordinary citizens to directly deal with central bank money. It will be an alternative to banknotes. And it will be digital.
CBDC: The Time Is Now
So, why are central banks interested in CBDC now?
There are multiple reasons.
One, cryptocurrency that’s backed by some kind of a stable asset (also called ‘stablecoin’) can be a real threat as an alternative to a sovereign currency. Stablecoins are private money instruments that can be used for transactions like payments with greater efficiency and with better functionality. For instance, the current payment and settlement system for credit cards in most parts of the world has the merchant getting money in their bank accounts 2-3 days after the transaction is done at their shops. A digital currency can do it instantly. For a central bank, there could be no greater threat to its ability to manage the monetary system than a private currency that’s in circulation outside its control.
Two, in most countries, there’s an overwhelming dependency on the electronic payment systems for all kinds of transactions. As more business shifts online and electronic payment becomes the default option, this is a serious vulnerability that’s open to hackers and the enemy states to exploit. A CBDC offers an alternative system that’s outside the payment and settlement network among commercial banks. It will improve the resilience of the payment system.
Three, central banks need to offer a currency solution for the digital economy that matches any form of digital currency that could be offered by private players. Despite the digitisation of finance and the prevalence of digital wallets in the world today, there’s still significant ‘friction’ in financial transactions all around us. You pay your electricity bill electronically by receiving the bill, then opening an app and paying for it. Not directly from your electric meter in a programmed manner. That’s just an example of friction. There are many other innovations waiting to be unleashed with a digital currency. Central banks need to provide a platform for such innovations within an ecosystem that they control. CBDC offers that option.
Lastly, digital money will reduce transmission loss both ways. Taxes can be deducted ‘at source’ because there will be traceability of all transactions done using CBDC. It will also allow central banks and the governments to bypass the commercial banks and deliver central bank money in a targeted fashion to citizens and households without any friction. The transmission of interest rates to citizens for which central banks depend on commercial banks could now be done directly.
While these are the benefits of a digital currency, there are other massive macroeconomic consequences including the loss of relevance of bank deposits that we have with our banks. A CBDC that offers interest would mean we will have a direct deposit account with the central bank. This will mean a move away from deposits in banks to CBDC with the central bank. Also, the nature of a bank ‘run’ will change. Today a bank ‘run’ means a rapid withdrawal of banknotes from a bank by its depositors who are unsure of the solvency of the bank. This takes time and is limited by the amount of money available in ATMs. In a CBDC world, the ‘runs’ will be really quick and only constrained by the amount of CBDC issued by the central banks. Depositors will replace their deposits with CBDC pronto.
This secular move away from deposits will increase the cost of funds of commercial banks. They will have to depend on other sources of funds than the low-cost deposits that customers deposit every month in the form of salaries to them. A reduction in deposits will reduce the availability of credit in the system. This will have a repercussion on the wider economy. It will also mean greater demand for reserves from the central bank by the commercial banks to provide credit to their customers. Central banks will increase their reserves and their balance sheets will become bigger. In summary, central banks will become more powerful.
China’s Digital Yuan Play
For these reasons, I believe CBDC is inevitable in this decade. Central banks will have to contend with the competition of cryptocurrency and the needs of the digital economy. They will find a mechanism to create a ‘platform-based model’ where the central banks create CBDC using a Distributed Ledger Technology (DLT) or a centralised ledger model while allowing private players to provide interfaces for customers to deal with this ledger. They will have to provide some level of comfort on privacy to their citizens by separating the transaction layer of CBDC from the core ledger.
But for China, the benefits of a digital Yuan do not just stop there. Beyond these benefits, a CBDC is a boon for a surveillance state as it turns into an ‘eye in the sky’ for every transaction happening in the economy. For China where all banking is owned by the state, the secular shift from deposits of commercial banks to CBDC is also a lesser problem. And most importantly, China is looking at leadership in CBDC to replace the US Dollar in global trade. A digital Yuan is the most feasible option for it to challenge the entrenched ‘dollarisation’ of the physical currencies around the world. 88 per cent of global trade is done using the US Dollar and it is what sustains the Dollar as the global reserve currency. For China to replace the US as the future global superpower, it will have to find ways to make Yuan the reserve currency. An early lead in adopting CBDC for domestic and cross-border payments is a great option to make a real fist of it.
China’s early trials in this space will force a response from other large economies on CDBC. The interoperability of sovereign CBDCs and how quickly the US is able to put together a CBDC alliance that counters China will be interesting to watch. In the meantime, I expect the current Chines regime to overplay its hand here like it has been usual for it in the last few years. Expect China to play hardball with the digital Yuan in global trade. This will be an interesting space in geo-economics to watch.
PolicyWTF: Casually Banning Films Committee
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
— Pranay Kotasthane
Most film certification authorities in democratic republics categorise movie content according to age-appropriateness and nothing more. But India’s is an exception. The Central Board of Film Certification (CBFC) — commonly referred to as the “Censor Board” — also plays the role of a film editor. The CBFC is empowered to ask filmmakers to drop certain scenes. Not just that, the CBFC in its wisdom can just plainly refuse to certify a movie. In such cases, filmmakers have the option of appealing to the reviewing committee of the CBFC. If even that fails, they could hitherto appeal to a 5-member Delhi-based tribunal called the Film Certification Appellate Tribunal (FCAT). This tribunal has now been shut down through an ordinance along with eight other tribunals. The stated intent is that this move will streamline legal recourses. Filmmakers will now have to appeal to High Courts directly and wait for the law to take its own (long) course. In other words, “tareekh pe tareekh, tareekh pe tareekh, tareekh pe tareekh…”
You would have already guessed why this is a PolicyWTF. Higher transaction costs, the existing burden on our High Courts, lack of state capacity, yadda yadda yadda. You can read these arguments here, here, and here. I won’t go there.
Instead, let’s address the larger PolicyWTF - the CBFC itself. As long as it is a government-appointed body with the power to play the role of a film editor, absurdities will continue. It is for this reason that the Shyam Benegal Committee in 2016 recommended that the CBFC’s powers to modify and change movies should be taken away and it should purely function as a certification body. Exactly what was needed. But it was also exactly what the government wouldn’t allow. And so, five years after that report, we still have a CBFC which is rubbing its hands to also edit OTT content. Moreover, the percentage of films without any cuts fell to its lowest levels over the last 100 years in 2016-17. And now, even the FCAT has been shut down. Clearly, film censorship is going in a direction opposite to what previous committees have recommended. So, is there a solution to this meta policyWTF?
Yes, turns out markets can help here. In 2016, my former colleagues Madhav, Adhip, Shikha, Siddarth, Devika and Guru wrote an interesting paper in which they recommended that film certification should be privatised.
The CBFC be renamed the Indian Movie Authority (IMA) and that the primary purpose of the IMA would be to license and regulate private organisations called Independent Certifying Authorities (ICAs) which will then certify films.
The certificate granted by ICA will only restrict what age groups the film is appropriate for. This is the only form of pre-censorship that is necessary in today’s age as all other restrictions on film exhibition should be applied retrospectively. The choice of ICAs available for producers to approach will render the question of subjectivity moot as the producer can switch to another ICA if unsatisfied with the certificate. The IMA will set the guidelines for the ICAs to follow and will be the first point of appeal.
In other words, this solution reimagines the CBFC as a body that grants licenses to independent and private certification organisations called ICAs. These ICAs need to adhere to certain minimum threshold criteria set by the CBFC. Beyond these criteria, some ICAs may specialise themselves as being the sanskaari ones trigger-happy to award an “A” certification while others may choose to adopt a more liberal approach. In the authors’ words:
This will allow the marketplace of ideas to draw the lines of what kind of content is fit for what kind of audience with the government still being capable of stepping in to curb prurient sensibilities.
