Prediction Time

—RSJ

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

Insights on current policy issues in India

— Pranay Kotasthane

Breaking the Mould: Reimagining India's Economic Future, a book by economists Raghuram Rajan and Rohit Lamba, has started a much-needed discussion on India’s future growth trajectory.

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.

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.

Before I bore you with that, let me share with you this wonderful excerpt from a paper I read recently. Titled ‘Enlightenment Ideals and Belief in Progress in the Run-up to the Industrial Revolution: A Textual Analysis’, it covers an area of eternal fascination for me - Enlightenment and its impact on Western Europe. 

Interesting conclusions and a must-read:

“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. 

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.

Read the edition here.

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.

Audio narration by Ad-Auris.

Global Policy Watch: A Mint With a Role

- RSJ

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).

The Wall Street Journal woke up to the digital Yuan (paywalled) last week with this article that starts off like a Marquez novel:

“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.

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.

Deploying the Banishing Bureaucracy framework, they wrote:

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 Corruption has 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.

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.

His obit in the New York Times read: Robert A. Mundell, a Father of the Euro and Reaganomics, Dies at 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.

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.

RIP.

An Interview

I also came across this interview of Jonathan Sumption over the weekend. Lord Sumption is a retired Justice of the Supreme Court of the United Kingdom and earned his reputation with his brilliant 4-volume history of the Hundred Years War.

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. 

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):

“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.

Satish Deshpande and Yogendra Yadav had proposed a similar model for higher education way back in 2006:

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

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.

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!”

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

A short mid-week note on some points that have emerged from the Pratap Bhanu Mehta resignation issue.

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.

One, 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 Schmitt’s friend-enemy construct in politics before here.

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 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).

The Counter

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: Nayaa Pakistan 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.

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

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.

Not(PolicyWTF): Delhi Government’s Singapore Ambitions

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.

- RSJ

Two somewhat random thoughts triggered this edition.

One, we have been talking about Radically Networked Societies (RNS) a fair bit here. These are non-hierarchical networks of individuals who share a common identity and take up a cause they are passionate about through adroit use of social media platforms and cellphones. In an RNS, there are no clear roles, the decision making is amorphous and the leadership is diffused. But things move really fast. The state which has to contend with RNS is hierarchical, slow and regimented. It can’t keep up. We have seen this with the many protests world over that have been triggered by RNS. Forget the state, even nimble hedge fund managers have found it difficult to stay in step with an RNS-like Reddit forum, r/wallstreetbets. We have made the case RNS are here to stay and the state will have to find a solution to control them.

But over the weekend I was struck with a thought. What have these RNS movements truly achieved? Have they turned themselves into mass movements and brought dramatic change anywhere? The answer is no. Over the last decade (starting from Arab Spring), there have been innumerable RNS movements driven by Twitter, WhatsApp and other platforms that have created a stir and captured media imagination. But they have been transient. Their long-term impact is yet to be seen. Does anyone really believe that the most long-lasting among RNS instances like Black Lives Matter or Occupy Wall Street will ever morph into something like the Civil Rights movement of the 60s or, more impossibly, the Russian revolution?

No.

So, the question: why?

Two, the majoritarian problem that’s facing many democracies the world over today. This is the ‘tyranny of the majority’ that Burke and Tocqueville had warned about almost two centuries ago. So, the question is how do you trump majoritarian-ism in a democracy which is designed for it? Granted, it is not where a democracy should have reached, but having reached there how does it get out from it? A solution I have written about in previous editions is to do nothing. My argument has been it is impossible for a large agglomeration to remain stable over a period of time. It will splinter because the concept of political is about the existential distinction between friend and enemy like Schmitt wrote. So, you just wait for nature to take its own course. But that doesn’t seem a proactive solution to many. There must be a way to counter-mobilise the masses, they argue.

So, the question: is there a way?

Enter The Longshoreman Philosopher

Both these questions - why the many RNS movements haven’t turned into real mass movements and why is it difficult to counter-mobilise against majoritarian tendencies - bring me to the works of Eric Hoffer. More specifically, his first book - The True Believer: Thoughts on the Nature of Mass Movements (1951).

Eric Hoffer was an intellectual like no other. Consider this: he never finished even grammar school, he was blind between the age of 7 to 15, and he worked every day of his life as a longshoreman in the docks of San Francisco doing hard physical labour. Yet, or maybe because of these, Hoffer was a peerless social and moral philosopher with dazzling aphorisms and insights. At the age of 53, he wrote The True Believer, a slim book that packs in, to my mind, the most number of insights per page than any book I have read. It will be impossible to sum up the book in a few lines but let me try with a few helpful extracts from the book. Just to be clear, these do no justice to the richness of the text when read in full.

First, Hoffer establishes all mass movements, religious, political or social, are interchangeable. When the situation is right for a mass movement, it is right for any movement regardless of belief or dogma. So, for Hoffer, every mass movement from Christianity to Communism to Fascism have the same underlying features. As he wrote:

“Since all mass movements draw their adherents from the same types of humanity and appeal to the same types of mind, it follows: (a) all mass movements are competitive, and the gain of one in adherents is the loss of all the others; (b) all mass movements are interchangeable. One mass movement readily transforms itself into another. A religious movement may develop into a social revolution or a nationalist movement; a social revolution, into militant nationalism or a religious movement; a nationalist movement into a social revolution or a religious movement.”

Second, the movements get off the ground by what Hoffer called ‘Men of Words’. Most people don’t like change, no matter how dissatisfied they are with their present. They will seek change at the margins. They look upon a rabble-rousing change agent with suspicion. Men of Words, on the other hand, are different. Their core skill is their ability to articulate the need for change in a benign yet persistent manner. They find an audience with the restive masses with their farsighted prescriptions for change without an immediate sense of urgency.

“…. the man of words prepares the ground for the rise of a mass movement: 1) by discrediting prevailing creeds and institutions and detaching from them the allegiance of the people; 2) by indirectly creating a hunger for faith in the hearts of those who cannot live without it, so that when the new faith is preached it finds an eager response among the disillusioned masses; 3) by furnishing the doctrine and the slogans of the new faith; 4) by undermining the convictions of the “better people"— those who can get along without faith—so that when the new fanaticism makes its appearance they are without the capacity to resist it.”

Third, once the ground has been set by the Man of Words, the fanatics enter. They love chaos and they seek anarchy. The old order is rotten to its core and only a complete dismantling of it will satisfy a fanatic. They don’t want to waste time to reform it. It has to be overthrown. The fanatics get the mass movement rolling not with their convictions but something more primal. Hate. As Hoffer wrote:

“Mass movements can rise and spread without belief in a God, but never without belief in a devil. Usually the strength of a mass movement is proportionate to the vividness and tangibility of its devil.”

The fanatics are ready to sacrifice their lives to smash the old order. This passion is great when they are in a life and death struggle with their enemies during the movement. But it becomes a problem when victory is in sight.

“The danger of the fanatic to the development of a movement is that he cannot settle down. Once victory has been won and the new order begins to crystallize, the fanatic becomes an element of strain and disruption. The taste for strong feeling drives him on to search for mysteries yet to be revealed and secret doors yet to be opened. He keeps groping for extremes.”

Fourth, the revolution is then saved from the fanatics by the practical ‘Man of Action’. This marks the institutionalisation phase of the movement. The change that was so desired and is now at the doorsteps needs to be perpetuated through institutions and systems. This has to be done by the Man of Action. The practical man looking for order. As Hoffer wrote: “The genuine man of action is not a man of faith but a man of law.” He is seeking stability and he will go to the extent of coercing the masses to perpetuate the hard-won change.

“In the hands of a man of action the mass movement ceases to be a refuge from the agonies and burdens of an individual existence and becomes a means of self-realization for the ambitious. The irresistible attraction which the movement now exerts on those preoccupied with their individual careers is a clear-cut indication of the drastic change in its character and of its reconciliation with the present. It is also clear that the influx of these career men accelerates the transformation of the movement into an enterprise.”

Hoffer believed a successful revolution works when these 3 roles - Man of Words, Fanatic and Man of Actions - are split among different people who play their parts and move on. However, he was aware there was a rare breed of people who straddled these roles depending on where the movement was at any point in time.

“There are, of course, rare leaders such as Lincoln, Gandhi, even F.D.R., Churchill and Nehru. They do not hesitate to harness man’s hungers and fears to weld a following and make it zealous unto death in the service of a holy cause; but unlike a Hitler, a Stalin, or even a Luther and a Calvin,1 they are not tempted to use the slime of frustrated souls as mortar in the building of a new world. The self-confidence of these rare leaders is derived from and blended with their faith in humanity, for they know that no one can be honorable unless he honors mankind.”

Hoffer Today

Now back to the two questions I raised at the start of this edition - why the many RNS movements haven’t turned into real mass movements and why is it difficult to counter-mobilise against majoritarian tendencies?

Hoffer probably has some answers.

One, the men of words who can sustain a long campaign to “undermine institutions, discredit those in power, weaken prevailing beliefs and loyalties” are in short supply today. The modern men of words take on too many causes, speak on varied issues and often end up contradicting or discrediting themselves.

Two, fanaticism is cheap on social media. The cost of fanaticism is low. This creates a temporary mob of impassioned supporters of a cause who are high on noise and low on stakes. They are all fire and brimstone behind the cloak of anonymity on these platforms. They lack the fundamental Hoffer-ian feature that distinguishes fanatics from others: self-sacrifice.

As Hoffer wrote:

“One of the rules that emerges from a consideration of the factors that promote self-sacrifice is that we are less ready to die for what we have or are than for what we wish to have and to be.”

It follows that any counter-mobilisation against a majoritarian agglomeration must satisfy the requirements of a mass movement laid out by Hoffer. And what would that be? A real intellectual foundation that’s sustained over time by men of words followed by real activism and self-sacrifice by the fanatics to the cause. The men of action can then follow to institutionalise the change.

As I was reading Vinay Sitapati’s excellent Jugalbandi: The BJP Before Modi, I realised how Hoffer’s thesis on mass movements fits perfectly to the two seminal political events of India over the last century - the freedom movement leading to Congress hegemony till the mid-80s and the rise of the BJP and Hindu nationalism from then to the present. Both involved men of words creating the grounds for stoking dissatisfaction over years followed by hordes of self-sacrificing fanatics getting the movement off the ground. That then sets the stage for men of action to codify and institutionalise the change. What our history has shown is any mass counter-movement to the current order will take years to fructify with the right conditions. Of course, the current order will try and prevent the building up of the right conditions. That’s what we see around us now.

70 years since its first print, Hoffer’s ‘The True Believer’ has the best answers to the question that’s often asked in politics today - how will an alternative emerge? I can imagine a lot of people whom I can recommend it as an essential reading.

HomeWork

Reading and listening recommendations on public policy matters

* [Video] An interview of Eric Hoffer (this is part 1. There are 4 more parts). The man was an original.

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.

Global Policy Watch #1: Deadly Advice

Bringing an Indian perspective to burning global issues

- RSJ

There are consultants and investment bankers who floor you with their presentations. And then there is Mckinsey & Co. When the ‘smartest guys in the room’ speak, you watch them transfixed. To use Coleridge’s immortal words:

“He holds him with his glittering eye—

The Wedding-Guest stood still,

And listens like a three years' child:

The Mariner hath his will.”

You are often the wedding-guest and you listen to them like a three-year-old.

I guess it didn’t exactly work out that way over the past few months when Mckinsey was answering questions about its role in abetting the opioid crisis.

Not Caring About the Consequences

On Feb. 4, McKinsey & Co., the management consulting firm, announced a $573 million settlement with 49 State Attorneys General for its past work for opioid manufacturers. In Nov. 2020, Purdue Pharma pleaded guilty to criminal charges of not doing enough to combat the opioid epidemic that has ravaged the American heartland largely on the back of aggressive marketing of its flagship product, OxyContin.

Purdue acknowledged it looked the other way when the prescription drug was diverted to the black market, it misled regulators to boost its manufacturing quotas and it paid doctors for random speaking gigs that were a way to reward them for writing more prescriptions for OxyContin. The costs to society were dramatic - over two million addicts and about half a million opioid-related deaths in the past two decades. There’s no other way to put it; Purdue Pharma was an evil enterprise that deliberately sold products that killed people while profiting enormously from it.

And Mckinsey advised Purdue from 2004-19 on how to do this well.

On Feb. 4, Kevin Sneader, global managing partner of Mckinsey, wrote a memo to all his colleagues on the settlement. It contained the oldest excuse in the book - we weren’t doing anything unlawful. That’s consulting-speak admitting we were unethical:

“Indeed, while our past work with opioid manufacturers was lawful and never intended to do harm, we have always held ourselves to a higher bar. We fell short of that bar. We did not adequately acknowledge the epidemic unfolding in our communities or the terrible impact of opioid misuse and addiction, and for that I am deeply sorry.”

And it contained this gem:

“It is also a key reason why we chose the course of action announced today since it allows funds to be deployed quickly and directly to victims of the opioid crisis while avoiding a long and protracted legal process.”

I’m not sure there is a consulting equivalent to that old Hindi proverb - “nau sau choohe maar, billi chali haj karne”.

But Mckinsey could use it next time.

The saga has followed a predictable course since. On Feb 24, the 650 global partners of Mckinsey voted to replace Kevin Sneader as its global managing partner. As far as Mckinsey goes, I guess, they have done all they could to put this behind them.

The Slippery Slope In Business

What makes a pharma company that set up its business to save lives go down the path of taking lives? Greed?

There’s always the usual punching bag brought up when something like this happens - the Friedman doctrine. The purpose of a business and its sole social responsibility are to maximise shareholders value. That, according to its critics, gives businesses a free run to do anything. It makes greed legitimate. But does it? We put up a passionate defence of the Friedman doctrine on the 50th anniversary of that paper in edition #70. Friedman, as we have argued before, wasn’t making a case of untrammelled capitalism. In fact, he makes following the rules of the game fundamental to how a business must operate. As he concludes in that paper:

But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book “Capitalism and Freedom,” I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (emphasis ours)

Business ethics is often half-jokingly cited as an example of an oxymoron. There are challenges inherent in the market system for a business to be virtuous or ethical on its own. There’s the principal-agent problem, to begin with. The people running the business often aren’t the owners of the business. They have an incentive to maximise their short-term gains at the expense of all others. Then there’s information asymmetry between the business and its consumers. It is not possible for consumers to know everything about the products of a company. They trust the company to make products that are good for them. The company then has the incentive to be economical with the truth. There’s also the collateral damage problem on the society or environment that a business often inflicts. Pollution, for instance. It is what the economists call a ‘negative externality’. How does a business pay for it? If markets were to be left free from any intervention, businesses will exploit these failures for their benefits. They might make inferior or harmful products, take short-term decisions that hurt their consumers, workers or shareholders, pollute their environment or harm society. You could say in the long-run the markets will figure this out and punish them appropriately. But the social costs incurred by then will be too high.

The Case for Regulations

This is where regulators come in. The only reason for the state to intervene in markets through laws and regulations is to address these market failures. But it is a cat-and-mouse game between the regulators and those who are regulated. Most companies follow the regulations and get on with their lives. Not all. There’s always a temptation to go around them. And it isn’t too difficult. If a company decides to hide or obfuscate the truth, it can hoodwink a regulator for long. We have seen this play out many times over across sectors.

But the case of Purdue Pharma is somewhat unique. It ran its racket of selling OxyContin as an opioid to addicts in plain daylight. Everyone who dealt with Purdue knew of it - patients, doctors, pharmacies, hospitals, auditors and consultants. The competitors knew of it. As did many reporters and writers who covered the opioid crisis over the past two decades in print and literature. Everyone except the regulator, which strictly followed the guidelines and only went by Purdue’s responses to their queries. So long as the responses and supporting evidence that went along with them were fine, the regulators considered their job done. And how did Purdue manage to do this?

Well, there’s Mckinsey & Co.

There’s no other way to put this. Purdue Pharma framed their problem this way - how to maximise the sales of OxyContin that included its abuse by addicts while keeping the regulators away with their smooth but inaccurate responses?

And Mckinsey, the smoothest of the mariner, hath their will (as Coleridge would say) with their presentations. Presentations that did some unique cost-benefit analysis ever in the history of consulting. Valuing human life. Presentations that suggested if Purdue paid $14,810 per “event”, and if 2,484 customers of the CVS pharmacy chain overdosed or became addicted in 2019, Purdue would pay CVS $36.8m that year. There’s more there in those presentations that will shake your faith in humanity.

As other cases and class action suits pile up, it is almost certain Purdue Pharma will cease to exist in its current form. The ‘philanthropic’ Sackler family that owns it will also have its day of reckoning. But what about Mckinsey? A $600 million fine and a change of its managing partner? That’s it? Seems like a fairly low cost to pay for some deadly advice.

The financial sector regulators have learnt from the many financial crises on how to regulate investment banking and advisory businesses. These included personal criminal liabilities, fines and clawback of bonuses paid if a wrongdoing is proven in future. There’s something to learn from them to ensure those in the business of advising corporates bear moral responsibility for their services. Not doing anything unlawful isn’t enough. Else, it is only a matter of time before another partner will be putting up similar slides to turbocharge another unethical business.

But can regulations ever be enough? Like we have seen over and over again, it won’t ever be watertight. Maybe a start needs to be made at business schools - the source of talent for these companies. Tom Peters, the bestselling author of many books on strategy and a Mckinsey alum, writing for FT makes this point:

In my opinion, this is not unrelated to the OxyContin affair. I have long argued that we should “shut down every damn business school”. This rant is hyperbolic, but my reasoning is that business schools typically emphasise marketing, finance, and quantitative rules. The “people stuff” and “culture stuff” gets short shrift in virtually all cases.

I agree. I’m not sure if there is equal importance given to the discipline of ethics as it is given to a course on Options and Futures in any MBA programme. You could structure a beautiful futures contract or devise a compelling strategy for enhancing sales force productivity using what you learnt in a business school. Those models could be terrible for society and your clients could be guilty of using human beings as means and not as an end in themselves. You could plead ignorance about these ideas. Or you could have read Aristotle and Kant at school and asked those questions before you began building your model.

Reading Friedman isn’t a problem. Reading only Friedman is.

A Framework a Week: The Domar Rule for Public Debt Sustainability

Tools for thinking public policy

— Pranay Kotasthane

This newsletter unabashedly bats for policies aimed at accelerating India’s GDP growth. We’ve reasoned out our position in myriad ways in previous editions. And yet, we realise that the sceptics aren’t fully convinced. The ideological challenges to GDP growth first — inequality, inclusive growth, and sustainability — continue to gain strength.

So let’s try another line of reasoning: even if you are in favour of big governments, you cannot escape the prior need for higher GDP growth. Here’s how.

Big governments need more money by way of higher taxation or higher borrowing. In the current economic situation when there are no profits to tax, governments across the world are competing to borrow money for restarting their pandemic-hit economies. In some economies like the UK, public debt has hit its highest level since 1945. Consequently, the interest rates these governments are promising their borrowers (bond yields) are rising.

This higher borrowing comes at the expense of the savings of future generations who will end up paying taxes in repayment of this mountain of debt. Is there a limit beyond which the fetish for big borrowing becomes unsustainable? A classic 1944 paper titled “Burden of Debt” and National Income by Evsey Domar gives an answer.

As the second world war was winding down, governments then faced a situation not different from today — the economic reconstruction needed massive borrowing. The policy orthodoxy at the time opposed wanton borrowing — today’s deficits would lead to tomorrow’s higher tax rates, they said.

Domar disagreed. Instead, he said that governments running deficits weren’t all that bad especially in times of crises when private investment would decline. Instead, the crucial variable one should be tracking was the national income. With a set of assumptions, he derived that as long as the national income grows at a rate faster than the interest rate, tax rates settle to manageable levels.

While it is true that higher deficits mean higher tax collections from subsequent generations, it doesn’t necessarily imply an increase in the rate of taxation. Provided that the economy grows at a robust rate, a smaller percentage of it hived away as tax can raise the same tax amount as would a higher tax rate raise on a slow-track economy. This is intuitive. For instance, a 12 per cent tax rate on an economy that is stuck at 100 units generates the same tax amount as a 10 per cent tax rate on a faster economy that has galloped to 120 units in the same period. In other words, compound growth counters compound interest.

Domar’s conclusion is simple but profound: the problem of debt burden is a problem of expanding national income.

The chart below illustrates this finding. At constant incomes (stagnant GDP), tax rates keep rising linearly. At the other extreme, when income rises at the same rate as the interest rate (2 per cent in this case), the tax rate remains constant. More interestingly, the sawtooth pattern below shows that even if there were recurrent wars every thirty years requiring recurrent massive government borrowing, tax rates would still be under control so long as the national income keeps growing handsomely.

So, higher levels of public debt are not all bad. The key is to understand how that additional borrowing is being utilised. If this money is invested in a way that accelerates economic growth, debt will be sustainable in the long run. In other words, spending on physical and human capital is desirable, spending on wasteful subsidies is not.

Now, armed with this framework, observe where India is. The interest rate on the government’s 10-year bonds is hovering at the 6.2 per cent mark while the GDP growth has barely turned positive last quarter after two consecutive quarters of negative GDP growth. Even before the pandemic hit, the situation wasn’t all hunky-dory. The slowdown of the last decade means that public debt sustainability has been worsening for almost a decade now.

A chart in Business Standard has a good illustration of this risk. Without returning to higher GDP growth rates soon, even government borrowing will become unsustainable. And if the government doesn’t have the spending power, all other worthy projects of tackling climate change and inequality have no chance of success.

Global Policy Watch #2: The Great Chip Squeeze

Bringing an Indian perspective to burning global issues

— Pranay Kotasthane

If you’re planning to buy a new car, don’t. Because you’re staring at indeterminate delays as the semiconductor IC chips that make your car infotainment and control systems work are just not available in the global market. No one’s quite sure when this shortage would be resolved. Some estimates suggest that nearly 1 million fewer vehicles will be produced the world over in the first quarter of 2021 because of the semiconductor shortage.

This peculiar market condition has been in the news for many weeks now. Two reasons are commonly cited. One, a massive advance purchase order from Huawei in anticipation of US sanctions last year gobbled up available manufacturing capacity. And two, as the demand for vehicles dropped during the lockdown period, contract semiconductor manufacturers shifted focus to meet the higher demand from a much more lucrative segment — phones, data centres, and routers. When the automobile demand eventually bounced back, the manufacturers had no spare capacity to offer them.

While these two are indeed the proximate reasons for the current shortage, the more fundamental cause is a uniquely bottlenecked semiconductor supply chain.

In the 1980s, the semiconductor industry was transformed by the arrival of companies specialising in manufacturing chips on contract. These companies in turn created a new generation of fabless semiconductor design companies which were unencumbered by the huge setup costs (setting up a manufacturing plant needs an investment in excess of $10 billion).

While thousands of fabless companies mushroomed around the globe, the contract manufacturing market kept consolidating with the end result that just one company, Taiwan-based TSMC, does nearly 50 per cent of the world’s contract chipmaking.

Not that anyone was complaining. This extreme form of comparative advantage-led diversification worked perfectly well. The labyrinthine supply chain worked so well in fact that TSMC was hardly known outside the tech world.

And then, the pandemic happened.

COVID-19 exposed the underlying fragility of this supply chain. The overdependence on a handful of contract chip manufacturers became a bottleneck and the supply chain unravelled. In most other markets, higher demand would have been met by new suppliers motivated by higher prices. But even this shock absorption is not possible the case of semiconductors. Setting up a new manufacturing plant costs three-four years, a lot of money, and top-notch talent.

The big takeaway from the current shortage is that the semiconductor industry is being seen in strategic terms. The US plans to get both Samsung and TSMC to set up new plants there while the CHIPS for America Act plans to pump in massive investment for local players. The Indian government too has floated an expression of interest to gauge interest for a semiconductor fab in the country. Europe for its part is also putting in place a plan to help its home-grown players. All this even as China has been pumping in billions of dollars since 2013 for its own version of semiconductor aatmanirbharta.

The moment is right for countries or industry bodies to form consortiums for financing the huge upfront costs of semiconductor manufacturing facilities. I have previously written why semiconductors should be the focus of technology cooperation in the Quad framework.

The lack of redundancy in the current supply chain coupled with the imperative to make supply chains of critical technologies China-free means that the semiconductor landscape is set to change this decade. Expect many policy flip-flops along the way.

HomeWork

Reading and listening recommendations on public policy matters

* [Paper] Political Economy of Government Finance in India by Govinda Rao gives a comprehensive overview of important features of India’s public finance story.

* [Article] How Covid-19 changes the geopolitics of semiconductor supply chains.

* [Article] Rathin Roy discusses why the quality of public debt is just as important as the quantity.

* [Article] The Economist asks - Should governments in emerging economies worry about their debt?

- RSJ

Chaitanya Tamhane’s debut feature Court (2014) convinced me about two things. One, here was a global talent whose cinema will make us proud in future. He did that and more with his next feature - The Disciple (2020). I knew of the precocious Tamhane back from 2007-08 when his knowledge and analysis of global cinema of all stripes used to leave us awestruck. We were no mugs about cinema ourselves. But he was different. Next level as they say.

That aside, it is the second point that I was left with at the end of Court that has stayed with me for long.

Ruka Hua Faisla

But to back up a bit, here’s what Court is about.

It begins with a day in the life of an elderly Dalit activist, Narayan: a writer of protest songs and a teacher for poor kids living in the slums. A simple man of deep conviction he has devoted his life to causes that are dear to him. Soon, he is arrested because a manhole worker died by suicide after listening to one of his angst-ridden songs that seemingly abetted it.

The trial is a Kafkaesque nightmare. It is clear that the manhole worker died because of inhaling the poisonous sewage gases. This isn’t anything new. The plight of these workers who go into the manholes without any safety equipment has been documented many times over. Yet, the public prosecutor and the state produce fake witnesses who testify against Narayan and bring up bizarre new charges like possession of illegal books (there’s one on Yoga) to make it watertight case against him. The state can’t accept the man died because of the abominable work conditions.

Instead it must have been that old mass murderer over the ages - poetry.

The autopsy report and the testimony of the wife nail the lie. This was no suicide. Meanwhile Narayan’s health continues to deteriorate while he is in custody. The judge grants him a bail for a surety amount of Rs. 1 Lac. Good news? Wait. The next day Narayan is arrested again on another trumped up charge. This time it is about sedition and for waging a war against the state. The case is back to the same judge who tells them to appeal to the High Court.

The film ends with what appears like a complete non sequitur.

We see Narayan on bail going back to teaching the poor kids in the slums. And then there’s a surreal bit to end the film. The judge and his family go out for a day long picnic. They travel in a minibus singing songs and playing antakshari. We see members of the family seek the judge’s counsel on different issues. The judge is like that old uncle we all know. He dispenses vacuous, outdated advice. The last scene has the judge dozing off on a bench mid-afternoon while the children play cricket nearby. A ball hits the judge mildly. He wakes up and promptly slaps the boy who has come to pick it up.

The film ends.

A Reflection Of Our Society

There are multiple themes apparent in the Court: the vengeful state, an indifferent judicial system, the drudgery of bureaucratic work, the idealism of an aging activist and the tenacity of a young advocate who is representing him. However, I was struck by that last scene. What was that about?

Over the last few years, I have thought about that scene often. Why?

Well, let me offer you three recent newspaper pieces.

First, here’s Shekhar Gupta in The Print on “how our judiciary is murdering the principle of ‘bail, not jail’ routinely”:

“It is a challenge to decide which institution has declined over the recent decades, the police or the judiciary. But today, if you are someone the powers that be don’t like, they can easily find police officers to file a case with serious sections from the IPC, never mind if they don’t have a shred (or iota, which our judges prefer in their orders) of evidence.

You might still think, certainly, they still have to produce me before a magistrate who would easily see through the police case that’s thinner on evidence than Coronil, if even that. And once the magistrate sees that, the order will be determined by that immortal line from the legendary late Justice V.R. Krishna Iyer: Rule is bail, not jail.

Contrary to our belief, that Krishna Iyer line wasn’t immortal. If anything, it’s been murdered and cremated routinely, and at least three times in recent days. Check the cases of Munawar Faruqui, Nodeep Kaur and Disha Ravi. Our choice of three very young and vocal people is a conscious one.”

Or, read this from The Economic Times:

“Chief Justice of India triggered a controversy on Monday with his remarks in two cases. In one case, he asked a man accused of rape in a relationship with a 16-year-old, whether he was willing to marry the complainant. The man faces accusations of rape, cheating and criminal intimidation, besides charges under the stringent Pocso Act designed to prevent exploitation of children.

The CJI’s remark was panned on social media.In another case, the CJI asked if a man’s sexual conduct, however brutal, could attract rape charges if it was made by his partner.”

Or, how about this:

“Justice Pushpa Ganediwala recently acquitted a man accused of groping a 12-year old girl's breast because he did not make skin-to-skin contact, and days earlier, ruled that holding the hands of a five-year-old girl and unzipping pants do not amount to 'sexual assault' under the POCSO Act.

In two other judgments, she acquitted two persons accused of raping minor girls after noting that the testimony of the victims did not inspire confidence to fix criminal liability on the accused persons.

"No doubt, the testimony of the prosecutrix (victim) is sufficient for conviction of the accused. However, the same ought to inspire confidence of this Court. It ought to be of sterling quality, Justice Pushpa Ganediwala said in one of the judgments.”

I could go on and on but I think you get my drift.

A Good Citizen?

Why have things turned this way over the past few years?

I have 3 reasons to offer. Firstly, we draw our bureaucrats and our judges from our society. Our society has progressed on liberal axis over the past seventy years. But not enough. It is largely illiberal. Secondly, society was illiberal in the past too. But there was no incentive for those running it to be illiberal while interpreting the law or administering a rule. Going by the evidence above, this seems to have changed as the state has turned illiberal. When incentive changes, behaviour changes. Thirdly, we seem to be sorely missing virtue in public life. In the absence of it we have deified certain institutions where virtue is often visible. Like the armed forces or the judiciary. There’s always a price to pay for deification without adequate scrutiny.

That brings me back to that last scene of the Court. I seem to get it a tad better these days.

Apart from the many other themes apparent in the film, the one that was running in the subterranean was that old question of Aristotle - who is a good citizen?

Is an old activist fighting the good fight against the state, writing revolutionary poems and organising the downtrodden to demand for their rights, a good citizen? Or is a learned judge with the majesty of law by his side, lording it over a court where the witnesses are fabricated and charges are often false, a good citizen? The society and the state have an answer. But is that the truth?

Tamhane answers this in that brilliant coda to his film. The activist whom the state considers a threat is busy teaching kids despite his troubles while the judge with no care in the world wastes his time in a frivolous picnic and slaps a boy who disturbs his afternoon siesta.

Court was released in 2014. Like all good art it is timeless.

Read the edition here.

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 of the good folks at Ad-Auris. If you have any feedback, please send it to us.

Global Policy Watch #1: A Bit About Bitcoin

Bringing an Indian perspective to burning global issues

— RSJ

What should we make of bitcoin? Should we think of it as the best performing asset class in the last decade? After all, it was priced at $1 in April 2011 and its current price is about $45,000. But was it designed to be an asset? Surely, no. Satoshi Nakamoto, who invented bitcoin, was driven more by angst than greed while writing the 31,000 lines of code that he put out to the world on Jan 3, 2009. Satoshi (a pseudonym) wrote a 500-word essay - Bitcoin: A Peer to Peer Electronic Cash System - to explain the working of the system he had created. The logic was simple - a software system that would spew out some 21 million bitcoins over two decades with people interested in the coins ‘mining’ for them using their computing prowess. 

Satoshi was clear about his aim. He had seen the global financial crisis and he could no longer trust the conventional currency (also called fiat currency) issued by the governments. All he could see around him was central bankers printing money mindlessly to prop up a system where the ordinary individual had no say. And the banks were willing to design more creative and more toxic products that only benefitted them. As he wrote:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

So he decided to take the governments and the banks out of the equation by his design of bitcoin. People could now transact with a currency that was purely digital, encrypted and anonymous with a distributed public ledger that kept track of the movement of the coin to ensure it isn’t used twice by the same owner to dupe someone. It was quite neat. More importantly, there was no bank or intermediary to get in the way of the transaction nor was there any central banker that could decide arbitrarily how many coins should be in circulation. This was a libertarian utopia. The last bastion of the state could fall now. Fiat currency, an imagined and a coercive construct of the state could now be challenged.

As the last decade has shown, bitcoin hasn’t exactly replaced fiat currency as a medium of exchange in any meaningful way. But that doesn’t mean it has slunk away into anonymity. It has seen a remarkable rise in the last six months with some of the smartest people in the world betting big on it. Bitcoin or cryptocurrency has never been a more mainstream part of discourse ever. 

There are multiple ways of looking at cryptocurrency and make sense of what’s happening here. I will take the most traditional one for this edition. And, maybe, over the next few months go a bit deeper into this area. 

Today, I will take the economic theory lens to evaluate cryptocurrency and its most valuable manifestation, bitcoin.

Let’s understand fiat currency a bit better. Why do all of us believe a Rs. 500 note has any value? Well, Econ 101 class would tell you that’s because the sovereign has decided it is a legal tender that’s worth Rs. 500. There’s a promise right there on the currency note signed by the RBI governor. That’s very reassuring. But does that explain why we don’t use any other commonly agreed medium of exchange? Back in the days when I stayed at a hostel, we used cigarettes or Old Monk as a medium of exchange. There were always more cigarettes and Old Monks in the hostels than currency notes (this was the pre-ATM era) and these had a stable range within which its value moved. If someone needed my help with an assignment, 2-3 cigarettes did the trick. Now the question is what if this was replicated at a larger scale? The demand for Rupee notes would fall and its value would fall notwithstanding the Governor‘s promise. 

So, why does this not happen more often? The answer is that old reason for most things in our society. Network effect. Since most people use Rupee as a medium of exchange, it is easier for the next person getting into a transaction to use it as well. Network effects create an exit barrier for people to adopt any other new medium of exchange and an entry barrier for that new medium wanting to usurp the position of the Rupee. You will need a lot of initial momentum going if you were to establish yourself as an alternative. And how will you generate that momentum? I mean why will people use you as an alternative? It isn’t like the Rupee is failing to meet your expectations as a medium of exchange.

But is that enough? Is Rupee valuable because we all collectively believe in the myth it is valuable? That sounds more Harari than real economics. So, let’s go back to the question of why do we think a Rs 500 note has a value. 

Some of the more original thinking in this area was done by the formidable Austrian school economist Ludwig Von Mises at the beginning of the last century. His view was that we use something as a medium of exchange today because at some point in the past it actually had a real intrinsic value. In his time most currencies traced their origin to a precious metal and overtime were backed by that real asset however nominally. 

That’s fine but what explains the value of Rs. 500 today. There is no real asset backing this except some vague notion of trust. Also, there’s no real reason why should we all believe that this myth of the Rupee having value will continue forever. What if we continue printing money endlessly leading to spiralling hyperinflation sometime in future? What if there’s a worse global pandemic in future that cripples the global economy? What if we know a meteor is on course to collide with Earth in the next 12 months? What happens then? Will we accept a medium of exchange that has no real value if we know our future is uncertain or doomed? Think of that last person willing to accept a fiat currency as a medium of exchange. Why would he take that risk? Doesn’t make any sense for him because there's no future person to whom he can give this currency for its value. We believe in fiat currency because someone in future believes in it too. No future means no such belief. Now work backwards. Why would the last but one person accept it if he knows the last person won’t? If you follow this backward induction logic to its end and if we all know the future is uncertain and (somewhat) doomed, you will conclude the value of fiat money will be zero in future and therefore it should be zero today. 

If you think about it this way, fiat money and this whole business of printing money to get over a crisis is a giant Ponzi scheme. Fiat money should have no value today. Whatever value it has now is a bubble. 

So why do people call bitcoin a bubble and not fiat money? 

Well, turns out there is one big use case of fiat money  - paying tax liabilities owed to the state. If you remember this was an argument used to explain modern monetary theory (MMT) too. If the only way to pay taxes to the government is through fiat money, then there is a periodic demand for it by the citizens. This goes up as the economy grows or as the government taxes more. Now we can avoid the backward induction logic problem that we discussed earlier. The fiat money has a value that’s non-monetary; it pays your taxes. This won’t allow its value to go to zero in future. Therefore it will have value today too.

On such arbitrary plank of state coercion the edifice of human progress rests.

So, what about bitcoin then? Like I said earlier it is as much a bubble as any fiat currency of today. There are three problems it has to solve. One, its unique architecture is both a feature and a bug. That there can only be that many bitcoins prevents anyone from flooding the market with them. This keeps its downside protected and makes it a stable store of value. But on the other hand, a limited stock of coins means the value of bitcoin will continue to rise to preclude its use as a medium of exchange. I mean why will you use bitcoin when you know it will be more valuable in future. You will store it. The ‘good money’ will go out of circulation. The old Gresham’s law will apply. Two, if people don’t use it as a medium of exchange, it won’t create network effects. Lack of network effects will mean it won’t create enough momentum to replace fiat currency. This is a chicken and egg problem. Three, there will be transactions where people will seek anonymity or privacy that will be good use cases for cryptocurrency. But will illicit goods and services on the dark web or those sought for by fringe libertarians be a market large enough to justify the crazy valuation that bitcoin has currently? 

Through a conventional economic prism, the whole bitcoin or cryptocurrency opportunity looks like an asset bubble. There’s a small probability that many Silicon Valley founders and mavericks will ‘bootstrap’ the network effect for a cryptocurrency by making their goods and services available only in that currency. This will bestow intrinsic value to them beyond being a medium of exchange. That’s the only chance it has. Unless the sovereign decides to start its own cryptocurrency that can be used to pay its tax liabilities. But that is for another edition.

Global Policy Watch #2: Disagreement in the Information Age

Bringing an Indian perspective to burning global issues

— Pranay Kotasthane

A democracy is as good as the discourse it fosters. And it needs no convincing that discourse has plunged many levels in many democracies across the world.

Redeeming our discourse requires two necessary but insufficient components: education in critical thinking, and praxis in disagreeing well.