This solution has the added benefit of levelling the playing field between OTT content and films. Currently, the CBFC has no capacity to certify the content being churned out on tens of streaming services. By delegating this function to private ICAs, the government can ensure adherence to certification norms.
In essence. just as governments can often plug market failures, markets too can sometimes plug government failures. Reforming our ‘Censor Board’ requires giving markets a chance.
There’s a lot more detail in the paper about grievance redressal, certification guidelines, and appeals procedure. Read it here.
PS: A couple of days after the FCAT was shut down in India came the news that Italy on the other hand has abolished all film censorship and moved to a self-certification system instead. Saluti!
A Framework a Week:
Tools for thinking about public policy
— Pranay Kotasthane
Dr Yuen Yuen Ang is one of the most insightful writers on China’s economy. Her first book explained how China managed to escape poverty. Her second book, China’s Gilded Age: The Paradox of Economic Growth and Vast Corruptionhas a framework on corruption that’s relevant to us in India.
The framework classifies government corruption on two axes — “who in the government engages in corruption?” and “does the money giver get anything in return?”. Four types of corruption result from this categorisation as shown above.
Ang claims that in most East Asian economies, the dominant mode of corruption is “access money” — bribes given to political elites with an explicit quid pro quo arrangement. On the other hand, the dominant mode of corruption in India is “speed money” — bribes given to low-level bureaucrats for property registration, a driving license, and so on. Though it intuitively sounds right, I take this result with heaps of salt as it is based on a survey measuring perceived corruption from the eyes of just 15 experts from the countries discussed.
Nevertheless, I found the framework interesting. A typology of corruption is a great idea. The book claims that with rising income levels, corruption doesn’t vanish but just gets institutionalised in the ‘access money’ quadrant.
To drive the point home, Ang connects these four types of corruption to four kinds of drugs. In her words:
“all corruption is bad – they are all drugs – but petty theft and grand theft are like toxic drugs [or drinking bleach, a term suggested by Jordan Schneider]; speed money is like painkillers; access money is like anabolic steroids – they help you grow rapidly but come with serious side effects that accumulate over time.
Access money functions as an incentive system for politicians and capitalists to work together, especially when massive infrastructure, involving huge sunk costs, is required for an emerging economy to take off. Access money overpays capitalists to do this, through cheap loans, subsidies, state backing, and in return you get feverish growth that lifts 700 million people out of poverty.”
That’s neat storytelling!
HomeWork
Reading and listening recommendations on public policy matters
* [Article] Stewart Paterson’s white paper on the Hinrich Foundation site: The digital Yuan and China’s potential financial revolution.
* [Article] Shyam Benegal on his tryst with CBFC. Money quote: ‘With Bhumika, there were no cuts, no obscenity. According to the censor guidelines, there was nothing that was transgressed, yet it was given an A certificate. I asked, why? They said, the subject of your film is adult.
And to top it all, he summed it all up in a way that has set the bar for brevity for all future economists and policymakers. He proposed a trilemma, an intuitive interpretation of his theory, which made it the touchstone of the neo-Keynesian macroeconomic paradigm. The trilemma, also called the impossible trinity, is a beautiful representation of economic reasoning.
The policy trilemma says a country must choose between free capital mobility, exchange-rate management and monetary autonomy. Only two of the three are possible. A country that wants to fix the value of its currency and have an interest-rate policy that is free from outside influence cannot allow capital to flow freely across its borders. Think India during the 70s.
If a country chooses free capital mobility and monetary autonomy, it has to allow its currency to float. This is India now.
And if the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy. Think countries now in the European Union.
Robert Mundell helped policymakers and central bankers think of the fiscal and monetary policies as two separate instruments to achieve varying objectives. His was a beautiful mind.
The preface to the interview sets the stage for his responses thereafter:
“Over the past year, his unabashed criticism of lockdown policies has turned him into something of a renegade. It is a development that mystifies him; as he sees it, his views have always been mainstream liberal, and it is the world around that has changed.
In the course of our conversation, the retired judge doesn’t hold back. He asserts that it is becoming morally acceptable to ignore Covid regulations, and even warns that a campaign of “civil disobedience” has already begun.”
I will reproduce three of his answers below from the Unherd site that deeply resonated with me:
On the ethics of law-breaking:
“I feel sad that we have the kind of laws which public-spirited people may need to break. I have always taken a line on this, which is probably different from that of most of my former colleagues. I do not believe that there is a moral obligation to obey the law… You have to have a high degree of respect, both for the object that the law is trying to achieve, and for the way that it’s been achieved. Some laws invite breach. I think this is one of them.”
On the dangers of public fear:
“John Stuart Mill regarded public sentiment and public fear as the principal threat to a liberal democracy. The tendency would be for it to influence policies in a way that whittles away the island within which we are entitled to control our lives to next to nothing. That’s what he regarded as the big danger. It didn’t happen in his own lifetime; it has happened in many countries in the 20th century, and it’s happening in Britain now.”
On the fragility of democracy:
“Democracy is inherently fragile. We have an idea that it’s a very robust system. But democracies have existed for about 150 years. In this country, I think you could say that they existed from the second half of the of the 19th century — they are not the norm. Democracies were regarded in ancient times as inherently self-destructive ways of government. Because, said Aristotle, democracies naturally turn themselves into tyranny. Because the populace will always be a sucker for a demagogue who will turn himself into an absolute ruler…
Now, it is quite remarkable that Aristotle’s gloomy predictions about the fate of democracies have been falsified by the experience of the West ever since the beginning of democracy. And I think one needs to ask why that is. In my view, the reason is this: Aristotle was basically right about the tendencies, but we have managed to avoid it by a shared political culture of restraint. And this culture of restraint, which because it depends on the collective mentality of our societies, is extremely fragile, quite easy to destroy and extremely difficult to recreate.”
HomeWork
Reading and listening recommendations on public policy matters
* [Podcast] On Persuasion, Yascha Mounk and Dr Leana Wen sit down to discuss the failures of expert opinions, the deadly consequences of inaction, and what the West needs to do to improve public health for the decades to come.
“Strong liberals stand out, however, as the only political group who feel they can express themselves. Nearly 6 in 10 (58%) of staunch liberals feel they can say what they believe. However, centrist liberals feel differently. A slim majority (52%) of liberals feel they have to self‐censor, as do 64% of moderates, and 77% of conservatives. This demonstrates that political expression is an issue that divides the Democratic coalition between centrist Democrats and their left flank.”
I take the ‘strong liberal’ in the US to be the progressive wing of the Democratic party. They are the ‘woke’ Skidelsky was referring to in his article.
There’s no equivalent survey of this kind in India. But I would venture to suggest the “strong liberals” in India might not poll as well on speaking their minds nor would the Indian conservatives be as reticent as their American counterparts in today’s times. Based on incidents like P.B. Mehta’s resignation that seem to have become more frequent in recent years and the ‘chilling effect’ that follows, I would guess these percentages might just flip in India.
Anyway, the percentages aren’t of interest to me. My interest is in the phenomenon. This dominance of one side that makes the other side self-censor themselves.
What explains this? That’s the second question for this post.
That Old Chestnut: The Breitbart Doctrine
Both these questions - on Gramscian long march and on self-censorship - bring me to the oft-repeated Breitbart doctrine:
“Politics is downstream of culture.”
That is, change the culture and sooner, politics will change. Now you’d think this was an insight that galvanised the American conservative right following the Obama takeover of the establishment. It was what got Trump into the White House with Steve Bannon in tow. That this was part of the right-wing toolkit.