Critical thinking is where we desperately need philosophers. Philosophy’s focus on argument as a topic of study has a lot to offer. Only when we have a methodological understanding of arguments can we train ourselves to reason well. Only when we reason well will we be able to reflect and reach independent conclusions.

If I were asked what is one course that should be added to high-school curricula, it would definitely be critical reasoning.

The other component, learning to disagree well, is a skill that needs a massive upgrade in the information age. We are not good at handling disagreements. We have a tendency to equate an attack on our opinion as an attack on us. This verb ‘attack’ itself illustrates how strongly we perceive disagreements.

All this was known yet manageable until we didn’t have social media. People disagreed but within their social circles, with people they shared some similarities they could always go back to when confrontations got ugly. But social media changed things dramatically. For one, it put us in contact with the opinions of people we otherwise know very little about. And two, it put our online selves in an endless status competition. The result: outrage without real disagreement, confrontation without camaraderie.

None of this is going away. And this is precisely why diagreeing well is a core skill in the information age. We are still only beginning to scratch the surface of what it means at an interpersonal level or a social media platform design level. Nevertheless, Ian Leslie’s Guardian Long Read article makes a good start.

His answer is two-fold. One, narrow the status gap. Leslie writes:

“People skilled in the art of disagreement don’t just think about their own face; they’re highly attuned to the other’s face. One of the most powerful social skills is the ability to give face; to confirm the public image that the other person wishes to project. In any conversation, when the other person feels their desired face is being accepted and confirmed, they’re going to be a lot easier to deal with, and more likely to listen to what you have to say.”

..

“When a debate becomes volatile and dysfunctional, it’s often because someone in the conversation feels they are not getting the face they deserve. This helps to explain the pervasiveness of bad temper on social media, which can sometimes feel like a status competition in which the currency is attention. On Twitter, Facebook or Instagram, anyone can get likes, retweets or new followers – in theory. But although there are exceptions, it is actually very hard for people who are not already celebrities to build a following. Gulled by the promise of high status, users then get angry when status is denied. Social media appears to give everyone an equal chance of being heard. In reality, it is geared to reward a tiny minority with massive amounts of attention, while the majority has very little. The system is rigged.”

Two, lower the identity stakes. Leslie writes:

“..what drags participants into destructive conflict is usually a struggle over who they are… That our opinions come tangled up with our sense of ourselves is not necessarily a bad thing, but it is something we need to be aware of when trying to get someone to do something they do not want to do, whether that’s stop smoking, adapt to a new working practice, or vote for our candidate. Our goal should be to prise the disputed opinion or action away from the person’s sense of self – to lower the identity stakes. The skilful disagreer finds a way of helping their adversary conclude that they can say or do something different, and still be themselves.”

More concretely, he identifies having a disagreement without an audience is one way of lowering the identity stakes. People feel more comfortable changing opinions beyond the performative glare. But this approach is suboptimal because it relies on reducing diversity of thought. The other approach is to “just be nice” at a personal level, to make an adversary feel that they can revise their opinion without losing face.

All this sounds quite difficult, of course. But the key takeaway for me was to think about disagreement as a necessary skill for the information age. I strongly recommend the entire article. It is an important theme of our times. and we need to pay a lot more attention to this line of inquiry.

PS: Two book recommendations for learning critical reasoning. Fundamentals of Critical Argumentation by Douglas Walton, and Critical Thinking Skills by Stella Cottrell. To get things started, there’s a good podcast by Oxford University as well.

PolicyWTF: Compulsory Philanthropy — I Told You So

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

In #108, we subjected the Corporate Social Responsibility (CSR) Law to an “anticipating the unintended” treatment. Turns out there’s evidence to back all those claims too!

Gautam John, one of the most steadfast supporters of this newsletter, sent us a paper that analysed the impact of government intervention on CSR funding since the mandatory CSR law came into effect in FY 2013-14. The authors Rajgopal & Tantri conclude:

* Overall, there is a marginal increase in the average CSR spending since the law came into effect in 2013-14. But ...

* “High CSR” firms — companies that used to spend 4% to 5% of their profits on CSR before the law came into effect — reduced their spending to the mandated 2% level. “Low CSR” firms — companies that used to spend less than 1% of their profits on CSR before the law came into effect — increased their spending to the mandated 2% level.

* CSR contributions became highly sensitive to negative shocks to profits. This meant that companies reduced their CSR spending during bad times but did not increase CSR spending by the same amount during good times.

In sum, “mandatory CSR crowded out voluntary spending”. It became a checkbox to be ticked, a tax to be complied with.

The effect is similar to what you see while booking flight tickets in India today due to COVID-19 price caps in force. Earlier, the ticket prices were distributed according to scarcity — the prices rose as the journey day got nearer and different airlines had different prices. That’s no longer the case. All airlines charge nearly the same amount, the one that just meets the price cap, regardless of how early you book the ticket.

Azim Premji has consistently highlighted the futility of mandatory CSR. Premji alone donated in excess of Rs 7000 crores last year in comparison to the ~Rs 18000 crores total CSR spending by ALL companies in FY 2018-19. On Feb 21, he spoke on this issue again:

"I do not think we should have a legal mandate for companies to do CSR. Philanthropy or charity or contribution to society must come from within, and it cannot be mandated from outside. But that's my personal view. As of now, this is the law and all companies must follow it.”

So, my conclusion remains unchanged. CSR is a tax but only worse.

HomeWork

Reading and listening recommendations on public policy matters

* [Paper] Events described historic at the time when they occur are rarely so in reality whereas the events that will be viewed as historic many years later attract little attention at the time. A really important finding that also explains why progress is so underrated.

* [Podcast] RSJ was on The Seen and The Unseen,

* [Article] Barun Mitra’s take on the way ahead for agricultural reforms is educational.

* [Article] Sarthak and Pranay have an article out on the latest attempt at making state finance commissions work.

* [Article] Devesh Kapur highlights the low-level equilibrium that our federalism has settled at with respect to agriculture.

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.

Global Policy Watch: No Telefoon in Rangoon

- RSJ

Mere Piya Gaye Rangoon Wahan Se Kiya Hai Telefoon is how C. Ramchandra immortalised Rangoon (Yangon) in our collective memories all those years ago. Unfortunately, ‘wahan se kiya hai telefoon’ is a tad difficult these days for the people of Yangon.

Myanmar should be aware of the idea of eternal recurrence by now. That all events in the world recur in the same pattern over an eternal series of cycles. The coup earlier this month by the Tatmadaw (the armed forces) was a case of history repeating itself three times over in its short post-war history. The reason served by the military had a familiar ring to it. It alleged widespread voter fraud in the November 2020 elections that led to a landslide victory for Aung San Suu Kyi helmed National League For Democracy (NLD). The quasi-democracy that was in place in Myanmar since 2015 didn’t mean any loosening of the iron-fist of the Tatmadaw. It retained its control on the key levers of power. For it to allege voter fraud in elections is comical. It must follow then it is admitting its incompetence in being dictatorial. Anyway, leave that aside. History has shown logic isn’t a particular strength of military junta anywhere in the world.

But irony is

The senior-most military leader Gen. Min Aung Hlaing had this to say:

“I would seriously urge the entire nation to join hands with the Tatmadaw (Army) for the successful realisation of democracy.”

Then the junta went digital with its defence. In a country where Facebook is the internet, it posted this on its official site:

After many requests, this way was inevitable for the country and that's why we had to choose it.

And soon it blocked Facebook and disabled the internet for the sake of ‘stability’ in the country. The tanks were on the street and midnight knocks on the doors of NLD leaders began. Suu Kyi was taken into custody and the crackdown started. It was 1988 once again for Myanmar. The eternal cycle had recurred.

As Nietzsche wrote:

"Everything has returned. Sirius, and the spider, and thy thoughts at this moment, and this last thought of thine that all things will return". 

Myanmar has been living through a transition to a fledgling democracy over the last decade. A new constitution that allowed for representative democracy and elections took shape in 2008. In 2015, NLD won the general elections and Suu Kyi became the State Counsellor (the equivalent of PM) of Myanmar. She is constitutionally barred from becoming the President because she was married to a foreigner and her children aren’t citizens of Myanmar. There was an uneasy truce between her and the military over the last term as Myanmar saw an unprecedented period of opening up to the world, growth and freedom for its people. Anyone who visited it in the last five years would vouch for how ‘normal’ it felt.

So, why the coup now?

There’s never an easy answer to this. For all you know it could be General Hlaing having a bad hair day. But let’s look at it through the frames of political and social philosophy to arrive at few likely reasons.

Firstly, the old Weberian power and legitimacy lens. Power is the ability to impose your will over others despite their resistance. Legitimacy is when this power is considered fair, even appropriate, by those over whom it is exercised. As Weber wrote:

“The basis of every system of authority, and correspondingly of every kind of willingness to obey, is a belief, a belief by virtue of which persons exercising authority are lent prestige” 

Power needs prestige to be legitimate. Else, it is coercion. In Myanmar, the junta always had power but rarely legitimacy. In the quasi-democracy era, the junta ceded a thin sliver of power to the NLD. But legitimacy is a strange meal. It can feed that feeble power and bestow it with enormous strength. A second term for NLD would have done exactly that. Power is a zero-sum game. The army generals know it. People sense the winds of change fast. The military couldn’t take any further chances with this version of democracy. Self-preservation kicked in on Feb 1, 2021.

Secondly, a recurring self-delusion that most authoritarians suffer from is how popular they are among the masses. The Constitution of Myanmar was drafted in a manner that favours large, majoritarian parties. You get a disproportionate number of seats regardless of the margin of victory on vote count. This was, of course, deliberate. There were two reasons for this. One, Myanmar is a multi-ethnic country with a distinct minority presence in its southwestern and northeastern borders. But the polity (the military and the NLD) is dominated by the majority Burmese Buddhists. A majoritarian Constitution is quite convenient. Two, General Hliang probably harbours political ambitions. His term ends this year. He backed the opposition in this elections thinking a victory would see him transition to being a President soon. The results were a shocker. 83 per cent of seats to NLD. The way the election rules have been drafted (by him) would now suggest an almost permanent NLD majority for the next many elections. This wasn’t acceptable. His network of businesses and the many interests of his family and friends could not be left to the mercy of mere civilian politicians. The general didn’t see himself in his labyrinth.

This is the old authoritarian problem. You overestimate your popularity. No one tells you the truth. You call for the elections. Then you can’t handle the truth (no copyright issue here; Aaron Sorkin is a friend). Exhibit A of this behaviour is Indira Gandhi right after the emergency. Exhibits B, C, D.. are all dictators too many to name here. This is why good authoritarians go the other way. They change the constitution to reduce the freedoms of the opposition, they extend their terms or they take elections out from the political equation. General Hliang must speak more often to his friends who are on his speed dial - Xi, Putin or Erdogan.

Thirdly, this is as good a time to mount a coup with little or no fear of international repercussions. Political cosmopolitanism is in a state of irrelevance now. The idea that states should be subject to some kind of international morality and they must behave in a manner consistent with it is at its weakest. The pandemic has further raised the walls at the borders. Transnational economic or political ideas have to contend with them. It is no surprise that international condemnation of the Myanmar coup is muted. China has asked all parties to resolve their differences internally (ha!). ASEAN, the largest market for Myanmar, has responded in a similar vein. The Biden administration has imposed sanctions and this will be followed by a few other western democracies. They hardly matter. Myanmar has lived in isolation for long to be concerned with them.

So, what does the future hold for Myanmar? Will this emergency be a mere one-year interregnum and will we have democracy back after it? Freedom is addictive. Even in the smallest of doses. There’s a view that whatever passed off for democracy in the last decade will be too strong in public memory for the junta to erase altogether. Despite the internet ban, street protests are spreading and, importantly, the arms of the state like bureaucracy, police and public servants (bank or healthcare workers) are participating in a departure from the past. Will these be enough? As a realist, I understand the state can play the waiting game for long and with an increasing degree of coercion.

There’s little likelihood of a Yangon spring this season.

Global Policy Watch: I am Small, I contain Multitweets

— Pranay Kotasthane

Do I contradict myself? Very well then I contradict myself; (I am large, I contain multitudes.)

— From Walt Whitman's Song of Myself

That's too nuanced a point for social media warriors of all persuasions.

After all, it's now possible to judge and crucify someone — notwithstanding their unique life experiences and resulting perspectives — merely on the basis of what they tweet. Or what they don't.

Just imagine. Our social media profiles — filled with inane and often ill-thought System 1 garbage output — are our most important extrinsic manifestations. It's tragic.

Two recent instances drove home this point to me yet again. One, an Indian-origin Oxford University Student Union President-elect had to step down after someone dug up her old Instagram posts containing some pretty terrible (and not even funny) wordplay about a holocaust memorial. As if the label “insensitive” wasn’t sufficient, more posts were dug up to also label her "racist" and "anti-LGBTQ".

What the person is today in real life, I have no idea. But what seems pretty clear to me is that past Instagram mistakes don't deserve anything more than a sincere apology. That’s unfortunately not the case though. If the internet remembers everything, social media extracts a heavy penalty for everything remembered.

The second instance was a shoddy article in The Caravan titled Establishment Man: The Moral Timidity of Sachin Tendulkar. Among other things, the author was able to make gross generalisations such as "… Tendulkar also shares the worst traits of the Indian middle-class: its indifference to the general good, its lack of commitment to the values of human rights and democracy, and its intellectual vacuousness" merely on the basis of Tendulkar’s Twitter feed.

The specific accusation is that while Tendulkar joined the orchestrated chorus against Rihanna's tweet, his 'Twitter stayed silent' when Wasim Jaffer was removed as the coach of the Uttarakhand cricket team.

This is not a defence of Tendulkar. As much as I admire him as a cricketer, I understand that a great cricketer can also be a craven follower. But I do have a problem when this judgment gets made merely on what he didn’t tweet about.

For instance, the author is quick to conclude, on the basis of a Twitter feed that “..his personal decency has always been accompanied by a deeply ingrained timidity towards authority, a primal fear of upsetting any establishment, whether cricketing or otherwise.” Yet, Tendulkar’s 2009 statement “Mumbai belongs to all Indians”, going against the well-entrenched parochial ‘Marathi Manoos’ politics, doesn’t get even a cursory mention. Similarly, the author doesn’t even attempt to show if he investigated Tendulkar’s off-Twitter support for Jaffer’s shameful ouster. After all, there is a lot someone like Tendulkar can do — and we can expect him to do in this case — than merely signal virtue on Twitter.

The Wrong Path Chosen

These two instances illustrate that we give others’ social media feeds way too much importance.

The first instance follows a well-established practice of digging up old tweets to defame a present-day achiever. This tendency ignores the fact that the most important human preference is our ability to change our past preferences.

Moreover, the more we label people, the more we polarise our politics. Philip Tetlock claims that text analyses studies show that people already tweet more like politicians (signalling virtue) or as prosecutors (assigning blame) rather than as hypothesis testers. And so, disproportional attention to our social media past will only make more people don the role of politicians and prosecutors — ready to fight every battle across the world while burning bridges in our vicinity.

The Tendulkar case is a more recent trend — people are to be judged not only on the basis of what they tweet but also what they don't. This too has a similar effect of pushing us into becoming prosecutors who are obligated to jump from one burning issue to the next without solving any.

Finally, to pay disproportional attention to our social media selves is both foolish and dangerous. To rebuild broken bridges, we need to assume by default that people contain multitudes. It's going to be tough.

Answer to the Quiz in #108

Yes, the answer is BR Ambedkar, who else? Those were the excerpts from the election manifesto of the Scheduled Castes Federation from 1951. SCF was a precursor to the Republican Party of India.

The entire election manifesto is a fascinating read. As one can expect from Ambedkar’s writings, this manifesto is not just a vague litany of promises but a rare well-reasoned agenda. Sample this:

IV. Co-operation between Scheduled Castes Federation and other Political Parties

51. Mere Organization does not make a party. A party means a body of people who are bound by principles. Without principles a party cannot function as a party for in the absence of principles there is nothing to hold the members of it together. A party without principles is only a caravanserai. The Scheduled Castes Federation will not, therefore, ally itself with a Political Party which has not laid down its principles and whose constitution does not demand a pledge from its members to stand by those principles and whose principles are not in antogonism with these of the Federation.

52. It is not enough to have political ideals. What is necessary is the victory of ideals. But the victory of ideals can be ensured only by organized parties and not by individuals. For these reasons the Federation will not support independent candidates who belong to no party except in exceptional cases.

..

54. As regards other Political Parties, the Scheduled Castes Federation’s attitude can be easily defined. The Scheduled Castes Federation will not have any alliance with any reactionary Party such as the Hindu Mahasabha or the R. S. S.

55. The Scheduled Castes Federation will not have any alliance with a Party like the Communist Party the objects of which are to destroy individual freedom and Parliamentary Democracy and substitute in its place a dictatorship.

The manifesto can be read here (page 386). Don’t miss it. We found out about this document in a Puliyabaazi with prominent Dalit intellectual and entrepreneur Chandra Bhan Prasad.

HomeWork

Reading and listening recommendations on public policy matters

* Sabastian Strangio in the Foreign Affairs: “Myanmar’s Coup Was a Chronicle Foretold”

* Are coups good for democracy? A paper by George Derpanopoulos, Erica Frantz, Barbara Geddes and Joseph Wright. Answer: “We find that, though democracies are occasionally established in the wake of coups, more often new authoritarian regimes emerge, along with higher levels of state-sanctioned violence.”

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

Google and the Australian government are on a warpath. There is a proposed new law - the News Media Bargaining Code - that forces Google and Facebook to pay media publishers for links to the news on their sites. While other countries have tried to regulate and make Google and Facebook pay for the content they freely use from news sites, this law is a global first.

The Code

Here’s a brief summary of the Code from the Australian government press release:

The Code will support a diverse and sustainable Australian news media sector, including Australia’s public broadcasters, by:

* encouraging the parties to undertake commercial negotiations outside the Code;

* enabling digital platforms to publish standard offers, which provides smaller news media businesses with an efficient pathway to finalising agreements with digital platforms;

* establishing a negotiation framework under the Code that allows both parties to bargain in good faith and reach binding agreements;

* ensuring that an independent arbiter is able to determine the level of remuneration that should be paid under a fair and balanced final offer arbitration model should the parties be unable to reach agreement; and

* setting clear and workable minimum standards for digital platforms including requiring 14 days advance notice of deliberate algorithm changes that impact news media businesses.

The Code will initially apply to Facebook NewsFeed and Google Search. Other digital platform services can be added to the Code in future if there is sufficient evidence to establish that they give rise to a bargaining power imbalance. 

404 Error

Google’s reaction was swift. It went for broke in its open letter addressed to Australians:

The ability to link freely between websites is fundamental to Search. This code creates an unreasonable and unmanageable financial and operational risk to our business. If the Code were to become law in its current form, we would have no real choice but to stop making Google Search available in Australia. 

For Google, search is free and neutral. Its proprietary algorithm takes your search term, trawls the net, ranks the relevant sites and presents to you a million search results in order of what it thinks will be most useful to you. This is free because that’s Google’s mission - to organize the world's information and make it universally accessible and useful. Along with your search results, it throws up a few relevant ads that might be of interest to you based on your search. These are clearly identified and highlighted as ads. It makes money through them. Search and ads are different silos for it. There’s a separation (or so Google would have us believe) between the church and the state

For Google, paying news publishers to link people to their websites is a slippery slope. Other businesses will soon demand for the same. The search algorithm will no longer be pristine. Soon there will be bidding wars to appear higher on the search ranks. The whole principle of open internet will be vitiated.

The Australian government responded to Google’s open letter with PM Morrison indulging in some plain speaking:

“We don't respond to threats. Australia makes our rules for things you can do in Australia. That's done in our parliament. It's done by our government. And that's how things work here in Australia."

Meanwhile, Facebook decided yesterday it will block its users and news publishers from posting links to news sites because of the Code.

Best Of Both Worlds?

So, how should we think about this?

Well, first let’s get all the good that Google has done for the world out of the way. Google has been the among the most transformational tools ever made available to humankind. It deserves its extraordinary profits and market cap.

But there have been unintended effects of its dominance especially for news media. News publishers have lost customers as print has fallen out of favour. Their digital properties don’t draw in as much ad revenues and most traffic to them is routed through Google or Facebook. Classifieds which were the other source of their revenues have also gone online. The subscription model might be the way forward but no one has really seen it scale. It still looks like a niche game.

There’s hardly a viable business model to run a mainstream newspaper with extensive ground reporting, investigative pieces and deeply researched stories. What has replaced these are free websites with commoditised news from the wire, paid articles masquerading as news, listicles with clickbait-ey headlines and, of course, fake news or disinformation sites with specific political agenda. Poor quality news for free will drive away good quality reportage - that’s the Gresham’s Law for media.

The downstream impact of this in culture and politics has been huge. If this were to continue and the price for news nudges towards zero, the supply of news will also be eventually zero. All we will be left with is views, opinions, hearsay and manufactured disinformation.

The question therefore is this. Does the bargaining code like that’s being taken to the Australian parliament solve this problem? Sure, Google will be forced to come to the table and negotiate a deal with the publishers. This will mean some additional revenues for them to support journalism that matters to them. But let’s play this out a bit. Different media houses will have different bargaining power. The smaller ones who might be doing cutting edge work won’t have any power to cut a deal for themselves. Google will now have an incentive to push certain types of links over others. Maybe it will present the links from sites whom it doesn’t have to pay on top of its results. You might have the cheaper, low quality journalism being promoted. More Gresham’s Law in action. Will that be a good outcome? Or, will Google play arbiter in ranking the results based on what’s the best commercial deal for it? It will interfere in the search results. Remember it is a publicly listed company. It will do what’s in the best long-term interests of its shareholders.

Lastly, there’s a more fundamental shift in the business model of the traditional news publisher that’s needed for them to survive in the long run. An annual boost of income from Google is welcome but not enough. The ability to unbundle their core product, using digital tools to deliver news beyond the written form, flexible subscription options and continuing to invest in content are all steps many of them have taken to remain relevant. They will have to continue investing in them and thinking beyond to fight the good fight.

Google itself has worked on a solution to compensate publishers through its platform called Google News Showcase. As the Google open letter said:

“With News Showcase, we would pay for publishers’ editorial expertise and for beyond-the-paywall access to news content for users—not for links to news content.” 

But the hitch here is the News Showcase doesn’t exactly even the playing field between Google and media outlets. Google has unilaterally decided this is a model that works best for others and it’s now their way or the highway. It’s a bit odd that an organisation that wants to convince the world it isn’t a bully should use a one-size-fits-all model for all publishers or threaten exiting a country because it doesn’t like a proposed new law. It does the exact opposite. The natural question that comes up is if every other country follows the Australian model, will Google exit them all?

A more flexible and negotiable News Showcase model is possibly a better option than the News Media Bargaining Code approach that’s being thrust upon Google in Australia. The principles of open internet and free search are too critical to be compromised. It is in Google’s interest to continue to make its model more palatable to publishers than have governments interfere in a space where there’s no real market failure. It appears that’s the way it is going after the strong response it received from the Australian PM. The deal it struck with Nine Entertainment yesterday seems to suggest that. This wasn’t possible even two weeks back:

A fortnight ago Nine was dismissive about the Showcase product, insisting it would not negotiate with Google until the law was passed.

“This is what monopolies do, they put an offer, in the form of Google Showcase, but not offer to negotiate,” a Nine spokesperson said at the time.

“It has to be all on their terms and that is not an approach we will participate in. We support the legislation the government is proposing as the best way to secure a fair payment for our content.”

The impending law seems to have got Google back to the negotiating table. If that’s what the law intended to do, it is a good lesson for Google to be proactive about offering flexibility to media platforms world over. We need good quality journalism that’s financially viable and we need an open internet. There shouldn’t be a trade-off between them.

HomeWork

Reading and listening recommendations on public policy matters

* A quick primer by The Guardian on the proposed Australian law and its background

* Tim Berners-Lee in The Guardian: “Australia's proposed media code could break the world wide web”

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.

Not(PolicyWTF): Acknowledging State Failures

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

- RSJ

We rarely miss an opportunity when the political or the administrative class make an announcement or draft a policy that goes against our ideology of common sense. So, it is only fair we write about the rare occasion when someone gets things right. Even if it is only in a speech.

Something New

This was that week. Here’s our PM speaking in the Rajya Sabha about the state spreading itself too thin and the unfortunate demonisation of the private sector in our polity. The Print reports:

While doffing his hat to the private sector Wednesday for its contribution to the growth and development of the country, Modi questioned the “power centre we have created in the country by handing over everything to babus”. 

“Sab kuch babu hi karenge. IAS ban gaye matlab woh fertiliser ka kaarkhana bhi chalayega, chemical ka kaarkhana bhi chalayega, IAS ho gaya toh woh hawai jahaz bhi chalayega. Yeh kaunsi badi taakat bana kar rakh di hai humne? Babuon ke haath mein desh de karke hum kya karne waale hain? Humare babu bhi toh desh ke hain, toh desh ka naujawan bhi toh desh ka hai,” Modi said.

(Babus will do everything. By dint of becoming IAS officers, they’ll operate fertiliser warehouses and also chemical warehouses, even fly aeroplanes. What is this big power we have created? What are we going to achieve by handing the reins of the nation to babus. Our babus are also citizens, and so are the youth of India.) 

I don’t know when words of this nature were last spoken in the Parliament. Maybe Minoo Masani made a few speeches of this kind during the heyday of the Swatantra Party. But to have a hugely popular PM, one with the rare ability to make the public do his bidding, speak these words suggests a shift in direction that was long-awaited.

Anyway, that speech came on the back of weeks of protests against farm laws that had morphed into Ambani-Adani bashing. The names don’t matter. A few decades back it was Tata-Birla. We have also had the usual reports about how the pandemic has exacerbated inequality purely on the basis of notional wealth created by a rising stock market. And there have been bizarre articles devoid of any economic logic as well.

These are familiar grounds. We have framed it as growth or redistribution trade-off in a few of our past editions. Like many others, we have argued India needs growth before worrying about redistribution. We have also done our best to dispel a notion deep within our psyche. That we are in some kind of a giant zero-sum game and someone winning must mean someone is losing.

Is that it?

Or is there more that can be brought into this debate?

The state must aim to foster conditions in a society that advance the well being and prosperity of its members. No one argues with this goal. The fundamental question of public policy then is what are the means it must adopt to create this environment?

Should the state aim for equality among its member through redistribution of its resources? That there can be no harmony or stability in a society unless there’s fairness and equality among its members.

Or, should the state guarantee the fundamental rights of the citizens, provide for law and order that safeguards them against anarchy and then get out of their way. People don’t want the state to legislate for some notion of equality that’s in its mind. They want freedom and security. That would do. Thank you very much.

The old Rawls versus Nozick debate

Rawls’ seminal A Theory of Justice argued for justice as fairness (the title of a later book of his) with two key principles. First, the greatest equal liberty principle which proposed people’s equal basic liberties should be maximised. Rawls conceived of an artificial construct called the original position - a state where each one of us has to decide on the principles of justice behind a veil of ignorance. That is we are blind to any fact about ourselves; we are ignorant of our social position, wealth, class or any natural attribute. Behind this veil, Rawls asked how would we choose the principles of justice for the society?

For Rawls, the logical choice for all of us would be what he called the maximin strategy that would maximise the conditions of those with the minimum. This gave him his second principle - the social and economic inequalities should be arranged only to provide the greatest benefits to the least advantaged.

Nozick agreed on the liberty principle with Rawls. But he had a strong disagreement on the idea of maximin. For him, any distribution of wealth (or holdings as he termed it) is fair if it comes about by a just and legitimate distribution. He defined three legitimate means. First, where the acquisition of a property that is unowned is achieved through the enterprise of a person and this act doesn’t disadvantage anyone else. Second, a voluntary transfer of ownership between two consenting entities. And third, a redressal of a past injustice in acquiring or transferring the holdings. Anyone who has acquired wealth or holdings through these means is morally entitled to them. Any attempt by the state to redistribute it would be a serious intrusion on the liberty and, therefore, unjust.

So the goal to reach a patterned distribution of wealth had a problem at its core. Once you achieve such a delicate balance, how do you maintain it? Every random economic act from there on will disturb the balance. And such random acts will be too many for the state to control. The state will then have to constantly meddle in the lives of its citizens to redress the balance. This meddling will spiral out of control soon till the state takes over the lives of its citizens completely in a totalitarian future. For Nozick state can act to redistribute only with the consent of its citizens. If people voluntarily redistribute their wealth (means #2) to others and want to design a society on that principle, they are free to do so. But the state cannot impose it against their will.

To me, the first point of agreement between Rawls and Nozick is critical from an Indian context - the liberty principle or the basic freedoms that must be guaranteed to every citizen. These cannot be violated or the absence of such freedoms should not be tolerated even if doing so in some ways increase the aggregate prosperity of the society or help the poor. Before we argue about redistribution, we must ask if we have created a society that satisfies the greatest equal liberty principle. That must be our first goal.

Postscript:

I don’t remember when I lost my faith in the ability of the state to improve the lives of its people. Perhaps there wasn’t an exact moment. Growing up the state was all around me. I spent most of my childhood in what used to be called a ‘colony’. One of the many that dotted the semi-urban Indian landscape in the 80s. A small industrial township whose heart beat to the rhythm of the government-owned factory at the centre of it. My school, my playground, the hospital and even the temple were all run by the state.

The state then subsidised a world-class higher education programme for me. At the turn of the millennium, I entered the workforce. If you had cut me then I would have bled state.

Over the next two decades, I lost my faith. Gradually. Two factors led to it. One, I understood the privilege that allowed me to take advantage of the generosity of the state. The accident of my birth - a savarna Hindu male born in the mid-70s to educated parents - seemed to play a disproportionate role in my relative success. I noticed the state could barely enable others to do well who weren’t born to privilege like me. They didn’t have the freedom that I took for granted. The state was absent to those who needed it the most. Two, the state had tremendous confidence in its capabilities that, unfortunately, was inversely related to its actual performance. This led the state to have its finger in every pie with poor outcomes. The state cast its long shadow in everything I did. It was present everywhere.

The Indian state was simultaneously ‘omnipresent’ and ‘omniabsent’ depending on who you were. One thing was common though. The consequences of both were terrible.

Once I saw through the nature of the state, I couldn’t ‘unsee’ it. The sorry spectacle of the flailing state, as Pritchett called it, was all around me. I wondered how others couldn’t see it. Why despite the overwhelming evidence do we look for the state to solve problems where there was no apparent market failure? Why did the state not narrow its focus on things that really mattered and build capacity in them instead of spreading itself too thin? Whenever I read about the argument for state to get into further redistribution, I cannot help but ask how does the end result of this patterned distribution look like. Is there really any end to it? Why should we let it meddle even further into our lives trying to get the redistribution right? Why can’t the state focus on ensuring the privilege I was born with is made available to all its citizens? That would fulfil the first principle agreed upon by both Rawls and Nozick.

The rest is just criminal overreach.

PolicyWTF: Compulsory Philanthropy

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

We in India love our oxymorons. Back in college days, we had “compulsory elective” courses. Similarly, many government interventions are what my senior colleague Narayan Ramachandran calls “voluntary mandatory” — voluntary according to the law but mandatory in practice. The most common example is the requirement to submit the “voluntary mandatory” Aadhaar for accessing any government service.

To this venerable tradition, add one more - “compulsory philanthropy”. Philanthropy implies choice. It is an act of generosity, of empathy. But that’s not how the State sees it. Under the name of Corporate Social Responsibility (CSR), philanthropy was made mandatory starting in 2014.

That move didn’t go as well as the State desired (surprise surprise!). One, there wasn’t just enough CSR expenditure forthcoming. The highest total CSR expenditure, clocked in FY19, was just about ₹18,000 crores. For reference, the union government earned ₹20,000 crores in FY20 through the Education & Health Cess alone. Two, new frauds emerged, with some companies funding dubious CSR projects that clawed money back to their promoters (duh!). And three, and this is the most important one. Fearing the wrath of the State, many companies spent their CSR funds on the “safe” subjects such as primary education and health, precisely the areas where the State’s role is supremely important. In other words, this had the effect of allowing the State to outsource its core functions.

Given these problems, the union government notified changes to the CSR rules last month (you can read the gazette notification here). These changes are all too familiar — increase disclosure requirements, mandate impact assessments, and of course, generate more accounting work. To balance it out, there are some positives too — a regimented list of subjects that qualify for acceptance of CSR has been replaced with a negative list, while the CSR provision has been decriminalised (phew, small mercies!).

I will evaluate the impact of these new rules at a later point in time. For now, I want to return to the purpose of CSR and debunk three common arguments made in favour of mandating philanthropy.

The first argument is that CSR is just corporate tax by another name, so why bother.

I agree that once you make philanthropy mandatory and statutory — India is the only country in the world to do so — CSR becomes tax-like. And yet, it is only worse. Anyone doing business in India will attest that it’s impossible to do so without breaking one of the thousands of rules and laws that demand compliance. Now with new rules and additional compliance requirements, CSR becomes another tool in the hand of the State to corner businesses and worse still, create new corruption opportunities.

There are three costs associated with any tax-like mechanism: the cost of collection, the cost of compliance, and the cost of market distortion. Mandating CSR is a tax in which the cost of compliance is way too high for it to make any economic sense. If the objective is to mobilise resources for social welfare, there’s a much better tax-like mechanism — it goes by the name ‘tax’.

The second argument is that look, many great things have happened because of CSR — lakes are being maintained, schools have started functioning, and drinking water is being provided. So why not get companies to do even more?

I call this argument the cost-blind fallacy. Any expenditure worth ₹18,000 crores is, of course, going to do some good things. In a complex system, even the worst of public policies always have some positive benefits. That doesn’t imply that anything goes. Since every policy also has a cost attached to it, it’s benefits need to be compared with the costs incurred.

So, has anyone asked what were the explicit and implicit costs of mandating CSR? Does it make the State more complacent having outsourced its work? What are the compliance costs for companies? Does it make companies already involved in philanthropy of their choice scale back their efforts to satisfy government paperwork? Without an answer to these questions, recounting a few successful examples of CSR is poor reasoning.

The third argument is that companies spending money on social welfare will be more efficient at achieving the required outcomes than our already stretched-out State. A quote from this Business Standard report gives a good idea about this line of thinking:

“India has huge inequalities in society and there is much to do about our environment. It is not possible or fair for the government to tackle it alone. It would also take many, many years to see the results. The reason CSR law was brought in was to make industry an equal and responsible stakeholder in the development process.”

This argument falls flat on two counts.

One, development successes are not achieved by “equal” stakeholders trying to fix each other’s failures but by each stakeholder doing well at what it is supposed to do in the first place. It’s not about ‘everyone doing everything’ but about ‘everyone doing at least one thing well’.

Previously, I have argued how hyper multi-objective optimisation lead to poor institutions and policies. Let the objective of the market be to bring prosperity and create livelihoods. Burdening it with social welfare conditions will lead to a situation where it achieves neither of the outcomes.

Two, to think that companies can easily plug government failures is deluding ourselves. All of CSR expenditure in FY19 less than one-third of union government expenditure on MNREGS alone. It’s only the state that has the resources and stamina to provide public goods. It must be held accountable for that. No amount of philanthropy can be allowed to wash the State its hands of the results.

In sum, compulsory philanthropy is akin to the Indian State reprimanding Markets and Society by saying: I won't do what I'm supposed to but why the hell aren't you two doing what I'm supposed to do?

India Policy Watch: Resources for Budget Analysis

Insights on burning policy issues in India

— Pranay Kotasthane

The budget season is upon us. After the union government budget, states — which account for nearly sixty per cent of all government spending in India — are in the process of planning their next financial year.

I strongly believe that financial statements of governments require closer scrutiny. Without better analysis of incomes and spending, we cannot expect government accountability. Add to that, this is one activity that public policy enthusiasts can do from the comfort of their homes.

So in this edition, I want to share some publicly available resources that can help you understand government finances better. Apart from state and union budget documents, there are many other data sources scattered on websites of different government bodies in true Yes Minister fashion.

Hopefully, this non-exhaustive list will be of some help.

Primers

* If you want to understand the basics of a government budget, start with PRS Legislative Research’s Overseeing Public Funds - How to scrutinise budgets document. The portal OpenBudgetsIndia also has a good primer here.

* If you want to analyse the budgets of your state, we have a three-part YouTube tutorial here: 1, 2, and 3.

Public Finance Databases

* If you want to know the stated outputs and outcomes of union government schemes, read the output outcome framework document released with the other budget outlay documents.

* If you want detailed information on union government spending arranged by minor heads, the Controller General of Accounts releases finance accounts data every year.

* The Department of Economic Affairs releases an Economic and Functional classification of the union government budget.

* If you’re on the lookout for the combined expenditure of union and state governments on areas such as research, health, or education, look at the Indian Public Finance Statistics.

* If you are looking for information on disinvestment of union government-owned public sector units, the Bombay Stock Exchange maintains a database here.

* The RBI maintains a database of all state government finances in one place, that too in spreadsheet form(!), here.

* All supplementary grants made by the union government ministries can be found here.

If you know of more such documents that lie hidden in plain sight, send them to me. Let’s create an exhaustive public finance database index.

Quiz: An Election Manifesto Worth Reading

— Pranay Kotasthane

Election manifestos are boring laundry lists of promises and a litany of woes rolled into one. So let me present to you an exception.

Given below are excerpts from an election manifesto of a political party, written by a well-known Indian political leader. You need to name them. Send us your answers as comments to this post. If not, just enjoy this manifesto for its clarity and farsightedness. I’ve substituted XYZ for the name of the party in these excerpts.

On principles of the party

“The attitude of the Party in public affairs will be governed by the following principles:

* It will treat all Indians not only as being equal before the law but as being entitled to equality and will accordingly foster equality where it does not exist and uphold it where it is denied.

* It will regard every Indian as an end in himself with a right to his own development in his own way and the State as only a means to that end.

* It will sustain the right of every Indian to freedom- religious, economic and political– subject to such limitations as may arise out of the need for the protection of the interests of other Indians or the State.

* It will uphold the right of every Indian to equality of opportunity subject to the provision that those who have had none in the past shall have priority over those who had.

* It will keep the State ever aware of its obligation to make every Indian free from want and free from fear.