Nothing could be further from the truth. The left was likely the originator of the idea that culture influences politics. To understand this better, we will go through a short history of ‘manufacture of consent’ and ‘cultural hegemony’. Knowing it will help address the two questions raised at the start of this post as well.
Manufacture Of Consent
The term ‘manufacture of consent’ first appeared in Walter Lippman’s book ‘Public Opinion’ (1922). For Lippman, the world was too complex for an ordinary individual to comprehend. In order to make sense of it, people carried a mental image of the world inside their heads. These pictures were what drove groups or individuals to act in society in the name of Public Opinion. A strong democracy, therefore, needs institutions and media that help in creating the most accurate interpretations of the world in the minds of the people. But this isn’t easy. Lippman was worried democracy relied on something so irrational as a public opinion that takes shape in the minds of poorly informed and easily manipulated people. For Lippman, policymakers and experts should use narratives for ‘manufacture of consent’ among people which enables public opinion to be channelled in a manner that’s consistent with what’s good for society. Lippman believed persuasion and the knowledge of how to create consent through ‘propaganda’ will change politics in the age of mass media. As he wrote:
“A revolution is taking place, infinitely more significant than any shifting of economic power. Within the life of the generation now in control of affairs, persuasion has become a self-conscious art and a regular organ of popular government. None of us begins to understand the consequences, but it is no daring prophecy to say that the knowledge of how to create consent will alter every political calculation and modify every political premise. Under the impact of propaganda, not necessarily in the sinister meaning of the word alone, the old constants of our thinking have become variables.”
Noam Chomsky and Edward Herman in their book ‘Manufacturing Consent’ (1988) picked up this idea to argue media outlets are “are effective and powerful ideological institutions that carry out a system-supportive propaganda function.” Market forces and an entrenched establishment control the mass media which manipulates public opinion by revealing only half-truths and distorted facts that serve their interests. It manufactures consent through propaganda while keeping the ill-informed public in thrall with distractions and entertainment. Chomsky has since argued this control of mass culture through media and institutions and the ‘manufacture of consent’ is essential to the survival of capitalism.
Gramsci And Cultural Hegemony
While Lippman was writing about the need for the ‘manufacture of consent’ using culture in a capitalist democracy like America, Antonio Gramsci, an Italian neo-Marxist was thinking on similar lines in a prison in Mussolini’s Italy. Gramsci started with a simple question. Why didn’t the working class living in an oppressive regime (anything that’s non-Marxist was oppressive in his view) revolt more often when they could see clearly how badly the economic balance was tilted against them? Why didn’t the exploited rise in revolt more often?
Gramsci argued a capitalist state had two overlapping spheres that helped it to thrive. There was the ‘political society’ that ruled through coercion and control of means of production which was visible to all. But there was also the ‘civil society’ that ruled through consent and control of minds. The civil society was the public sphere of ideas and beliefs that were shaped through the church, media or universities. To him, the capitalist state was successful in ‘manufacturing consent’ among people through the ‘cultural hegemony’ it set up through its control of the public sphere. People living in such societies didn’t question their position or their exploitation because they thought this was the ‘natural state’ of existence. The cultural hegemony was so complete and overpowering that there could hardly be any mobilisation of people against the ‘political society’ which ruled through coercion. The minds of the people were brainwashed through propaganda.
Gramsci, therefore, concluded that for the struggle (or revolution) to take over means of production to even begin, the people will have to win the war over cultural hegemony. He used the WW1 terms that were in vogue then. For the war of manoeuvre (that is a direct attack over the enemy) to be successful, it has to be preceded by the war of position (digging trenches and cutting off enemy lines etc). The people will have to win the war of ideas and beliefs by creating their own cultural hegemony and taking over the public sphere through control of religious institutions, media and universities. This is the ‘Gramscian march’ that Skidelsky referred to in his article.
This was a far-reaching idea about how the nature of power had changed in a world where universities and mass media shaped people’s thinking. The power of engineering consent using culture is the first step to launch a successful attack over an existing power structure. While Garmsci used neo-Marxian terms to expound his ideas, the broader implications of his argument were clear. In short: establishing cultural hegemony is the first step to winning the minds and eventually, the votes of people (we are talking of democracy here). Over time, this hegemony in the public sphere will earn you the long-term consent of the people who will consider it their ‘natural state’. Self-censorship will follow as an outcome of this hegemony. That addresses the second question on why people self-censor themselves.
Over a hundred years since Lippman first wrote about ‘manufacture of consent’, the idea that politics is downstream of culture has only acquired greater currency in a saturated media space that all of us inhabit now. The left and the right have both acquired the toolkits to fight this ‘war of position’ in various democracies around the world. In the US, it is ‘woke left’ on a supposed Gramscian march today. In India, I suspect, the shoe is on the other foot.
But the march is definitely on.
India Policy Watch: Mandal Again
Insights on burning policy issues in India
- Pranay Kotasthane
A Constitution Bench of the Supreme Court is set to announce its judgment on the Maratha quota case. Amongst other issues, the court will decide on the question if state governments can breach the 50 per cent reservation ceiling. This 50 per cent limit comes from the Indra Sawhney judgment of 1993, which legally upheld the recommendations of the Mandal Committee Report.
Legal issues aside, today’s political reality makes this judgment even more riveting. Perhaps all political parties appear to be in favour of going beyond this 50 per cent limit, although in different ways. The NDA government has already increased reservations to ~60 per cent in central-government jobs, central-government educational institutions, and private educational institutions through the 103rd constitutional amendment in 2019. The additional 10 per cent seats are now meant to be reserved for economically weaker sections (EWS) of citizens not already benefiting from reservation. In other words, this quota is for persons from non-SC, non-ST, non-OBC classes, as long as their earning is below a defined income threshold. On the other hand, many caste-based and one-caste-dominated political parties are in favour of breaching the 50 per cent ceiling in order to extend or increase quotas for their caste base. The gap between the court-prescribed ceiling and the political reality has become unsustainable. To use a Ravi Shastri phrase, “something’s gotta give”.
Not to forget, that 50 per cent ceiling number itself is quite contrived. Read what the Indra Sawhney case judgment says:
Just as every power must be exercised reasonably and fairly, the power conferred by Clause (4) of Article 16 should also be exercised in a fair manner and within reasonably limits - and what is more reasonable than to say that reservation under Clause (4) shall not exceed 50% of the appointments or posts, barring certain extra-ordinary situations as explained hereinafter. From this point of view, the 27% reservation provided by the impugned Memorandums in favour of backward classes is well within the reasonable limits. Together with reservation in favour of Scheduled Castes and Scheduled Tribes, it comes to a total of 49.5%.
Beneath the legalese, observe the narrative power of numbers at play. Any measured phenomenon creates implicit norms of what is “too high” or “too low”. The 50 per cent limit seems intuitively “just right” or “balanced” — half of the seats have quotas while the other half doesn’t. This powerful narrative largely survived for over 25 years but seems to be falling apart now.
And so it appears that reservations have ceased to be a means to correct for inadequate representation of certain disadvantaged sections. Instead, reservations have become springboards for all groups to demand proportional representation. The implicit norm now is that the State needs to enable representation of groups in educational institutions and government jobs according to their proportion in the population; the question of historical disadvantage has been relegated to an incidental criterion. Moreover, the general equilibrium effect of quotas is that group identities have become sharper and more powerful.
Is there another way out?
There is no doubt that a republic founded in a society with a long history of systematic discrimination will inevitably resort to some affirmative action. But is there a way out beyond caste-based reservations?
Nitin Pai and I had proposed one such alternative a couple of years ago in FirstPost:
Consider this thought experiment. There are no predetermined quotas for any posts. Positions are filled only based on a composite score of all applicants. The composite score is a combination of two measures. The first is an inequityscore — calculated to compensate for the relative disadvantage faced by an applicant.
The second measure strictly represents an applicant’s ability to be effective for the position they are applying for. Selection is on the basis of the composite score. No seats are reserved and yet the score allows for addressing multidimensional inequity much better than current methods.
The inequity score can be used to indicate relative disadvantage along several dimensions: individual, social and geographic. Different factors can be assigned different weightages. For instance, given the salience of caste in the Indian social context, the greater the disadvantage a community faces, the higher the weightage.
In addition, we can incorporate other parameters into the inequity score — parents’ level of education, income levels, rural upbringing, or even childhood nutritional deficiencies. Currently, our system of quota-based allocations does not account for non-caste disadvantages that have a disproportionate impact on life outcomes.
A national commission for equity can be formed to propose and review parameters and their weightages within a cooperative federal framework. It doesn’t have to be one-size-fits-all solution. States can assign their own factors and weightages according to the local conditions.
The second measure — an effectiveness score — can then be kept completely independent of equity considerations. It can take the form of a test, an interview or any other indicator to assess candidates’ ability to perform the job they have applied for. Information about the inequity scores can be masked from evaluators of the effectiveness score.
By filling positions based on a sum of the two scores, it becomes possible to be more comprehensive in addressing social inequities while also creating stronger incentives for an individual pursuit of excellence.
An evidenced-based model addressing multiple sources of group and individual disadvantages helps to de-essentialise identity markers such as caste or religion; that is, it provides a rational explanation why specific castes or communities are entitled to compensatory discrimination and undermines attitudes that treat such entitlements as a “birth right”.
In essence, this solution tries to solve for both “merit” and “disadvantage”. The opponents of reservation claim that quotas directly undermine efficiency and merit. The proponents of quotas on the other hand find the notion of merit completely odious. They argue on these lines:
Efficiency of administration in the affairs of the Union or of a State must be defined in an inclusive sense, where diverse segments of society find representation as a true aspiration of governance by and for the people.
In contrast to quotas, the composite score solution acknowledges that some assessment of “merit” is inescapable, even desirable. But it also doesn't ignore the problem that disadvantaged individuals face. Hence, we believe it is a better solution than quotas.
In edition#72, we discussed a framework on “nine competing visions of equality” only to reiterate Deborah Stone’s insightful conclusion:
“equality often means inequality, and equal treatment often means unequal treatment. The same distribution may look equal or unequal, depending on where you focus.”
Essentially, any distribution, however equalising it is in one respect, can be charged as being unequal on another parameter. What matters far more is whether a distribution is perceived as being fair or not. As Starmans et al write:
… humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality
In the Indian context, quotas come with charges of unfairness. It is time to look beyond them.
PS: A commonplace assertion that “the constitution imagined reservations to last only for ten years at the outset” is a myth. This 10-year clause was meant to apply to reservations of seats for SC/ST groups in the Lok Sabha and Legislative Assemblies. There was no such 10-year limit on reservations in jobs and educational institutions under articles 15(4) and 16(4). I too believed in this urban myth having read it being regurgitated in countless opinion pieces. Hat-tip to an alert Puliyabaazi listener for updating my priors.
HomeWork
Reading and listening recommendations on public policy matters
* [Video] "The Big Idea" - a half-hour interview between Noam Chomsky and British journalist Andrew Marr, first aired by the BBC in February 1996. A great interview where Andrew Marr is completely convinced he’s not taken in by the propaganda while Chomsky is sure he is!
* [Podcast] A Puliyabaazi episode discussing the nine competing visions of equality
* [Article] Alexander Lee on redesigning India’s reservation system
* [Article] Satish Deshpande traces the history of reservation policies
* [Article] Pratap Bhanu Mehta on how the open category is slowly becoming a reserved category through other means
First, Melvin Capital lost half of its $13bn fund during the GameStop saga in January this year. Melvin had taken massive leveraged short positions against the GameStop stock convinced its business model has no future. Well, the Redditors on WallStreetBets organised themselves to do the world’s first RNS (radically networked society) driven short squeeze. Melvin couldn’t reverse out of the trade soon enough. Only an emergency line of $2.75bn from other hedge funds kept it afloat. We have covered the GameStop shenanigans here.
Second, the collapse of Greensill Capital, a ‘supply chain finance’ company doing Enron-like things in a decidedly dull corner of finance. The full impact of its fallout is yet to be ascertained. The collateral damage so far has been impressive: London-based steelmaker GFG alliance (run by India-born Sanjeev Gupta) is facing an existential crisis; a German retail bank that Greensill had bought has gone down; Credit Suisse that funded Greensill through securitisation of its invoice finance arrangement had to write down huge losses; Bluestone Resources, a US-based coal mining company that’s left high and dry without Greensill’s funding pipeline; and Tokio Marine Insurance that underwrote the risks Greensill’s clients and investors in Credit Suisse funds were taking is still counting its losses.
The Greensill story is a good example of how it is not different this time. Supply chain financing has been around for a long time. Company A buys goods from a smaller Supplier B and promises to pay it (say) in 90 days. Ideally, B would like to be paid immediately but it usually lacks the bargaining power. Company A would prefer to pay as late as possible since it improves its cash flow and use it to further its business. Enter C, the Supply Chain Financier. C promises to pay B faster but at a small discount as the cost of getting its money quickly. It then collects the full amount from A. In a way, C pays on behalf of A and then collects the money from A over a period of time. It is like a traditional short-term loan that’s backed by the security of the invoice. And how does C get the money to pay to the suppliers faster? Usually, C would issue commercial papers (unsecured promissory notes) to obtain funds from market participants looking to park their excess funds for a short-term to back their invoice arrangements. The spread it makes between the two is C’s business.
But in a world where the liquidity is high, interest rates low and stock markets at their peaks, there’s always money looking for avenues to make some ‘extra’ return. Greensill had a perfect plan for them. Instead of issuing commercial papers, it securitised the supplier invoices into short-term assets and offered them to the likes of Credit Suisse and other asset management firms. In other words, these invoices were turned into a different financial instrument which could now be positioned differently to investors. With this, the stage was set to get into riskier bets and shuffle the risk around in a way that made investors believe they were still investing in a safe supply chain financing instrument than something more complex.
These investment firms launched Greensill-linked funds and raised money from investors who were drawn to the promise of almost risk-free returns that were higher than money market funds. Greensill also got insurance companies to back the risks underlying these funds to make them appear safer and more attractive. This was mortgage-backed securities (MBS) that brought down Lehman Brothers in 2008 all over again. Not content with this, Greensill went a step further. It started advancing funds to its clients based on anticipated future invoices. That is, there was no supplier and no goods purchased. But it was giving money in anticipation of business being done with a supplier in future. In effect, it started offering long-term loans to its clients in the guise of short-term, low-risk loans with neither the insurer nor the funds like Credit Suisse being wiser to their tricks. It was only a matter of time before the house of cards would collapse.
Third, the implosion of hedge fund Archegos Capital late last week caused by extreme leverage. With GameStop and Melvin Capital, the leverage was on the short. With Archegos, it was on the long side. It borrowed money from the usual Wall Street names - Nomura, Credit Suisse (again!), Goldman Sachs and Morgan Stanley. But it used a derivative known as Total Return Swaps (TRS). The mechanics of this were simple. The hedge fund borrows money from the Bank to invest in stocks through a swap agreement. The hedge fund pays a small interest to the Bank, say, 2.5 per cent. The bank pays out any upside of investment made by the fund back to it. If there are losses, the hedge fund makes it up for the bank. This means the hedge fund makes investments without owning the asset. The bank has no real downside. The bank loves TRS because they make large fees from such arrangement without setting aside a lot of capital when compared to actual trading in securities. Being flush with liquidity in a low-interest environment makes such arrangements appear too good to resist for the banks.