* It will insist on the maintenance of liberty, equality and fraternity and will strive for redemption from oppression and exploitation of man by man, of class by class and of nation by nation.

* It will stand for the Parliamentary System of Government as being the best form of Government both in the interest of public and in the interest of the individual.

….

There may not be anything new in the Principles of the XYZ. They will be found in the manifestoes of most political parties. But there are two considerations which distinguish the Z from other Political Parties. The first consideration is that the principles of the Z are not adopted by the Z merely to look politically respectable or merely to delude the voters. They are natural to the Z. They are borne out of the social condition of the XY. The XYZ cannot exist without adopting these principles and without holding up to those principles and living up to them. The principles of the XYZ are the life book of the XYZ. They are not the external marks of a political faith. They are the outward register of the inward feeling. They are not cloak worne for the purpose of winning the election. Many parties may adopt these principles. But no party can be so true to the principles as the XYZ.”

On what the party’s policy would be like

“The policy of the Party will be to try to give effect to the principles set out above. The policy of the Party is not tied to any particular dogma or ideology such as Communism, or Socialism, Gandhism, or any other ism. The Party will be ready to adopt any plan of social and economic betterment of the people irrespective of its origin and provided it is consistent with its principles. Its outlook on life will be purely rational and modern, emperistic and not academic.”

The Party’s approach to increasing productivity

“For the purpose of increasing production, the XYZ will not be bound by any dogma or any pattern. The Pattern of industrial enterprise will be a matter regulated by the needs of the time and circumstances. Where national undertaking of an industry is possible and essential, the XYZ will support national undertaking. Where private enterprise is possible and national undertaking not essential, private enterprise will be allowed. Looking at the intense poverty of the people of this country no other consideration except that of greater production and still greater production can be the primary and paramount condition. A pre-conceived pattern of industry cannot be the primary or paramount consideration. The remedy against poverty is more production and not the pattern of production.”

On Kashmir

“On the Kashmir issue, the policy adopted by the Congress Government is not acceptable to the XYZ. This policy if continued will lead to a perpetual enmity betwen India and Pakistan, and the possibility of war between the two countries. The XYZ believes that it is essential for the good of both countries that they should be good and friendly neighbours. For this purpose the proper policy to adopt towards Pakistan should be based upon two considerations. (1) There should be no talk about the annulment of the partition of India. Partition should be accepted as a settled fact not to be reopened and that the two countries to continue as two separate sovereign States. (2) That, Kashmir to be partitioned– the Muslim area to go to Pakistan (subject to the wishes of the Kashmiries living in the Valley) and the non-Muslim area consisting of Jammu and Ladhak to come to India.”

On Foreign Policy

“The other centre of our foreign policy which has made other nations our enemies is China. India is made to fight her battle for entry in the United Nations Organisation as a permanent member thereof. This is an extraordinary thing. Why should India fight the battle of China when China is quite capable of fighting her own battle? This championing of the cause of Communist China by India has been responsible for the prevailing antagonism between India and America with the result that it has become impossible for India to obtain financial and technical aid from America.

…. India’s first duty should be to herself. Instead of fighting to make Communist China a permanent member of the U. N. O. India should fight for getting herself recognised as the permanent member of the U. N. O. Instead of doing this, India is spending herself in fighting the battle of Mao as against Chaingkai Shek. This quixotic policy of saving the world is going to bring about the ruination of India and the sooner this suicidal foreign policy is reversed the better for India. Before championing the cause of Asiatic countries, India must strive every nerve, must seek every aid to make herself strong. Then only will her voice be effective. This will be the line of Foreign Policy that the XYZ will pursue.”

Finally, cheers to a strong rejection of prohibition.

“From the point of equity, there is no justification for prohibition. The cost of prohibition is borne by the general public. Why should the general public be made to pay the cost of reforming a lakh or two of habitual drunkards who could never be reformed ? Why should the general public be made to pay the cost of prohibition when the other wants of the public such as eduction, housing and health are crying for remedy? Why not use the money for development plans? Who has greater priority, the Drunkard or the Hungry? There are pertinent questions to which there is no answer except arrogance and obstinacy. Whatever happens, the policy of prohibition must be reversed and this colossal waste of public money should be put a stop to and the resources utilised for advancing general welfare.”

HomeWork

Reading and listening recommendations on public policy matters

* The Economist (Schools brief) on the three post-war liberals who strove to establish the meaning of freedom.

* [Article] Prof Govinda Rao has the authoritative take on the 15th Finance Commission recommendations.

* [Podcast] Pranay and Saurabh discuss GameStop, Rihanna, and the politics of radically networked societies on Puliyabaazi.

* [Article] Bharat Karnad has another contrarian take on Tejas and India’s search for fighter aircraft.

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 writing about Radically Networked Societies (RNS) for the past couple of editions. Maybe you have had enough of it. But not the world around us. After the Rihanna/Greta tweet episode that led to the government mobilising its own RNS with film stars and cricketers in the van, we now have moved to the next stage of the battle of RNS.

New Front

The government this week asked Twitter to remove over 1000 accounts and posts which it believes spread misinformation about the new farm laws. Twitter responded by reducing the visibility of the hashtags that contain harmful content and suspending more than 500 accounts, some permanently, that violated its rules. But the government isn’t satisfied with the response. It has upped the ante now with not so subtle threats of arrests of Twitter officials if the company didn’t comply with the government orders under Section 69A of IT Act.

Into this mix jumped in Koo - Twitter’s Indian knockoff with the added feature of sending messages using eight Indian languages. The usual atmanirbhar noise was made by its founders and investors and soon we had ministers, MPs and ‘nationalist’ Twitter users advertising their migration to Koo. Of course, as the shift to Koo gathered momentum, the other camp started mock celebrating the ‘cleaning up’ of Twitter.

It is apparent there’s a level of government support to scale up Koo. The reasons are obvious. The government views the global social media giants with suspicion based on their broader liberal inclinations around the world. These companies follow their own free speech code and won’t always toe the government line on key issues. The impact of RNS in mobilising an opinion against a government plan was clear from the recent events. Why would the state want to be held to ransom by non-state actors with low stakes and a disproportionate voice? The solution to this for the state is either to curb the freedom of social media sites or to promote a homegrown site that can be controlled. My guess is we will try both.

Will it succeed?

Probably not. Why?

Well, let’s first get the most obvious reason out of the way. Network effect. Social media sites are addictive because of it. Koo might get a few users in the early days who are swept in with the momentum. But like we have seen in the past with Whatsapp users moving to Signal or left-wing Twitter users moving to Mastodon (remember), these things don’t really take off. People find the user interface clunky, miss features familiar to them or find a truncated version of their network that force them back to the old platforms. Network effect is a very strong moat. I will be surprised if Koo bucks this trend.

But network effect is not the lens that interests me here. If you were to apply a political philosophy lens to this migration to a like-minded social network, there are a few interesting points to consider here.

Firstly, your politics is defined more by what you specifically oppose rather than what you support. Your opposition is what defines you in specific terms; in fact, politics comes about because some people group together in opposition to others. This is a bit of a rehash of the Schmittian claim that the specific political distinction in society hinges on the friend-enemy distinction. Schmitt believed any difference that marks out a group from the other will take a political hue if it has the strength to align them into opposing and warring camps ready to inflict real damage onto others. Now I have no sympathy or time for Schmitt in general. The man was a fascist. But on this, he makes a compelling argument. You take away the friend-enemy distinction and the political engagement fades away. Leo Strauss writing to Schmitt in 1932 had summarised Schmitt’s view on political distinction:

"because man is by nature evil, he, therefore, needs dominion. But dominion can be established, that is, men can be unified only in a unity against—against other men.”

So, the right or the left-wing aiming for a social network that only has people like them and no enemies to unite against is a recipe for long-term disengagement with politics for its members. Confronting the enemy and beating them on any platform is necessary for the political existence of a group.

Secondly, a homogenous identity within a group invariably splinters the agglomeration. There is a simplistic assumption that once the friend-enemy distinction disappears because there is no longer an issue that separates members of a group, the political contest ends. This was the predominant assumption in the early 90s when the liberal democratic order felt it had vanquished the other. As later events have shown, political identity abhors a vacuum. People will find another identity to take on that will replicate the intensity of political conflict of the past. To repeat Straus: "because.. man needs dominion.” Any move to sequester your group from your enemies will lead to your group finding enemies within to fight.

Thirdly, it is ironical to find the right-wing or the conservatives (as loosely defined in India) moving to a platform that will encourage their common identity. The conservative critique of liberalism is that it aims for a vague universalism and a common bond among people across all markers of identity. The individual identity that’s built over centuries, that’s localised and which is linked to tradition and custom gets subsumed in this utopian ideal. This is an anathema to the conservatives who value individual identity and distinctiveness. To transition out of platforms that support diverse identities, however inimical to you, to single identity platforms will be going against the core belief of conservatism. It will diminish conservatism eventually.

To close, exclusive social media platforms based on ideologies might take off if they somehow create their own network effect fast enough to retain a critical mass of their members. However, it will also sow the seed for the future splintering of the group. A homogenous unit is the most fragile. Diversity is anti-fragile. And there are benefits of having enemies.

As Kabir said all those centuries ago:

“निंदक नियरे राखिए, ऑंगन कुटी छवाय,बिन पानी, साबुन बिना, निर्मल करे सुभाय।”

(Keep your critics close, they improve you)

HomeWork

Reading and listening recommendations on public policy matters

* The Wired on How to Break Out of Your Social Media Echo Chamber

* From the Hesiod’s Corner, Carl Schmitt: The Friend-Enemy Distinction

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: Rahne Do, Rihanna

Insights on burning policy issues in India

- RSJ

In one of the recent editions on GameStop, I wrote about the Gamma squeeze and I was particularly pleased with myself. After all, there might not be many newsletters who over the last year could have shoehorned Dr Shreeram Lagoo, Louise Glück and Gamma squeeze into their editions. Maybe there’s someone up there who is keeping an eye out for me. Because this edition has Rihanna and Mia Khalifa (careful now) in it!

What a time to be alive and, importantly, to be writing on public policy!

The Farm Laws Backstory

We have written quite a bit on the new farm laws in the past few months. I believe the laws are critical to transforming agriculture in India. Pranay agreed on the potential of the laws but questioned the timing and the lack of a narrative by the government to make them acceptable to all stakeholders. He felt this could get sticky.

Turns out he was prescient. A simple stakeholder mapping exercise would have revealed the key farmer groups in Punjab and Haryana would be the most impacted by these laws. They needed specific attention. Further, the years of paranoia built by the Indian state itself about corporates, profits and other capitalist bogeys in farming would not just go away by a stroke of the pen. It should have been expected that it will be used by those in opposition to create a counter-narrative. A government that encourages opinions and arguments within its cabinet and among its coalition partners would have figured a way to anticipate and resolve these issues. But the usual shock and awe playbook that this dispensation favours came into play. An announcement about the new farm laws was made at the peak of the pandemic as part of the COVID relief package. Then came the ordinance, and finally the farm bills went to parliament where they were passed with a voice vote in Rajya Sabha. That, remember, was the only place where there was a half-decent chance of a debate. It was not to be.

Now you can argue that almost every party has in the past had similar laws as part of their manifesto. Or there have been umpteen committees who have recommended opening up of agriculture and dismantling of MSP. But only a political novice would believe these would mean everyone opposed to the government today would lay out the red carpet for these laws. Nothing this sensitive and transformative will be accepted in our fractured polity without building a narrative for it. But there wasn’t any strong ‘sell your story’ efforts for a set of reforms that if pitched right might have actually been supported by Greta Thunberg. After all, the groundwater depletion and other ecological imbalances in many states are because of incentives and distortions the MSP provides to grow crops alien to the land.

In A No-Win Situation

So here we are. The farmer protests have gathered strength. The government has offered an eighteen-month delay in implementing them. The commitment to continue with MSP has been made. In short, the reforms are dead in water. But it has made zero difference to protests. Because while making these conciliatory moves on one hand, the government has gone into an overdrive painting the farmers as anti-nationals and terrorists. The protests now have morphed into a Shivji ki Baraat - all kinds of assorted species are in it. Then we have the unedifying spectacle of spikes being nailed and battlefield-like fortifications on roads leading up to national capital. This is to prevent the farmers from entering it. This has now gone beyond farm laws.

Into this mix walked in Rihanna. On Tuesday, she tweeted out “Why aren’t we talking about this?’ with a link to a CNN article about headlined, ‘India cuts internet around New Delhi as protesting farmers clash with police’ to her 101 million followers. Soon Greta Thunberg and Mia Khalifa tweeted their support to the farmers. That’s it.

The radically networked societies (RNS) of their supporters coalesced with the network of Indians who were protesting the laws. So in the red corner, we had the Radically Networked Society -1 (RNS1). The government got into the act. Soon we had Indian film stars and cricketers supporting the laws (and more). And in the blue corner, we had the RNS2. To top it, the Ministry of External Affairs (MEA) also came out with an officious sounding formal statement asking global celebrities to stay away from matters relating to India. We now have a triangular contest of sorts - the state, RNS1 and RNS2.

Going Deeper

There are a few issues involved that merit discussion and conceptual clarity. Let me attempt to tackle them. Your thoughts are welcome.

* Like Pranay says, every issue is global by default in the times of RNS. You don’t have to be universalist to take a position on an issue that doesn’t affect you directly. Social media allows you to take a position and broadcast it to your followers. And you will. A vocal stand on issues generates cohesion among the members of your RNS. Cohesion strengthens RNS and draws more members. This is the RNS flywheel (Jeff Bezos who secretly reads us would be so proud of me for this analogy).

* Celebrities have taken a stand on issues unrelated to their countries for decades now. They are private citizens and they are free to do so. And there will be more of this kind of activism seen in future. The challenge for the state is, in the times of RNS, they can inflict serious damage on the objectives of the state by supporting a counter-narrative. I’m staying away from whether the objectives of the state are right or wrong for now. The state is hierarchical and it cannot be agile enough to contend with the speed of RNS mobilisation. The state has two options - continue with its slothful response or mobilise its own RNS. The Rihanna tweet followed by the tweets of the ‘state celebrities’ is the Indian state’s recognition of the power RNS, its own limitation to counter it through official means and its signal to others that it can mobilise its own RNS. Should states be doing this? Probably some action was needed as self-preservation is the primary goal of the state. RNS is a threat and they must learn and deploy counters to it. Also, this was a way to pre-empt other celebs from jumping on to the bandwagon. The rest of the narrative built about these celebrities being paid or being on the payroll of George Soros (that’s one guy with all the time and money with him to support leftist causes, around the world, apparently) is meaningless drivel. That’s just the loony supporters and the IT cell discrediting the other RNS. It is stupid and it helps mobilise the opposing RNS.

* The other question is how should we view Indians who encourage global celebrities, organisations or governments to take a stand on government action. Do these acts constitute support for violation of our sovereignty?

Firstly, global organisations and foreign governments do take positions on acts of other governments all the time. These positions are conveyed through diplomatic channels as a matter of routine. In case this doesn’t work they use the media to make their position known. The most common of these issues are those where there is an established global order of going about things. For instance, just last month the US Treasury department put India on the list of currency manipulators. Now, is this a violation of our sovereign right to manage our currency? We live and trade in a global order. So we should abide by its rules. Else, others will act in a manner that will question our sovereign moves. On other occasions, the issue could be of the government action violating human rights or being undemocratic. This is a tricky area since it is not easy to define them. But that hasn’t stopped India to opine on others over the years or vice versa.

Secondly, there’s no such thing as internal matter as the Indian state likes saying. In the RNS world, issues are global. Also, the farmers’ protests haven’t emerged out of thin air. There’s a cause and an effect. So, it serves no purpose to ask others to keep off our lawns if there’s smoke coming out of our house. Fixing the smoke is our problem, of course. But others asking us to have a look at it isn’t a violation of any sort. They are only making statements.

Thirdly, and this is perhaps the most important point, private citizens of India raising their voice against certain actions of the government in domestic and international platforms is not the same as treason against the state. The state exists because the citizens have given it the legitimacy to use violence. The citizens can and should question if the state steps beyond it. There’s a line there that the citizens can’t cross where their acts, not words, can threaten the existence of the state. But that line is quite distant. It can’t be invoked on the smallest of pretences. Unfortunately, this has now turned into conspiracy theories about a deep state wanting to destabilise India or preventing its pre-destined rise to being a superpower. Superpower pre-requisite #1 is to be secure enough not to wallow in conspiracy theories against you. Read more about USSR on this.

* The other point I had was about the role of institutions in a democracy. Acemoglu, Johnson & Robinson have argued about the nature and the strength of institutions as the fundamental reason for the sustenance of a democracy and for its long-term economic growth. This explains why democracy has struggled to develop roots in countries like Myanmar or in many nations that won their independence following WW2. And also, why its sustains in India. All the revisionism about our history, our freedom struggle or about Gandhi, Nehru and Ambedkar won’t wear out a single unvarnished truth. The founding fathers of our Republic built institutions and served to strengthen them to sustain our fledgeling democracy. Why do I bring up the point on institutions here? Well, a question I have asked in the past week is what prompted a host of our celebrities to copy-paste the exact tweet to support the government? And did the irony of following a government diktat to the letter while taking a stand against propaganda was lost on them? Do they really believe in the benefits of the farm laws? Is this a show of patriotism? Or, are they toeing the line of the state because it is in their interest? Maybe it is the first two. But I’m sure there is an element of toeing the line here based on how coordinated the act was. And this toeing the line isn’t a new thing. Previous governments have done the same or worse. What do our celebs fear? Compare this with the stands taken by celebrities, sports personalities and many CEOs during the Trump era. The simple conclusion you reach is the US state can’t use its institutions to go after you. The police, the FBI and the tax authorities won’t find a hundred reasons to file charges. Their institutions are strong and they follow their own code. Plus, the state isn’t overbearing. Its laws don’t encompass every aspect of your life in a manner that you cannot ever claim you haven’t violated them. The question we must ask is what does the easy falling in line of celebrities or the fear of protesting against laws say about the state of our institutions and the nature of the state? And if our institutions are indeed weakening, what does it portend about the future of our democracy and our long-term growth prospects.

Among the great skills of the present government is how easily it can shift any discontent against its actions into the territory where it is the strongest. Nationalism. Over the years it has also built a strong media ecosystem that advances nationalism as a primary means to reach the objectives of the state - economic prosperity and protection of sovereignty. Unfortunately, history has shown nationalism is a blunt instrument to achieve sustainable prosperity. The Khalistan flags seen during protests or Rihanna’s tweets give the government ready props to fight the battle of ideas on farm laws on the grounds of nationalism. There, even if it loses the battle, it will win the war.

The question is if that holds true for India too.

Addendum

— Pranay Kotasthane

I have three short points to add to RSJ’s comprehensive take.

One, every protest should be assumed as being global by default. Gandhi’s political genius was to get the masses to participate in the freedom struggle at a low opportunity cost, by just spinning a charkha. Today, this job doesn’t require a Mahatma, it justgets done by the internet. Showing instantaneous support for any cause across the world is now almost frictionless. It can be done with low opportunity costs. Even when there’s no immediate cause, there’s work happening — latent identities get created or reinforced through social media tuned for rewarding polarisation. Come the next immediate political cause and this powder keg is ready for use. ‘Nolocus standi’ arguments are pointless.

Two, those with the lowest stakes in an issue might end up being the more powerful voices. Because the entry barrier is so low, you don’t need to have much at stake to show support. Such a scenario complicates dispute resolution as those with the highest stakes can get sidelined. Even worse, the state machinery will be hard at work to establish nefarious links between those with high stakes/low power and those with low stakes/high power, with the aim to discredit both.

And three, the more aggressive the State response, the more fodder it is for future RNSes. The State that responds, positions itself as the villain which brings together more people. It becomes the ‘other’ that creates the ‘us’. Once that happens, all that remains is the next political cause to emerge.

India Policy Watch #2: Politics and Visual Storytelling

Insights on burning policy issues in India

— Pranay Kotasthane

It irks me when someone forms a strong opinion on complex issues just by watching a Netflix series, movie, or documentary. Chernobyl and The Social Dilemma come to mind. Both these rather well-made series ended up confirming biases against nuclear power and social media respectively.

Visual storytelling is evocative. It can create powerful narratives that elicit instant responses from what Daniel Kahneman calls the fast brain. The more a visual story appeals to our emotions, the more the need to temper the fast brain response with reflection, education, and discussion.

And yet, our movies can reveal a lot about our politics. Not through what they show but through what they cannot show. For example, would it be possible today for a mainstream movie to have a plot in which a Muslim man elopes with a Hindu woman? Or would it be possible to recreate the iconic Mahabharat parody scene from Jaane Bhi Do Yaaro today?

What happened to Tandav and Munawar Faruqui indicate otherwise. This should worry us all. An insecure society abridges individual creativity and distracts the State from what it is supposed to do. It is this insecurity that paves the way for pakistanisation of a society.

PS: A French Netflix parody A Very Secret Servicecame as a refreshing change. The politically incorrect and satirical take on France’s national security apparatus spares none. I couldn’t help but rue the fact that something on these lines is unimaginable in present-day India.

India Policy Watch #3: The Constitution in a Knowledge Graph

Insights on burning policy issues in India

— Pranay Kotasthane

In #103, I had written how cool would it be to represent the Constitution as a knowledge graph. Well, one AtU reader, Rithwik, has now created one such knowledge graph and it looks stunning.

This image below is the Obsidian Knowledge Graph of the Indian Constitution. The backlinks are based on cross-referenced articles in the Constitution. One immediate thing you will notice is how disconnected the Directive Principles of State Policy section is. It’s like an afterthought.

Rithwik has helpfully put the code and all files on GitHub. We are now on the lookout for ideas to make the backlinking more intelligent and useful. If you have any such ideas, please do send a comment.

HomeWork

Reading and listening recommendations on public policy matters

* The unyielding demands of the protesters and the response of the government are both troubling, writes T.N. Ninan in the Business Standard

* [Report] The 15th Finance Commission report is out. It is a goldmine for people interested in Indian public finance. The studies commissioned by the Commission are equally useful.

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

The once in a century budget is now behind us. The reaction to it has been positive even among those who tend to be sceptical about the economic management of this government. What we are interested now is to understand if the budget portends a more fundamental shift in the economic policy or the outlook of this government.

Quick Take

As a newsletter, we like to avoid quick takes on events. But this time around a quick take is unavoidable. Here’s our take:

First, after a long time, we have had a budget that is transparent about the finances of the government. The expectations following a year like we have just had were low. The government has used it to present a tough but true picture of its finances. The fiscal deficit for FY21 (the current year) is pegged at 9.5 per cent of GDP. The deficit for FY22 is estimated to be 6.8 per cent and the glide path to a 4.5 per cent target in FY 26 has been laid out. This will mean a deviation from the FRBM Act. The government plans to submit a fiscal deviation statement and introduce an amendment to the Act.

Off-budget chicanery like the FCI borrowings from National Small Savings Funds (NSSF) that were done to keep the fiscal deficit optically low is being junked. There were no new (questionable) welfare schemes introduced and the tax regime was left untouched. These are good signs. Also, the long-drawn glide path suggests the government is being realistic about the recovery while shedding some of its fiscal conservatism. The broad message is it is willing to spend to support the recovery and initiate a capital investment cycle.

Second, the lack of private investment growth was a key problem in the economy over the last decade. There are multiple structural and governance reasons for the same - we have not had real reforms on resolution or liquidation of stressed assets, many key industries have turned oligopolies aided by arbitrary regulatory regimes and there’s an absence of a long-term economic plan that gives entrepreneurs the confidence to make long-term bets.

The budget shows some intent in tackling these issues. There is a significant government investment planned to develop infrastructure. The details of the plan will have to be seen because on the surface the contribution of infrastructure spending to the fiscal deficit (in percentage) doesn’t seem to be moving. But I think we should give the budget the benefit of doubt here. And this spend is required because, given the state of the economy, the government will have to be at the forefront of cranking the investment cycle. The private sector can come in later to buy these projects with good gains for the government and run them efficiently. There are multiplier benefits of investing in infrastructure and the private investor confidence will follow. The announcement about privatisation of two PSU banks and one general insurer is also welcome. It might not mean much in real terms but it signals a bolder approach to reforms. Private investments are the subject matter of confidence.

Third, like many budgets that have come and gone, this one promises divestments and privatisation of public sector units across industries. But there are a few points of difference. There’s no way the fiscal deficit math will work out over the next many years in normal course of events. Not even when you consider the gradual path suggested in the speech. Unless, of course, the government raises capital through strategic stake sale in PSUs. Other ideas like monetisation of government land are attractive but trickier. So, its hands are forced this time and there’s a sense that the Overton Window has shifted on divestment. Also, the speech was more specific in its intent. It named names. This will get done.

Fourth, there are a few areas where the government is either out of ideas or continues to peddle bad ideas. The atmanirbhar and nation-first ideology is now well and truly established as it marks its entry into the budget document. Random custom duty increases make no sense. We should focus on making ourselves competitive and we have written multiple editions of this newsletter arguing why this reversion to the economic thought of the 70s will be counterproductive. But what’s a bad idea worth if it doesn’t grow roots?

The other rehash is the proposals to set up an Asset Reconstruction Company (ARC) to house the bad loans (“bad bank” as it is known) and incubating another Development Finance Institution (DFI). Both these proposals don’t address the root causes of financial sector stress. At best these are band-aid fixes that will take a lot of time and effort to set up and they will go down the same path of irrelevance. The solutions to ‘twin balance’ sheet problem lie in more fundamental reform in regulation, resolution framework and in reducing the arbitrary role of the state in the industry. We will have to wait for that day.

In summary, it is a good budget as much as we find it futile to rate a stock-taking exercise. The problem on hand is two-fold. The government will have to balance a whole host of conflicting objectives.

The liquidity in the system is at an all-time high. RBI narrowed the reverse repo corridor and sucked some liquidity out of the system a couple of weeks back. Yields that were moving up gradually over the last few months accelerated upwards after the budget. The FX operations of RBI continues because it has to constrain Rupee from appreciating too much. We are in danger of being called a currency manipulator. The dollar purchase continues to add to the liquidity. With the express tasks of controlling capital flow and the exchange rate, the impossible trinity comes into play. We start to lose control of the domestic monetary policy. This is evident as the money market rates have become unmoored from the policy and gone below repo levels.

The RBI also has to manage inflation, spur growth and support Rs. 12 trillion of government borrowings next year. This is a non-trivial challenge. Inflation is moderating but there are fears it will go up. The increased cess on petrol and diesel, continuing high liquidity and existing concerns that we still haven’t got all supply chains running to pre-Covid levels mean we can’t be complacent on inflation in the near future. But growth will need an accommodative stance while liquidity will need to be high to support borrowing. It is a conundrum. It will require great sagacity and wisdom to thread this needle.

For macroeconomy watchers, the next few years will be wonderful. We are keeping the popcorn ready.

On the Defence Budget

— Pranay Kotasthane

The first five items of the Union List in the Constitution all deal with defence. As the foremost responsibility of the Union, no budget discussion is complete without understanding the government’s spending plans on defence.

To understand the defence allocations for FY22, we need to understand what happened in FY21.

The revised estimates of FY21 have increased by a marginal 2.3 per cent over what was proposed in the last budget. But there’s been a significant change in the composition of this expenditure. The revised pension expenditure went down by nearly ₹9000 crores while the capital outlay increased by nearly ₹20,000 crores in the same period. This implies that the government has defrayed pension expenses over multiple years while focusing on capital outlay.

Most of this increase in capital outlay is accounted for by committed liabilities for equipment already purchased by the navy and the air force.

The FY22 budget retains the same level of expenditure as the revised expenditure figures of FY21 except on pensions, which are budgeted to go down by a further ₹10,000 crores. 

On the revenue side, with the Fifteenth Finance Commission recommending a non-lapsable fund for funding modernisation, the government can earmark proceeds from the sale of surplus defence land and sale of defence public sector enterprises for modernisation. Over the long-term, this route holds some promise.  

The key lesson is that the government managed to just about maintain defence expenditures at pre-COVID levels in the pandemic year. To confront China’s aggression, India’s military planning needs a change in approach; hopes of a sudden increase in defence allocations should be laid to rest.

HomeWork

Reading and listening recommendations on public policy matters

* On the defence budget, here’s a quick take by Pranay

* Ajay Shah reminds that reversing the dip in private investment should be the parameter for evaluating budget performance.

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.

Global Policy Watch: Capital Markets (Enter, Stage Right) - Radically Networked Societies

- RSJ

It is difficult to write a newsletter this weekend and not talk about GameStop. Even for a public policy newsletter. But I like to believe if you hold your gaze long enough at any news going around, you will find a public policy problem. This becomes especially true if you run a twice-a-week public policy newsletter. Everything starts looking like a public policy issue soon enough.

Anyway, a lot of what’s happened with the GameStop stock over the last couple of weeks is part of the broader gusts of change that’s buffeting society and culture since the global financial crisis (GFC). In that sense, it is useful to try and look beyond the story to understand the GameStop phenomenon. But let’s not get ahead of ourselves. Let’s do a quick recap of the story.

GameStop is a brick-and-mortar video game seller. A fairly routine presence across large malls across America, GameStop was meandering its way into irrelevance over the last many years. After all, who goes to the mall to buy video games anymore? And then the pandemic arrived to compound its woes. Its days seem numbered. Soon it would join the likes of Blockbuster, JC Penney and scores of other businesses that couldn’t reinvent themselves for the digital age. That was the consensus on Wall Street.

The Short Squeeze

But the Street is a strange place. A business with no prospects is also an opportunity to make money. By shorting its stock. You borrow a few shares of the company from someone (usually a broker) and you sell them in the market. Since you are borrowing the shares you pay a small charge for it. Plus the broker wants a bit of insurance in case things go bad. So you keep some money in an account that the lender can access in case things go south. Since you believe the stock price will go down, you wait for it to happen. When it does, you buy the same number of shares at the lower price and return them back to the broker. You pocket the difference. This is how it goes for any ordinary investor. If you happen to be a star fund manager of a hedge fund, you make it known to the world you are shorting the stock. You have a platform to voice your views and you send out a signal the stock will tank. Often this turns out to be a self-fulfilling prophesy. The stock does go down on your word and momentum does the rest. You make a tidy profit for your clients and a fat commission for yourself.

Of course, plans go awry too. The stock goes up contrary to your bet. You think this is temporary so you wait. But the broker is nervous and wants some assurance. So you top up the account where you had put some money in case things went bad. If the stock keeps rising, you have to keep topping this up. Since your loss can be unlimited (the stock can keep rising), you feel hemmed in as the stock rises. You feel squeezed. So you decide you want to call this bet off. The only way to do this is to buy the stock at an elevated price. You do that. But remember you are not the only one who had shorted this stock. As the likes of you buy the stock at the elevated price, the price goes up further. And other short sellers feel the squeeze. This is called short squeeze. It can wipe you out.

That’s that. Life is too short to know any more about short selling.

And The Gamma Squeeze

On the other hand, there are people who bet the stock price will go up. That’s usual. The riskier bet is buying a call option on a stock. Here you don’t buy the stock. Instead, you buy an option that the stock will go above a certain price. This is a small bet. You lose all money if the stock doesn’t reach there. But if it does, you make a lot of money on a small bet. Since this is a bet, there’s always the other party (market maker) that’s sold you the bet. They sell many such bets. And to hedge their bets they go out and buy a small number of the underlying stock. In case the stock price does go above the bet price, they will atleast recover some of their losses if they own that stock. For simplicity let’s call the rate of buying the stock to hedge the bet as ‘delta’. You can see where this is heading. If the stock keeps going up and more people buy call options, you will have the market makers buy more of that stock. This in turn drives the price further up. That is the delta keeps becoming faster. This rate of change of delta is called gamma. It is like acceleration. And this kind of squeeze in favour of stock going up is called the gamma squeeze.

Life is complicated enough already to know any more about Greek letters in stock markets.

Unstoppable GameStop

Events conspired in mysterious ways to bring both the short squeeze and the gamma squeeze to the GameStop stock overt the past few weeks.

* There’s a Reddit forum (r/WallStreetBets) that has a mix of investors - small-time investors with deep knowledge of the markets (very few), bored young men (mostly men) who trade in markets for a lark (few more), thrill-seekers and degenerates who trade by turning economic logic on its head (many more) and gullible new investors who are drawn into this in the hope of getting tips to make a quick buck (the largest number). The forum members see themselves as Davids taking on the Wall Street establishment (Goliath). Fun fact: only 14 per cent of Americans directly invest in individual stocks and 3 out of 4 of them belong to the top 20 per cent of American households by income. Calling themselves the ‘little guys’ is a bit rich.

* Sometime last summer a few members of the forum started making a case for GameStop as a stock that’s undervalued. The stock was trading at about $4 then. There was no rationale. It was pure optimism backed by hopes of a turnaround in the business. But that’s how even the best equity analysts often make a case for a stock. Or a VC fund values a start-up. The stock caught fancy of a few members in the forum and rallied a bit.

* In September, Ryan Cohen, an entrepreneur who sold his online pet store Chewey for $3.5 Bn a few years back, bought about 12 per cent of GameStop at $8.4 per share. Cohen believed he could turn GameStop into an online success. This was the validation the WallStreetBets members were looking for. The stock doubled in three months soon after.

* In January this year, things got weirder. GameStop was one of the most shorted stocks in the market (the total shorts were more than the available outstanding shares). As it rallied up, some of the prominent short sellers started talking down the stock. Particularly, two firms - Melvin Capital and Citron Research - called out the insanity around the stock. Now a word about short sellers, hedge funds and other established fund houses on Wall Street. For years since the GFC, there’s been a wave of simmering anger against them from the retail investors. Deservedly. These firms have done it all - cartelisation, manipulation of stocks leading to fake momentum and selling toxic products to ordinary investors. The calling out of GameStop rally by them triggered something extraordinary.

* The WallStreetBets forum decided to apply the short squeeze on the short-sellers. It was the mother of all squeezes. Meanwhile, GameStop brought Cohen and his two buddies on to their Board. Momentum was on. Gamma squeeze was in. The stock went berserk. From $20 to $320 over two weeks with wild fluctuations. Over 20 Bn shares were being traded daily making it the most traded stock in the world. Nothing had changed in its underlying business. In fact, the numbers were looking worse. But this wasn’t about GameStop anymore.

* In these two weeks, the whole thing has turned into a movement. It is no longer about making money. It is about making a statement. Socking it in the face of the establishment. There’s no logic anymore. It is a cult. Citron and Melvin have closed their positions and made extraordinary losses. These wins have given more life to the movement. Shorted stocks of companies that can hardly have a future have quadrupled. These include names like AMC, Blackberry (remember) and Nokia. The whole thing is nuts.

The bar for absurdity in Wall Street lore is high. Short squeezes have a long history. The original baron, Cornelius Vanderbilt, once short squeezed the life out of NYC Council members who were betting against him. The railroad empire he built was the result of that. George Soros took a $10 Bn short position on the British Pound and almost broke the Bank of England in 1992. And in the early days of the pandemic last year, the crude oil price went below zero. There’s something about the GameStop story that tops them all. There was a rational economic explanation to the earlier events however bizarre they appeared. This one goes beyond economics.

Markets In The Crosshairs

Four trends now deeply embedded in our culture and politics seem to have marked their arrival in the markets with this story.

* Radically Networked Societies (RNS) meet Capital Markets: Nitin Pai and Pranay define a radically networked society as a web of hyper-connected individuals, possessing an identity (imagined or real), and motivated by a common immediate cause. The emergence of RNS aided by cellphones, cheap data connectivity and social media platforms is a phenomenon for the hierarchical state to contend. The immediate cause that motivates an RNS could be irrational but before the state or the established institutions can even put their shoes on, the RNS might have gone around the world twice with their message. This is what fuelled the bizarre stories emerging from the suicide of a Bollywood star during the pandemic or with the rise of the QAnon movement in America. Well, RNS is now in the markets. The WallStreetBets is a classic case of RNS. A bunch of hyperconnected, mostly anonymous investors who view themselves as Wall Street outsiders and whose immediate cause is to take down short sellers and hedge fund managers. That their chosen targets are a greedy, egoistic bunch divorced from reality has made their job easier. The story sells itself - the long due revenge of the ordinary investor.

* Knocking the experts off their pedestal: The experts are all sold out. They have an agenda and they won’t tell you the truth. That’s the message that’s mainstream now in politics and culture. This is what drives the anti-vaxxers, climate science deniers, trade protectionists and other conspiracy theories going around. Now add the Wall Street experts to this list. If a research analyst says a stock has no future, bet against her. Do the irrational thing and if it pays off for even a day, you have been proved right.

* The crowd is right: What are people like you buying, watching, eating or wearing? So many people can’t be wrong. If I can watch and enjoy something based on what others are watching, I can buy a stock the same way. Zero brokerage platforms like Robinhood and Public have built their business models around this. Gamify the stock markets. Make it addictive. The millennials seeking thrill sitting at home during the pandemic have a new destination. Buy stocks, buy options and have fun. Let them buy high, sell low and take a selfie while doing so. You earn street cred doing this within your community. Who cares about the losses? YOLO.

* It is personal: Hyper-personalisation, the market of one, call it by any name. You are now invested deeply in your belief and your platform. It is your identity. The echo chamber you inhabit keeps reinforcing this belief. After a while, even the platform has no control over you as Twitter and Facebook have seen over the years. And Robinhood discovered to its dismay last week. They will take you down too. Because it is all personal. You can’t just let Citron Research or Melvin Capital have a view about GameStop that’s contrary to yours. They have to be taken down.

The GameStop phenomenon is just the beginning. It is like the Arab Spring of 2011 engineered on Twitter. Today it seems like a moment when the little guys took on the big, brutish establishment and won. This victory, like that of the Arab Spring, will be pyrrhic. The genie that escaped from that movement has been hard to put back into the bottle. The markets will now have to contend with the genie. It is out.

For those like us who battle to protect the fast receding middle ground everywhere, this is a new front. Anything that elicits support from both Alexandria Ocasio-Cortez and Ted Cruz must give the classical liberal a pause. That moment for Capital Markets is here.

A Framework a Week: Three Functions of the State

Tools for thinking public policy

- Pranay Kotasthane

Public Finance in Theory and Practice (1973) by Musgrave and Musgrave has an elegant classification of budgetary functions. Since you’ll be bombarded with the news about the union budget over the next few days, this classification would be of some use.

From a public finance perspective, the three main functions of the State are allocation, distribution, and stabilisation.

Allocation of social goods needs to be done primarily by the State because the market is likely to under provide such goods. Consider a private company willing to install street lights in your area for a fee that will be collected from all residents. Residents are likely to underpay because the benefits of good lighting will accrue to strangers beside themselves. Most people would prefer freeriding, the result being unlit streets. Here’s where the state comes in to allocate such social goods and imposing mandatory taxation, it tries to prevent freeriding.

Distribution of income or wealth is another important and perhaps the most controversial function of the State. If the income distribution is not in line with what the society perceives as being “fair”, the State tries to alter the distribution pattern. For example, it is now widely accepted that poverty and food insecurity are undesirable in the Indian society and hence there is broad support across the political spectrum for some subsidies to the poor.

Further, there are three fiscal instruments for redistribution:

* a tax-transfer scheme, combining progressive taxation of high-income with a subsidy to low-income households. example: tax money used for a direct benefit transfer for low-income families.

* progressive taxes used to finance public services, especially those such as public housing, which particularly benefit low-income households.

* a combination of taxes on goods purchased largely by high-income consumers with subsidies to other goods which are used chiefly by low-income consumers. example: GST rate of zero for grains and salt but tenwty-eight percent for cars.

All three instruments of distribution distort markets and hence need to be used in moderation. In a previous edition, we have written why a tax-transfer scheme is better than loading a tax-system with multiple objectives.

Finally, macroeconomic stabilisation seeks to achieve desirable levels of macroeconomic indicators such as inflation and unemployment since the market-determined values might not be optimal. Increase in the budget for the employment guarantee scheme (MGNREGS) due to COVID-19 is an example of budgetary policy being used to stabilise the unemployment situation.

Stabilisation can happen through these two instruments:

* Monetary instruments such as interest rates, discount rates, and open market operations, or

* Fiscal instruments such as raising public expenditures on infrastructure.

Often, a budgetary policy designed for one of these functions can cause problems in the other. For example, a government trying to stabilise inflation by banning exports of commodities can affect the distribution of incomes of producers. This is the precise predicament of export bans on onions. Hence the grand challenge is to design policies that minimise such conflicts.

Humour: Green shoots

The Union budget will be presented tomorrow and we bet you’ll hear the phrase ‘economy green shoots’ at least once. Many growth rate-based narratives around the economic recovery will compete with each other. So, here’s a pic in anticipation of all that — green shoots on a money plant.

HomeWork

Reading and listening recommendations on public policy matters

* [Audio] Amit Varma with Pranay on Radically Networked Societies in The Seen And The Unseen

* [Article] Kevin Roose’s The Shift column in The New York Times: The GameStop Reckoning Was a Long Time Coming

* [Article] Sarthak and Pranay have an article in Deccan Herald on an underrated budget document.

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.

- Pranay Kotasthane & RSJ

It’s the 72nd Republic Day today (as we write this). The Constitution of India is a revolutionary document. The past few years have seen some wonderful works of scholarship about our constitution. We’d like to call out a few here.

The Constitution will remain a distant and daunting document as long as we don’t develop a habit of referencing it directly. Thankfully, EBC has been publishing a coat pocketbook version since 2009. It works great as a reference book. And it doesn’t hurt that it looks elegant and makes for a wonderful gift. As an aside, a dream project of mine is to convert the constitution into a knowledge graph that visually connects the cross-referencing articles in the Constitution. If any AtU reader has the technical chops to make this happen, please ping us.

Madhav Khosla’s India’s Founding Moment: The Constitution of a Most Surprising Democracyis a brilliant and erudite work that is essential to understand the radical nature of our Constitution and the interplay of ideas and debates among people who cared deeply for this nation that led to its creation.

Rohit De’s A People’s Constitution: The Everyday Life of Law in the Indian Republic challenges the idea that our Constitution was the product of an elitist imagination whose impact in the lives of ordinary Indians was minimal. De uses four examples to make his case about the Constitution empowering the people of India to take on the state.

Tripurdaman Singh’s Sixteen Stormy Days: The Story of the First Amendment of Constitution of India shows how the idealism of the Constitution became a difficult burden to bear while running a government. No constitution can be eternally infallible. But we set a precedent of changing the architecture of our Constitution really early in the life of our Republic. We might never recover from that ‘original sin’.

Gautam Bhatia’s The Transformative Constitution: A Radical Biography in Nine Actsexplains in detail why the Constitution at its core aims to bring about a social revolution. Many a constitution aim to transform the polity and economy but few aim to change society itself. This is what sets the Indian Constitution apart. The classic work on this line of reasoning is Granville Austin’s The Indian Constitution: Cornerstone of a Nation.

This passage from Rohit De’s A People’s Constitution helps make sense of the remarkable achievement that the Indian Constitution is.

“The Indian Constitution was written over a period of four years by the Constituent Assembly. Dominated by the Congress Party, India’s leading nationalist political organization, the assembly sought to include a wide range of political opinions and represented diversity by sex, religion, caste, and tribe. This achievement is striking compared to other states that were decolonized. Indians wrote the Indian Constitution, unlike the people of most former British colonies, like Kenya, Malaysia, Ghana, and Sri Lanka, whose constitutions were written by British officials at Whitehall. Indian leaders were also able to agree upon a constitution, unlike Israeli and Pakistani leaders, both of whom elected constituent assemblies at a similar time but were unable to reach agreement on a document. The Indian Constitution is the longest surviving constitution in the post-colonial world, and it continues to dominate public life in India. Despite this, its endurance has received little attention from scholars. [Rohit De, A People’s Constitution, pg 2]

To explain the last point visually here’s a comparative chart plotting the number of constitutions against the year of independence for Asian states.

India, of course, falls in the heavily clustered zone labelled “independence era states” - political communities that overthrew European colonialism to establish new nation-states. Zooming in this era, we find that a handful of constitutions in Asia have survived. Only three amongst them had a constituent assembly that brought together people to make their own constitutions. And even amongst the ones where one constitution has survived this far, most have been beset by politically active militaries and dictatorships. The Indian constitution is without a doubt an exception to be proud of.

Among the many flaws that are often pointed out about our Constitution, the one we disagree most with is about how unmoored it was from India’s past. The accusation is we didn’t try and locate the great ideas and values of the Constitution in our past. This created a sense of distance of the ordinary Indian from the ideals of the people’s Constitution. We have two problems with this line of argument. First, this alienation from our tradition (if true) was to be bridged by later scholars and interpreters of the Constitution including legislators and administrators. The members of the Constituent Assembly shouldn’t have been expected to also write a commentary on it in parallel. Second, there are multiple references to how the principles enshrined in it are consistent with the best of our historical tradition.

Another common criticism is that the Constitution reproduced two-thirds of the GoI Act of 1935 and hence wasn’t transformative enough. What’s forgotten of course is that the 1935 Act itself was a result of a powerful Indian independence movement’s consistent political pressure on the British government. The charge of not being transformative enough” needs rethinking.

We will leave you with two excerpts of speeches made in the Assembly that support the assertion that the Constitution is consistent with the best of the Indian historical traditions while leaving out the undesirable elements.

On 17th October 1949, J.B. Kripalani made both the points we have stated above:

“Sir, I want, at this solemn hour to remind the House that what we have stated in this Preamble are not legal and political principles only. They are also great moral and spiritual principles and if I may say so, they are mystic principles. In fact these were not first legal and constitutional principles, but they were really spiritual and moral principles. If we look at history, we shall find that because the lawyers and politician made their principles into legal and constitutional form that their life and vitality was lost and is being lost even today.

Take democracy. What is it? It implies the equality of man, it implies fraternity. Above all it implies the great principle of non-violence. How can there be democracy where there is violence? Even the ordinary definition of democracy is that instead of breaking heads, we count heads. This non-violence then there is at the root of democracy. And I submit that the principle of non-violence, is a moral principle. It is a spiritual principle. It is a mystic principle. It is a principle which says that life is one, that you cannot divide it, that it is the same life pulsating through us all.

As the Bible puts it, "we are one of another," or as Vendanta puts it, that all this is One. If we want to use democracy as only a legal, constitutional and formal device, I submit, we shall fail. As we have put democracy at the basis of your Constitution, I wish Sir, that the whole country should understand the moral, the spiritual and the mystic implication of the word "democracy". If we have not done that, we shall fail as they have failed in other countries. Democracy will be made into autocracy and it will be made into imperialism, and it will be made into fascism. But as a moral principle, it must be lived in life. If it is not lived in life, and the whole of it in all its departments, it becomes only a formal and a legal principal. We have got to see that we live this democracy in our life.”

And more famously, Dr. B.R. Ambedkar in his last speech at the Constituent Assembly draws upon our past:

“It is not that India did not know what Democracy is. There was a time when India was studded with republics, and even where there were monarchies, they were either elected or limited. They were never absolute. It is not that India did not know Parliaments or Parliamentary Procedure. A study of the Buddhist Bhikshu Sanghas discloses that not only there were Parliaments-for the Sanghas were nothing but Parliaments – but the Sanghas knew and observed all the rules of Parliamentary Procedure known to modern times. They had rules regarding seating arrangements, rules regarding Motions, Resolutions, Quorum, Whip, Counting of Votes, Voting by Ballot, Censure Motion, Regularization, Res Judicata, etc.Although these rules of Parliamentary Procedure were applied by the Buddha to the meetings of the Sang has, he must have borrowed them from the rules of the Political Assemblies functioning in the country in his time.

This democratic system India lost. Will she lose it a second time? I do not know. But-it is quite possible in a country like India – where democracy from its long disuse must be regarded as something quite new – there is danger of democracy giving place to dictatorship. It is quite possible for this newborn democracy to retain its form but give place to dictatorship in fact. If there is a landslide, the danger of the second possibility of becoming actuality is much greater.”

The above lines are followed by his famous ‘Grammar of Anarchy’ passage. He knew what he was talking about.

HomeWork

Reading and listening recommendations on public policy matters

* [Video] Ambedkar’s speech at the Constituent Assembly

* [Document] Judgment on Shankari Prasad vs Union of India: The First Constitution Amendment Act, 1951 was challenged in the Shankari Prasad vs. Union of India case. The Supreme Court held that the Parliament, under Article 368, has the power to amend any part of the constitution including fundamental rights.

* [Podcast] On Puliyabaazi, Rohit De joins Saurabh and Pranay to discuss India’s tryst with constitutionalism.

* [Article] Democracy and the Republic - the differences between these two concepts.

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.

A Framework a Week: The Basis of Morality

Tools for thinking public policy

- RSJ

The other day at a dinner with a few friends (in our ‘bubble’) the topic of farm laws came up. The usual argument followed. Farmers need to be freed from the overbearing power of the state that has kept them poor for so long versus Ambani/Adani will take over and control food prices in future leaving nothing for the farmers or the consumers. Things were going according to the script till the issue of morality came up. Both sides were convinced they had the stronger moral argument to support them. Luckily, the dinner was served and good food quietened things down.

This set me thinking about how we think about morality. Regardless of how we define political axes in India (left vs right, liberal vs conservative, statist vs free marketer), each side arrives at their ideology based on what they believe is morally right for the society. What’s the basis for our inherent self-righteousness and why does it differ among people?

About Morality

Jonathan Haidt in his superb book The Righteous Mind: Why Good People are Divided by Politics and Religiongoes deep into this question. When he was at graduate school, Haidt learnt about Kohlberg’s six stages of moral reasoning. This model (Kohlberg’s) developed in the early 60s held that moral reasoning which forms the basis for ethical behaviour evolves over six developmental stages. These six stages were broken into three levels: pre-conventional, conventional and post-conventional. Each stage was more evolved and better at responding to moral dilemmas than the last. Kohlberg’s six stages were:

Level 1 (Pre-Conventional)

* Obedience and punishment orientation

* Self-interest orientation( What's in it for me?)

Level 2 (Conventional)

* Interpersonal accord and conformity( The good boy/good girl attitude)

* Authority and social-order maintaining orientation( Law and order morality)

Level 3 (Post-Conventional)

* Social contract orientation

* Universal ethical principles (Principled conscience)

Haidt found something amiss in this model. It seemed too cerebral with the rational mind driving moral decisions. In 2001, he wrote The emotional dog and its rational tail where he presented the social intuitionist model as an alternative to the rationalist model. Haidt’s point was simple: moral judgment was widely believed to be caused by moral reasoning. Instead, he argued, we reach a moral judgment based on our intuitions that are shaped by moral and cultural factors (link 1 in the model below). We construct a scaffolding of moral reasoning after that to support our judgment (link 2). Judgments based on reason (link 5) and change in intuitions after private reflection (link 6) are quite rare.

Theory Of Moral Intuition

It is a far-reaching paper that helps explain a lot of things around us.

What did Jefferson mean when he held certain truths as ‘self-evident’? Or, why do we now believe politics is downstream of culture? You can’t change politics unless you change culture. Why is this true? Or, why do you often end up in a political argument feeling frustrated that the other side doesn’t see your point of view which is moral or right?

To Haidt, this is because of our moral intuition. We don’t know why something is wrong but we just know it’s wrong. Haidt defined moral intuition as:

“..the sudden appearance in consciousness of a moral judgment, including an affective valence (good-bad, like-dislike), without any conscious awareness of having gone through steps of search, weighing evidence, or inferring a conclusion. Moral intuition is therefore the psychological process that the Scottish philosophers talked about, a process akin to aesthetic judgment: one sees or hears about a social event and one instantly feels approval or disapproval.”

Haidt gave the elephant-rider metaphor to explain this. This is a metaphor to explain how our unconscious mind guides our conscious rational faculty. The elephant is the total of our intuitions and our unconscious influences. It is large and chooses its own path. The rational conscious mind is like the rider on the elephant. She thinks she is controlling the elephant but that isn’t true.

“the mind is divided into parts that sometimes conflict. Like a rider on the back of an elephant, the conscious, reasoning part of the mind has only limited control of what the elephant does.”

Only a very skilled rider can sometimes change the course of the elephant. That’s the reason only the really sharp minds on either ends of the political spectrum can intellectually and morally justify the intuitions of the masses and direct them to a political or social goal. As Haidt concludes in his paper:

“The time may be right, therefore, to take another look at Hume’s perverse thesis: that moral emotions and intuitions drive moral reasoning, just as a surely as a dog wags its tail.”

But this wasn’t enough. Why do we have different moral reasoning among us? Why do two brothers who grew up together in the same household often hold diametrically opposite political views?

Our Moral Foundations

Haidt (with others) built the moral foundation theory to explain the differences in moral valence among people. They argued humans have six universal moral foundations that develop in them over time depending on culture, social interactions and their own understanding of the world around them. They proposed the five foundations of morality and later added a sixth:

1) Care/harm: This foundation is related to our long evolution as mammals with attachment systems and an ability to feel (and dislike) the pain of others. It underlies virtues of kindness, gentleness, and nurturance.

2) Fairness/cheating: This foundation is related to the evolutionary process of reciprocal altruism. It generates ideas of justice, rights, and autonomy. [Note: In our original conception, Fairness included concerns about equality, which are more strongly endorsed by political liberals. However, as we reformulated the theory in 2011 based on new data, we emphasize proportionality, which is endorsed by everyone, but is more strongly endorsed by conservatives]

3) Loyalty/betrayal: This foundation is related to our long history as tribal creatures able to form shifting coalitions. It underlies virtues of patriotism and self-sacrifice for the group. It is active anytime people feel that it’s “one for all, and all for one.”

4) Authority/subversion: This foundation was shaped by our long primate history of hierarchical social interactions. It underlies virtues of leadership and followership, including deference to legitimate authority and respect for traditions.

5) Sanctity/degradation: This foundation was shaped by the psychology of disgust and contamination. It underlies religious notions of striving to live in an elevated, less carnal, more noble way. It underlies the widespread idea that the body is a temple which can be desecrated by immoral activities and contaminants (an idea not unique to religious traditions).

6) Liberty/oppression: This foundation is about the feelings of reactance and resentment people feel toward those who dominate them and restrict their liberty. Its intuitions are often in tension with those of the authority foundation. The hatred of bullies and dominators motivates people to come together, in solidarity, to oppose or take down the oppressor.

As Haidt writes in the book:

“"the moral matrix of a culture is something like its cuisine: it’s a cultural construction, influenced by accidents of environment and history, but it’s not so flexible that anything goes. You can’t have a cuisine based on grass and tree bark, or even one based primarily on bitter tastes. Cuisines vary, but they all must please tongues equipped with the same five taste receptors. Moral matrices vary, but they all must please righteous minds equipped with the same six social receptors."

Why We Differ?

Over time Haidt developed a moral foundation questionnaire to understand how people from different political orientations (mostly from the US) valued the five moral foundations (the questionnaire dropped liberty). The results over thousands of surveys suggest the crux of the disagreement between liberals and conservatives (we are using the current American meaning of these terms here). Liberals value Care and Fairness deeply while Conservatives give almost equal weightage to all five foundations almost equally. As the abstract of the paper (the full paper is here) summarises:

“Across 4 studies using multiple methods, liberals consistently showed greater endorsement and use of the Harm/care and Fairness/reciprocity foundations compared to the other 3 foundations, whereas conservatives endorsed and used the 5 foundations more equally. This difference was observed in abstract assessments of the moral relevance of foundation-related concerns such as violence or loyalty (Study 1), moral judgments of statements and scenarios (Study 2), “sacredness” reactions to taboo trade-offs (Study 3), and use of foundation-related words in the moral texts of religious sermons (Study 4). These findings help to illuminate the nature and intractability of moral disagreements in the American culture war.”

Haidt (and Graham) argue that we need to use all five moral foundations to understand political or social issues. This suggests the onus is on the liberals to make the extra effort to go beyond their two values. This has earned the theory ire from the liberals. Haidt, who calls himself a liberal, has a more balanced view of this. He suggests we all need to step out of our moral matrix. We need to appreciate the diversity of our moral foundations. Once we do that it will be easier to step into others’ shoes.

That, like it is apparent to all of us these days, is easier said than done.

Matsyanyaaya: Vaccine Diplomacy

Big fish eating small fish = Foreign Policy in action— Pranay Kotasthane

India’s vaccine diplomacy was widely discussed this week. On one hand, a few heads of state and international media organisations lauded the Indian government’s decision to supply vaccine shots for free even as its own domestic vaccination campaign has only started. On the other hand, there were arguments suggesting that the government should’ve first vaccinated its priority population before letting a single vial out. That in the amoral context of international relations, giving away vaccines for free amidst a health emergency is unaffordable altruism.

So, how to make sense of this?

I would argue that it’s not altruism but national self-interest that guides international humanitarian assistance efforts by all states. The Indian government’s vaccine diplomacy can also be explained through this lens of self-interest.

Let’s consider the facts first. 3.2 million Covishield vaccines have been supplied under grant assistance to a handful of neighbouring states out of the 11 million procured by the Indian government. Moreover, of the 30 million priority-sector workers supposed to be vaccinated under phase 1 of India’s vaccine programme, only 1.5 million have been vaccinated by Jan 23th.

Now consider the options in front of the Indian government. One option would have been to wait for phase 1 to complete before gifting vaccines away. As such, this option doesn’t mean that the recipient countries would’ve been left high and dry. They would’ve had to wait for commercial exports of Covishield outside the GoI’s procurement like Brazil did. A second option would’ve been to block all commercial exports of vaccines manufactured in India until phase 1 is completed. A third option would’ve been to divert a part of the procured lot to select countries right at the outset to signal the positive role that India can play in the world order. The first two options can easily be argued as hard-nosed realism. But its the third option, the one that India chose, needs more reflection.

While it is true that this one act of benevolence is unlikely to change the future behaviour of nation-states towards India, it crucially reminds the smaller states in the subcontinent that India cannot be easily substituted by China, especially given how opaque the latter’s vaccine journey has been thus far. Extending help in a crisis situation also improves India’s credibility in international fora. Finally, the norms of international cooperation have evolved in a way that makes complete apathy more costly than non-reciprocal overtures. In 2015, Pavan Srinath and I had written this in the context of humanitarian assistance and relief efforts:

“Countries are expected to do a certain minimum amount of international disaster relief, be it unilaterally, or through contributions to charities. This minimal assistance has increasingly acquired characteristics of altruism. Many animals give out distress calls for the benefit of the herd and at possible cost to itself. Similarly, international disaster relief is a slowly becoming a norm that is obeyed without explicit rewards except that of building an atmosphere of cooperation.”

In short, India’s vaccine diplomacy is an act of self-interest but not selfishness.

As for the question of vaccinating Indians, it’s not the lack of doses that are holding things up. The government needs to enlist the help of private enterprises to increase the pace of vaccine deployment as soon as priority-sector workers have been reasonably covered.

HomeWork

Reading and listening recommendations on public policy matters

* [Video] The Moral Roots of Liberals And Conservatives: Ted Talk by Jonathan Haidt

* [Article] Kohlberg’s Stages Of Moral Development

* [Blog post] This meta-post on Gulzar Natarajan’s Urbanomics blog is a must-read for anyone interested in public policy in India. Don’t miss the linked article: Overcoming behavioural failings: Insights for public administrators and policymakers.

Financial Regulation of Private Firms + Emigration of Indian Talent

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

News reports suggest the vaccination drive among frontline workers is going slower than expected.

The issue isn’t the supply. It’s demand.

Frontline workers seem to have apprehensions about the safety of the vaccines.

An Old Story

I was reading up on the history of vaccines last week after I heard a good BBC history podcast on Edward Jenner who did pioneering work on smallpox vaccine. Four points stood out:

* The scourge that was smallpox. It was super infectious, and the fatality rates were over 30 per cent. It wiped out civilizations as European powers spread it through South America and Africa. There was no real cure except something called variolation where a small amount of material from smallpox scabs were given directly to healthy people. These healthy people then developed symptoms of smallpox but these were milder. Fewer of them died through this than the normal method of getting the pox.

* Jenner discovered vaccination somewhat serendipitously. He came across a milkmaid who told him she won’t get smallpox because she had already got cow pox (a milder disease). Jenner tested this theory by giving his gardener’s son a small dose of cow pox material. After a few months, he exposed the boy to the smallpox virus on multiple occasions. The boy never developed smallpox. Soon, Jenner wrote his treatise ‘On the Origin of the Vaccine Inoculation’. It wasn’t accepted by any reputed journal because it lacked adequate scientific rigour (even for those days). Jenner self-published the treatise.

* The vaccination method became hugely popular. There was no state drive to spread it. People tried it out and it spread through word of mouth. So widespread was Jenner’s fame that when France jailed a few doctors from England on some specious charge of espionage, he wrote to Napoleon to free them. Napoleon agreed because it was Jenner.

* The anti-vaxxer movement started right away. Since Jenner published his methodology for anyone to adopt, the doctors who earned their living through variolation and its side effects didn’t take to it. They did their bit by spreading misinformation. Also, injecting cow pox material meant other infections could get into a health person. This meant there were always cases of people contracting, or even dying, of other diseases after taking the vaccine. The vaccine scepticism took roots. And it hasn’t gone away since then.    

Why The Scepticism?

This got me thinking on why is it difficult for people to believe in the effectiveness of vaccines? Or, on climate change? Or, why do good policy proposals often lack popular support?

Three reasons seem likely:

* Our brains aren’t wired to believe non-intuitive concepts. These concepts aren’t often self-evident. Even if we understand them in theory, we end up doing the more intuitive wrong thing in practice. Behavioral economists have demonstrated this with multiple experiments. Vaccination is a non-intuitive concept. To inject oneself with a mild variant of a disease willingly in the hope that it will create long-term immunity goes against the intuitive idea of self-preservation. The notion of price in economics is similar for lay people. That price is a signal that adjusts itself to demand and supply instead of being centrally controlled is difficult to comprehend even if you are taught the theory. The first instance of surge pricing by Uber and the theory collapses. You believe it must be controlled. Pretty much the same way we react when people hear the news of deaths after vaccination.

* People don’t get probabilities. That more people will likely die without a vaccine than because of an unproven side effect of taking the vaccine can be proven with data. But the notion that we invite the side effects because we take a vaccine on our own while contracting a disease is outside of our control is quite strong. This obfuscates our understanding of probability. Even during the current pandemic, the probabilities weren’t clearly thought through by the policymakers. The Covid-19 vaccine was clinically ready almost a year back when we had the virus genome mapped. From then on it was about doing a sound cost-benefit analysis of what level of vaccine testing is acceptable given the costs of loss of human lives and the impact of lockdown on the economy. We might have been ready to use a vaccine much earlier had we done this right. In any case, that the vaccine is ready within a year when compared to almost a decade it took earlier is proof that we have taken a right probabilistic call, albeit a bit late. This should have been the norm earlier.

* News amplifies exceptions and this erodes the trust on experts. You will not hear of the millions who have taken the vaccines without any side effect. But every single death of someone who has taken a vaccine will be reported. That the cause of death is unrelated to the vaccine itself will struggle to find space in the news cycle. This is because we are looking for adverse news to confirm our intuitive bias about it. The more we come across this kind of news, the greater our scepticism of experts. Conspiracy theories take off from here.

The solution to this kind of scepticism about a sound public policy is available. Eugene Bardach in his seminal book A Practical Guide for Policy Analysis outlined the eightfold path to arriving at a policy decision. The eighth and the final step is ‘tell your story’ which is as important a step as any of the previous steps taken to arrive at the policy decision. This is often an area that’s given less thought by policymakers as they plan a rollout. I suspect we have done the same with the vaccination programme in India.

As Bardach writes:

If one of your goals is to engage a lay audience, keep in mind that ordinary folk are rarely moved by statistics alone. Indeed, relying on numbers to demonstrate the importance of addressing a problem can actually undermine the psychological processes needed to prompt a response; people may not only fail to grasp the statistics, they may be numbed into inaction. Data and statistics are obviously indispensable to analysis, but when it comes to telling your story to a general audience, be sure to put a human face on the problem. And show how your solution could make life better for real people.

If you are making a clear recommendation, make sure that you raise and rebut possible objections to it that might occur to various important audiences. Also, make sure that you compare it to what you or others might regard as the next best course of action, so as to be ready to show why yours is better.

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Charlemagne in The Economist on ‘Why is Europe so riddled with vaccine scepticism?’

* [Article] A comprehensive view by The Guardian on vaccine scepticism

We have hit a century! Thank you for reading us.

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.

PolicyWTF: Prohibition and Morality

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

If one were to write a book chronicling bans on victimless crimes in India, the index entry for Morarji Desai would be a long one. After all, he holds the dubious distinction of turning lakhs of ordinary citizens into criminals by prohibiting two independent victimless crimes.

The first ban, on alcohol, is rather well-known. The notorious Bombay Prohibition Act of 1949 was passed when Desai was the state’s Home Minister. To enforce the ban, the government created elaborate compliance machinery, misdirecting the limited policing capacity towards apprehending tipplers instead of protecting victims of other crimes. By the time this act was watered down in 1964, more than four lakh people had been convicted under Prohibition! The draconian law is well-documented in Rohit De’s excellent book The People’s Constitution. Read this, for instance:

“The BPA granted vast powers to the police and Prohibition officers. It empowered Prohibition officers and all police officers to “enter at any time, by day or by night, any warehouse, shop, house, building, vessel, vehicle, or enclosed place in which [they have] reason to believe [that] intoxicants or utensils, apparatus or implements used for manufacturing intoxicants are kept.” They could also open packages and confiscate goods that they suspected of containing illicit liquor. Warrants were not required for arrests for any of these offenses or for searching premises. The BPA provided that people believed to have committed an offense under the act could be detained without trial and have their movements restricted. The Prohibition policy thus created a system that operated outside the penal code and the criminal procedure code that applied to most offenses.” [The People’s Constitution, Rohit De, page 45]

The direct consequences of this PolicyWTF aren’t hard to anticipate. People either switched to alternatives that bypassed the law or started consuming a far worse quality of alcohol in the black market. For instance, De writes:

By 1963 the Planning Commission was protesting the number of tinctures available in India. It pointed out that the British Pharmacopeia had reduced the number of tinctures from thirty-four in 1932 to fourteen in 1963, but the Indian Pharmacopeia of 1955 listed forty-two different tinctures. After interviewing leading medical representatives, the Planning Commission came to the conclusion that there was hardly any medical use of tinctures, which were outmoded and being replaced by modern drugs that were not alcohol-based. Spot checks revealed that several tinctures on the market were actually spurious, consisting solely of alcohol and a suitable coloring agent. Other manufacturers were producing eardrops and eyedrops with a large percentage of alcohol. The frustrated Planning Commission suggested that tinctures be abandoned for more modern medicine and that industrially produced eyedrops and eardrops be replaced by prescriptions that could be made by pharmacists. [The People’s Constitution, Rohit De, page 61]

Says a lot about central planning. When there’s demand, supply finds a way out in imaginative ways that governments can’t clamp down easily.

Desai’s second prohibition was on the sale and holding of gold, even in small quantities. It was this policyWTF that made smuggling of gold a lucrative profession. Here’s what the Directorate of Revenue Intelligence — a union government agency — observed in its Smuggling in India Report 2019-20:

The economic reforms of 1990s witnessed the repeal of the Gold (Control) Act, 1968 that had prohibited the import of gold except for jewellery. The erstwhile statute had led to the emergence of a notorious network of gold smugglers during 1970s and 1980s. The economic reforms and liberalisation led to the imposition of a modest specific duty of Rs 300 on 10 grams in 2011-12 (increased from Rs 200 in 2010-11) on the imported yellow metal, bringing gold smuggling almost to a grinding halt.

While both these policies had immediate adverse consequences, the general equilibrium effect was far worse: the successful and respected people in the society were the ones whose only competence was breaking the law.

PS: Nitin Pai, on his blog, succinctly captures the general equilibrium effects of banning victimless crimes in this figure.

Global Policy Watch: Student Loan Forgiveness and Friedman

- RSJ

The new Biden administration is expected to enact a student loan relief programme through legislation or an executive order when it assumes office later this month. There might even be a more comprehensive student loan reform on its agenda. The left-wing of the Democratic Party has made a case for a total student loan forgiveness for a long time now. Biden is a centrist, yet he might use the student loan relief proposal as a bargaining chip to rein in other more socialist ideas from them. It will be interesting to see if the administration merely forgives a part of the outstanding loan or it uses the student loan crisis to arrive at a more market-driven long-term solution to the problem of funding higher education and the role of government in education in general.

Quantum Of Crisis

There are about 45 million student loan borrowers who owed roughly USD 1.6 trillion in 2019. To put that in perspective, India’s total credit outstanding is in the same ballpark. On average, each borrower has over USD 34,000 outstanding credit. By some estimates, the Biden forgiveness proposal is to waive off USD 10,000 from this. That would mean a total waiver of about USD 500 billion. No small change even in the days where stimulus packages routinely run into trillions.

So, what explains these eye-popping numbers that are unique to the US education system?

Well, there are a few reasons.

* Because the colleges can: There has been no disruption in the higher education model over the past two hundred years. The system is an oligopoly. The same set of universities have remained at the top through a combination of brand building, (alumni) network benefits and bigger endowments (that are tax-free). The price set at the top is high and everyone below the chain benchmarks to that price. As income inequality has grown, the price has gotten unaffordable at every level except the very top.

* Student loans are expensive by design: There’s hardly any collateral to hold as security for a student who is getting started in life. These loans are largely unsecured, unlike a mortgage where the house is the underlying security for the banks. The possibility of a student getting a good job and paying back the loan is relatively lower than most other loan types. Added to this is the uncertainty about the final location of the student after he finishes off his education and the costs of tracking them down. It is no surprise the default rates of these loans are in excess of 10 per cent. These uncertainties are baked into the pricing of a student loan. They tend to be long-term and expensive.

* Universities have no incentive to innovate: Why should they? They control their supply and keep college seats ‘scarce’. The admission rates of Ivy league schools have been coming down over the years. They are at sub-five per cent these days. This scarcity gives them enormous pricing power. They offer lifelong tenures to the professors. There’s hardly anyone who holds a university to account for failed careers of its students. The student cops most of the blame. It is a great business model with limited accountability. Here’s a sample statistic. Students at public four-year institutions paid an average of $3,190 in tuition fee for the 1987-1988 school year, with prices adjusted to reflect 2017 dollars. Thirty years later, that average has risen to $9,970 for the 2017-2018 school year. That’s over 200 per cent increase after adjusting for inflation. The entry-level salaries haven’t kept pace with that. After adjusting for inflation, they are almost flat over this time.

This is what riles the ‘progressives’. The higher education system now perpetuates inequalities instead of reducing them. The system is rigged from the start - SAT scores track family income closely, private counsellors help kids from rich families to write their applications and expensive tuitions in drama, music or elite sports help in making the cut. The list of such privileges that are needed to get in is long. And the higher education system explains all of this away in the name of merit.

The Moral Burden Of Student Debt

Those who battle this entrenched system and take expensive loans to fund themselves can find the going tough. The job market remains choppy, the nature of jobs is changing and there’s increasing automation in every sector. To start your career with a debt that you can’t be sure of paying off is a burden that seems unjust. Worse, there are many others who can’t get a loan or don’t venture into higher education at all because the costs are high. It is a terrible loss of human potential.

This much is commonly understood. The problem is with the solution that the ‘progressives’ advocate - a kind of a universal free higher education model best captured by Bernie Sanders line “College For All and Cancel All Student Debt”:

Today, we say to our young people that we want you to get the best education that you can, regardless of the income of your family. Good jobs require a good education. That is why we are going to make public colleges and universities tuition free, and cancel all student debt.

The problems with such prescriptions are aplenty. We have devoted multiple newsletters to them. When the price is zero, supply tends to zero. The inherent moral hazard of cancelling debts. What about those who actually paid their debts? What about those who didn’t take up college because they didn’t want to take debt? What about other borrowers who took other types of loans? Why should their debts be not cancelled? This a terrain full of moral hazard landmines.

Government, Market and Education

So how should we think about solving this? To start with we need to understand the market failures in the education system. What are they?

* Primary and secondary education has positive externalities. There’s a benefit that accrues to the society in educating one person which can’t be captured by the supplier. This restricts the supply of such goods because they can’t be priced accurately. The government has a role in addressing this failure through subsidies or vouchers. Higher education or vocational training are tailored to provide employment to an individual. The positive externalities here are overshadowed by the private economic benefits to an individual. So higher education doesn’t have this type of market failure

* But it has other failures. One is the information asymmetry problem. You can never know how good a college is till after you finish college and enter the job market. The college and your goals aren’t exactly aligned. There’s no downside risk to the college if you don’t get the right kind of job after it. This asymmetry problem extends to the banks providing student loans. They don’t have enough information about either the student or the quality of college education to assess the risk of future payments. They err on the side of caution.

The interesting thing is there’s a 65-year old paper authored by Milton Friedman that captures the role of the government in education. The 1965 paper ‘The Role of Government in Education’ is a document of remarkable clarity and vision even by Friedman standards. It is not a dogmatic advancement of the market as a solution to the problem of funding education. It is nuanced and deeply insightful about what the government should be doing in education.

Friedman On Government In Education

I will end with two key excerpts from it. First, Friedman’s views on primary and secondary education and the role of the government in it. His solution was simple - public financing but private operations of education in this space:

“The arrangement that perhaps comes closest to being justified by these considerations--at least for primary and secondary education--is a mixed one under which governments would continue to administer some schools but parents who chose to send their children to other schools would be paid a sum equal to the estimated cost of educating a child in a government school, provided that at least this sum was spent on education in an approved school.

This arrangement would meet the valid features of the "natural monopoly" argument, while at the same time it would permit competition to develop where it could. It would meet the just complaints of parents that if they send their children to private nonsubsidized schools they are required to pay twice for education--once in the form of general taxes and once directly--and in this way stimulate the development and improvement of such schools. The interjection of competition would do much to promote a healthy variety of schools. It would do much, also, to introduce flexibility into school systems. Not least of its benefits would be to make the salaries of school teachers responsive to market forces. It would thereby give governmental educational authorities an independent standard against which to judge salary scales and promote a more rapid adjustment to changes in conditions of demand or supply. “

The second excerpt is about how to think of funding higher education or vocational programmes taken to improve employment prospects. Friedman suggests an Income Share Agreement (ISA) model all those years ago.

“For vocational education, the government, this time however the central government, might likewise deal directly with the individual seeking such education. If it did so, it would make funds available to him to finance his education, not as a subsidy but as "equity" capital.

In return, he would obligate himself to pay the state a specified fraction of his earnings above some minimum, the fraction and minimum being determined to make the program self-financing. Such a program would eliminate existing imperfections in the capital market and so widen the opportunity of individuals to make productive investments in themselves while at the same time assuring that the costs are borne by those who benefit most directly rather than by the population at large. An alternative, and a highly desirable one if it is feasible, is to stimulate private arrangements directed toward the same end.”

It is instructive to conclude here with Friedman’s conclusions from the paper:

“This re-examination of the role of government in education suggests that the growth of governmental responsibility in this area has been unbalanced. Government has appropriately financed general education for citizenship, but in the process it has been led also to administer most of the schools that provide such education. Yet, as we have seen, the administration of schools is neither required by the financing of education, nor justifiable in its own right in a predominantly free enterprise society. Government has appropriately been concerned with widening the opportunity of young men and women to get professional and technical training, but it has sought to further this objective by the inappropriate means of subsidizing such education, largely in the form of making it available free or at a low price at governmentally operated schools.

The lack of balance in governmental activity reflects primarily the failure to separate sharply the question what activities it is appropriate for government to finance from the question what activities it is appropriate for government to administer (emphasis ours)--a distinction that is important in other areas of government activity as well. Because the financing of general education by government is widely accepted, the provision of general education directly by govern mental bodies has also been accepted. But institutions that provide general education are especially well suited also to provide some kinds of vocational and professional education, so the acceptance of direct government provision of general education has led to the direct provision of vocational education. To complete the circle, the provision of vocational education has, in turn, meant that it too was financed by government, since financing has been predominantly of educational institutions not of particular kinds of educational services.”