Things were going well for Archegos as it went about building massive levered long positions in media stocks like ViacomCBS and Discovery and various Chinese internet stocks. Some of these were quite illiquid stocks where Archegos almost owned half of the total stocks available for trade. Till ViacomCBS, whose stock had gone up 3X over the past year, decided to do a $3bn share sale wanting to capitalise on its good fortune. This backfired and the stock nosedived. This triggered a margin call and we were back to 2008 again. Archegos couldn’t cough up funds to cover the losses and the brokers dumped the shares on their behalf. The forced liquidation led to a massive selloff late last week across markets. Nomura and Credit Suisse couldn’t get out fast enough and warned of significant impact to their earnings. The worries of a contagion started going around. No one is sure if the collateral damage has been contained.
Safety Valves Or Canaries?
One way to look at these three events is to consider them as the safety valves of capitalism. There are excesses that happen in each cycle and the market mechanism is subverted by a few players. But there is a reckoning soon enough and the markets are better off for it.
The other way is to view them as early signs of a looming crisis - the canaries in a coal mine. It is often said bubbles aren’t merely about skyrocketing valuations. The underlying truth to any bubble is the shortening of time horizons in the market. Everyone is out there to get rich and get out as quickly as possible. This snowballs very quickly attracting more short-term traders to make massive bets with levered money with ever-shrinking time horizons.
The markets might well take these events into their stride (as they seem to have done). The three firms collapse and everyone moves on.
That’s the end of it.
Or maybe not. This might just be a beginning.
HomeWork
* [Article] Apropos of nothing related to this post: Robin Hanson on “how best to explain UFOs if they are in fact aliens!”
Two, narrative dominance of any kind doesn’t emerge out of a vacuum. It is built on the vestige of a previously dominant narrative. Those who were dominated by the previous narrative, remember those times. The humiliation and the rage of being under it is the fuel that sustains the current narrative. Unfortunately, humans are mortal. They die and a whole new generation arrives who have no first-hand experience of the previous narrative. They only learn about it from the surviving members who tell them about the horrors of the past. Or, from books. That’s one of the reasons why changing history textbooks is always on the agenda of every dispensation in the world. You control the past, you control the future. But time wears down everything eventually. In the pre-internet era, this could take multiple generations to come to a pass. That has shrunk now. Alternative narratives sustain themselves online and the information velocity facilitates their spread.
Three, there’s always a tendency to overreach among those who are driving their narrative dominance. Nothing remains sacrosanct in their desire to dominate - university, media, courts, law enforcement agencies, regulators or independent bodies. In a democracy, with strong independent institutions, the checks and balances in-built in the system come into play to counter this. This is a battle of attrition between institutions and political formations. The institutions usually win because they are designed to be permanent. They are necessary for democracy to survive. If they are subverted, democracy withers away.
The Indian Problem
Between the three, the institutional response tends to be the fastest way to counter-narrative dominance. The other two could take time and a lot could be undone during that period. The challenge in India is the institutional mechanism has been systematically weakened over many decades. To begin with, we inherited colonial institutional and legal structures that weren’t exactly suited for liberal democracy. Whatever gains we made in building new institutions and strengthening them were lost starting from the 70s. The Emergency being a high watermark of that era. Since then it has been one step forward and two backward on this. The reasons why a state or the union government in India can make citizens or private entities (like a private university) fall in line are two-fold. One, there are just too many outdated laws often working at cross purposes that are impossible for anyone to manage. This gives the state the power to haul you up for breaking the law. Two, the willingness of the institutions to do the bidding of the political class because their independence has been compromised. This means a CBI or a Tax raid is always around the corner. Coercive institutions are a structural problem and there’s little incentive for political parties to change this.
This seems like an irreversible slide. The problem with this slide is clear. Overtime when this narrative loses steam and an alternative narrative emerges (as it will), expect its adherents to be keener to dominate every sphere. To eliminate space for any dissent. And they will do so using the same tools - political and ideological mobilisation that overwhelms the institutions.
Pratap Bhanu Mehta might have been countering the narrative of the current regime in his op-ed pieces. But the larger point he was making was probably beyond it. He was alerting us to the dangers of this inevitable slide.
HomeWork
Reading and listening recommendations on public policy matters
* [Article] “The Spectre of Totalitarianism: The worst offenders in the new climate of intolerance are our universities”writes Edward Skidelsky in The Critic. Money quote: The “woke” left is currently pursuing this goal by way of a Gramscian “long march through the institutions” — a progressive co-option of the schools, universities, state bureaucracies and big corporations.
This was following the usual script on social media. We took interest, however, when the Minister of External Affairs (MEA) was asked about these ‘freedom’ reports. He dismissed the basis for their conclusions and questioned their intentions. More importantly, he gave two interesting counters to the usual ‘Hindu nationalist’ branding of the current dispensation in large sections of global media and among thinktanks.
The first was factual - they call us nationalists but we are leading the efforts in donating vaccines to countries around the world. We have already shipped over 40-50 million vaccine doses taking a humanitarian view instead of keeping them for ourselves. Tell us which western democracy is doing so? Then the second point - in these countries almost every elected official takes the oath of office with their hand on a holy religious book (America and the Bible were possibly what he meant). Do we do so in India?
Social media was abuzz with this clip. This is the ‘new, confident India’ was the usual comment among the partisans.
Well, maybe it is. Who knows?
To me, this incident is another useful lens to view nationalism. There are two things to parse here. One, is ‘vaccine diplomacy’ the antithesis of nationalism? Two, is the taking of an oath of office on a holy book blurring the lines between the church and the state?
A Masterstroke
Let’s tackle 'vaccine diplomacy’. We go on in these pages about international relations being guided by matsyanyaaya - big fish eating small fish. This is realism at play. All morality stops at the boundary of a nation-state. Beyond that is Hobbesian chaos. Going by this, donating millions of vaccines to other nations while you haven’t vaccinated your own would seem insane.
But that would be taking a narrow view of matsyanyaya. International relations is a long game with a clear understanding of your adversaries and their strengths. Vaccine diplomacy for India is a perfect counter to China in the post-pandemic world. China’s conduct in suppressing information during the initial phase of the pandemic and its bullying behaviour around the region later are open flanks for India to exploit. Donating vaccines at an early stage of their mass production checks all the boxes of being a reliable friend in international relations - it is relevant and timely, and it involves sacrificing self-interest to help others. That it provides a counter to the view in global media about this being a nationalistic dispensation is an added bonus. This act isn’t one of those false masterstrokes. This is the real thing.
What Kind Of Nationalism?
Now on to the oath and the holy book business. What’s the core issue here? If you peel the layers, there are two questions to be tackled.
* How important is the role of ethnocultural nationalism in the building of a modern nation-state?
* If it is important then what kind of ethnocultural nationalism should a state strive for to achieve its objectives of peace and prosperity for its citizens?
On the first question, it is hard to argue against the advantages of solidarity and a communitarian outlook that ethnonationalism engenders among the members of a nation. Universal brotherhood is great in the abstract but all kinship is real and very specific. The idea of a free individual owing allegiance to higher human ideals while being aloof from the emotions and instincts of his immediate surrounding is bizarre. It isn’t sustainable and it motivates no real action. It can never help in the project of nation-building. Nationalism might be seen as ‘false consciousness’ to the liberal but it is a tangible driver of change among its adherents. It can move mountains.