A Framework a Week: A Taxing Month Ahead

Tools for thinking public policy

— Pranay Kotasthane

What’s a budget without new taxes, fees, cesses, or surcharges? As the budget date nears, let’s understand the categorical differences between these four seemingly interchangeable terms.

A tax is the purest economic manifestation of the state’s monopoly over the legitimate use of force within its territory. That’s because a tax is not accompanied by the promise of any specific service by the government in return. The money raised from taxes goes into the consolidated fund of the relevant level of government. Then on, it’s the government’s prerogative to decide what this money should be spent on. So if you were to file a case refusing to pay income and property taxes on the grounds that the road outside your house is broken, you would’ve no chances of winning the case.

A fee, in contrast, involves a quid pro quo. You pay for a service or good in return. When you pay a parking fee, you pay for the right to occupy a physical space for a specific period of time. The linkage between what you pay and what you get in return is much clearer than is the case with taxes. It is for this reason that collecting fees for private services is a less distortionary way of raising resources for local governments. We had covered this in more detail here.

A cess is tied to an earmarked purpose. The money raised through a tax is held separately to fund a project that the cess is meant for. A Swachch Bharat Cess, for example, is a levy on services, the proceeds of which are used to fund the Swachch Bharat Abhiyaan. If you filed your income tax returns, you would have also noticed a health and education cess of 4 per cent. A legitimate question is that if this cess is being used to finance something as core as health and education, what were the taxes you pay being used for in the first place.

Through some legal chicanery, the government has another advantage of raising money through the cess route. This money doesn’t fall in the divisible pool that needs to be shared with other levels of government. Unsurprisingly, the union government has been raising cesses to subvert the Finance Commission’s recommendation of devolving a larger chunk of the divisible pool of money to state governments.

Surcharges are eviler. They are merely taxes on taxes. They are not raised for an earmarked purpose. Neither are the proceeds shared with lower levels of government.

So that’s that. There are many ways in which governments can extract money from you, some better some worse.

For more, read:

* Why cesses are evil

* Cesses and Surcharges: Concept, Practice and Reform, A Fifteenth Finance Commission Study conducted by Vidhi Centre for Legal Policy

Matsyanyaaya: Decoupling Dynamics

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane

A lot has been written about businesses moving away from China as a fallout of geopolitical tensions with the US. Fewer write-ups have tried to imagine what this decoupling would actually look like. A recently released report by the European Union Chamber of Commerce in China & MERICS does a good job of analysing this process.

The report breaks down decoupling into nine layers in four major categories:

* Macro decoupling – political and financial;

* Trade decoupling – supply chains and critical inputs;

* Innovation decoupling – research and development (R&D), and standards; and

* Digital decoupling – data governance, network equipment and telecommunications services

Of these, the authors identify three layers of high concern — decoupling of critical inputs such as semiconductors, software, and rare earths, decoupling of data governance regimes, and decoupling of standards. In contrast, financial decoupling is less likely because of China’s inability to internationalise renminbi and its continued dependence on the US dollar even for its Belt and Road projects.

In short, the US-China confrontation is likely to play out over critical and emerging technology and not over finance and industrial production.

Finally, there’s a useful framework visualising how decoupling across the nine layers might look in three scenarios.

HomeWork

Reading and listening recommendations on public policy matters

* [Book Excerpt] Toppling the myth of meritocracy: Excerpt from Michael Sandel’s “Tyranny of Merit: What’s Become of the Common Good?”

* [Article] Robert Farrington writing in the Forbes: “The Moral Hazard Of Student Loan Forgiveness”

* [Article] Prohibition’s ghosts continue to linger in Mumbai, writes Shoaib Daniyal.

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

The West German band Scorpions released their anthemic number Wind of Change sometime in early 1991. It is hard to find a better popular culture artefact that captures the mood in Europe during those times. The Berlin Wall had come down, democratic revolutions were sweeping across the countries of eastern Europe and it was clear the liberal democratic order running their economies on the ‘Washington consensus’ had won the Cold War.

The lyrics had both that triumph and a hope for future contained within:

“The world is closing in

Did you ever think

That we could be so close, like brothers

The future’s in the air

Can feel it everywhere

Blowing with the wind of change..

The wind of change

Blows straight into the face of time

Like a storm wind that will ring the freedom bell

For peace of mind”

To broaden things a bit beyond Europe, the 90s were also the time when China was entering the global economy and India was ‘reforming’. Things seemed to be all converging towards the same end. The ‘end of history’ as Fukuyama put it was nigh. Liberal democracy was the ultimate political system. Nothing could better it. We just needed to wait for every nation-state to realise this truth.

Not Quite The Expected Future

Exactly 30 years later, the obvious question is staring at our face. There’s the rise of populist, xenophobic and authoritarian leaders all across eastern and central Europe over the last decade. Russia is a kleptocratic oligarchy that bullies it neighbours who don’t toe its line. On various counts, India has regressed on liberal values and has slowed considerably on reforms. China, contrary to expectations, didn’t become more liberal or democratic as it integrated itself with the world. Instead, it now mocks the liberal western order for its weakness while exporting its brand of illiberal governance as it continues it inevitable rise to the top. Leave these aside for a moment. What’s worse, even the western democracies that were flagbearers of liberalism are caught in the pincer-like grip of populist political urges on both the right and the left.

So, what happened?

How did the spirit of liberalism that pervaded the world in the 90s dissipate so easily? Well, there’s a whole small-scale industry that’s developed over the years to answer this question. And I must add I’m a platinum-card carrying customer of this industry. Over the last year or so I have been reading up every book that elaborates either on the failure of the market economy or the shortcomings of liberalism.

The Light That Failed

A recent entrant to this list is the magnificent ‘The Light That Failed: Why The West Is Losing The Fight For Democracy’ by Ivan Krastev and Stephen Holmes. Krastev, a Bulgarian by birth, serves at the Institute for Human Science in Vienna while Holmes teaches at NYU School of Law. They bring a wide east-west perspective to their arguments on why liberalism failed. Among the books I have read in this genre (including Fukuyama’s Political Order And Political Decay), this is the most analytical in understanding the underlying psychosis of illiberal, populist movements sweeping the world.

At the start of the book, the authors talk about John Feffer, a young American, who in 1990 spends most of the year traversing across post-Communist Europe with an intent to record the transition of these countries into free, open and liberal societies. There’s something Naipaul-ian about this. Naipaul wrote Among The Believers based on his travels across non-Arabic Muslim world with a long pre-Islamic history (Iran, Pakistan, Malaysia and Indonesia) immediately after the Iranian Revolution. Naipaul wandered around without a definite plan, talked to a cross-section of people and ended up with deep insights about these societies. In a similar vein, Feffer spends most of his time speaking to local people to document their hopes and apprehensions in times of tumultuous change in their lives. And quite like Naipaul went back to the same countries two decades later and wrote Beyond Belief, Feffer goes back in 2015 to speak to the same people on how their lives have panned out in the intervening period. What he found was a warped kind of capitalism had taken root that had accentuated inequalities in the society. There was widespread resentment of western values that were transplanted there and a feeling of betrayal about the failed promise of 1990s. Feffer concludes: Communism was the god that failed for the post WW2 generation in eastern Europe. For the current generation, liberalism is the god that failed.

While Krastev and Holmes explain the reasons for the failing in eastern Europe in great detail, there are broader conclusions one can draw that could be used to explain the widespread disappointment about liberalism across the world. I drew three of them.

* Cheap Imitation: Liberal democracy adapted by these countries are a cheap imitation of the western model. There was limited attempt at locating it in the history and the culture of these nations. The national traditions were given a go by and there was no desire to transform the society from within to manage this transition. Foreign experts who barely understood the ground realities were flown in to set up democratic institutions. There was festering discontent among people who found the struggle to become a cheap imitation of a western democracy humiliating. The nativist backlash shouldn’t have surprised anyone. A spark was waiting to be lit. The populist leaders waded in. They questioned the superiority of this model, delegitimised the moral authority of political parties that followed the western liberal mores unquestioningly and spoke about a glorious past which should be the guiding light for the society. It worked. This is pretty much the playbook for all populist leaders around the world. Some of this has been followed in India too. The only thing remarkable about us is the backlash came some 70 years after independence. There was an undercurrent of resentment about western imitation in our society driven by a liberal constitution that seemed to have been thrust upon us. A combination of factors – heterogeneity in our society, charismatic leaders who were steeped in western ideals and an urban, educated elite who held the levers of power and media for long – seemed to have kept this resentment at bay for long. But this edifice is crumbling. Or maybe, it has already crumbled.

* Triumphalism of Liberals: The hard-won benefits of cold war were frittered away by a remarkable dropping of the guard by the liberals over the last two decades. As the authors write: “Liberalism fell in love with itself and lost its way”. The years of heady growth till 2008 where an interplay of forces of globalisation, technology advances and cheap credit kept the growth engine humming and led everyone to believe a rising tide was lifting all. The Global Financial Crisis (GFC, 2008) was a rude jolt. The faultlines of economic inequality, unaccountable financial institutions, a self-serving set of elites and a corrupt political class became stark and visible. The reckoning that was expected after the GFC never came. Instead the solutions to the GFC led most to believe the real culprits not only got away but also profited from it. The belief that losses are socialised while the gains are cornered by a few strengthened. GFC still casts a long shadow on the polity across the world. We have reached a stage where both the extreme right and left rile against liberalism to work up their base following the GFC.

* Demographic Anxieties: As the growth became more lopsided and inequality grew, the demographic anxieties strengthened. These anxieties take various shape in different democracies, but they have one similar feature – a sustained othering of the minority. The irrational fear that the more fecund minorities will gradually engineer a democratic and cultural ‘coup’ by turning themselves into a demographic majority and take over political and social power has gained strong currency. This takes shape differently across countries. In eastern Europe there is a steady degrowth of the native ethnic groups over the last 2 decades where the educated, liberal elites have voted with their feet and left their homes. In US and UK, income inequality, social fallout of globalisation and an ageing population has fed the paranoia about minorities. The story in India, of late, is well known to be repeated here. The common outcome of all of this is a lurch towards ethno-nationalism with a ‘nation-first’ doctrine. It is a far cry from the boundaryless global village that liberals thought they had achieved sometime back.

In the list of books I have read over the past 18 months, The Light That Failed scores over others in its rigorous analytical dissection of the reason for failure of liberalism. It is short on rhetoric. And unusually for the genre, it believes a diversity of ideologies is good while simultaneously holding out hope that liberalism will learn its lessons. That it will not again strive for homogeneity and ideological dominance around the world.

The authors end the book with a tip to Rudyard Kipling’s first book (from where the title is drawn) The Light That Failed. That novel had two different endings – one happy and one sad. The authors hope that a “chastised liberalism having recovered from its unrealistic and self-defeating aspirations to global hegemony, remains the political idea most at home in the 21st century. It is our choice to celebrate rather than moan.” That’s their expectation of a happy closure.

HomeWork

Reading and listening recommendations on public policy matters

* [Video] Krastev and Holmes discuss the book at CEU (Vienna)

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.

Global Policy Watch — Storming Se Storming Tak: From 1642 To 2021

- RSJ

Here’s a short quiz to begin things.

What’s common to these dates (not an exhaustive list)?

4 January 1642: England

Feb 27, 1933: Germany 

Feb 23, 1981: Spain

April 27, 2017: Macedonia

Difficult?

Here’s a clue. The latest entrant to this list

Jan 6, 2021: USA

‘Workout-able’ now?

These are select instances of attacks on parliament buildings in democracies over the years. Of course, this is different from attacks that happen within the parliament building where lawmakers have a go at each other using microphone stands, paper-weights and files as projectiles. That’s a rich and glorious tradition where Taiwan, South Korea and India are global leaders.

The attacks on parliament from the outside is a different phenomenon. It points to a fracture in the common belief among citizens about the power or legitimacy of the sovereign. This is not mere symbolism. Often the attacks are real attempts to disrupt or change the outcomes of a parliamentary process to elect the head of the government.

That’s what happened, say, in Spain on Feb 23, 1981 when Lt. Col Tejero and his small band of army men burst into the lower house of the Spanish legislature during the vote to elect a new Prime Minister. The attempt to overthrow the democratic regime came unstuck when King Juan Carlos denounced it in a televised address. The storming of the Macedonian parliament in 2017 was done in somewhat similar circumstances though without any section of army backing it. That brings us to Germany. The fire at Reichstag in 1933 right after the Hitler had been sworn in as the Chancellor was blamed on a communist conspiracy. It is almost certain now that this was engineered by the Nazis to demonise their opponents. This incident of arson was then used by the Nazis to issue a nationwide emergency and pursue the communists with a vengeance. The Communists MPs were arrested and the Nazis won the elections to those vacant seats as was expected. Within a year the Nazis had complete control over the German state. You know how that story ends.

The Original Storming

My interest, however, is in the first instance of the storming of a Parliament: Jan 4, 1642.

This was no ordinary rebel laying siege over the lawmakers in Westminster. It was Charles I, the king of England. He entered the Parliament with armed soldiers to arrest five MPs who he accused of treason. What had they done? Well, to the king and his loyalists, they were anti-nationals. Sounds familiar. They were accused of encouraging Scotland to invade England and a conspiracy to defame the king. Charles went into the parliament and called out the name of the five MPs seeking their arrest. He asked the House speaker, William Lenthall, about their whereabouts. Lenthall responded:

“May it please your majesty, I have neither eyes to see nor tongue to speak in this place but as this House is pleased to direct me whose servant I am here; and I humbly beg your majesty's pardon that I cannot give any other answer than this to what your majesty is pleased to demand of me.”

In a historic first of sorts, the speaker had sided with the parliament over the divine will of the king.

“All my birds have flown,” Charles I said as he scanned the member benches for the five MPs.

The storming of the parliament by Charles I was a seminal moment in the history of democracy. The tussle for sovereignty between the parliament and monarchy that had been simmering for over three decades had reached its flashpoint.

The English parliament in those days was a collection of landed gentry who controlled the exchequer through their power of collecting taxes. The king needed its approval to raise taxes. By the time Charles I ascended the throne in 1625, the Crown was deep in debt no thanks to the expensive wars of the Tudor and Stuart periods and the lavish lifestyles of the royalty. This apart Charles had other problems too. There was a deep suspicion among the aristocrats about the strength of his Protestant affiliation after he married the Catholic Bourbon princess Maria of France. His subsequent religious acts did nothing to dispel this impression. The desire of Charles I to go to war with Scotland meant he wanted the parliament to increase taxes and do his bidding. The parliament continued to resist and Charles dissolved it in 1629.

The next 11 years when he ruled without a sitting parliament is termed his ‘personal rule’. He introduced new taxes arbitrarily, supported Catholic religious policies and hounded the aristocrats who opposed him. The tyranny was going well but for a small hitch. He still needed the parliament to convene for collecting the tax revenues. He called a new parliament in 1640 in the hope he will be able to control it. Not quite. The parliament passed an act that forbade its own dissolution and went about rolling back the policies that Charles had set in motion. The stage was set for him to storm the parliament looking for the errant MPs.

The Post-Metaphysical Age

The storming of the parliament led to what is collectively called the English Civil Wars (1642-1651) between the Royalists and the Parliamentarians. Charles I was tried and executed in 1649 (none of this namby-pamby impeachment business in those days). There were three key outcomes of the civil wars:

* The replacement of English monarch by the Commonwealth of England

* The consolidation of Protestant ascendancy and the defeat of Catholicism in England. The downstream impact of this was huge

* The precedent that the English monarch cannot rule without the Parliament’s approval. The seal of Parliamentary sovereignty and the establishment of individual rights, however, were legally established only after the Glorious Revolution of 1688.

There’s a subplot here.

A gifted English polymath who had fled England in 1640 to Paris watched all this unfold with interest and concern. A man of science who counted Galileo, Bacon and Mersenne among his friends, he was developing a theory of about people, nature and politics as he came to terms with the chaos in his country. He was also the tutor to Charles II, the young prince, who was in exile in Paris. By 1650, he was ready with his magnum opus that broke new ground on the relation between the state and its subjects. In 1651, he returned to England.

His name was Thomas Hobbes. The book was Leviathan.

The Genesis Of The Modern Liberal State

Hobbes is, arguably, the founder of modern political philosophy and Leviathan is a masterpiece of original thinking. Hobbes made three core arguments in it:

* The State of Nature: Human beings left to themselves will pursue their objectives of maximising their comforts. These pursuits will bring them in conflict with others. People are similar (within a range) in terms of their physical and mental prowess. So no one person can dominate others for long. This led him to conclude that humans in their state of nature would be in constant strife with one another. “A war of everyone against everyone” is how he called it. In this state, he famously said, human life would be “nasty, brutish and short.”

* The Laws of Nature: Hobbes argued that humans were rational beings who understood the futility of living in the state of nature. They would seek a practical solution to establish peace. To Hobbes, this solution was for people to establish mutual covenant (agreement) among themselves to submit to the authority of a sovereign. Simply put, people will be willing to forego some of their freedoms to a sovereign institution in return for peace and rule of law governed by that authority.

* Unlimited Sovereign Authority: For Hobbes, once the people had come together to hand over the power to the sovereign, its power was unlimited. There was no quid pro quo involved here. No real checks and balances. So long as the sovereign kept peace among its people and protected them from outside powers, it retained its political legitimacy. Nothing else mattered. Any attempt to split the powers of the sovereign would render it ineffective.

The impact of Leviathan on future political philosophers was profound. In many ways, it is the foundational text of the modern state. Everyone from Locke, Rousseau, Weber to Rawls have used it either as a springboard or as a counter to develop their social and political theories. The criticism of Hobbes over the centuries is also useful to shine a light on the originality of his thinking. The usual arguments offered against his political philosophy include:

* A bleak view of human nature: The short conclusion easily drawn from Leviathan is that Hobbes held no illusions about the nature of human beings. Left to themselves in a natural state, they would be in an endless series of internecine wars. This is Hunger Games territory. But Hobbes was a bit more nuanced than that. To him, it is not human nature to be in a war of everyone against everyone. Instead, in the absence of laws and its enforcer, human beings pursuing their rational interests will get in the way of each other. This will be the basis for strife and not the absence of better angels of their nature

* Social contract theorist: Some view Hobbes belonging to the line of social contract theorists who thought and wrote about the arrangement between the society and the state or the ruled and the rulers. This isn’t exactly accurate. Social contract theory assumes that society already exists with a contract among its members. The society then enters into a ‘second contract’ with the state by relinquishing some of its freedom in exchange for peace and stability from the sovereign. For Hobbes, there was no second contract. The society or the state don’t exist ab initio. There is only a single contract - the covenant between the members of the society to come together. The sovereign emerges from this. It is almost like the ‘Big Bang’ theory of political philosophy.

* Totalitarian: The other criticism of Hobbes is he justifies a totalitarian regime when he lets the sovereign off the hook for any kind of quid pro quo contract with the society. This is misreading of the term absolute. Hobbes considers the sovereign absolute in terms of its power which means they ‘can interfere’ in ‘any aspect’ of the lives of its citizens. This is different from a totalitarian regime which is based on the idea that the state ‘will permeate’ into ‘every aspect’ of the lives of its people. In fact, Hobbes was the first to free religion from the construct of the state. Once you are free from theology, you set the basis for a liberal state.

Bookended By Hobbes

The storming of the Capitol building by pro-Trump protesters marks a moment in the history of democracy in America. There’s always a temptation to over-read the current moment. But the irreversible slide of the discourse, the shrinking of the middle ground with a loony, conspiracy-theory fed right and an anarchist, self-righteous left and an almost cult-like adherence to prior beliefs that get accentuated in the echo chambers of social media have meant this moment was nigh. The strength of the social covenant (“we, the people) is under stress rarely experienced before. Once that covenant is broken, the political authority wanes or gets delegitimised as we see it happening in America for most of last year. Unless checked and reversed, we will be back to the state of nature. Chaos will follow.

Maybe there’s a polymath philosopher watching all of this unfold with unease while developing an original political thesis like Hobbes over four hundred years ago. The storming of the English parliament of 1642 and the siege of the Capitol in 2021 seem to bookend the political era whose foundation was laid by Hobbes.

There’s a need for a new social contract for these times.

A Framework a Week: OOO

Tools for thinking public policy

— Pranay Kotasthane

The union government’s first post-pandemic budget will be presented in the Parliament on Feb 1. The all-consuming buildup has already begun as if it were a Rajinikanth movie. As the budget date nears, you will come across many more number-based narratives — the need for higher public health expenditure, the imperative to reduce allocations for subsidies, and the necessity to adequately fund the requirements of our armed forces.

So let’s revisit a framework that helps put these numbers in perspective. The Outlays-Outputs-Outcomes (OOO) framework is a useful way to analyse the many schemes that the Finance Minister will announce on Feb 1.

Inputs/Outlays refer to the resources provided to a scheme or project that the government runs. Once the budget is presented, virtually all the public discussion will be on these outlays. This gives an idea of how the union government prioritises all its functions. But as we all know, outlays for a project is no guarantee for success. To measure success, policies or schemes need two other parameters: outputs and outcomes. Outputs refer to the direct and measurable product of program activities, often expressed in physical terms or units. Outcomes, on the other hand, are the long-term benefits that a project or intervention is designed to deliver.

Using this framework allows us to scrutinise government schemes better. As Ajay Shah writes:

This framework became famous around education, where the inputs are school buildings and recruitment of teachers, the outputs are kids who are enrolled and attend school, and the outcomes are what the kids actually know. From about 2004 onwards, we have understood that very large increases in public expenditure in the per-pupil expenses were associated with essentially no gains in the outcomes. The education bureaucracy has proclaimed its victories as counted by school buildings, teachers employed or kids enrolled. But at a fundamental level, state spending on elementary education has not delivered: vast increases in the input has not delivered gains in the outcome.

This framework also yields a useful vocabulary for measuring success. We can assess policies in terms of its economy, efficiency, and effectiveness. Economy refers to inputs. It answers the question: are project inputs being purchased at the right price? Efficiency relates to outputs over inputs. It answers the question: what is the relationship between investment in inputs and the outputs that are produced? Effectiveness relates to outcomes over outputs. It answers the question: are outputs leading to the expected outcomes? (all definitions are taken from Indicators of Inputs, Activities, Outputs, Outcomes and Impacts in Security and Justice Programming, DFID).

Ideally, any government programme should begin with a theory of change that connects the desired end state (outcomes) to the programme activities that need to be carried out (outputs) which further require a set of resources (inputs).

Seen from this frame, a policy that fails to achieve the desired outcomes can mean two things. One, that there was an implementation failure. Insufficient outlays or difficulty in converting outlays into outputs due to corruption are examples of implementation issues. Two, that there was a theory of change failure which means that the assumed causal linkage between outputs and outcomes was incorrect.

In the Indian context, a commonly held notion is that governments have good policies but poor implementation. What’s less appreciated is that policies often fail because the underlying theory of change itself is inaccurate.

Better data and feedback help uncover this theory of change failure. For example, ASER surveys have now shifted the conversation on education by disproving the theory that more schools and better-paid teachers alone can lead to better student learning outcomes. The National Family Health Survey data can similarly help question the assumed causal linkages between health outlays, outputs, and outcomes. It is indeed a positive sign that on both health and education, we are talking effectiveness and not just outlays. This reflects that governance in these areas is maturing.

PS: For the upcoming budget, skip the outlay PDFs and open this new document called the Output Outcome Framework. It maps each government scheme outlay to the desired outcomes and outputs over the next financial year. If the budget were also to map the performance of each scheme against the promised outcomes in the year gone by, it will go a long way in correcting both implementation and theory of change failures.

Matsyanyaaya: False Equivalences with Chinese Characteristics

Big fish eating small fish = Foreign Policy in action— Pranay Kotasthane

Political turmoil in the US has understandably shaken many of us here in India. Events of this magnitude lead to a general despondency about democracy itself. The hope is that this despondency would get displaced by introspection and positive alternatives.

At the same time, we need to guard against narratives that cite these events to equate the US and China. One strand of Indian strategic thought has long held the view that a world order shaped predominantly by the PRC might be just as good (or bad) for India as the current one underpinned by US power. China’s border incursions last year led to the deprecation of this narrative but the churn in the US can give it a new lease of life.

Aided by the PRC’s attempts at drawing false equivalences on one hand and spurred by the self-criticism that is bound to dominate American thinking, we might see arguments such as this make a comeback:

We do not know how Chinese hegemony will work in the future, but we know the exploitative and heinous character of the French and the British Empires. The question is, why are we not as afraid of the West as we are of the Chinese? [China is Not Alone in Adding to the Indian Ocean Woes, Economic & Political Weekly, Atul Bhardwaj, April 2018]

Nothing can be further from the truth.

For one, there is enough evidence to suggest that a Sinocentric world order will not align with India’s quest for yogakshema — peace and prosperity for all Indians. Look at the way China has alienated — simultaneously and purposively — a new generation of peoples in all of its neighbouring countries. Look at how the Chinese Communist Party has imposed one language on a diverse set of its own peoples. And finally, look at how it has transformed its all-weather friend into a mere tributary.

Second, it’s true that the US conduct on the liberal international order is not untainted. But the norm of a liberal international order is in India’s own self-interest. We must and we do question the US when it deviates from this norm. For example, the Indian PM’s condemnation of the Capitol violence is possible in the current order. In a Sinocentric world, this norm itself will cease to exist. If the Indian PM were to criticise something even remotely equivalent in China, the party-state will spring into concerted anti-India action in economic, political, and military dimensions.

These are two clear and important differences that we shouldn’t take our eyes off in the zeitgeist.

HomeWork

Reading and listening recommendations on public policy matters

* [Book] Leviathan by Thomas Hobbes with an essay by the late W. G. Pogson Smith (skip the religious bits)

* [Article] Tom Mctague in The Atlantic: Is This How Greatness Ends?

* [Article] Rathin Roy distinguishes between the better and worse forms of deficit financing.

* [Paper] Abel Schumann’s OECD paper Using Outcome Indicators to Improve Policies is a must-read for public policy enthusiasts.

* [Podcast] Indrani Bagchi discusses the geopolitics of the Quadrilateral Security Dialogue on Puliyabaazi.

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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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

The farmers protesting against the three new farm laws (“Farm Laws 2020”) have entered into the seventh round of negotiations with the Union government. We have discussed these laws a few times here, here and here. For a moment, leave the laws aside and focus on the protests. Not the conspiracy theories about who is funding them and what their ‘real’ agenda is. But on how protests work. I had a few questions as I thought about them.

Why do some issues generate protest over others?

Take the last couple of months in India. We have the new farm laws that seek to open up the markets for farmers to freely sell their produce. The economic conditions of our farmers under the APMC mandis and MSP regime need no retelling. The new laws are new only for India. In most parts of the world, this is normal. Yet we have protests that have built up quite a steam.

Now contrast this with the Prohibition of Unlawful Conversion of Religion Ordinance that the UP Assembly passed in November. This so-called love jihad law is being sought to be replicated in other states like Himachal Pradesh, MP, Haryana and Karnataka. The provisions under these laws (which are quite similar across the states) fly in the face of the fair, liberal and democratic order that India has enshrined in its constitution. There is a subversion of the individual right to freedom of religion, free will and of the fundamental legal principle on who bears the burden of proof. And it isn’t as if there weren’t existing laws to curb forced mass conversions in these states. These laws have only one purpose – to strengthen the strawman about a global Islamic conspiracy to turn India into a Muslim majority state. Demographics, arithmetic, or logic militate against this strawman. But the strawman has been created and now it is about demolishing it to prove the effectiveness of the regime.

So, what explains the absence of any mass protests against questionable love jihad laws while there are protests against farm laws that most political parties had in their manifestos in the past?

There are two possible reasons for this. First, for any protest to start there is a need for a core group that feels aggrieved by an issue and questions the fairness of the actions of the state or the society. Both the points are critical – a sense of hurt and a moral basis to question the action that has created it. Second, the core group has to have a long-held common identity that’s clearly defined. It isn’t an identity that has been formed only because of the issue on hand.

Now let’s use this to look at love jihad laws.

Is there a core group that’s aggrieved by this? Muslim youth? Not really. The idea that there’s an organised group of Muslims being trained to woo Hindu girls in some kind of love academy and then sent out to marry them and Islamise India is in the realm of fantasy. As a strategy, it’s plain stupid with high investment and low returns. There’s no ‘superhit formula’ for wooing girls and Hindu girls aren’t waiting to be picked while having no agency of their own. So, there won’t be any Muslim or Hindu protest against these laws. As an aside, this was different in case of the Citizenship Amendment Act. There you had a core group (of Muslims citizens) who had a reason to be aggrieved and a moral basis to protest. On love jihad laws, the only group aggrieved would be those who believe in liberal values of freedom and justice. They will question the fairness of it. But does this group of ‘liberals’ have a long-held common identity? Not exactly. Most liberals can’t agree on the definition of liberals itself, forget about forging a common identity. So, don’t expect mass protests against a genuinely bad law anytime soon. Also, expect more of such laws in future that play the dog-whistle to the base without any protests from any group.

Things are a bit different with farm laws.

There’s a core group of farmers in Punjab and Haryana (and possibly in western U.P.) that benefit from the MSP regime who are agitated by these laws. That they – farmers whose toil ensures food on our table – are being given short shrift gives them a moral basis to protest. Finally, as farmers, they have a common identity around which they have organised, politically or otherwise, on numerous occasions in the past. So, you will have protests from this group.

That brings us to the next question.

What creates momentum for a protest?

Protests are started by a small, core group of protesters. The economic rationale is simple. The costs of protesting – organising, the opportunity cost of time and the likely threat of state violence – is weighed by them against foregoing existing benefits or incurring new losses (tangible or intangible). The initial group of protesters tend to be those who stand to lose the most. This loss outweighs the costs especially the threat of state violence which could be high for a small band of initial protesters. As the protest gets going, a positive network effect comes into play. Every new member joining the protest has a lower marginal cost than the previous member since the costs of organising and of state violence is now spread over more people. But the benefits remain the same. Or increase because the probability of a protest being successful increases with more members joining it.

The positive network effect is relatively easier to create in the radically networked societies we inhabit now. Once the costs and benefits are articulated clearly, the dissemination costs through social media can be almost zero.

Two other factors influence the momentum.

One, the ability of protesters to broaden their support base without diluting the focus of their objectives. This is a delicate balance and often protests fail in treading this line. Not broadening the base runs the risk of the momentum of protest fizzling out eventually since the state can play the patience game for longer than protesters. But adding too many allies who might bring in their own issues into the mix and then speak in multiple voices can derail the original cause of the protest. The great mass protests of Indian independence (Non-cooperation or Quit India movements) are fine examples of getting this balance right. Two, the ability of the state to run a counter-narrative about the protest and undercut the support base. The democratic states aren’t usually great in doing this since their response time is significant when compared to the speed of a radically networked group. However, a more authoritarian state can compete with a counter-narrative through mainstream media and through its own radically networked base which is ready and can respond quickly.

The current farmers’ protest has two problems in creating momentum. The positive network effect hasn’t taken shape in states beyond Punjab and Haryana. A likely reason for this is the benefits of the APMC and MSP regime are restricted to those two states while farmers from other states don’t have any incentive to protest against the new laws. The other reason is possibly the poor articulation of the grievances of the farmers and its broadcast to the farmers across the country. This scenario is unlikely in current times of social networks.     

Finally, what does it take to make a protest successful?

The state responds when the continuation of the protest threatens its core interest of perpetuating itself. The size and the spread of the protest could reach a critical mass in the calculation of the state where it could threaten a regime change. Or the protest derails the lives of ordinary citizens who then turn against the state. Reasonable states will act in advance of such a scenario. In most cases, the state partly accepts the moral basis for protests and arrives at a reasoned compromise or it lets it counternarrative undercut the protest and let time take its own course. Only in rare cases does a state accept the moral basis of the protest and go back on its stand.

The protests we have seen in recent times (CAA, Article 370, farm laws) have seen this government use the counternarrative effectively. In fact, more than any other time in the past, this strength of the current regime will render most street protests ineffective. The protest on farm laws is a bit tricky since farmers account for 40-50 per cent of the voters in most states and have a history of mobilising themselves during elections. The narrative created in favour of the farm laws is strong and the limited appeal of the protests in other states has meant the government has stalled the protesters with multiple rounds of talks. Considering the limited geographic spread of the protests, the likely conclusion to these talks could be a few concessions made in the laws for these states. A full repeal of these laws is unlikely unless a groundswell of support for the protesters that’s so far missing emerges in the next few weeks.  

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Nathan Heller in The New Yorker: Is There Any Point To Protesting?

* [Article] Pratap Bhanu Mehta in The Indian Express on the farmers’ protests.

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

— RSJ

Happy 2021 everyone!

There’s no logical reason to believe that turning over to a new year will make a difference in the fortunes of humankind. But we are an optimistic lot.

So, we hope the spectre of 2020 is behind us. It was what it was. If you are a believer, you’d think there was a cosmic message to us through the year.

Like Alexander Pope wrote in that great defence of the ways of God to men – An Essay On Man:

“Hope humbly then; with trembling pinions soar;

Wait the great teacher Death; and God adore!

What future bliss, he gives not thee to know,

But gives that hope to be thy blessing now.

Hope springs eternal in the human breast:

Man never is, but always to be blest:

The soul, uneasy and confin'd from home,

Rests and expatiates in a life to come.”

Pope concludes with:

“All nature is but art, unknown to thee;

All chance, direction, which thou canst not see;

All discord, harmony, not understood;

All partial evil, universal good:

And, spite of pride, in erring reason's spite,

One truth is clear, Whatever is, is right.”

We must accept whatever is, is right

We will continue to write to help us make sense of the world around in 2021. But a year like 2020 helps put things in perspective. The world works in mysterious ways. You can’t control it. Spontaneous order is ordained.

Ten (or Fifteen) Predictions For 2021

The laziest way to start a new year edition is to post predictions. Admittedly, I’m basking in my garden with the late winter morning Bangalore Sun warming my toes. So, let’s do the lazy thing here.

#1

By the end of 2021, we will all realise we overrated the long-term impact of the pandemic on everything. There won’t be any ‘new normal’ to write home about. Things will be more of the same. There will be a plethora of books on the post-pandemic world (hey, Pranay has edited one too😊) and the lessons to be drawn from the pandemic. But my guess is barring the strange experience of the lockdown that will linger in our memories, the world at the end of 2021 will be quite similar to how it was at the end of 2019. There will be fewer business travels and more people will work from home, but this will be a mere acceleration of the long-term trend than a radical departure from the past. That apart there won’t be any great reset.  

#2

Global financial markets will be one area where the impact of the pandemic will be felt in the (really) long term. Don’t worry we will all be dead by then. The size of the stimulus in most developed economies and the amount of liquidity pumped into the system will mean two things – eventual inflation and a repeat of the taper tantrum in future. In some ways, we have subscribed to the modern monetary theory (MMT) without admitting to it. Deficits have come to mean nothing and any future slowdown in the economy or fall in markets will mean more stimulus. Someone in future will be left holding the can. We can’t see them nor can we feel deeply empathetic about them. ‘Deficit is all a myth’ line of argument will gather momentum.

#3

The stock markets are in bubble territory now. But there won’t be any reckoning in 2021. The stocks doing well during the pandemic will continue to do well. Others who were impacted by the lockdown will limp back to normalcy. With interest rates at historic lows and excess liquidity all around, the top 2-3 per cent who invest in equity will have no other options but to park surplus funds in the market. The millennials (who believe the markets only go up?) will enter the markets in large numbers on the back of zero-fee platforms like Robinhood and Zerodha. The divergence between the real economy and the street will continue to confound all of us.

#4

We spent a lot of time in 2020 thinking about economic recovery. What policy actions will aid it, what will be the shape of it and how quickly will we get back to the pre-pandemic levels on a sustained basis? The early signs are of a K-shaped recovery around the world. This will be strengthened in 2021. A small set of companies and people will see a rising graph of growth and prosperity. The long-term impact of the pandemic will be to worsen inequality. The early but definite signs of this will show up in 2021. In India, this K-shaped recovery will have a second-order impact. We will measure recovery on the rising part of the ‘K’ since the data there is available at a greater frequency. Expect terms like ‘roars back’, ‘strikes back’ to be in vogue in the second quarter of the year while describing the economy. There will be limited economic rationale behind such commentary.  

#5

The Indian economy will trundle along. The twin balance sheet problem will persist. The impact of the moratorium on the financial services sector will show up in the latter part of the year. PSU banks will need more capital once they are done with their consolidation. The government will find it difficult to do that. Some kind of divestment will be attempted that will be stalled by the usual protests from the opposition, unions and public opinion. Banks and NBFCs will be extremely careful with lending, especially to new projects or new customers. Credit offtake will be weak and the revival of consumption story will be dampened because of this. Private investments were trending downwards anyway before the pandemic. Its revival seems unlikely in 2021. Government finances will continue to be under strain and its borrowings will crowd out others. Expect RBI to continue to bear the burden of holding up the economy.

#6

The Chinese economy will lead the global growth engine. Despite its misadventures during the pandemic, China will continue its rise to the top. The Biden administration will take a more accommodative stance towards China. The trade war will subside and the EU will continue to strengthen its relationship with China. The anticipated move of global supply chains away from China will be insignificant in the larger scheme of things. China will continue with bullying its neighbours and those who don’t toe its line. India’s reluctance to be seen in the US camp and the new Biden administration will mean there won’t be any real Quad counterpoint to China in Indo Pacific. Most of US attention will be on domestic issues where race and identity politics will consume everything in the next year. There will be the usual handwringing about a democratic coalition of the willing to take on illiberal Chinese authoritarianism. But those will be words. There won’t be any real US response to China’s rise to the top.

#7

Technology sovereignty will be a key theme in 2021. Countries across the western world will assert their technology independence. The most common form this will take is in keeping Chinese technology companies out of strategic sectors like telecom and finance infrastructure services. Some early efforts will be made to create common standards and shared investments in data protection, usage of AI, 5G protocol and cybersecurity in the western democracies. There will be greater regulation of Big Tech and social media platforms with some serious repercussions for Google and Facebook in 2021. The blunt instrument will be hiving off some of their businesses into separate companies. Or you could expect heavy fines for restrictive or anti-competitive practices and heavier hand of regulations on these companies.

#8

How to vaccinate India will be a policy question that will keep everyone busy in the first half of 2021. Everything about vaccines – procurement, pricing, storage, administration and safety – will test our policymakers. My guess is we will do quite well in this entire exercise. We know how to pull off large events of this kind. The state that’s all-pervasive and weak in getting things done is good in one thing. Mobilising people to stand in haphazard queues and getting them to do its bidding. Vaccination drive falls squarely in its sweet spot. Expect many ad hoc regulations, orders and trampling of individual liberties and common sense when this is being done. But we will surprise ourselves on this front. My bet is the PM uses the Republic Day platform this year to have the first person to be vaccinated in India. Expect it to be an old, female health worker from West Bengal.

#9

It won’t be a great year for reforms. The wrong lessons will be learnt from the protests against farm law reforms. Plus, the usual set of assembly elections and the weak economy post the pandemic will continue to weigh on the government. So good, bold and much-needed reforms across sectors will again go into the backburner. The weak economic performance will then be compensated by the unnecessary and illiberal social policies to keep the base enthralled. Expect more states to pass laws against love jihad and cow slaughter. Some kind of population control bill and revoking of the amendments made to the Constitution during the emergency might also be in news. Those worried that India is headed in the wrong direction will be driven to deeper despair.

#10

The BJP election machine will have a mixed year. Barring Assam where it should keep its majority and some gains in West Bengal, it won’t see much success. The campaign and the narrative building leading up to elections in Assam and West Bengal will not be for the faint-hearted. There will be a plethora of fake news, violence and no-holds-barred Muslim bashing. The signs are already there on the news channels. The opposition will remain largely ineffective with some kind of split happening in the Congress during the year. But there will also be the earliest sign of some kind of coming together of regional parties to counter BJP in 2024. This seems inevitable. PM Modi will continue to remain above all of this as he cultivates his spiritual Mahatma image.

— Pranay Kotasthane

There are two kinds of 2021 predictions I have come across. The first kind says that the post-pandemic world will be the same as the pre-pandemic one. The second kind says that the post-pandemic world will have a far-reaching impact on that one phenomenon that the author is deeply invested in.

Both kinds of predictions are susceptible to what Philip Tetlock calls ‘outcome-irrelevant learning’ — a situation wherein no matter the reality, people are in an excellent position to explain that what happened was consistent with their view.

One way to check outcome-irrelevant learning is first to make specific, measurable predictions and then reflect on real-world outcomes at the end of the prediction horizon. Which, for this newsletter, means we will do another post at the end of 2021 reflecting on our hits and misses.

With that caveat out of the way, I have five predictions to add to RSJ’s ten.

#11 Petrol prices in Bangalore will hit ₹100 at least once before the end of 2021.

We have previously written about excise duties on petrol and diesel being the superhero of last resort for state and union governments. Given the resource crunch that’s set to continue in 2021, I expect the retail price of petrol to hit a swashbuckling century in my city.

#12 A maximum of 2 CPSUs will be privatised by the end of 2021.

There are many news reports indicating the union government plans to sell its stake in over 25 CPSUs. My prediction is that in only two of them (possibly, Air India and BPCL), the government will sell all its shares. In the remaining companies, the government will reduce its stake or the sale process might not complete.

#13 GST will continue to have the current five tax slabs.

The fiasco on GST compensation cess has meant that union-state relations are in the wrong place. Negotiations will be more challenging as both sides will harden their stands. They will guard the status quo and resist attempts to simplify the GST regime.

#14 The status quo at Ladakh in terms of territorial control will continue.

Even if there is a reduction in the numbers deployed, PRC is unlikely to back off. A negotiated settlement doesn’t suit the PRC.

#15 The number of US service personnel in Afghanistan will fall below 2500 by the end of 2021.

There seems to be a bipartisan consensus on Afghanistan in the US. Trump administration plans to reduce uniformed US troops from the current 4500 to 2500 by Jan 15. My prediction is that Biden will stay the course.

Finally, I disagree with RSJ’s prediction that there will be no real response from the US to China’s rise. There might be fewer tariff hikes but efforts to slow down China’s progress in advanced technology will gather steam. I did not include this in my list as I couldn’t come up with a specific, measurable prediction in relation to US-China relations. It’s hard to make good predictions!

What are your predictions for 2021?

HomeWork

* [Video] Fareed Zakaria interview on his new book - Ten Lessons For A Post-Pandemic World. Snark alert: a bit amazing that he already has a book about the post-pandemic world while we haven’t gotten over the pandemic yet! But he makes sensible points here. Watch it.

* [Article] What is Wrong with Econ 101. An excellent primer on common misconceptions about economics.

* [Article] Ajay Shah explains the critical difference between Inputs, Outputs, and Outcomes in relation to NFHS data.

Note: Anticipating The Unintended will be on its annual break over the next two weeks. Normal service will resume from Jan 3, 2021

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

The focus of this newsletter is to make public policy accessible to the public. That’s a claim we often make around here. There are thinktanks and public policy specialists to advise those who are in power. We are at the other end of the pipe. Trying to influence the demand side of the market of democracy. The hope is that an aware and an enlightened public will demand better from their representatives. Once the pattern of demand changes, supply will adjust itself.

The reassuring bit about working at this end of the democratic pipe is the freedom to engage with and critique policies on their merits without tiptoeing our way around giant political or bureaucratic egos. Also, simplifying the language used in policy discourse is fun and enriching. Of course, the difficult part is getting people to listen to you. Not because it is difficult to reach them. Instead as we often realise, the public isn’t interested to know more. They interpret the world around them with limited information available to them and construct an imagined world in their heads. This constructed imagination is the lens through which they view all information they receive. This is what spurs them into political or social actions.

There’s no good answer on who should a public policy newsletter try and influence? The powers that be or the general public?

I realised last week while reading about the Lippman-Dewey debates, this is a century-old question. In the 1920s, the two were engaged in a fascinating duel of ideas and philosophy. While both believed in democracy, one saw it half-empty, the other half-full.  

Lippman’s Scepticism About The Ordinary Citizen

Democracy is founded on the belief that public opinion matters. But as the society becomes more advanced, knowledge more specialised and a wider range of issues impact lives, citizens find it difficult to inform themselves about all the issues impacting their lives. The ordinary public can’t be ‘omnicompetent’. This is the problem of knowledge that Lippman probed in his two seminal books – Public Opinion (1922) and The Phantom Public (1925). As Lippman wrote:

"The real environment is altogether too big, too complex, and too fleeting for direct acquaintance.”

The ordinary citizen “lives in a world he cannot see, does not understand and is unable to direct.” This leads to an inevitable discrepancy between “the world outside and the picture in our heads.” This “pseudo environment” in our heads is what we use to form political and public opinions. This is what political parties and media work on to create narratives. For Lippman this was the flaw with the democratic ideal of public participation in decision making. They are coming at it with the “most inadequate picture”.

Lippman though is empathetic to the ordinary citizen’s plight:

“My sympathies are with [the citizen], for I believe that he has been saddled with an impossible task and that he is asked to practice an unattainable ideal. I find it so myself for, although public business is my main interest and I give most of my time to watching it, I cannot find time to do what is expected of me in the theory of democracy.”

Democracy needs competent citizens. If the majority of voters aren’t able to make sense of the real world around them to make clear-headed judgments, what’s the point of it all?

Lippman’s response to this problem was in the role of experts. Representative politics “cannot be worked successfully…..unless there is an independent, expert organization for making the unseen facts intelligible”. An enlightened oligarchy of experts is the answer. In Lippman’s prescription, the expert is a disinterested participant with deep mastery of an area who advises those in power within the government or administration. As Lippman writes:

“The power of the expert depends upon separating himself from those who make the decisions, upon not caring, in his expert self, what decision is made.”

For Lippman this separation of responsibilities is critical for the functioning of the democracy. The role of the ordinary public is restricted in mobilising themselves to elect their representatives on the basis of their performance (real or promised) which in turn depends on how they have used the experts to frame laws and policies. Lippman has no illusions about the capabilities of a popular government that sways to the mood of the public. They need guidance from experts. The citizens neither possess the knowledge or the competence on the wide range of issues that concern their world nor can this be taught to them. Education is a bit overrated and only the optimists see it as a solution. The media and the political parties will continue to construct reality for the citizens that will drive their decision making. The best hope for democracy therefore is to have detached experts who have the ears of those at the helm.  

 Dewey’s Democratic Faith

The riposte to Lippman came from political philosopher and a champion of public voice in democracy, John Dewey. While Dewey agreed with Lippman’s thesis about an omnicompetent citizen being an illusion, he questioned the need for such special capability. Instead, he argued there are ways in which citizens can acquire sufficient knowledge to participate effectively in a democracy. This to him was a better option than the tyranny of the experts that Lippman favoured.

Dewey viewed knowledge as a kind of social capital that each individual possesses stemming from their participation in the society and from the long history of people gathering knowledge before them. To believe an individual has to know everything about the world around them is to ignore the accumulated knowledge that’s available and which people draw upon in their everyday lives. To him, as he wrote in The Public And Its Problems (1927), this knowledge is built-up through “association and communication; it depends upon tradition, upon tools and methods socially transmitted, developed and sanctioned.”

Dewey gives the example of scientific progress made by humankind as an example of this kind of knowledge. As he wrote:

“The development of tools into machines, the characteristic of the industrial age, was made possible only by taking advantage of science socially accumulated and transmitted.”

And he was convinced this accumulation of knowledge was possible for the political sphere too.

“Just as the specialized mind and knowledge of the past is embodied in implements, utensils, devices and technologies which those of a grade of intelligence which could not produce them can now intelligently use, so it will be when currents of public knowledge blow through social affairs.”

The build up of this social knowledge happens over the years through experts who study this area. So, there is still a role of experts in Dewey’s thesis. However, unlike Lippman, Dewey sees their role is to focus on informing the public, not the experts. The experts must continue to study the complex world around us and the forces that shape them. They must then interpret this for the average citizen who can then act with foresight within their social and political environment. Dewey wrote:

“…inquiry, indeed, is a work which devolves upon experts. But their expertness is not shown in framing and executing policies, but in discovering and making known the facts upon which the former depend.”

For Dewey, the experts must be guided by public spirit and owe their allegiance to the public. They must share their knowledge directly with the public and not restrict it to those in positions of power. The citizen doesn’t need to be omnicompetent; they must know enough through the stock of social knowledge and the guidance of experts to contribute meaningfully to public life.

We are no experts here. But as a public policy newsletter, we side with Dewey in these debates.  

HomeWork

Reading and listening recommendations on public policy matters

* [Article] A primer on Lippman-Dewey debates: Notes from Carl R. Bybee, 1997, Media, Public Opinion and Governance: Burning Down the Barn to Roast the Pig, Module 10, Unit 56 of the MA in Mass Communications, University of Leicester

* [Article] Sean Illing writing in the Vox: Walter Lippmann’s famous critique of democracy revisited.

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

PolicyWTF: What Broke the Constitution’s Seventh Schedule?

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

The Seventh Schedule of the Consitution has three lists scoping out the responsibilities of the parliament and the state legislatures. List I contains the subject-matters over which the parliament has exclusive power to make laws (defence, foreign affairs, banking etc.). List II does the same for state legislatures (health, public order, water, land, agriculture). List III contains subject-matters on which both the parliament and state legislatures can legislate (education, forests etc.).

Looks neat. Except that this assignment of powers hasn’t stopped union governments from designing and funding hundreds of schemes that squarely fall under List II — National Health Mission, Swachch Bharat Mission, Pradhan Mantri Awas Yojana, to name a few. You would imagine that these schemes, known as Centrally Sponsored Schemes (CSS), would be opposed tooth and nail by state governments, right?

Wrong. We’ve reached a low-level equilibrium where the state governments have grudgingly reconciled to the reality of CSS. They oppose it on paper or complain to Finance Commissions but are also happy to receive funds as part of these union government-sponsored schemes. And so, successive union governments have continued to misuse Article 282 of the Constitution — which permits union and states to make grants for any ‘public purpose’ regardless of where that purpose lies in the seventh schedule — to interfere with state subject-matters.

With no clear effective assignment of responsibilities, it is not surprising that people expect prime ministers to provide them with water supplies, public order, and clean streets, none of which are union government subjects. Without a clear assignment, there is no way to fix accountability. Without accountability, citizen preferences don’t matter. The State does what it can and citizens endure because they must.

In short, the Seventh Schedule is broken. As NK Singh, Chairman of the 15th Finance Commission argues: there’s a need to change the Seventh Schedule and Article 282, both. Absent that, we will keep CSS proliferating depending on how populist a union government wants to be. At present, there are approximately 211 schemes and sub-schemes under the 29 umbrella CSS!

For more, read:

* Ten Little Schemes, my article for Pragati

* Chapter 5, Review of Inter-Governmental Transfers and Consolidated Public Finance, Report of the Fourteenth Finance Commission, Volume 1.

* Rationalising Central Schemes, The Financial Express, M Govinda Rao

India Policy Watch #1: Missing Artists in Our Polity

Insights on burning policy issues in India

— RSJ

The farmers’ protests are now into their third week. The Union government seems to be in the mood for talks with farmer leaders now; after trying out the other alternatives, namely, barricading road, lathi-charging and using water cannons in cold Delhi winter. We aren’t sure about the kind of compromise that will be worked out. The track record of the government in arriving at a common ground isn’t great.

That we have fluffed our lines on reforms in a sector that needs them direly is quite incredible. It is starker when you consider the numerous expert committees in the past that have recommended exactly what the new agriculture laws aim to achieve. These recommendations have had broad-based support from most political parties and even made their way into their election manifestos. With such support and history, you’d expect we would have got these much-needed reforms off the ground. Yet we are struggling with it. It’s an object lesson in public policy implementation.

A Reform Whose Time Has Come

We have made our arguments in support of farm reforms before. No one can claim with conviction our agriculture policies have been a success since independence. The entire agriculture value chain – from pricing, storage, distribution and purchase – has been in a regulatory chokehold that was designed during the early 60s. Faced with successive failures of monsoon and with the memory of famines (Bengal, particularly) still fresh, we had to seek US support to import food grains under the PL 480 scheme. The scars of that event led to the Green Revolution that saw a dramatic increase in agriculture productivity.

Agriculture in India is a state subject. So, alongside the miracle of the Green Revolution, a majority of Indian states decided to enforce the Agricultural Produce and Market Regulation (APMR) to ensure food security. Soon, the purchase and the auction of food grains was restricted to the markets that were run by the state. The Agricultural Produce Market Committee (APMCs) and their mandis became the only legal buyer of the farmers’ produce. This was in keeping with the spirit of the times. The Indian state was in a massive expansion drive. It swallowed the whole of agriculture.

What has the past half-a-century of this state control given us? It is important to summarise the points again to appreciate how the status quo cannot be the answer.

* We achieved food surplus by the early 80s, but we didn’t stop the Food Corporation of India (FCI) continue the practice of buying wheat and rice at Minimum Support Price (MSP). The MSPs have continued an upward trajectory ever since. Where are we today with this policy? The FCI godowns today are bursting at seams with about 100 million tonnes (MTs) of food grains as against the buffer requirement of about 40 MTs. The burden of supporting FCI procurement is a huge drain on the exchequer. The 2020 budget had set aside Rs 1.36 lakh crores as FCI borrowings to support the MSP regime. The unintended consequences of this borrowing on our fiscal health are a separate story. This is the price we pay to sustain MSP.

* The farmers of Punjab and Haryana who constitute the bulk of protesters have a reason to feel aggrieved with the dismantling of the current system. Take rice for example. Only about 12 per cent of farmers benefit from MSP in India. That same number is north of 90 per cent in Punjab and in a similar range in Haryana. MSP support to rice has created a scenario where a primarily wheat eating region like Punjab is the biggest producer of rice in the country. This coupled with free electricity to farmers has meant a significant reduction in groundwater levels in these states. The narrow focus on these two food grains has meant we run a deficit in other crops including dals, oilseeds and other cash crops. We import these while continuing to produce surplus rice and wheat every year. The local variety of grains that are hardy and require less water (jowar, bajra and ragi) have all but disappeared from our plates over the years. Separately, the desire to raise two crops every year leads to farmers in Punjab burn their stubble. This adds to Delhi’s gas-chamber like pollution. Lesson: incentives matter and negative externalities are real.

* The Essential Commodities Act (ECA) that runs in parallel with the APMC makes things worse. The Union government periodically imposes stock holding limits for various grains and takes away the market flexibility to manage supply-demand swings. This has meant there are no organised sector entities in the agriculture supply chain to manage the storage. No wonder tur dal or onion prices skyrocket at various times in the year. Our retail inflation sways to these price movements.

* The upshot of it all? Agriculture with about 16 per cent contribution to our GDP supports about 60 per cent of our population. Less than 1 per cent of farmers own 10 hectares of land that can be considered optimal to pursue agriculture as an enterprise. The rest are in subsistence farming. Like we have asked before, how can anyone argue to continue with this system?

How Not To Reform

Despite this, we seem to be in a situation where we have to negotiate and may be dilute the three bills that sought to reform the farm sector. The bills allowed the sale of farm produce to players outside APMC, relaxed stocking restrictions under the ECA and enabled contract farming. The problem was correctly diagnosed, and the right solution offered. So, what could go wrong?

* Agriculture is a state subject. Any big reform needs consultations with state governments, farmers, and the opposition. Since a broad consensus on these reforms had emerged from the reports of various expert panels over the years, this could have been a process less fraught than what has been seen in the case of GST or other reforms that needed a federal consensus. Yet there were no deliberations. The manner of passing the bill especially in Rajya Sabha where a debate was avoided, and a voice vote was used to pass them through betrayed a lack of faith in parliamentary procedures.

* There is a strong desire for a big reveal that underlines the way the PM operates. This is how all key measures – from demonetisation, amending Article 370, CAA and labour reforms – have been announced and then pushed through. The desire to stun the nation with a bold move is seen to be the key to make a decision. This doesn’t help in managing change that big reforms entail. There is wider anxiety among the impacted stakeholders if things aren’t discussed and deliberated. This is further stoked by the minority that wants to stonewall these reforms. The opposition also latched on to this opportunistically. That’s how this has played out. Then the usual bogey of big corporates (Ambani and Adani) was raised. There’s always a currency for this in India.

* The desire and speed for a bold move have invariably meant poor anticipation of unintended consequences of these reforms. Clauses that can only be called illiberal have seen their way through these laws including those where the executive is given powers to adjudicate with no remedial mechanism to appeal against the decision in civil courts. This won’t stand in any court of law.

* Lastly, when confronted with the first signs of protests, the entire playbook of how not to manage protests was put into action. First, the police force was deployed to break the protests. Then the protesters were dismissed as rich farmers or middlemen protecting their turf. Finally, they were branded terrorists and anti-nationals before some mediation was attempted.

Missing Artists?

The unfortunate outcome of this might be the wrong lessons we will learn for future – that reforms are difficult to implement. Further, as Pratap Bhanu Mehta writes in the Indian Express there is a greater loss to the polity that’s likely:

“Chances are that, for the moment, given its overwhelming power, the government will ride out the protests. But the simmering discontent will remain. Cooperative federalism is in tatters, and the weakness of political parties means protests now take an amorphous form. Given the far-reaching changes we need in agriculture in Punjab, it is important that the trust between the state and the farmer remains. A good faith dialogue that gives the farmers reasonable assurances and a face-saver is necessary. It is easy for the government to win. But how many times in Indian politics have we won short-term victories that create long-term political precariousness?”

Over the years we have gotten used to the many reasons why we haven’t seen structural reforms gather pace in India. These have ranged from coalition compulsions, lack of majority in both houses, absence of political will, obstructionist opposition or ‘too much democracy’. As the farm reforms saga shows, these are mere ruses.

Politics is the art of possible. And we are missing those artists.

India Policy Watch #2: Lessons for Politics in Radically Networked Societies

Insights on burning policy issues in India

— Pranay Kotasthane

Beyond the specifics of India’s agriculture, some broader lessons come out of the ongoing logjam for politics and policymaking. Some quick intuitions here:

* Vocal Local is also the Global. The Canadian PM’s comments are an indication of a broader trend. No political issue is purely “internal” to a State anymore, at least as far as narrative-building is concerned. With networked communities, this trend will become stronger as outrage is the new form of entertainment. A corollary is that stakeholders with more narrative power but little interest in the issue can end up setting the narrative. Just like the ISI using this issue to fan Khalistani separatism again.

* Popular governments will try to bypass parliaments in crises citing the need for fast-tracking reforms in the backdrop of COVID-19.

* More of the same. No statement or action by the government and the opposition suggests a realisation that they aren’t willing to come together to tide over India’s first recession after 40 years. Unfortunate.

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Sandip Das on “A fiscal crisis: Why FCI needs provisioning in food subsidy”

* [Podcast] On Puliyabaazi, Saurabh and Pranay speak to Gunwant Patil of the Shetkari Sangathana Farmers’ Movement on the three farm laws.

If you like the kind of things this newsletter talks about, consider taking up the Takshashila Institution’s Post Graduate Programme in Public Policy (PGP) course. It’s a 48-week in-depth online course meant for working professionals. Applications for the Jan 2021 cohort are now open. For more details, check here.

Note: Sorry for the delay in the mid-week edition. Life intervened

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

Readers are sending in all sorts of questions. So, our parampujya guru of economic and political reasoning, Prof. Arthananda Ilyich Smith-Hayek (AISH), is back. Prof AISH is a home-grown economist without a single videshi bone or cartilage in him. He is a veritable sangam of three key economic streams – Neoclassical, Marxist and Austrian – whose advice can be safely consumed in these low trust times.

Over to the burning question.

Dear Prof,

The CEO of Niti Aayog yesterday complained we have too much democracy in India. He later claimed he was misquoted. That, of course, dispelled any remaining doubt among us that he had indeed made that statement. All hell broke loose. Memes appeared, Immanuel Kant was quoted, and Twitter had a field day with the usual leftist malcontents suggesting fascism is nigh. I don’t understand this. All my life living in India I have felt we have too much democracy. Nothing moves in India because everyone has a say. You can’t get anything worthwhile done because no one is willing to pay any price. We elect goons and criminals because every fool has a vote. Anything that’s good for the majority can be hijacked by a minority that’s vocal and organised. We have all seen this. How can we outrage over the ‘too much democracy’ comment when we know it is true? What do you have to say? I hope you are wise enough to know what’s good for us.

Yours etc,

Prajatantra Mallik

Prof AISH:

Dear Prajatantra,

Thank you for writing in. There’s always a complaint of too much democracy when you are thwarted by the people. Never when you win elections by the slenderest of margins but earn the right to govern with full powers of the executive. That’s how things roll.

Anyway, there are three parts to my answer. The first part will clarify a few things about democracy and the state. The second part will be on the critique of democracy over the years. And at the end, I will talk about how despite everything blaming too much of democracy in the Indian context is meaningless.

Democracy, Republic, and The State

To start with democracy is a form of government - nothing more. There is an element of religious passion towards it by its adherents. This is particularly true in America and, possibly, stems from Walt Whitman, the poet of Democracy. Whitman elevated democracy to a mystical phenomenon. His poem For You O Democracy (from Leaves of Grass, 1892) is a hymn to it:

“I will plant companionship thick as trees along all the rivers of America, and along the shores of the great lakes, and all over the prairies,

I will make inseparable cities with their arms about each other’s necks,

                   By the love of comrades,

                    By the manly love of comrades.

For you these from me, O Democracy, to serve you ma femme!

For you, for you I am trilling these songs.”

It is difficult to top that. Democracy is an end to itself and it must be valued with passion. Whitman’s spirit pervades the US polity till date. The American exceptionalism over the last century has made democracy more than a mere form of government. It has come to be seen as an ideal for society. India too adopted not just a form of government following independence, but this belief about the virtues of democracy beyond it. This is one part of the problem.

But let’s start with its definition itself. Democracy may not even be an ideal form to choose who will govern the state. But like Churchill (never) said it is the worst form of government except for all the others. Broadly, it means everyone has a share of the government and the majority view prevails. This is understood to recognise every citizen has an equal opportunity in creating the legislature that will govern them. The state that has the monopoly of legitimate violence over its citizens has multiple arms to conduct its affairs. Not every arm of it is democratic in nature like the legislature. We don’t elect our judges or our bureaucrats through popular mandate. In most cases, the process is designed to find the most qualified or the most appropriate person for the role instead of the most popular. Through an elaborate mechanism of checks and balances, these non-democratic institutions are subject to the will of the people. There are hardly any pure democratic institutions in any democracy.  

Even the will of the people to determine the legislature isn’t democracy in its purest form. Most modern democracies are representative in their form. This is a recognition that the rule can never be directly of all people but of ‘typical members’ who represent them. It tacitly acknowledges those who represent the people are better suited than others to ‘rule’. In that sense, every democracy still retains an element of aristocracy or the rule of the elite. It is important to remember here, this representative form of government while being partly elitist still can’t be replicated in other spheres of the society. No firm or enterprise can run on democratic principles. Nor can any team, guild or community.

We shouldn’t seek more democracy in society; probably striving for more inclusiveness and openness makes more sense. Instead, we should be striving for a better republic that strengthens the process of choosing the best representatives among the people who then wield the power of the state and use it to enhance the welfare of individuals.

Criticising Democracy

There hasn’t been any shortage of criticism of democracy over the ages. And we aren’t including tyrants, despots, and dictators in this list. This is led by Plato and Aristotle who it could be argued lived in a society that was democratic (slavery notwithstanding). They viewed democracy as good in theory but difficult to put in practice. Aristotle clubbed democracy as a deviant constitutional form clubbing it with tyranny and oligarchy. To him, the ultimate end of a state was neither to maximize wealth as oligarchs would believe, nor was it to promote liberty and equality in every public sphere as the democrats aspire. Instead, he argued, it was ‘good life’ that’s the true end of the state. That requires a ‘middle constitution’ or a ‘mixed government’ of a numerous middle class that chooses a wise few to govern. If one were to be kind to Aristotle, the mixed constitution he bats for is the precursor to the modern Republic.

Following the French and American revolutions in the late 18th century, the ideas of liberty and democracy were debated widely. Political philosophers from Ruskin, Carlyle to Tocqueville were troubled by the exaggerated deference to the will of the majority. In their view, there was a qualitative difference among people and the idea to treat all of them equal in their right to rule the state was terrible. The majority will be swayed by demagogues who will pander to their worst instincts and the minority that’s qualitatively better will lose the will to fight. James Bryce in ‘Hindrances To Good Citizenship’ laid out the arguments of this school in detail. In a chapter titled, The True Faults of Democracy, he pointed out four flaws:  

“First, a certain commonness of mind and tone, a want of dignity and elevation in and about the conduct of public affairs, an insensibility to the nobler aspects and finer responsibilities of national life.

Secondly, a certain apathy among the luxurious classes and fastidious minds, who find themselves of no more specific account than the ordinary voter, and are disgusted by the superficial vulgarities of public life.

Thirdly, a want of knowledge, tact, and judgment in the details of legislation, as well as in administration, with an inadequate recognition of the difficulty of these kinds of work, and of the worth of special experience and skill in dealing with them. Because it is incompetent, the multitude will not feel its incompetence, and will not seek or defer to the counsels of those who possess the requisite capacity.

Fourthly; laxity in the management of public business. The persons entrusted with such business being only average men, thinking themselves and thought of by others as average men, and not rising to a due sense of their responsibilities, may succumb to the temptations which the control of legislation and the public funds present, in cases where persons of a more enlarged view and with more of a social reputation to support would remain incorruptible. To repress such derelictions of duty is every citizen's duty, but for that reason it is in large communities apt to be neglected. Thus the very causes which implant the mischief favour its growth.”

Fairly prescient there. The criticism of democracy remained muted through much of the great wars of 20th century and the cold war. However, the last 20 years have seen a revival of sorts. The question has been on new democracies that have sprung up without a fierce adherence to the notion of individual liberties. The earliest work on this was by Fareed Zakaria who in a piece titled The Rise of Illiberal Democracy (Foreign Affairs, Nov 1997) wrote about the perils of democracy without the concomitant pursuit of liberalism. In an interview in 2017, Zakaria updates his warning about democracy:

“The happy narrative we told ourselves was that there was an almost ineluctable path to liberal democracy, and the evidence suggests that this is not how it works. Liberal democracy seems to be one of the many exits on which the democratic experiment could end, but there are others, like illiberal democracy, that are equally likely.

It appears this is what's happening in Turkey right now and in parts of Central Europe and in Russia. It's important to remember that despite all the repression, Putin is very popular. What we're learning is that authoritarian politicians have figured out how to achieve a balance between liberalism and illiberalism that keeps people satisfied. If they can give enough bread and circus to the public, they can maintain a stable working majority buttressed by a certain degree of repression of the press and political opposition.

And we have to reckon with the possibility that this model might become the most stable alternative to liberal democracy.”  

The Indian Case

All of the above is not to suggest there’s a reason to applaud the lament of ‘too much democracy’ that springs among elite Indians. The reasons that have stymied India don’t have much to do with the perceived flaws of democracy. Like we have pointed out earlier, it has more to do with an overextended state that’s weak. Instead of being good in a few things, the state has chosen to be bad in a lot of things. The Niti Aayog and its earlier avatar, the Planning Commission, are great examples of this overreach. The check against ‘too much democracy’ is to become a better republic and to fix the ‘flailing state’.  

HomeWork

Reading and listening recommendations on public policy matters

* [Book] Bryce on American Democracy Selections from "The American Commonwealth" And "The Hindrances to Good Citizenship" and edited by Maurice Fulton.

* [Article] Caleb Crain in the New Yorker book review on The Case Against Democracy

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

New Book Out! — India’s Marathon: Reshaping the Post-Pandemic World Order

— Pranay Kotasthane

I’ve co-edited India’s Marathon — a collaborative effort that brings together bold ideas on India’s place in the changing world order from some of India’s finest young thinkers.

(India’s Marathon, book cover by Anirudh Kanisetti)

Don’t take my word for it. This is what Ambassador Shivshankar Menon writes in his foreword:

“This volume poses questions which everyone wants answered but few dare to reply: how will the world order evolve and how can India deal with it? The Takshashila Institution has brought together some of the best minds to answer this question, and to give an Indian perspective on world order issues. Just for this the book deserves to be welcomed. This volume consists of coherent contributions from these scholars covering how India should manage its external relationships and the reforms that India needs to undertake domestically.

… No reader would or should agree with everything in this book. I, for one, am not sure that India’s choice is between alignment and non-alignment any more, or that strategic autonomy is an unattainable goal for India. After all, strategic autonomy by one name or another is what all powers, even superpowers, seek. But this book would have served its purpose if it provokes thought and rational discussion about India’s place in the emerging world, whether it is ‘orderly’ or not. Despite the daunting world that seems likely, and the scale and scope of the necessary domestic reforms outlined in this book, I found it reassuring that so many contributors found it possible to rationally conceptualise these issues from an Indian perspective, and to map out a path through the dimly sensed future that awaits us.”

Pranay Kotasthane, Anirudh Kanisetti, Nitin Pai (editors). India's Marathon (Kindle Locations 144-150). The Takshashila Institution. Kindle Edition.

This Twitter thread lists all chapter ideas and contributors. It’s a stellar list, I tell you.

Get your copy from Amazon India. Do give it a read!

Global Policy Watch: Fukuyama (et al) And The ‘Middleware’ Solution To Social Media Monopolies

— RSJ

Twitter India did a first last week. It labelled a tweet by BJP IT cell head as ‘manipulated media’. It claimed the label was based on its Synthetic and Manipulated Media policy. This was a policy launched by it in February this year. The rule for its user states:

“You may not deceptively share synthetic or manipulated media that are likely to cause harm. In addition, we may label Tweets containing synthetic and manipulated media to help people understand their authenticity and to provide context.”

Curbing Digital Colonialism

It is unclear if Twitter found no such tweets in India since February that satisfied the criteria for manipulate media. Surely, this wasn’t the first instance of false information shared by a blue-tick user in India. In any case, a beginning has been made and it will be interesting to see where and how far it will go with this. These steps are part of similar efforts by other social medial platforms to self-regulate themselves as they come under increasing government and regulatory scrutiny. There is a greater urgency among regulators around the world to curb the abuse of the dominant positions of the big tech platforms.

EU pursued antitrust charges against Google for over a decade. In 2018, it fined it nearly $10 billion. But not much has come out of it. Google was left to devise its own measures to offer a level playing field to its rivals. Google continues to dominate the search-engine market in Europe with over 90 per cent market share. The U.S. Justice Department last month sued Google for violating federal antitrust laws in running its search and advertising business. Also, the US Congressional investigation into the power of Big Tech (Amazon, Apple, Facebook and Google) concluded in September this year with a voluminous 450-page report. The report indicts them in no uncertain terms:

"These firms have too much power, and that power must be reined in and subject to appropriate oversight and enforcement. Our economy and democracy are at stake.”

India hasn’t yet taken a concrete view about the dominance of Big Tech but there are rumblings. Last month, India’s antitrust regulator (CCI) opened an investigation against Google based on complaints from the start-up ecosystem. The practices of ‘forcing’ the app makers to exclusively use its billing system for in-app purchases and for bundling its payments app with Android smartphones sold in the country are under the regulatory lens. Last month, India brought all OTT platforms under the purview of its Information and Broadcasting ministry by changing the GoI (Allocation of Business) Roles, 1961. And it has been considering regulating the social media platforms and their content for a while now.

Not The Usual Lens

There are three key points that we have made about regulating Big Tech and social media platforms:

* Antitrust regulators take the old Chicago school view to monopolies. This looks at monopolies through the economic lens of consumers and checks if they are being harmed by the dominance of monopolies. This is difficult to prove in case of Big Tech monopolies who provide most of their services for free and have deep customer loyalty.

* The nature of these monopolies is quite different from those of the past. These players have appropriated huge amounts of data, run 2-sided platforms, have asymmetrical knowledge and power over their users, and can easily move into newer businesses based on these strengths. The traditional measures to curb the monopolies like breaking them up or stopping a line of business are difficult to implement.    

* Economic dominance is only one part of their power. It is the political dominance or the dominance of thought that can be more insidious. Like we wrote in edition #74,

“the data and attention appropriation done through these platforms constrain our choices: we live in echo chamber of our opinions, we buy things that are suggested to us and we see a version of reality that’s tailor-made for us and that no one else is seeing. Often the term ‘digital colonialism’ is bandied about when talking about Big Tech. This lack of freedom to be oneself, discover things on our own and not be dispossessed of our right to choose is what colonialism is about.”

* The current antitrust laws have nothing to manage this.

In short, our view was the minimum acceptable price of Big Tech businesses to exist wasn’t zero.

It was you. Your data and your liberty.

In the normal course of events, politics would be about contestation of ideas and narratives in the political marketplace. And the best or the most acceptable idea would surface from this that would guide the polity. But social media platforms engineer a failure in these markets. The ideas that get pushed to your timelines haven’t won their duels in the marketplace of ideas. They have been programmatically fed to you. That program can be gamed. And Big Tech isn’t willing to solve this problem on its own. It took a long time to even acknowledge it is a problem.

We had concluded edition #74 with these lines:

“These are early days of policymaking in this area. There’s a need for deeper philosophical and sociological work in this space that will enable our thinking in how to legislate this.”

A Novel But Half-formed Approach

As if on cue this week we had Francis Fukuyama, Barak Richman, and Ashish Goel publish an article in Foreign Affairs titled How to Save Democracy From Technology: Ending Big Tech’s Information Monopoly. The article picks up the core point made by us. The antitrust regulations are using old tools to solve the economic problem. They may or may not be enough. But they don’t even begin to address the political costs of the Big Tech monopolies. The solution offered is not exactly fleshed out in the article, but it is important because it goes beyond the conventional thinking that has dominated this space.

They write:

“The economic case for reining in Big Tech is complicated. But there is a much more convincing political case. Internet platforms cause political harms that are far more alarming than any economic damage they create. Their real danger is not that they distort markets; it is that they threaten democracy.”

It is remarkably similar to the points made by us in the past. The article then picks up the usual solution to break monopoly power – more regulations, breakup, data probability and privacy laws – and dismisses them all before proposing a solution:

“If regulation, breakup, data portability, and privacy law all fall short, then what remains to be done about concentrated platform power? One of the most promising solutions has received little attention: middleware. Middleware is generally defined as software that rides on top of an existing platform and can modify the presentation of underlying data. Added to current technology platforms’ services, middleware could allow users to choose how information is curated and filtered for them. Users would select middleware services that would determine the importance and veracity of political content, and the platforms would use those determinations to curate what those users saw. In other words, a competitive layer of new companies with transparent algorithms would step in and take over the editorial gateway functions currently filled by dominant technology platforms whose algorithms are opaque.”

The solution comes with its own set of problems. The authors acknowledge it and posit this as the start of a conversation to find a solution:

“Many details would have to be worked out. The first question is how much curation power to transfer to the new companies. At one extreme, middleware providers could completely transform the information presented by the underlying platform to the user, with the platform serving as little more than a neutral pipe. Under this model, middleware alone would determine the substance and priority of Amazon or Google searches, with those platforms merely offering access to their servers. At the other extreme, the platform could continue to curate and rank the content entirely with its own algorithms, and the middleware would serve only as a supplemental filter. Under this model, for example, a Facebook or Twitter interface would remain largely unchanged. Middleware would just fact-check or label content without assigning importance to content or providing more fine-tuned recommendations.

The best approach probably lies somewhere in between. Handing middleware companies too much power could mean the underlying technology platforms would lose their direct connection to the consumer. With their business models undermined, the technology companies would fight back. On the other hand, handing middleware companies too little control would fail to curb the platforms’ power to curate and disseminate content. But regardless of where exactly the line were drawn, government intervention would be necessary. Congress would likely have to pass a law requiring platforms to use open and uniform application programming interfaces, or APIs, which would allow middleware companies to work seamlessly with different technology platforms. Congress would also have to carefully regulate the middleware providers themselves, so that they met clear minimum standards of reliability, transparency, and consistency.”