Ethno-cultural examples of nation-building abound in modern history. From the white Anglo-Saxon Protestants who built America, the ethnic chauvinism that welded modern Germany during the pre-WW1 period or the cultural renaissance that motivated imperial Japan between the wars. Even the rise of China in the past quarter-century is an ethnocultural project.
Now if that’s true, what about the second question? What kind of ethnocultural nationalism should the state strive for? There’s always the danger of an ethnocultural movement ascribing a core moral or cultural value to a nation that excludes a significant minority from it. This is almost certain if the ethnocultural value is derived from a glorious past (real or imagined) which is lost today because of reasons beyond the control of the majority that believes in the value. The notion of Aryan supremacy and its undermining by Jews in the past or the belief in the supremacy of the Japanese subjects of Sun God and its imperial project thereafter are examples of this.
The momentum of a nationalist movement is beyond the control of those who start it. History has shown it destroys a lot before it builds something. And what it builds is rarely sustainable. It is never easy to balance liberal-democratic values and nationalistic attitudes. A middle ground is often sought but rarely achieved. This was the project that faced the leaders of modern India at its founding moment in 1947. They chose a modern conception of the Indian nation - liberal, tolerant and statist - and promoted cultural and historical artefacts that supported this ethnocultural nationalism. That was the middle ground they chose to build a modern India.
This is what they thought worked for successful liberal, democratic nation-states they saw around the world. It was bold and it was a clear break from the past. And let’s be clear. It was also the only option that wouldn’t have plunged the nation into anarchy. This project of building ethnocultural nationalism caught the imagination of people in the early years. However, as recent years have shown, it didn’t grow deep roots. Why? It’s a whole different story and we have covered a few of the reasons on these pages.
In any case, India is back at that moment in its history. What kind of ethnocultural nationalism must it choose for the current project of nation-building? That’s at the heart of the debate these days. The democratic mandate seems to suggest upending the consensus of its founding moment.
There’s always the lure of learning the wrong lessons from history. Did India choose unwisely then or did it get the execution wrong over the last 70 years? It is hard to build and easy to destroy as Amit Varma says in his newsletter. There’s a lot to think over here. Choose your nationalism wisely.
Lastly, the American Presidents take the oath of office placing their palms on the Bible. Sure.
But they don’t open it to run the country.
There’s a balance.
Matsyanyaaya #1: Quad Not Being Square Anymore
Big fish eating small fish = Foreign Policy in action
— Pranay Kotasthane
It’s amazing how often and quickly a common, powerful, and abrasive adversary can make States bury their mutual differences. China as an adversary has reliably displayed all the three attributes, and in the process, created a new geopolitical formation — the Quad.
This formation, of course, is not new. It has hummed and hawed for nearly fifteen years. But it is China’s rapid growth and arrogant conduct that has breathed life into this idea. And finally, last week was the first time when the four heads of State met and proudly declared to the world that the Quad is here to stay and act. This reminded me of Edward Luttwak’s prescient analysis from his 2012 book The Rise of China vs The Logic of Strategy:
“Other things being equal, when a state of China’s magnitude pursues rapid military growth, unless the resulting shift in the power balance passes the culminating point of resistance inducing the acceptance of some form of subjection, it causes a general realignment of forces against it, as former allies retreat into a watchful neutrality, former neutrals become adversaries, and adversaries old and new coalesce in formal or informal alliances against the excessively risen power.”
In other words, for China, with great power came great adversaries.
This Quad summit meeting is significant at two levels: procedural and substantive.
By procedural significance, I mean that for the four States to meet and release a joint statement is itself a big deal. Usually, different countries have different readouts on major issues. The joint statement was followed up by a joint opinion piece under the names of the four heads of state. In diplomacy, where words are everything, the willingness to agree on terminologies, definitions, policy proposals, and actions with not one but three other differently placed partners, is major progress. Think of these joint statements as the diplomatic equivalents of conducting joint military exercises. Extrinsically, it is an exercise in signalling to the adversary. Intrinsically, it helps develop some comfort working in unison.
By substantive significance, I mean the creation of three working groups on vaccines, critical and emerging technologies, and climate change. While China is a glue that can hold these countries together, it can’t be a fuel that propels the Quad forward. That requires a positive agenda of action items, which these three working groups do.
Of the three areas, the vaccine partnership seems to be the most well-thought-out. In short, all four countries have agreed to expand the manufacturing of COVID-19 vaccines at facilities in India and give these vaccines to countries in the Indo-Pacific. Sanjaya Baru describes the geoeconomic significance of this move thus:
“What Quad has already achieved in geo-economic terms is to use the Asian demand for Covid-19 vaccines as an opportunity to create a four-way economic relationship that combines the benefits of American research, Japanese funding, Indian manufacturing capacity and Australian marketing network to supply vaccines to Asian developing countries. This is without doubt a smart idea and one that can ensure its equal ownership by all four partner countries.”
From the Indian perspective, Quad giving an impetus to vaccine investment in India pours cold water on the usual doubts that prevent collaboration with western countries.
The second working group on critical and emerging technologies seems to be the most undercooked. For starters, there isn’t an agreement on the definition of critical and emerging technologies. The Trump administration did label 20 technologies as critical and emerging but to expect multilateral cooperation on all twenty would be a high cost, low returns approach.
We have argued earlier that a better approach would be to secure semiconductor supply chains first for three reasons:
“one, the semiconductor industry underlies all critical technologies. Two, it is perhaps the most globalised high-value supply chain and no country can become entirely self-resilient. And three, all four countries have complementary strengths in the semiconductor supply chain.”
Better if the four countries can demonstrate measurable success on less controversial technologies such as semiconductors before dealing with the more vexing questions of cyber governance, data privacy, and AI governance.
Finally, this Quad meeting was initiated by the US president, putting all doubts to rest that the Biden administration might soften its stance against China. In fact, the US now seems to have a more concerted strategy to contain China. That they have a leader who is not abrasive is itself a big relief for the other partners.
Matsyanyaaya #2: NayaaPakistan Again?
Big fish eating small fish = Foreign Policy in action
— Pranay Kotasthane
Pakistan is back in the headlines these days. Surprisingly though, for good reasons. First came the much-needed Line of Control ceasefire agreement earlier this month. Since then, no ceasefire violations have been reported. And last week came a couple of conciliatory statements by the Pakistani Chief of Army Staff and PM Imran Khan.
Gen Bajwa had this to say:
.. let me say profoundly that we are ready to improve our environment by resolving all our outstanding issues with our neighbours through dialogue in a dignified and peaceful manner.
However, it is important to state that, this choice is deliberate and based on rationality and not as a result of any pressure. It is our sincere desire to re-cast Pakistan's image as a peace-loving nation and a useful member of international community. Our leadership's vision is Alhamdullilah transformational in this regard. We have learned from the past to evolve and are willing to move ahead towards a new future, however, all this is contingent upon reciprocity.
Pakistani PM Imran Khan echoed:
“Pakistan could not fully exploit its geo-economic potential unless it improved its ties with neighbours by strengthening trading connection and establishing peace in the region.”
The ceasefire agreement and these two statements mean that the marginally hopeful types are again entertaining these two questions: has Pakistan turned a corner finally? Will we see a sustained improvement in India-Pakistan relations?
On the first question, it’s too early to conclude. However, there are a few signs. Pakistan did not ratchet up tensions on the western border all through 2020, at a time when India was busy dealing with the China threat. Two, from Pakistan’s standpoint, India’s changing of Jammu & Kashmir’s constitutional status provided it with a potential casus belli to escalate terrorism. It hasn’t yet done so.
What explains this change in strategy? Probably a mix of new drivers and constraints. The major drivers are a dawning realisation that deploying terrorism as state policy has done more harm than good and the need to impress the new US administration. The major constraint, and one that’s hurting them most, is a flagging economy with declining external benefactors.
To answer the second question, let’s revisit the theory of constructivism in international relations. Constructivism contests the realist worldview that anarchy in international relations immutably leads to a security dilemma. Constructivist theorists argue that while amassing power remains the most important priority in a state of anarchy, this competition doesn't imply permanent confrontation. In Alexander Wendt’s now-famous “construction”: Anarchy is what states make of it. In other words, while all states pursue power, their identities and interests are socially constructed — it is not impossible to reimagine enemies as adversaries, adversaries as neutrals, and neutrals as friends. Big fish do eat small fish but only when they’re hungry.
Seen from a constructivist lens, we can now ask if elites in India and Pakistan view each others’ states differently. If yes, we could well say that relations between the two countries are on the right path.
I doubt if that’s the case. Constructivism itself acknowledges that once state identities and interests get institutionalised over time, constructing new identities and interests becomes exceedingly difficult. This is precisely the case with Pakistan and India. Moreover, on the Pakistani side, there’s an irreconcilable actor — the military-jihadi complex (MJC) — whose dominance of the affairs in Pakistan rests on being anti-India. Constructivism hasn’t hit the MJC yet. Many attempts to redefine state interests and identities have been cut short by terrorist attacks engineered by the MJC.
On the Indian side, new state identities and interests are being constructed, but not in a direction that leads towards peace between the two countries. For example, the recurring rhetoric of taking back Gilgit Baltistan, and viewing partition as unfinished business prevent a reset in ties.
Finally, reconstructing interests and identities would require consistent positive actions. Pakistan allowing India-Afghanistan trade over its land and India making J&K a full state again might be two good starts.
HomeWork
Reading and listening recommendations on public policy matters
* [Article] Book review of Yael Tamir’s Why Nationalism by Nick Cohen in The Guardian: “The rise of nationalism – a product of the left’s embrace of globalism – can be a benevolent force, according to this ‘wine-bar’ polemic. Nick Cohen begs to differ”.
* [Podcast] A Puliyabaazi on the Quad with Times of India Diplomatic Editor, Indrani Bagchi.
* [Report] The University of Chicago’s Kalven Committee Report on the University’s Role in Political and Social Action is a must-read given what’s happening in India. Raghuram Rajan mentions this report in his note on Pratap Bhanu Mehta’s resignation.
Before wading in any further, understanding three political science terms — nation, state, and government — is important.
State is a political construct, an abstract political institution. Max Weber’s instrumental definition of the State as “a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory” is especially relevant here. To ensure that all its individuals’ liberties are protected, a State is invested with the powers to use violence or force to prevent other belligerent groups from terrorising individuals. It is for this reason that a State maintains armed institutions like the police and the army.
Going by this definition, an anti-State act would be the one that challenges the State's monopoly over the legitimate use of physical force. In other words, an act of violence or the use of force by anyone other than the State becomes anti-State.
Government is a temporary governing body of the State. If the State is like a corporation, the government is like its management. State is semi-permanent. It will live on until it is overthrown or replaced and a new social contract is established. Unlike the State, the government is composed of a set of people organised into a hierarchy. When the electorate vote, they choose their government and not the State.
By this definition, an anti-government act would be the one that criticises the policies, strategies, and directives of the governing body in power.
Nation, on the other hand,is a mental construct. Ernest Gellner defines this concept precisely yet comprehensively thus:
“Two men are of the same nation if and only if they recognize each other as belonging to the same nation. In other words, nations maketh man; nations are the artefacts of men's convictions and loyalties and solidarities. A mere category of persons (say, occupants of a given territory, or speakers of a given language, for example) becomes a nation if and when the members of the category firmly recognize certain mutual rights and duties to each other in virtue of their shared membership of it. It is their recognition of each other as fellows of this kind which turns them into a nation, and not the other shared attributes, whatever they might be, which separate that category from non-members.”
In other words, nations are imagined. People belong to the same nation only if they consider themselves to be so.
An anti-national act thus could be of two types. One that denies the existence of such an imagined community. For example, libertarians could argue that only individuals matter and not the groups these individuals are a part of. And the other view imagining a nation along lines different from the dominant belief. For example, communism sees workers across the world as one “nation”.
What is Sedition then?
With these key differences out of the way, we are now in a position to understand sedition and blasphemy laws.
Sedition laws can lie on a continuum. In dictatorships and party-states, sedition laws are applied wantonly to criticisms of the government. That is, being anti-government itself is being seditious. In most modern democracies, however, sedition laws punish only those anti-State actions which have the capability to directly challenge the State’s authority. Thus, criticism of the Republic of India would not count as sedition but inciting violence against the police would count as sedition. Crucially, being anti-national is not the same as being seditious.
On the other hand, blasphemy laws penalise a subset of anti-national actions, the ones that call into question something held sacred. As the idea of individual freedom has gained prominence, blasphemy laws have been repealed in many places. Not in India though.
The Indian Sedition Law
Now we are in a position to understand sedition in India. India’s sedition law i.e. Section 124A of the Indian Penal Code has colonial origins. Unsurprisingly then, being anti-government was reason enough to be labelled seditious. Tilak, Gandhi and scores of other leaders were tried for sedition.
After independence, the stated aim was to get rid of sedition laws altogether. That never happened. Sedition law continued in its colonial avatar. What did happen is that the application of such laws reverted to a stricter interpretation. Anti-State acts were penalised and not anti-government ones as a result of a right to freedom of speech and expression. In subsequent court rulings, the scope of sedition was further truncated. Only those anti-State acts that had the tendency to incite violence or disturb law and order were deemed to be seditious.
This dissonance between the original definition and application continues to this day. See for yourself. The sedition law says:
“Whoever, by words, either spoken or written, or by signs, or by visible representation, or otherwise, brings or attempts to bring into hatred or contempt, or excites or attempts to excite disaffection towards, the Government established by law in India, shall be punished with imprisonment for life, to which fine may be added, or with imprisonment which may extend to three years, to which fine may be added, or with fine.
Explanation 1.-- The expression "disaffection" includes disloyalty and all feelings of enmity.Explanation 2.--Comments expressing disapprobation of the measures of the Government with a view to obtain their alteration by lawful means, without exciting or attempting to excite hatred, contempt or disaffection, do not constitute an offence under this section.Explanation 3.--Comments expressing disapprobation of the administrative or other action of the Government without exciting or attempting to excite hatred, contempt or disaffection, do not constitute an offence under this section.
Note how wide-ranging this law is. Even disloyalty and all feelings of enmity count as sedition. Now read the qualifier that the Supreme Court added in Kedar Nath vs State of Bihar 1962.
“..the sections aim at rendering penal only such activities as would be intended, or have a tendency, to create disorder or disturbance of public peace by resort to violence. As already pointed out, the explanations appended to the main body of the section make it clear that criticism of public measures or comment on Government action, however strongly worded, would be within reasonable limits and would be consistent with the fundamental right of freedom of speech and expression. It is only when the words, written or spoken, etc. which have the pernicious tendency or intention of creating public disorder or disturbance of law and order that the law steps in to prevent such activities in the interest of public order.”
In non-legalese, for an action to count as seditious, its connection with violence is necessary according to the Supreme Court but not so according to the original framing in the penal code.
This dissonance is a problem. To such an extent that the same judge presiding in two similar cases (Disha Ravi’s and Safoora Zargar’s), referring to the same 1962 judgment, reached two diametrically opposite conclusions! In Safoora Zargar’s case, bail was denied on the grounds that the connection of an act with violence is not necessary. In the Disha Ravi case, bail was granted on the grounds that the connection of an act with violence is necessary.