As a new approach to deal with the problem of fake news and lies circulating on social media platforms and making it sit well with the notion of free speech, this is a useful starting point. The control of what kind of content we want to see should lie with us. Like it has always been in media, the content consumer has to be active while engaging with it and the provider passive. Not the other way around.

Matsyanyaaya: The Strategic Consequences of India’s Low Economic Growth

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane

Last week I came across a data story in The Business Standard and I haven’t been able to erase off my mind. Krishna Kant writes:

“Over the past 10 years, India’s per capita GDP is up 35 per cent cumulatively from $1,384 in 2010 to $1,877 now. In the same period, per capita GDP in China rose 141 per cent from $4,500 to $10,839, while it doubled in East Asian countries (excluding Japan, South Korea, Taiwan and Hong Kong) from $4,006 to $8,195.

Bangladesh saw the fastest growth with its per capita up nearly two-and-a-half times from $763 in 2010 to around $1,900 at the end of this year. And, Vietnam’s per capita rose 115 per cent from $1,628 to around $3,500.”

There’s a nice chart showing how the India growth story lost its way over the last full decade.

(Source: Krishna Kant, India's 10-year growth one of the biggest laggards in Asia, EM peers, The Business Standard)

The humanitarian consequences of low economic growth are obvious. I won’t bring them up here. The questions I have are concerned with India’s engagement with the world: what would be the strategic consequences of this poor economic performance? Does a decade of slow growth foreclose some options for India? Would India’s position on RCEP have been different had the last decade’s performance been at par with other peers? Would the PRC have been just as aggressive against a more prosperous India?

The search for answers took me back to Sanjaya Baru’s 2002 landmark paper titled Strategic Consequences of India’s Economic Performance. The paper captures what scholars were thinking nearly twenty years ago, just before the golden growth years between 2004 and 2009.

“For India, there is no doubt that the first and most important challenge is that of accelerating the rate of economic growth and development. Economic performance and capability certainly constitute the foundation of national security and power even more so for a developing nation like India. It will define the limits to military capability and alter the relationship between India and its neighbourhood, especially its two major adversaries, namely, China and Pakistan.

The paper’s observations on Pakistan have broadly stood the test of time. The Pakistani military-jihadi complex’s self-defeating policies have strangled the economy in ways that even a nuclear weapons status and use of terrorism as a state policy haven’t been able to offset. The dehyphenation between India and Pakistan in international affairs is now self-evident. However, the story of this last decade is humbling. The gap between the two has increased not because India has done well but because Pakistan has done far worse.

On China, the paper argued:

“The strategic consequences of the economic competition with China are, there- fore, fundamental to India’s future role within Asia and the global system. If India can sustain above average growth (over 7 per cent per annum in the next decade) and if China experiences a deceleration of growth, coupled with domestic political uncertainty, the widening gap between the two civilisational neighbours can be reversed to an extent. If not, China will emerge as the pre-eminent Asian power and force India into accepting its strategic leadership even within south Asia. The key to this strategic rivalry will be the relative economic performance of the two countries. The main strategic challenge for India in the medium term is, therefore, its relative economic performance vis-à-vis China.”

Remarkably prescient. Eighteen years on, the gap between the two countries has only widened. China has been able to forge strong economic ties with all countries in the Indian subcontinent.

Economic Reforms Needed

The paper identified these macroeconomic targets essential from a national security perspective:

* Elimination of the revenue deficit, a manageable fiscal deficit, elimination of wasteful subsidies not targeted to the poor;

* Low and manageable current account deficit;

* Low internal and external debt, low short-term debt in overall external debt;

* Profit-generation by public enterprises; privatisation of non-strategic public enterprises;

* Self-financing public utilities like power, irrigation water and public transport;

* An increase in the tax/GDP ratio to levels reached by rapidly industrialising developing countries of around 15 per cent of GDP from the current low of 9 per cent of GDP.

What struck me was that eighteen years since, many of these targets still remain aspirations.

Lessons for the Future

It is clear now that China’s rapid and sustained economic development over three decades played a fundamental role in transforming its international stature. The bad news for India is that not only did it start on the same path ten years later than China but it also seems to have fizzled out much earlier.

Going ahead as well, India’s economic development will underscore its international role. India’s economic trajectory will decide whether it can play the role of a swing power between the US and China or whether it gets relegated to a weak partner of the US, much like Pakistan is to China. The stakes have never been higher.

We put this rather simply in a flowchart to conceptualise India’s future options like this:

(Source: India in the Post COVID-19 World Order, Takshashila Discussion SlideDoc)

Money Quote: Why Care About Budget Deficits?

— Pranay Kotasthane

Dr M Govinda Rao pointed me to this quote by Martin Feldstein from his LK Jha Memorial Lecture at RBI. Feldstein warned about the adverse consequences of large budget deficits thus:

“Unfortunately, it is easy to ignore budget deficits and postpone dealing with them because the adverse effects of budget deficits are rarely immediate. Fiscal deficits are like obesity. You can see your weight rising on the scale and notice that your clothing size is increasing, but there is no sense of urgency in dealing with the problem. That is so even though the long-term consequences of being overweight include an increased risk of a sudden heart attack as well as of various chronic conditions like diabetes. Like obesity, government deficits are the result of too much self-indulgent living as the government spends more than it collects in taxes. And, also like obesity, the more severe the problem, the harder it is to correct: the overweight man has a harder time doing the exercise that could reduce his weight and the economy with a large deficit and debt is trapped by increasing interest payments that cause the deficit and debt to rise more quickly. I emphasize the analogy to stress the point that budget deficits need attention now even when their adverse effects may not be obvious.”

Enough said.

HomeWork

Reading and listening recommendations on public policy matters

* [Interview] Promarket interviews Fukuyama. “A Loaded Weapon”: Francis Fukuyama on the Political Power of Digital Platforms

* [eBook] Friedman 50 Years Later series. A collection of 28 essays reflecting on Friedman’s essay on shareholder maximisation

* [Reports] US Thinktanks CNAS and CFR make the case for two different multilateral arrangements between powerful democracies to take on China in the technological domain

* [Article] Amit Cowshish and Rahul Bedi have a definitive take on India’s defence pensions system.

If you like the kind of things this newsletter talks about, consider taking up the Takshashila Institution’s Post Graduate Programme in Public Policy (PGP) course. It’s a 48-week in-depth online course meant for working professionals. Applications for the Jan 2021 cohort are now open. For more details, check here.

India Watch #1: Of Protests and Perfect Tricks

Insights on issues relevant to India

— RSJ

For nearly a month now, some of India's top wrestlers, who between them have earned over 25 medals in various global competitions, have been protesting against the conduct of the Wrestling Federation of India (WFI) chief and BJP MP Brij Bhushan Singh. This is not an ordinary protest. The allegations in the FIR against Singh are quite serious, including a couple of instances of demanding sexual favours as a quid pro quo for professional assistance, about 15 incidents of sexual harassment and stories of inappropriate touching, and molestation of minor girls. You would imagine this would be some kind of an open-and-shut case. 

I mean, here are a few women wrestlers who have everything to lose here by taking a stand against their own federation and the government. They aren’t superstar cricketers with financial security and access to media. They don’t have multi-million and multi-year sponsorship deals or lucrative post-retirement commentary gigs waiting for them. Their sport is everything to them, and they are willing to risk that one thing they have loved doing all their lives. These are girls who have come up the hard way in a society that doesn’t prize either women or sports and especially women in sports. They have persevered despite the odds against them because that’s what athletes do. So, the least you would have thought is that while the police investigations and the judicial process is going on, or, as we like to say in India, as the law takes its own course, the government should ask the WFI chief to step down temporarily. Surprisingly though, this doesn't seem to be a priority for the government. Instead, it appears they would rather suppress these voices than address their concerns. So, last week while you had saturation coverage on various channels about the inauguration of the new parliament building, these athletes were being roughed up and assaulted at the site of protest. There was barely any TV media there.

As they say, there are always two Indias at work. 

It is tempting to zoom out a bit and say that this story, in many ways, reflects the current state of Indian politics and society. It is not there yet. But there is a pattern in how we are dealing with protests and dissent that merits a deeper look. Before I go there, let me count the number of ways we have got this thing wrong. 

Firstly, for decades, we have managed sports and their governing bodies in India in the most unprofessional way possible. These positions have often been given to politicians as small consolation prizes to run their minor fiefdoms. Corruption, nepotism and high-handedness of officials have come along with this. Read any autobiography of an athlete in India and you will be struck by the remarkable apathy and neglect they had to overcome from their own sporting federation to succeed. As major sports events like the Olympics or Asian Games approach, there's often a question of why our sporting performance doesn't reflect our population size and recent prosperity. This story never gets old. While we have seen some improvement in the last decade, we remain an underperforming nation in sports. One fundamental issue to address is improving sports administration by involving experts with experience in either playing the sport, managing large organizations, or possessing a proven visionary track record. Indian tennis is a prime example where one family has presided over its administration for over half a century. We have only gotten worse in tennis, with almost no one ranked anywhere in the top 1000 in the world. Similar fiefdoms exist in other sports like boxing, shooting and even cricket. 

Despite the efforts of some public-spirited lawyers and a few interventions by the Supreme Court to set things right, things have remained the same. There was some hope when this government came to power that there would be much-needed reforms in sports administration, especially in those early days. However, once you have the keys to the power of the state, it is difficult to resist its benefits. The result is a disheartening situation where politicians with limited understanding or passion for sports lead the federations. We are back to the bad old days now. 

Secondly, we seem to be undoing all the progress we have made in addressing sexual harassment allegations in the workplace. There are POSH committees that are legally mandated in organisations and a framework that allows for a safe and secure environment for women at work. In India, the foundation for this framework was based on the Vishaka guidelines set nearly 25 years ago. In cases like this, the employer (in this case, the sports ministry) should form a committee with an independent chair who investigate these allegations and arrive at their conclusions. And it is usual that during such an investigation, it would be appropriate for the accused to step aside for a free and fair process. However, none of this process has been followed. Neither the WFI nor the Indian Olympic Association (IOA) have even acknowledged taking up these allegations. In fact, P.T. Usha, the current chief of IOA and a track legend initially dismissed them as false and an attempt to tarnish our nation's image. We are back in the territory of ghar ki izzat, and the patriarchal attitudes where raising such concerns are seen as bringing dishonour to one's family or damaging a country's reputation. It is concerning that even government officials are not adhering to their own established guidelines.

The response to the protests by both the sporting fraternity and the general public has been surprising. Despite the police manhandling of these athletes, very few voices have come out in support of them, with notable exceptions like Abhinav Bindra and Sania Mirza. Even their anodyne statements hoping that the athletes are given their due and that proper investigations take place seems like an act of courage. The 1983 cricket World Cup winning team, too, came out with a statement expressing anguish at the treatment of the athletes and hoping for a resolution. I’m not sure what resolution they are expecting in a case that should be picked up by the police and investigated with rigour. Quite disconcertingly, although to the surprise of no one, the usual set of partisans and news anchors have questioned the motives behind these protests. The usual whataboutery season is on in the TV debates, and the WhatsApp universities are busy generating content blaming the victims or distracting us with Rahul Gandhi’s US visit. It is a textbook case of a society losing its moral compass today while romanticising its glorious past and its superiority as a civilisation. 

In a society where many underprivileged children pursue sports as a means to improve their lives, the exploitation by administrators and coaches within the system should be a matter of great concern. Despite this reality, political affiliations and a belief that our leader can do no wrong is now trumping reason. We now have a situation where there are people questioning the legal process put in place for sexual harassment complaints that apparently favour the woman victims’ rights to fight their case. This mindset risks undoing the progress made towards providing safe working environments for women. We are happy to go down the path of victim blaming and gaslighting than hold men in power accountable. This in a country where crime against women is still among the highest in the world and that has one of the lowest female participation rates in labor worldwide. 

So, why is the government reluctant to act against Singh? Based on the track record of how it has handled previous protests, there are three possible explanations for this behaviour. 

One, this administration perceives admitting a mistake as a sign of weakness. They would rather make incorrect decisions than appear weak in any way. We have made this point earlier. This is the basis of its electoral appeal. That it can do no wrong. Accepting that the protesters are right will dent its strong government image. Two, there is the electoral angle to this, given we are less than a year away from the Lok Sabha polls. Brij Bhushan Singh's influence in the Ayodhya-Gonda region cannot be ignored. He or his family members have won elections there for over three decades, regardless of their party affiliation. His ability to switch allegiances while maintaining electoral success suggests a ground network that doesn’t depend on a party for success. While the BJP is on a strong wicket for winning 2024, it doesn’t want to risk failure, especially in U.P. This calculus might still turn if the recent mobilisation of the local Jat communities and Khap panchayats to support the wrestlers becomes stronger. This shift may transform the protest into something more politically relevant, as it happened with the farmer protests. I don’t think I had imagined a day when the Khap panchayats would be seen as advocates of women’s rights. But we are there. The third explanation lies in the ruling party's deeper understanding of social undercurrents, which they believe represent the silent majority's views. This covers issues like women's liberation and how India has imitated Western liberal guidelines that aren’t compatible with our civilisational values. They would like to believe that a sizable portion of Indian society may support a pause on liberal issues especially relating to women’s freedom. I’m not very sure if this is an accurate assessment, but it doesn’t hurt to be politically ambiguous on this. 

At a broader level, this is also about how we see protest or dissent in these times. It is intriguing how easily people trust the state despite the weight of history against it while distrusting the protesters who have a grouse against the powerful. This is an odd inversion that seems to have arisen because our collective sense of self-worth and pride are now closely intertwined with our perception of how well the state performs. So, questioning its actions or motives can be seen as an attack on the collective self-worth.

It is an almost perfect trick. 

India Policy Watch #2: Beyond Isomorphic Mimicry 

Insights on burning policy issues in India

— Pranay Kotasthane

“South Korea became a manufacturing and technological superpower riding on industrial policies that backed chaebols (large domestic business conglomerates), so why shouldn’t India do this too?”

“Technological upgradation of Chinese companies happened because of the Party-state’s policies of Forced Technological Transfer, also known as ‘trade-markets-for-tech (TMFT)’. India should adopt this approach as well.”

“France has banned short-haul flights to counter climate change. India should follow this lead and impose green taxes on air travel if not a full ban.”

“Amsterdam has bicycle tracks and Bogota has Bus Rapid Tranist (BRT); so should Bengaluru.”

I’m pretty sure you have come across similar arguments. Not just people outside the government, policymakers and career analysts can also be found making arguments of this nature. Now, it’s easy to ridicule these points of view as “isomorphic mimicry”, what Andrews, Pritchett, and Woolcock define as:

the tendency of governments to mimic other governments’ successes, replicating processes, systems, and even products of the ‘best practice’ examples… a key technique of successful failure that perpetuates capability traps in development.

My instinctive response to such arguments is similar. However, I now think that we need to go one step beyond and ask, “why are we prone to committing isomorphic mimicry? What makes us seek refuge in it?” This post is an attempt to answer these questions.

The fundamental reason behind such arguments is a mental model that imagines public policy as a deterministic process where heroic policies can quick-solution us out of trouble. It is this assumption that we must rethink in order to avoid isomorphic mimicry. Here’s why.

To begin with, we need dollops of humility. Forget quick-solutions, we don’t even know all the variables that impact major public policy processes.

Observe, for instance, the question of economic growth. In edition #52, RSJ explained how there’s no single answer as to why countries experience a period of rapid economic growth. At best, we can identify clusters of factors such as economic freedom, political freedom or institutions, geography, and investment in human and physical capital.

So is the case with innovation. Over the last few months, I tried to understand the reasons behind China’s strides in innovation and technology upgradation. The more I read about it, the more it became clear that forced technology transfer, IP theft, or industrial policy alone cannot explain the transformation. At best, I could come up with the explanation that China's innovation is a combination of fundamental factors and proximate factors. The fundamental factors were: a Capable Workforce, Technology Transfers, and State Focus on Innovation. The proximate factors such as Forced Technology Transfer, IP Theft, Specific Government Policies, and Selective Protectionism have, at best, played a cameo role.

So is the case with urbanisation. We have some good hypotheses about why certain sectors spatially organise into concentrated clusters, but we don’t know for sure what would it take to make a successful new city. We can identify some fundamentals, but it’s difficult to create a pathway.

These three examples illustrate the need to adopt a different mental model to think about public policy. One such frame is complexity theory. Over the last two decades, there have been several attempts to think about public policy as a complex system. Public Policy scholar Paul Cairney explains the attributes of complex systems in these words:

* A complex system is greater than the sum of its parts; those parts are interdependent – elements interact with each other, share information and combine to produce systemic behaviour.

* Some attempts to influence complex systems are dampened (negative feedback) while others are amplified (positive feedback). Small actions can have large effects and large actions can have small effects.

* Complex systems are particularly sensitive to initial conditions that produce a long-term momentum or ‘path dependence’.

* They exhibit ‘emergence’, or behaviour that results from the interaction between elements at a local level rather than central direction.

* They may contain ‘strange attractors’ or demonstrate extended regularities of behaviour which may be interrupted by short bursts of change. [From Paul Cairney’s post on his ever-excellent blog]

When applied to public policy, this complex system mental model gives us a few axioms.

Policy Ingredients, not Policy Recipes

The complex system lens shows us that it is futile to obsess about deriving policies using “best practices” from another country or city. It is far more important to think about preparing the initial conditions that could trigger emergent behaviour towards the desired policy goal. A government shouldn’t be designing a perfect quick solution to a chronic problem, but creating conditions in which different competing solutions can emerge. In a sense, governments need to put together all the essential ingredients that go into achieving a policy goal rather than create an award-winning policy recipe.

This line of thinking explains national innovation. There's no one blueprint to be found for innovation success. Countries have followed different pathways. But we know that ingredients such as reasonably high levels of human capabilities and infrastructure and strong connections with global science and technology ecosystems are common fundamental factors in innovation success.

Another example comes from economic policy. Pro-market policies are about putting together key ingredients for growth take-off, while pro-business policies are equivalents of step-by-step recipes handed down to you. I used to think that finance ministers claiming “the fundamentals of our economy are strong” was a cleverly-worded evasion. But the lens of complexity would suggest that fundamentals are exactly what the government should focus on.

The Idea of Probabilistic Success

The lens of complexity implies that governments are not as effective in achieving our goals. The best case is when governments have prepared all initial conditions for take off. But that’s no guarantee for success. In the Indian context, this thinking should give us a pause before we airdrop governments as a troubleshooter for all our problems.

The Merits of Decentralisation

In a complex system, it’s beneficial to give agency to organisations so that they can learn from their experience and change tack in response to on-ground conditions. In this sense, complexity theory is a reaffirmation of Hayek’s insight in The Use of Knowledge in Society. Individuals and, by extension, markets are in a better position to experiment and display different emergent behaviours than centrally engineered solutions from the top.

Hope, not Analysis-paralysis

Complexity can at once be liberating and shackling. The insight that there are no perfect policy recipes can drive us into an analysis-paralysis mode, leading to dejection and disillusionment. But the knowledge that given the right conditions, emergent behaviour can spring up unexpectedly gives a reason for hope and provides a new meaning to the shloka, “Karmanye Vadhikaraste ma phaleshu kadhachana” (perform your duty but do not expect the fruits of your labour).

P.S: The complexity theory mental model holds promise in public policy, but at present, there are far more questions than there are answers.

India Policy Watch #3: Why this Kolaveri with Assembly?

Insights on burning policy issues in India

— Pranay Kotasthane

I like the richness of the debate on the production-linked incentive scheme (PLI) for electronics manufacturing. Last week, economist and former RBI governor Raghuram Rajan questioned the government’s self-congratulatory messages on mobile exports using these words:

“.. it turns out that very little apart from assembly is done in India, though manufacturers claim that they intend to do so in the future. So, India imports much of what goes into the mobile phone, and when we correct for that, it is very hard to maintain that net exports have gone up.”

Some of you readers might recollect that we have regularly critiqued the electronics PLI since its inception. Our first post about it was written in November 2020. So, it shouldn’t surprise you that we agree with this recommendation:

The government should undertake a detailed assessment on how many PLI jobs have been created, the cost to the country per job, and why the PLI doesn’t appear to have worked so far before extending it to other sectors.

That said, I have several questions about the analysis.

First, I was surprised that one of the criticisms in the note is that “it is entirely possible that we have become more dependent on imports during the PLI scheme” on account of increased imports of mobile phone components for assembly in India.

It is well-known that imports of sub-components will keep increasing as we scale up assembly in India for a few years until local substitutes come up, as they did in China and Vietnam. Moreover, as we wrote in edition #185, China and Viet Nam witnessed a decrease in the domestic value added per unit of demand when they began assembling mobile phones. Companies preferred to import components, assemble, and then export them. Only after their electronics exports had achieved global scale did the two countries target local content addition.

And hence, we shouldn’t expect quick gains in the Indian case as well. Only after the assembly in India achieves some scale will local suppliers come up. In the Apple ecosystem, for instance, the Final Assembly Testing and Packaging (FATP) units run by the likes of Foxconn are the key nodes. Once they take root, it’s in their self-interest to develop a local supplier ecosystem to meet the unsparing demands of their product launch cycle.

Curiously, a terrible way for governments to reduce the import of components is to raise import tariffs further, a solution that the authors of the note would vehemently disapprove of.

Second, the note proposes that India should make its own chips. Manufacturing chips will help reduce the import bill, and that’s where the government’s semiconductor strategy comes in. However, the path to making a complicated leading-edge processor chip will perhaps take two decades. And to get there, the government would, in turn, need more PLIs and upfront capital investment in fabs. In fact, we should expect higher chip imports from China over the next decade until we have a semblance of chip manufacturing done here. Importing cheap chips from China is not a vulnerability.

In sum, I don’t see a rise in imports of components as an indication of the failure of the PLI, just as I don’t interpret the rise in mobile phone exports alone as an unqualified success.

HomeWork

Reading and listening recommendations on public policy matters

* [Chapter] Don’t miss this chapter on isomorphic mimicry. An old classic.

* [Podcast] On Puliyabaazi, MR Madhavan of PRS Legislative Research discusses all things Parliament. The part where we discuss the impending Lok Sabha constituency delimitation threw up a few interesting alternatives.

* [Blog] Paul Cairney’s long-running blog Politics & Public Policy is a must-subscribe.

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

If you haven’t been living under a rock, you would have come across this Andy Mukherjee column in Bloomberg over the last weekend. Titled ‘Why I’m Losing Hope In India’, it is a searing and despairing piece on how India is losing its window of opportunity for growth and prosperity. By Mukherjee’s own high standards of writing op-eds, it is a tour de force.

Predictably, the reactions to it have swung between extremes. There are those for whom Mukherjee has voiced, in limpid prose, their anxieties and disappointments with how things are turning out in India. For others, this is another elite, wringing his hands and pandering to his own discredited lot, as a new and different India takes shape. The few belonging to neither camps have praised the piece for raising pertinent issues but have taken exception to the deep pessimism pervading it.

Now, there are occasions when we too receive mails berating us for our pessimism about India. It is a criticism we fail to comprehend. You can contest the interpretation of facts or the logic underlying an argument. That’s understandable. It is difficult to argue on why someone shouldn’t feel a certain way. Also, like we have mentioned it a few times, the reason we write this newsletter is because of our optimism about the people of India. That by putting out our point of view regularly, we will have a public that will demand better policies from its representatives. We like to think Mukherjee feels the same way. There is no reason to question his pessimism so long as his arguments support it.

So, do his arguments merit his pessimism? Or is he projecting his biases and adding to the constant drumbeat of gloom that’s the par for the course among analysts living abroad who cover India?

Anantha Nageswaran in his blog – Why it may be the wrong time to give up hope on India? – has a factual riposte to many points that Mukherjee makes. He goes overboard a bit in defending the indefensible like demonetisation, handling of migrant issues during lockdown (quoting Bibek Debroy on some 1979 statute to absolve the Union government) and some unconvincing GDP comparisons with China by scaling them to non-financial sector debt. But these aside, he makes a good case for remaining hopeful about India. If you keep an open mind about these things, it is an interesting perspective on how many within this government might be looking at our economy in these times.

I have three problems with Mukherjee’s columns where his love for rhetorical flourish or a lack of economic understanding comes in the way of a reasoned argument.

* Mukherjee believes there’s a structural demand deficiency in India and the consumption led boom that sustained our economy has plateaued. For some reasons he believes all the recent reforms in farm or labour sector or the work that he praises this government for in areas like affordable health, formalisation of finances, providing for cooking gas, sanitation, and clean water, will only debottleneck the supply side. Not much will turn on the demand side. I don’t understand why he thinks so. It is true this government’s economic response to the pandemic has been largely supply-side focused. But that’s different from the demand generation potential of many of these ideas. You could argue with the economic merits of PLI (production linked incentives) or the atmanirbhar policies but in the short run it will boost employment and demand. The investment in public infrastructure in pre-covid era like on building national highway network or the work done under PM Grameen Sadak Yojana is good for solving structural demand issues. Like we have argued in the last edition, it is early days, but the speed at which demand has bounced back in many sectors after lockdown was lifted has surprised all of us. This isn’t a sign of structural demand deficiency.

* There have been many other columns of Mukherjee where he points to the problem of India’s stressed financial systems. This is widely understood as a problem. He mentions this here too. But what’s the solution? Is it a stringent bankruptcy code like that was put in place in February 2018? We have argued here that the IBC is a good reform that needs some runway before it can be made more stringent. Trying to be too harsh about insolvency guidelines will likely lead to that familiar policy issue in India – operation successful, patient dead. Besides, the root cause of many of these NPAs are in discretionary power of the state, the difficulty in getting projects off the ground in India and consistency in policy making. None of this is a financial sector reform. A lot of this precedes this government. My limited point here always has been to cheer every minor reform in these areas without being overly critical of it. It takes a lot to get reforms going in India. It is one of the reasons the farm bills need to be supported.

* Mukherjee also, surprisingly, goes for some convenient north-south divide narrative. The south, in his opinion, is better governed, faster growing and has therefore remained immune to the strongman charisma of the PM. The north, on the other hand, appears a bit of a basket case in the column. To quote Mukherjee:

“Sadly, I don’t see northern India’s economic pessimism — or its caste enmities, religious hatred and deep-seated misogyny — making way for a less toxic, more aspirational politics.”

Firstly, these have been features of north Indian politics for ages, aided and abetted by every large political party in these states. It isn’t a BJP created political environment. Secondly, you can argue the north isn’t as progressive on many metrics as the states of the south. But they aren’t regressing. On almost every parameter, social or economic, the northern states have continued to make progress. Of course, much needs to be done. But to ‘blame’ northern states to have been taken in by the PM and his brand of “chest-thumping nationalism and an atavistic yearning for a pre-Islamic past” isn’t exactly the most constructive way of taking this debate further.

These points aside, there’s a lot there in the Mukherjee article for us to reflect upon and debate with those who think all’s well with us. It isn’t whether we should be losing hope in India. The real question is what we can do to keep our hope about India alive. There are no full stops in history. Every phase, however interminable it might seem then, is transient in the long run. Public policy advocacy, like we never tire of repeating, is a marathon. We run on hope. 

HomeWork

Reading and listening recommendations on public policy matters

* [Podcast] The Diplomat’s Asia Geopolitics podcast host Ankit Panda (@nktpnd) speaks to Abhijnan Rej, The Diplomat’s security and defense editor, about how a Biden administration in the United States is likely to approach South Asia.

* [Article] Business Standard on India’s lost decade

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

PolicyWTF: One Nation, One Election

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

The series “One Nation, One X”, like another sitcom Tarak Mehta Ka Ooltah Chashmah, doesn’t seem to end. The latest season of the series is titled One nation, One election (ONOE).

PM Narendra Modi has batted for this idea on many occasions before. In his latest pitch, he said:

Elections are held at different places every few months, the impact it has on development works is known to all. Therefore, it is a must to have deep study and deliberation on ‘One Nation, One Election’.

This speech apart, the most robust defence of ONOE comes from a NITI Aayog discussion paper by Bibek Debroy and Kishore Desai. They cite four reasons. Let us investigate the top two.

Reason #1: Imposition of Model Code of Conduct by the Election Commission derails development programs and governance

According to this view, political parties, once in power, are brimming with development ideas but are not able to do so, that too for considerable periods, because of repeated elections. This view is shared by many people outside the government as well.

The discussion paper tries to estimate the development time lost because of elections. Based on a projection that at least two states go to elections in India every year the authors conclude:

“Assuming the average period of operation of Model Code of Conduct as 2 months during election to a State Assembly, development projects and programs (that of State Governments going to polls and of Union Government in those states) may potentially get hit every year and that too for about one-third (four months) of the entire time available for implementing such projects and programs. Such a situation is completely undesirable and needs serious deliberations and appropriate corrective measures.”

Sounds quite serious. But hang on. There are several problems with this assessment.

One, if the Model Code of Conduct is the problem, it can be changed either by shortening the length of the moratorium or by relaxing the kinds of developmental activities permitted during the election season. Even in its current form, the government can consult the Election Commission about the developmental works it plans to undertake and if they are deemed to not have electoral implications, they are allowed to continue. I’m in favour of removing these restrictions altogether. If a government wants to use developmental activities to lure its voters, it’s more than welcome to do so. If the government is promising freebies to distort voter choices, it can do so even today, just before the Model Code of Conduct comes into place.

Two, the claim that developmental activities get stalled for four months a year is misleading. That’s because the code of conduct applies only to the state where elections are to be held. There’s no reason why developmental activities need to stall in all other states. Moreover, it’s useful to see the development period lost over a five year period. Assuming that one Lok Sabha election gets held between two state assembly elections over five years, the total “developmental time lost” in the state is six months. That’s an average one-tenth of a year, not one-third.

Three, this “developmental time lost” argument sounds a lot like the dog ate my homework excuse. For one, governments know when the next elections are due and can reasonably plan their developmental works taking this ex-ante information into consideration. Secondly, and this is the bigger issue, this view relegates elections to a begrudgingly necessary event; a mere obstacle blocking the grand developmental vision of the party or the leader in power.

Reason #2: Frequent elections lead to massive expenditures by governments and other stakeholders

The NITI Aayog paper claims:

Elections lead to huge expenditures by various stakeholders. Every year, the Government of India and/or respective State Governments bear expenditures on account of conduct, control and supervision of elections. Besides the Government, candidates contesting elections and political parties also incur huge expenditures. The candidates normally incur expenditures on account of various necessary aspects such as travel to constituencies, general publicity, organizing outreach events for electorates etc. while the political parties incur expenditures to run the party’s electoral machinery during elections, campaigning by star leaders and so on.

While this is true, “massive” expenditures need to be unpacked. The first component is the government expenditure in conducting elections. The 2014 Lok Sabha elections cost 3870 crores i.e. an expense of 0.03 per cent of India’s 2014 GDP once every five years. State elections for a large state like Bihar cost a tenth of this amount i.e. 0.003 per cent of India’s 2014 GDP every five years. Even if we assume all states require the same amount as Bihar did, India would be spending 0.12 per cent of India’s 2014 GDP over a period of five years, all state assemblies and Lok Sabha elections combined. Clearly, this number is not unaffordable. It can’t be the primary motivation for undertaking a constitutional amendment exercise fraught with unintended consequences.

The other component of the cost is spending by political parties and candidates. While the latter is capped to laughably low numbers (Rs 70 lakh for Lok Sabha and Rs 28 lakhs for state assembly elections), there’s no cap on the former. The paper claims that taken together, this component amounted to Rs 30,000 crores for the 2014 Lok Sabha elections. This is indeed a worrying number, more so because the expenditure is often in the form of freebies and vote for cash exchanges. But, arguing that conducting simultaneous elections will fix this problem is an admission by political parties that they will not change their ways; it’s just that they will engage in this simultaneous corruption once every five years. Fixing election expenditure requires many urgent solutions but a simultaneous election is not one of them.

Besides these two reasons, there are other counterarguments that I haven’t considered at all. For example, there is a correlation between a higher percentage of electoral wins for national parties as against regional parties when Lok Sabha and state assembly elections are held together. There are also severe repercussions on India’s federal structures as state governments falling before completion of the five year period might have to be placed under the charge of caretaker governments or state governors.

Regardless, what this limited analysis shows is that even the two reasons given in favour of simultaneous elections don’t hold water. We don’t need One Nation, One Election.

India Policy Watch #1: RBI And Banking Licenses

— RSJ

The Internal Working Group (IWG) of the Reserve Bank of India (RBI) last week came out with draft report that recommended a calibrated entry of industrial houses into the banking sector and for conversion of large NBFCs into banks.

The usual brouhaha followed. But hidden in the brouhaha is an important lesson about the interplay between political and economic institutions. We will come to it later. First, the brouhaha.  

Always A Bad Idea

The camp against the idea of entry of corporates into Banking was led by the formidable duo of Raghuram Rajan and Viral Acharya. In a LinkedIn post titled – “Do we really need Indian corporations in banking?” – they laid out their reservations in no uncertain terms including an innuendo here and a wink there. It covered the usual grounds – risks of connected lending where a corporate house will raise cheap deposits from ordinary citizens and finance their businesses without due diligence; further concentration of economic power among few corporates in a country that’s fast turning oligopolistic and the need for the government to find more bidders when it begins privatisation of PSU banks that it can’t fund any longer.

“First, industrial houses need financing, and they can get it easily, with no questions asked, if they have an in-house bank. The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower? Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending.”

“The second reason to prohibit corporate entry into banking is that it will further exacerbate the concentration of economic (and political) power in certain business houses. Even if banking licenses are allotted fairly, it will give undue advantage to large business houses that already have the initial capital that has to be put up. Moreover, highly indebted and politically connected business houses will have the greatest incentive and ability to push for licenses.”

“One possibility is that the government wants to expand the set of bidders when it finally turns to privatizing some of our public sector banks. It would be a mistake, as we have said in an earlier paper, to sell a public sector bank to an untested industrial house.”

Do We Need More Banks?

The short answer is yes.

Look at India’s ambitions. A 5 trillion economy by 2025 that’s a global economic powerhouse. Keep your dose of realism aside for a moment. If India has to even make a fist of this ambition, it needs a robust, deep and competitive banking sector. What do we have today? A total of maybe six and a half large banks that have the capital, management strength and the ambition to support this vision.   

India is still severely underbanked. Credit to GDP is about 56 per cent which is woefully short of what a fast-growing economy needs. PSU banks that fanned out into the interiors hardly built a deposit base or managed to support enterprise at scale outside of urban centres. Despite such modest achievements, almost every PSU bank has drained taxpayers’ money with very little to show for. Turning PSUs around is nigh impossible. It is easy to recommend professionalising the management but there’s no easy way to achieve it. The government has mixed up its role of being a regulator, shareholder and the management. All sorts of conflicts of interest follow. The benefits of running PSU banks are concentrated among bureaucrats, employee unions and politicians who use them to pump prime the economy when it is politically expedient. The costs are diffused among millions of taxpayers. No wonder the market cap of all PSU banks put together is smaller than the biggest private sector bank.  

Is there really an alternative to big businesses or large NBFCs (many of whom have corporate houses as promoters) to support India’s ambitions? Who else has the ability to bring in patient capital and support a bank for a period of time in future?

Fait Accompli?

So, does this mean we will soon have corporate houses being issued bank licenses? In my opinion that’s unlikely unless government really nudges the RBI in that direction. I have my reasons:

* In the current dispensation itself, many NBFCs could have applied for banking license over the last five years. But they haven’t. Why? The capital requirements needed to run a bank are very different from that of an NBFC. That apart, the NBFCs face far relaxed regulatory oversight than banks. No wonder none of the NBFCs have touched it with a barge pole over the years.

* RBI will have to change the Banking Act, 1949 through a bill passed in the Parliament. Following that there will be a ‘fit and proper’ filter that will be with the RBI to decide on who to give the license. The IWG report suggests some of these will be made more onerous for the applicants.

* This is still a political hot potato. There are many voices within the government who might not be comfortable with this. The pressure group of unions, bureaucrats and opinion makers still wield significant power to block the entry of corporate houses.

* RBI will continue to make it very difficult for anyone applying the bank license

So, what’s happening here? Why is RBI coming out with a paper for allowing corporates in Banks while simultaneously making the criteria impossible to achieve.

A Balancing Act

RBI as an economic institution understands the need for more banks in India. But it does not believe the political institutions in India will be able to manage the conflict of interest inherent in having large corporates as banks. So on one hand it wants to show the political leadership it is supporting their aspirations in ambitions by re-looking at the guidelines for new licenses while making the conditions of the guidelines so onerous that it will make the license unattractive for an industrial house.

For nations to succeed (like Acemoglu and Robinson have argued), its institutions have to be strong. In my view, a nation has to have its political and economic institutions in sync with another. It is difficult for it to have its political institutions extractive, exclusionary and rent-seeking while its economic institutions are liberal and inclusive; and yet succeed in the long run. Having an extractive and exclusionary political institution while continuing to work with economic institutions that are free and inclusive is an unstable equilibrium. Sooner or later, the extractive nature of one type of institutions casts its long shadow on everything. The post-independent history of India speaks to this phenomenon.

Following Independence, India chose a model where its political institutions were by design inclusive and liberal while its economic institutions came to be dominated by the state. In the late 60s, Indira Gandhi found it expedient to double down on the state control of economy in order to consolidate herself politically. This led to the nationalisation of various sectors including that of banks. As this domination and undermining of economic institutions turned complete, the political institutions couldn’t stay beyond it. The judiciary became subservient, roles like governors of state turned into rubber stamps, Article 356 was liberally used to dismiss state governments at slightest of pretexts and most independent institutions were packed with sycophants. No surprise then this culminated into the emergency of 1975.

The crisis of having both political and economic institutions that were extractive reached a point of no return by 1991. That’s when we decided to take a sharp turn away on how we’d like to manage our financial situation. The state reduced its control on factors of production, multiple independent regulators were born and a relativity free market came in to play. The feedback loop of the liberalisation of economic institutions soon started coming up against the extractive nature of political institutions. Through some fortunate circumstances of coalition politics, enlightened leadership and favourable global conditions, the political institutions began to change in the image of the liberal economic institutions. This was reflected in a more active election commission, laws like RTI being passed and the courts actively preserving the liberties of the citizenry.