The other problem is the political economy of India’s sedition law. Because it is construed as a grave anti-State offence, it is cognisable i.e. investigation and arrest can happen based on just an FIR, and non-bailable i.e. bail is subject to the decision of a sessions judge. Such strict provisions mean that the police slap sedition charges indiscriminately and by the time charges are cleared, many years pass by. The process becomes the punishment.
Clearly, this needs fixing.
The Way Forward
Broadly, there are three ways out. The first method would be to revise the sedition law to end the dissonance between the text and its subsequent interpretation. Make the link with violence a necessary condition for the application of sedition.
A second way is to scrap the law altogether. If the tendency to cause violence is what triggers sedition, there are enough and more laws in place to address such actions. Even if this law were to be struck down, provisions to punish acts inciting violence against State, government, or other people will still be applicable.
A third way out is to address the political economy question by making sedition a bailable and non-cognisable offence. With nothing to gain by slapping the additional charge of sedition, its usage is likely to decline. A solution with a similar effect is to make police personnel comply with additional requirements before arresting a person for sedition. The Bombay High Court tried to do this in the Asim Trivedi case by issuing guidelines to police personnel listing specific preconditions. A failure to adhere to these guidelines made the police officer liable to dereliction of duty. To what extent these guidelines been adopted since then, I do not know.
Given my biases, the second solution is the ideal one. But it’s also the most unlikely one in the current situation. We in fact run a real risk of going the other way — sedition laws might well revert to punishing anti-government utterances and blasphemy laws might be used more frequently. Given this reality, focusing on changing the incentives of police might be more practical.
For now, I’ll leave with these lines in Disha Ravi’s bail order that need to reach far and wide:
“Citizens are conscience keepers of government in any democratic Nation. They cannot be put behind the bars simply because they choose to disagreewith the State policies. The offence of sedition cannot be invoked tominister to the wounded vanity of the governments. Difference of opinion,disagreement, divergence, dissent, or for that matter, even disapprobation, are recognised legitimate tools to infuse objectivity in state policies. An aware and assertive citizenry, in contradistinction with an indifferent or docile citizenry, is indisputably a sign of a healthy and vibrant democracy.”
India Policy Watch #2: The Coming Inflation
Insights on burning policy issues in India
- RSJ
Last week Pranay wrote about the Domar rule and how to think about public debt sustainability. Pranay and I have long held economic growth is a moral imperative for India now. Domar’s paper, like Pranay wrote, makes it clear that growth is necessary even if you favour a big government. The argument is simple. Governments are free to borrow and spend on their favoured programmes. They can run deficits without worrying about today’s deficits turning into tomorrow’s higher taxes or higher inflation only if the national income (r) grows at a rate faster than the interest rate (i).
That is if “r” > “i”, we are fine with deficit spending.
The logic is simple. If you grow faster than the interest rate, you can keep your debt to GDP ratio at a constant level. So, please go ahead and spendbut choose wisely. Spend in areas that will yield higher growth rates in future. Growth will take care of your debt burden.
Since we are in the territory of public debt sustainability and role of government spends, I thought it would be useful to bring the Fiscal Theory of the Price Level (FTPL from here on) into this discussion. So, consider this an addendum to Pranay’s piece.
Price stability or inflation control is a key goal for all governments in a democracy. Why? Because they want to win elections and nothing irks public than price rise. So, there are two questions in public policy on this issue - a) how do we tame inflation and b) is there an optimal level of controlling it?
Now, the usual macroeconomic explanation offered to the first question was simple. Inflation is managed by the monetary policy of the central bank. An independent central bank focused on price stability will manage it by controlling the supply of money. If the total output grows at x per year and the money supply grows at y, then over a period of time the prices will grow at (y-x) per year. That’s your inflation rate. Simple.
There’s a problem though. It assumes the demand for money among people today is uniform across. This isn’t true. Because all of us have different beliefs about the future. If our view of future inflation is different, our need to hold money today will be different. This means there could be many paths to price stability other than just the monetary approach. These paths are varied depending on households’ views about the economy’s future state. And that’s influenced by fiscal policy. So, according to FTPL, a tough and independent central bank is good to have but it alone cannot guarantee price stability. Fiscal policy will have to work in tandem. Government’s choice of how it finances its debt has a key role in how inflation plays out in future. The central banker must continue to convince the government to adopt the right stance on fiscal policy.
On the second question - how much inflation control is optimal - FTPL suggests allowing price levels to swing to any wild variations to the government’s budget. This gets a bit complicated but a simple summary is that in times of economic shocks like a pandemic it is efficient to allow prices to go up.
That done, let me move to add my nuance to Pranay’s explanation of Domar’s rule. No one can argue about “r” > “i” logic. The key questions about the deficit, however, are for how long and how much? If you have a fiscal deficit of one per cent for one year and you take the next five to grow higher than the interest rate to offset it, you’re fine. But what if you keep adding a five or six per cent deficit every year for a decade and more? As a somewhat laidback, retiring fiscal hawk, this is what worries me when I see unlimited deficit spending all around. A trillion here in stimulus and another trillion there and soon we are talking about some real money here. My worry is we have reached a stage where “r” > “i” cannot support the deficit spending. So inflation will come in.
That’s my view. A high inflation future is inevitable.
Addendum squared
RSJ makes an important point. “r” > “i” is a necessary but insufficient condition. The reality is that “r” needs to be sufficiently greater than “i”. That’s because the “r” > “i” condition rests on the assumption that the primary deficit is zero i.e. the government is only borrowing to pay interest on debts accumulated in the past.
That’s not the case in India. The primary deficit in 2019-20 was 1.6 per cent of GDP while it is estimated to be 3.1 per cent in the next financial year. This means a lot of borrowing is being deployed not just for capital investment but also for the day to day running of the government.
With higher primary deficits comes higher responsibility to restart economic growth.
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
— Pranay Kotasthane
Given how we keep going on and on about the urgency of economic growth, this line in the Delhi government’s budget came as a pleasant surprise:
“Our goal is that the per capita income of Delhi by the year 2047 is equal to the income of a Singapore citizen. To make this possible, we have to increase the income of our citizens by about 16 times which is a difficult target, but not impossible.”
It’s not new for Indian governments to aspire to be like someplace else. Isomorphic mimicry is in fact quite common. Vilas Rao Deshmukh wanted to transform Mumbai into Shanghai more than a decade ago.
What’s different this time is the Delhi government has set itself a measurable output target with a defined end date, something most governments refuse to commit to.
The Delhi Finance Minister even had a well-thought-out response to the question “Why Singapore?”. He said:
“Singapore has one of the most stable economies in the world, with high government revenue and a consistently positive surplus. As a result of its strategic geographical positioning in Asia, the socio-economic context of Singapore is relatable to that of India. In addition to this, Singapore is also a city state which has achieved substantial growth in the past 25 years. So, when we think of Delhi 25 years from now, we envision a Delhi which can stand at par with one of the fastest growing and developed economies in the world.”
Setting a clear, measurable income target against which performance can be measured is a welcome change. Hopefully, the other governments are watching.
HomeWork
Reading and listening recommendations on public policy matters
* [Article] John Cochrane on fiscal roots of inflation. A great paper.
* [Article] ‘Disaffection’ and the Law: The Chilling Effect of Sedition Laws in India by Siddharth Narrain is a good overview of the history of sedition in India.
* [Podcast] Pranay and Saurabh discuss the impossibility theorem of affirmative action on Puliyabaazi.
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