However, over the last decade or so, the political institutions in India have turned the clock back on being extractive. Electoral victories on the back of a strong leader, a decimated opposition and the power of majoritarian politics have meant we have reversed the gains we made post-liberalisation on making our political institutions freer. As the feedback loops in, the economic institutions are starting to corrode.

This is where RBI finds itself today. It still is a free and liberal institution that’s walking the tightrope between a democratic mandate (that the government represents) and its own independent thinking. The draft IWG report in that sense is its stand. It will play ball yet not play it at the same time. It is anyone’s guess how long it can continue to do so.

The right solution of course is to go back to the path of strong, free and inclusive political AND economic institutions. But that doesn’t look likely anytime soon. It is a lost opportunity.   

India Policy Watch #2: Farmers’ Protests

Insights on burning policy issues in India

— Pranay Kotasthane

We warned in edition #70:

Any reform that is even remotely seen to impact the MSP gravy train is bound to face opposition from a host of incumbent beneficiaries. One, the farmers growing the 22 crops backed by the MSP. Two, the traders getting a percentage of the MSP. And three, the state governments making money by charging hefty commissions for the sale of produce at APMCs. None of this is surprising.

That apart, we mentioned two critiques merit serious attention: one, the timing of these reforms amidst the worst economic crisis in decades meant that the government needed to align the cognitive maps of those losing out. Two, the government fostered suspicions because the three farm laws said nothing about the impact on the existing procurement price mechanisms.

Unfortunately, the anticipated unintended consequences have played out according to the script above. Farmers in Punjab and Haryana are agitating while the government has not come out with a reconciliatory offer yet.

As usual, Pratap Bhanu Mehta’s article takes the long view. He writes:

“Given the far-reaching changes we need in agriculture in Punjab, it is important that the trust between the state and the farmer remains. A good faith dialogue that gives the farmers reasonable assurances and a face-saver is necessary. It is easy for the government to win. But how many times in Indian politics have we won short-term victories that create long-term political precariousness?”

Just like the GST compensation cess issue, the union government has pushed through a big change without getting other political parties or state governments onboard. These specific reforms might still go through but future negotiations will become even more difficult. Parties to the table will come with ossified positions. That’s a precursor to policy paralysis. We have seen this movie before.

In the crisis situation we find ourselves in, it is all the more important that the union government’s reform agenda should factor in distributional consequences of those losing out. The government needs to build bridges. Politics, after all, is the art of the possible, as Bismarck said.

HomeWork

Reading and listening recommendations on public policy matters

* [Podcast]: Acemoglu talks with Russ Roberts on why institutions matter.

* [Article]: Jagdeep Chokkar and Sanjay Kumar make a solid case against simultaneous polls.

* [Podcast]: In the second Puliyabaazi episode on Indian banking history, Amol Agrawal shares fascinating insights on princely state banking, the feud with the State Bank of Pakistan, priority sector lending, and lots more.

* [Article]: Mohammad Taqi in TheWire writes how “Pakistan’s Islamisation started almost a decade before its birth, and long before any army dictator or adventurist general came along.” Even Pakistan didn’t become Pakistan all of a sudden. Something for us to reflect on in India.

If you like the kind of things this newsletter talks about, consider taking up the Takshashila Institution’s Post Graduate Programme in Public Policy (PGP) course. It’s a 48-week in-depth online course meant for working professionals. Applications for the Jan 2021 cohort are now open. For more details, check here.

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

Are we done with the pandemic in India? While the case counts have seen a renewed surged in a few states and there’s been partial lockdowns and travel restrictions imposed, the markets are crowded, traffic is back on the roads and industry leaders are claiming everything is back to pre-Covid levels. Like most things in India, we follow rules while simultaneously not following them. So, we have found a way to pay our respect to the virus (wearing a mask) while getting on with life (pulling the mask over our chin while dealing with others).

This is the kind of contradiction we revel in. Unsurprisingly, our economy is following suit.  

Newspaper headlines would indicate we are seeing a robust recovery. Hardly a day passes when you don’t come across an interview of a business leader who announces their business volumes are back to pre-Covid levels. The message from the economic advisors to the government and from the officials of the Finance Ministry is upbeat. Apparently, the worst is behind us and the reforms initiated during the pandemic have set the stage for growth in future.

How real and sustainable is this? Our everyday experiences don’t sit well with this narrative. A lot of us still aren’t out and about to shop or to work. Our spends on discretionary items have been low because salary cuts are still operational. Services is still on the ropes as a sector as we aren’t travelling, eating out, watching films, or going to the salons as we did in the past.

So, how’s the economic recovery really going?

It’s best to look at macroeconomic indicators instead of cherry-picking data to make sense of things. There are three perspectives that emerge reading through the macro data.

#1 Data Is Good; But Who Is It Good For?

There are multiple areas where we are doing good:

* Stock markets are at an all-time high. Since the pandemic lows in late March, the market has rallied more than 50 per cent. Over 5 million demat accounts have opened since April ‘21. For comparison, 4.9 million accounts were opened in the whole of FY 20. Mutual Funds inflows in H1 has grown by 6 per cent over last year. If the index is a consensus estimate of future prospects of listed entities, we are at peak levels of optimism.

* Listed entities made record profits in H1 of FY21 which coincided with the pandemic and large-scale demand destruction. Net profits of listed entities grew in this period by 24 per cent. To put this in context, the median profit growth in the last 60 quarters was 9 per cent. The pandemic also accelerated the oligopolistic characteristics in most sectors of the economy. The top 3 players in most sectors accounted for more than 60 per cent of profits. The rich are getting richer.

* NPCI retail transactions have grown by over 30 per cent in volumes in H1 FY21 over the previous year while they are down 15 per cent by value. Value of UPI transactions in H1 has grown by over 50 per cent. Clearly, there’s more business transacted in the formal economy during the pandemic. More importantly, low value transactions have moved to formal economy as well going by the increase in volumes. Also, Bank deposits have grown by 10 per cent during the same time while household savings are at their peak.

Who is it good for? Two conclusions are easy to draw from the data above. One, the top 4-5 per cent of the populace that participates in capital markets seem to be doing well for themselves. This segment also accounts for a significant share of consumption of high-value goods. They haven’t held themselves back during the festive season. This is seen in the September data of various sectors. Two, the growth in retail transaction volume that’s captured by NPCI and UPI suggests a significant shift from informal to formal economy. The data about the informal economy or on those outside the 4-5 per cent isn’t exactly visible at this moment.     

#2 Data Is Good; But Is It?

Then there are areas where the data suggests we are back to pre-Covid levels. All’s well now. This is tricky territory and needs to be understood better. Let’s look at a few high-frequency data indicators:

* In Sep 20, passenger vehicles volumes grew by 13 per cent while 2 wheelers volumes went up by 11 per cent over the same month last year. To put this in perspective, FY 19-20 was one of the worst years for the automotive sector. Tractors have sold really well; up by over 20 per cent in H1 over last year.

* E-way bills and railway freight traffic origination – the two metrics indicating the health of logistics sector – were up in September over last year after being down by more than 15 per cent till then.

* Net new EPF subscribers reached 1 million in August ’20. The pre-Covid levels in Jan and Feb was about 1 million. This suggests companies are back hiring.

The data above points to a robust recovery. But does it? Let’s take the data of net new EPF subscribers. Till the pandemic hit us in March, we were adding over a million new subscribers every month and growing at 15-20 per cent over previous year. Since the pandemic began, we have lost the opportunity to add about 3.5 million net new subscribers based on this run rate. How soon will we be able to make up this deficit? We will have to assume from September onwards we return to our usual growth trajectory plus we make up the lost ground with ‘real’ recovery, i.e. we have an incremental higher growth than the usual trajectory. Even if we assume this incremental growth to be about 10 per cent on y-o-y basis, it will take us between 30 – 36 months to recover the lost ground in areas where we claim to have hit pre-Covid volumes now.

The same principle will apply to any sector including passenger cars and two-wheelers that we have talked about above. Similarly, the logistics growth seems to be on the back of inventory being cleared that had piled up during the lockdown. To truly recover what we have lost will take us about 2.5 – 3 years on a best-case basis.

This is a sobering thought. The optimistic way to look at this is that we have recovered to pre-Covid levels in many of these areas sooner than we thought. That’s small solace.

#3 Data Simply Isn’t Good

There are multiple areas where the data isn’t good at all.

* Labour is under stress across the board barring the top 1-2 per cent of the working pool. The record profits seen by listed companies in H1 also come with the lowest wage increases (over the past 15 years) of less than 4 per cent y-o-y in the past two quarters. Companies have reduced their headcounts in this period and may have learnt they were carrying flab over the years.

* MGNREGA work demand has remained higher by over 50 per cent in H1 this year over last. Even in Sep ’20, the work demand was of over 24 million households was 71 per cent higher than last year. Employment provided by the scheme has also been at over 50 per cent higher. The 19 million households employed in Sep ’20 was 56 per cent higher over last year. The reverse migration of workers from the urban economy back to the agriculture sector that’s saddled with low productivity and low-income levels has undone years of movement away from it.

* CPI (retail inflation) has soared to over 7.3 per cent. This is already in the uncomfortable range. Liquidity in the system is still at all time high. The RBI will have its hands tied in cutting interest rates further to spur growth.

While the economic activity has picked up possibly faster that a lot of us expected, there’s hardly anything to be complacent about. The recovery is still fragile because we aren’t seeing the full picture yet. Sajjid Chinoy in the Business Standard made a pertinent observation:

“Operating profit growth of listed non-financial firms sizzled (+44 per cent in nominal terms) but largely on the back of firms rationalising expenditures. Recall, on the income side, GDP is simply the sum of economy-wide operating profits, pre-tax wage incomes and indirect taxes. If GDP is poised to contract in the July-September quarter, yet listed company profit growth is so strong and indirect taxes are recovering quickly, what does that tell us? That profits of smaller, unlisted firms and labour income (wages and employment) suffered sharp contractions last quarter. This, in turn, could have meaningful implications for future growth and income inequality.”

We still have a long way to go before we get back to the pre-pandemic output trajectory. A rough estimate suggests a minimum of three years on a conservative basis. Meanwhile, the informal economy and the labour are still bearing the brunt of the pandemic lockdowns. The stimulus injected by the government has been meagre so far. Most of what has been announced are relief measures or medium to long term reforms.

The annual budget is about 3 months away. It will be useful for the ministry to take a hard and realistic look at the economy and take measures that ensure we don’t lose more time. A well-timed stimulus will still go a long way.

There’s an invisible India that will continue to suffer for long otherwise.  

HomeWork

Reading and listening recommendations on public policy matters

* [Podcast] David Beckworth with Bilal Hafeez on his podcast Macro Musings. Bilal and David discuss the prospects for a K-shaped US recovery, COVID-19’s impact on the Eurozone and the UK, how the launch of the EU’s recovery fund has fared, and how the pandemic has impacted the outlook for the services sector, inflation, and the US dollar.

* [Article] Economist Ajay Shah peers into the economic recovery.

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

India Policy Watch: Pro-market Vs Pro-business

Insights on burning policy issues in India

— Pranay Kotasthane

Indian governments have a rule-making obsession. These myriad rules, regulations, and laws are particularly onerous for running businesses. One anticipated unintended consequence is self-evident: over-regulation incentivises businesses away from the regulated activity into an activity that is far more harmful.

But that’s not all. The other unintended consequence is that overregulation increases rent-seeking opportunities i.e. some businesses cut side-deals with regulatory agents and thrive. Hallward-Driemeier and Pritchett explain this succinctly in their 2015 paper:

“when strict de jure regulations meet weak governmental capabilities for implementation and enforcement … researchers and policy makers should stop thinking about regulations as creating “rules” to be followed, but rather as creating a space in which “deals” of various kinds are possible”.

Kar, Pritchett et al in a 2019 paper find further evidence of the way these deals play out. They reach an interesting conclusion that as regulatory stringency increases, the proportion of firms obtaining clearances, permits, and licenses quicker also increases. In their words:

“..quick deals are often the result of weak implementation via regulatory capture and/or influence or evasion, rather than the result of better regulation or the more speedy completion of regulatory processes. In other words, firms are able to get permits and licences much faster, without due diligence being undertaken for their business activities, by influencing the regulatory bureaucracy and/or their political bosses. As a country’s state capability increases, there is greater ability to counter the pressure for regulatory capture and hence the proportion of such quick deals falls.”

This results in a low-level equilibrium where regulatory capture becomes the de facto norm.

Such deal-making reality is relevant in India today as sector after sector, market concentration is on the rise i.e. a few select firms are able to get clearances, permits, and licenses by cutting side-deals with governments. Unsurprisingly, a lot of media attention is on exposing these special high-level political connections or direct influencing mechanisms.

What’s lost in the din is that while such exposés can shed light on particular instances of government-business dealings, they don’t help reduce levels of corruption. One business tycoon gets replaced by another and the story repeats. As long as higher regulatory burden continues to coexist with low enforcement capacity, side-deals flourish.

The solution then is to decrease the regulatory burden in the short-term and increase enforcement capacity in the long-term. Simplifying rules are pro-market not just pro-business. They negate the advantage that some companies enjoy on account of their special connections with regulatory agents. That’s precisely why simpler tax, policy, and legal environments are pre-conditions for making India’s market more competitive.

Global PolicyWTF: Turkey For Thanksgiving

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— RSJ

Bad policy ideas never go out of fashion. They spruce themselves a bit, don new clothes and return to wreak havoc all over again. They are remarkably resilient because the public falls for them every time they show up in a new garb. This is why strong institutions matter. Failing which an enlightened populace that appreciates economic reasoning can stand as the last line of defence. We talk a lot about PolicyWTFs here because our modest aim is to evangelise economic reasoning. The root causes of most PolicyWTFs that we target can be traced to two fundamental human failings – good intentions and hubris. In the past few months, we have seen this play out in Turkey in all its glory.

Killing The Messenger

On September 15, Moody’s Investor Service cut Turkey’s sovereign credit rating to B2, about five levels below investment grade. This put Turkey on par with countries like Rwanda and Jamaica.

“Turkey’s external vulnerabilities are increasingly likely to crystallize in a balance-of-payments crisis,” Moody’s wrote in their report.

"Turkey has been muddling through for some time now, but muddling through is not a strategy that can be used forever. At some point they will run out of road," Sarah Carlson, lead sovereign analyst at Moody's Investors Service, told Reuters in an interview.

President Tayyip Erodgan responded by attacking Moody’s and other rating agencies as he has done in the past. The usual bogey of interest rate lobby and currency manipulators was wheeled out to defend his position.

Turkey’s economy is on the rise and not dipping at the moment, but “they are downgrading our ratings again,” Erdogan said in Istanbul on Saturday after the Moody’s announcement. “Do what you want to do, your ratings are of no importance.”

The Certitude Of Erdogan

So, what’s gone wrong with policymaking in Turkey? Well, in a single word – hubris. Erdogan cannot imagine being wrong and worse, he thinks the economy can be managed centrally and bent to his will. He has fired central bankers, appointed his son-in-law as the Finance Minister and has made policy moves that would do a tin-pot dictator proud. Things were already bad for Turkey at the start of this year. Then came the pandemic. Alongside these Turkey has been flexing its political and military muscle all around the region. That has won it no friends. From the US, Russia to Saudi Arabia, it has been picking the choicest battles to dig itself further into a hole. The EU integration dream has been smashed beyond recognition.

But Erdogan fancies himself as the leader of the Muslim world and a strong man who will change the destiny of his people. He won’t change course. Admitting a mistake is the biggest sin in his worldview. So now you have a situation where foreign currency funding of over $50 billion has fled Turkey over the past couple of years while the local banks have been mopping up domestic savings in dollar-denominated deposits. These funds are being borrowed by the Turkish Central Bank (CBRT) and sold in the market to defend the Turkish Lira. The CBRT has negative net foreign currency reserves at this moment.

This means Turkish banks are sitting on huge exposure to CBRT which has nothing left in reserves while the government continues to borrow from the state-run banks to fund its ambitious infrastructure programmes. The Turkish Lira has fallen over 30 per cent this year, there’s double-digit inflation and the investors are voting with their feet. A balance of payments crisis is imminent and that’s what Moody’s and other rating agencies have flagged.   

Bonfire Of Economic Reasoning

The problem is you could see this coming for many years because the first casualty of political hubris is economic reasoning. And Turkey has shown a fine disregard to it under Erdogan. Turkey runs a large current account deficit (imports more than its exports) which requires external financing or a capital account surplus to fund. This is usual for an emerging economy with a strong and growing domestic market. Over the years the promise of deeper integration with EU and the relatively large size of its market has meant it has attracted strong foreign capital flow. This led to the expansion of credit that fuelled the consumption boom. The way to manage this is to continue reforms to retain the confidence of foreign capital, invest in infrastructure and human capital to improve the long-term competitiveness of Turkish industry and maintain internal and external harmony to keep the economic engine humming.

Instead, President Erdogan has put his own version of economics at the forefront to bring Turkey to the brink. The list of Erdogan PolicyWTFs is long:

* He loves low-interest rates that allow people to borrow and spend. That makes him popular. But he also has a warped notion that high-interest rates cause high inflation. This is a problem in a country like Turkey that has chronic high inflation and depends on foreign capital. A lower interest reduces the attractiveness of Turkish assets and foreign capital goes elsewhere. This weakens Turkish Lira. This is what has happened in the last two years where a domestic credit boom has been engineered by keeping interest rates artificially low. But the consumption upsurge has meant more imports because Turkish people love buying foreign goods. The weakened Lira means Turkey keeps importing inflation in the form of foreign goods. And the inflation keeps rising, hurting the poor the most.

* Demolishing the independence of central bank has been his singular achievement in the past few years. He has taken the powers to appoint members to CBRT’s rate setting board directly. He has installed a lackey as its Chairman who cut interest rates with little regard to the consequences over the last two years. There is no system of checks and balances left for Turkey to have an independent monetary policy anymore.

* As usual wrong root causes have been identified for the balance of payments crisis. That imports are a problem. One way to solve this is to find energy sources of its own so that fuel imports reduce. That explains its increased belligerence in the eastern Mediterranean region. Nothing good would come out of it except inviting more sanctions and a further flight of capital. Soon there will be a call for import substitution (there are already those calls) and to shun foreign goods. There will be another round of whipping nationalistic fervour to cover the economic mess.

* The three options that can help avert a balance of payments crisis are anathema to President Erdogan. He doesn’t like higher interest rates so that’s not an option. Buying Turkish Lira using domestic foreign exchange reserves is the other. This has been done to its fullest and the reserves are in negative now. The final option is to go to IMF who will dictate terms but that can’t be countenanced by a strong leader.

Turkey is a good lesson in believing intentions and political legitimacy trumps economic rationale. That a strong and popular leader who trusts his instincts can make bold calls for an economy. The economy bends to no one’s will. Except to reason.    

Money Quote: What Has Capitalism Done for the Poorest?

— Pranay Kotasthane

This month I’m reading the works of Deirdre McCloskey, one of the best living economists. These lines from her book Why Liberalism Works need to be reflected upon by everyone in the public policy space:

“..according to the scientific consensus in economic history, the much-maligned “capitalism” has raised the real income per person of the poorest since 1800 not by 10 percent or 100 percent, but by over 3,000 percent. Cheap food. Big apartments. Literacy. Antibiotics. Airplanes. The Pill. University education. The increase is a factor of thirty. That is, 30 minus the original, miserable, base of 1.0, all divided by the base is 29/1, to be multiplied by 100 to express it per hundred—or a 2,900 percent increase over the base, 3,000 near enough. I will keep saying it, and keep dazzling you with my prowess in arithmetic, until you feel it on your pulse. It is the greatest, yet regularly overlooked, fact about the modern world. Most people by actual questionnaire think that since olden days the real capacity of poor people to buy goods and services has increased maybe 100 percent, at the outside 200 percent, a doubling or a tripling. They’re quite wrong. The increase has been much, much greater. If we appreciate it, the appreciation will transform all our politics. For example, the fact of the Great Enrichment is a crucial element in showing that humane true liberalism of the modern sort I advocate here is good and enriching, in every sense.

The Great Enrichment doesn’t mean, of course, that there’s nothing more to do in helping the poor, especially by ending the numerous, monstrous, and yet politically popular policies that in fact damage them worldwide. But it does mean that it is mischievous to attack, as many political theories do, a “capitalism” that has done more than anything else to help the poor. The Great Enrichment doesn’t mean that little bits of other systems—a soupçon of socialism for worthy public projects, a cup of Christian charity for the poor, a tablespoon of encouragement to worker-owned cooperatives, such as law and accounting firms—are to be scorned. But it does mean that replacing “the system” as a whole would be disastrous for the poor, as it has been shown to be in the USSR after 1917, in Venezuela after 1999, and over and over again in between.”

McCloskey, Deirdre Nansen. Why Liberalism Works . Yale University Press. Kindle Edition.[Emphasis mine]

Matsyanyaaya: Assessing China’s Silicon Rush

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane and Rohan Seth

[An edited version of this article appeared first in South China Morning Post on 15th Nov under the headline China’s semiconductor gold rush: A reality check]

The semiconductor industry has become a major front of the US-China tech war. Given that this is a weak link in China’s otherwise impressive technology stack, the US has imposed export controls restricting Chinese semiconductor companies from accessing key equipment, software, and intellectual property.China has been aware of this weak link. Since 2014, the Chinese state has set up two 'Big Funds' to incentivise growth. These funds raise money primarily from government bodies — the finance ministry, state-owned enterprises, local governments — and invest it in upcoming semiconductor companies.The government-led investment has led to a 'crowding-in' of private enterprise. According to recent data, more than 13,000 Chinese enterprises registered as semiconductor companies in the first nine months of this year. That is a significant jump from the nearly 9,000 companies that registered last year. Such is the lure that several new entrants with no prior experience in semiconductors have thrown their hat into the ring. Many come from a range of disparate sectors such as automobiles and seafood.So, does this silicon rush mean that China will become self-sufficient in semiconductors soon? Not quite. China's state-backed funds might well spur private investment, even producing a few champions but such moves are unlikely to result in a self-sufficient Chinese semiconductor industry anytime soon. Here's why.The semiconductor supply chain is a complex one. It can be very roughly split into three main stages: integrated circuit (IC) design, semiconductor manufacturing, and assembly & testing. The returns of investment for China in each of these stages will be different due to their unique limiting constraints.

China's prospects in IC design

The first stage — IC design — is skill-heavy and asset-light. Coming up with newer chip architectures and integrating them requires a large number of high-skilled engineers familiar with specialised software. There were nearly 138,000 design startups in China as of September 2020, most of them getting registered after the first government-backed fund was announced in 2014. Though there are fears of talent shortage, government-backed massive investment means that such shortage can be tackled by poaching talent from Taiwan at higher wages. The fortune of design shops is on the rise.And yet, these design shops are not destined for success. One critical bottleneck remains in the US control: software. IC design is intricate and requires extensive use of automated design software collectively known as Electronic Design Automation (EDA). EDA requires massive R&D investment and in-depth knowledge of chip fabrication. As a result, this market has rapidly consolidated over the years. Currently, there are three dominant global players, two of which are US-owned while the third is based in the US. Exploiting this asymmetry, the US banned the sale of US-origin EDA software to HiSilicon, Huawei's IC design unit. With China having no EDA firm at the cutting edge and the US taking a hardline approach on IP piracy, developing self-sufficiency in EDA tools will require considerable time.The second bottleneck is processors for high-end mobile phones. ARM Holdings is the dominant firm here with over 90 per cent market share. ARM was recently bought by NVIDIA, making it directly subject to American export restriction laws that are being used to target Huawei. To overcome this dependence, Chinese companies such as Alibaba have thrown their weight behind a rival open-source architecture known as RISC-V. Though impressive development has taken place on this front, RISC-V still has many years of catching up to do before it can displace ARM’s core general purpose processors in mobile phones and tablets.

China's prospects in chip fabrication

Physically translating IC design onto silicon is a capital-intensive process requiring regular and massive capital infusion. For example, TSMC, the world's leading chip manufacturer estimates that its next-generation chip fabrication plant will cost $19.5 billion.China’s Big Chip Funds will help pool in the significant investment for building new fabrication plants. Despite this, two challenges will constrain China's hand in the catch-up game.One, China's starting point remains a handicap. Even Semiconductor Manufacturing International Corporation (SMIC), China's national champion in this space, can commercially produce 14-nanometer chips as of now. This is a couple of generations behind the industry leader's (TSMC) 5-nanometer capability. This number is indicative of the transistor size; the smaller this number, the more transistors can be packed in the same area leading to higher device performance. Even with enough capital investment, it might take the better part of a decade for China to catch up with TSMC. And by the time that happens, the cutting edge would likely have moved on to a more advanced process. Until then, companies such as Huawei have no local option for manufacturing their high-end chips.Two, a fast follower approach is challenging to execute with ongoing US sanctions. For instance, the US has been applying pressure on ASML, the world's only producer of a technology required to manufacture high-end chips. Applied Materials and Lam Research, two other US companies which supply critical manufacturing equipment to SMIC also face US export curbs. Without access to this equipment, SMIC will not be able to produce advanced chips.

China's prospects in assembly & testing

Finally, the back-end, commonly referred to as Outsourced Semiconductor Assembly & Test (OSAT), is a labour-intensive sector with lower profit margins.OSAT has already moved to countries that have a comparative advantage in the availability and cost of labour. The capital investment is still significant, but not as high as the manufacturing process. These characteristics make OSAT a low hanging fruit for China's Big Fund investments. Although Taiwan remains the leader in the space by a significant margin, China's market share has been growing steadily. Jiangsu Changjiang Electronics Technology Co. (JCET), backed by a Big Fund, now has over 15% market share in the global market. As the state lays out an increasing number of incentives, it is the OSAT segment that is most likely to benefit from them as compared to the other stages.China faces an additional geopolitical challenge in chip fabrication and assembly. Just a handful of Japanese companies dominate the global market in silicon wafers, photoresists, and essential packaging chemicals. These companies are well-regarded for their high-quality production capabilities and their products are not easily replaceable even by a manufacturing heavyweight such as China. In a changed world where strategic concerns are guiding technology flows, China’s chip ambitions can be foiled not just by the US but also by Japan and Taiwan.Based on this survey of China's strengths and weaknesses in different stages of the semiconductor supply chain, judging Big Funds' success by the number of registering companies doesn't provide an accurate picture. Throwing money at the problem is not a solution that can work for all sectors. The spectacular failures of Fujian Jianhua Integrated Circuit Company (a memory chip maker) and Wuhan based HSMC (a chip manufacturer) have amply demonstrated that China's push to be self-reliant will require a lot more than massive public investment. Crucially, China's own arrogant international conduct that has resulted in significant geopolitical barriers for its fledgeling semiconductor industry. To adapt William Gibson's oft-repeated quote, the future of semiconductors in China is here — it's just not very evenly distributed.

HomeWork

Reading and listening recommendations on public policy matters

* [Article]: ‘An imbalance of payments leaves Turkey with hard choices’: John Lubbock in the Ahval on where Turkey’s economy stands today

* [Paper]: Cooperative arrangements in the technology domain to balance China’s power seem to be gaining traction.

That’s all for the week from us.

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

Democracies have periodic elections to ascertain the will of its people on who should govern them. Often the incumbents lose. This leads to a nebulous, yet perhaps the most precious of features of a democracy – the peaceful transfer of power between the vanquished and the winner. In most democracies, there isn’t a written down law on how this should happen. Instead there are norms of conduct and fair play that guide this. The idea that someone voluntarily steps aside and lets an opponent take over the reins of power is fraught with risk. There’s no guarantee if this gesture will be reciprocated or perpetuated in future. The ability to transcend this fear is what makes democracies tick around the world.

Cannot Be Taken For Granted

How precious this feature is can be gauged from this study done by Adam Przeworski of New York University that was cited by the Economist a few weeks back.

“Mr Przeworski’s database, which analyses elections in more than 200 countries between 1919 and 2015, shows that only a little more than half have had even one orderly electoral transfer of power—defined as government handovers free of coups, civil wars or constitutional crises after a vote.

Eleven such handovers from one party to another have occurred in America since the end of the first world war. This makes the country an exceptional success on this measure.”

Norms follow a logic unique to them. Once set it isn’t easy to dislodge them. Conversely, once challenged and then flouted, it’s difficult to restore them. The norm of peaceful transfer of power for the world was set in the US in the early 19th century. The elections of 1800 were fractious and fiercely contested between the Federalists led by the incumbent President John Adams and the Democratic-Republican Party led by Thomas Jefferson. This was a bitter battle. To quote www.history.com:

“During Adams’s presidency, Democratic-Republicans and Federalists clashed over everything from taxes to religion, but especially over the main policy dilemma facing the nation: how to deal with the ongoing French Revolution.

These bitter differences were front and center during the 1800 presidential campaign, which played out in the highly partisan press. Federalist newspapers and propaganda materials branded French sympathizers as dangerous radicals, while Democratic-Republicans accused the Federalists of wanting to re-establish a monarchy.

When the votes were counted, confusion reigned. Though Jefferson and his running mate, Aaron Burr, had defeated Adams and Pinckney, both had received the same number of electoral votes. The tie sent the decision to the House of Representatives, where Jefferson finally won the presidency on the 36th ballot.

In the early morning hours of March 4, 1801, John Adams, the second president of the United States, quietly left Washington, D.C. under cover of darkness. On the heels of his humiliating defeat in the previous year’s election, Adams was setting an important precedent. His departure from office marked the first peaceful transfer of power between political opponents in the United States, now viewed as a hallmark of the nation’s democracy. Since then, the loser of every presidential election in U.S. history has willingly and peacefully surrendered power to the winner, despite whatever personal animosity or political divisions might exist.”

In his inaugural address, Jefferson made his famous unifying declaration:

“But every difference of opinion is not a difference of principle. We have called by different names brethren of the same principle. We are all republicans. We are all federalists.”

Banking On The Usual American Exceptionalism?

Over the years, there have been laws drafted and passed to establish a mechanism for peaceful transfer of power. The Presidential Transition Act of 1963 and its numerous subsequent amendments have attempted to create more defined guidelines to achieve this.

Yet a few features remain unique to the transfer of power in the US electoral system:

* There’s an inordinately long 10-week transition period between the elections and the inauguration of the new President.

* During this period, the incumbent President continues to hold full executive powers till the President-elect is sworn-in.

* There’s no clarity about what happens if the incumbent refuses to transfer the power citing fraud or electoral irregularities.

Alexis de Tocqueville in his classic Democracy in America remarked on the period just preceding the presidential election and after it with acuity:

“Whatever the prerogatives of the executive power may be, the period which immediately precedes an election and the moment of its duration must always be considered as a national crisis, which is perilous in proportion to the internal embarrassments and the external dangers of the country. Few of the nations of Europe could escape the calamities of anarchy or of conquest every time they might have to elect a new sovereign.”

The ‘national crisis’ that he calls out isn’t a hyperbole.

This transition period where no one is really in control has seen some famous missteps by the U.S. political class. The transition from Buchanan (arguably, the second worst President after Trump) to Lincoln between November 1860 and March 1861 was when the states of the Confederate South prepared for the Civil War while the executive remained paralysed. Similarly, the protracted legal battle between Bush and Gore following the elections in 2000 is believed to have given Bin Laden and his associates the window to plan 9/11.   

These unique features and the dangers of protracted legal battle during the transition period have now come into focus as President Trump refuses to acknowledge he lost the elections. With the crisis of a second wave of Covid-19 striking many states and the urgent need for a national vaccination plan to be administered in the next six months, there couldn’t be a worse time to question the legitimacy of an election and rousing nearly half of the country to believe the voting was rigged.

But Trump has managed that. And more.

He is now striking at the foundational norm of democracy – the peaceful transfer of power – a gift that the US has given to the world. Such norms once questioned cease to be inviolable. All bets are then off for future transitions.

Tocqueville had cited three causes responsible for maintenance of democratic republic in the United States:

* The peculiar and accidental situation in which Providence has placed the Americans.

* The laws.

* The manners and customs of the people.

The Manners Of Americans

Of these, Tocqueville specifically cited the manners of American people as the most critical determinant of its success as a democratic polity. He wrote:

“The citizen of the United States does not acquire his practical science and his positive notions from books; the instruction he has acquired may have prepared him for receiving those ideas, but it did not furnish them. The American learns to know the laws by participating in the act of legislation; and he takes a lesson in the forms of government from governing. The great work of society is ever going on beneath his eyes, and, as it were, under his hands.”

“The laws and manners of the Anglo-Americans are therefore that efficient cause of their greatness which is the object of my inquiry.

The American laws are therefore good, and to them must be attributed a large portion of the success which attends the government of democracy in America: but I do not believe them to be the principal cause of that success; and if they seem to me to have more influence upon the social happiness of the Americans than the nature of the country, on the other hand there is reason to believe that their effect is still inferior to that produced by the manners of the people.

The manners of the Americans of the United States are, then, the real cause which renders that people the only one of the American nations that is able to support a democratic government; and it is the influence of manners which produces the different degrees of order and of prosperity that may be distinguished in the several Anglo-American democracies.”

As Trumpism and a deeply divided society contend with an unprecedented scenario of a raucous transfer of power that so far was the preserve of newly minted democracies of Africa and South America, one hopes the ‘manners’ of the American people that Tocqueville extolled, will save them from the blushes.

The American people will have to be at their best ‘manners’ in the coming days.  

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Timothy Naftali in the Foreign Policy: “The transition of power between presidents has long been a weakness of the U.S. political system. But never more so than now.”

* [Article] The Election That Could Break America, a long-form piece by Barton Gellman in The Atlantic about the various scenarios of transfer of power

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

India Policy Watch #1: Production-Linked Incentives

Insights on burning policy issues in India

— Pranay Kotasthane

Production-Linked Incentives (PLI) — that’s the name the government’s recent, most-favourite industrial policy instrument goes by. It seems elegant on paper: the government will reward companies for incremental sales of manufactured goods with a subsidy. More the sales (either domestic or exports), more the subsidy amount.

The intent seems sound too: encourage companies to up their manufacturing game.

First introduced for the electronics sector earlier in the year, PLIs worth ₹2 lakh crore for ten disparate sectors over the next five years were announced by the Union Cabinet earlier this month. These sectors are automobiles and auto components, pharmaceutical drugs, advanced chemistry cells (ACC), capital goods, technology products, textile products, white goods, food products, telecom and specialty steel.

Let’s assume that the size of the incentive is big enough to change companies’ investment decisions at the margin (that’s a big if). What are the consequences likely to be in that case? Can we anticipate some unintended consequences beforehand?

Let’s parse this policy through the framework discussed in edition #48. Three unintended effects are possible:

* “Reasonable regulation drifts toward overregulation, especially if the costs of overregulation are not perceptible to those who bear them.”

The PLI scheme for the electronics sector has specific eligibility criteria both on incremental investment and incremental sales a company needs to commit over the next five years. This is supposed to be cross-checked by a Project Management Agency (PMA), a government-body formed under the Ministry of Electronics and Information Technology (MeitY).

The PMA will further submit its recommendations to an Empowered Committee (EC) composed of CEO NITI Aayog, Secretary Economic Affairs, Secretary Expenditure, Secretary MeitY, Secretary Revenue, Secretary DPIIT and DGFT which will make the final decision. The EC is also empowered to revise anything — subsidy rate, eligibility criteria, and target segments.

In short, more bureaucracy and predictably unpredictable delays. The speed of incremental investments might get decided by the speed of government decision-making. EC’s powers to make any changes to this policy in the future is also filled with possibilities of regulation becoming overregulation.

There’s one more gap. In order to increase innovation, the PLI scheme will not consider incremental investments towards land and buildings towards the eligibility criteria. Only investment towards plant, machinery, equipment, research, and development is allowed. This might incentivise companies to fudge their land dealings and for government officers verifying the real quantum of incremental investments to cut deals for themselves.

* “Moral hazard increases.” The ten sectors chosen by the government might see a crowding-in of investment at the cost of all other sectors. Are these ten industries strategic for India while others aren’t? I don’t quite know the basis of this selection.

Next, every policy move has an associated opportunity cost. It’s a bane of Indian policymaking that policy decisions are rationalised solely by looking at projected benefits; by ignoring opportunity costs. In the context of PLIs, the government needs to pay up ₹2 lakh crore over the next five years to a few companies in these ten sectors. The government will most likely rake in this revenue in the form of taxes. Using the Kelkar/Shah Marginal Cost of Public Funds (MCPF) estimate for India of 3, the total cost to India from this subsidy would be of the order of ₹6 lakh crore. The scheme would make sense if the benefits are projected to be higher than this number. Whether an analysis of these costs has been taken into account, we don’t know.

* “Rent-seekers distort the program to serve their own interests”. Companies that benefit will seek to modify the eligibility criteria to suppress competition thus leading to more market concentration. They might even try to extend the sunset clause of this scheme in order to keep benefiting from the discount.

These unintended consequences might substantially diminish the benefits that the PLI schemes are aiming at.

What are the alternatives?

Read this statement by the chairman of the India Cellular and Electronics Association (ICEA):

“The disability stack runs deep in the economy. For example, the taxes on fuel. Second, electricity is not subsumed under GST (goods and services tax). So how do you become competitive?

This is the key point. Perhaps PLIs are a much-needed band-aid solution for a wounded economy but it cannot transform manufacturing in India. Doing that would require consistent and simpler tax, policy, business, and trade environments. Improvements on these grounds will benefit all sectors and investments will follow sectors which show higher productivity. In other words, we’re still waiting for a reforms 2.0 agenda.

India Policy Watch #2: The Many Hues Of Charisma

Insights on burning policy issues in India

— RSJ

The recent Bihar election results confounded many. First, the consensus from multiple opinion and exit polls suggested a clear majority to the UPA. They got it wrong. Second, there was view the NDA coalition was going into the elections with a triple disadvantage – anti-incumbency, the particularly severe effect of lockdown on Bihari migrants and the disappointment among the youth about the economic progress in Bihar despite many years of promise. There was no regional face of the BJP to counter the rising popularity of Tejaswi Yadav. The pandemic also limited the ability of the NDA to field the PM and other star campaigners on the ground to mobilise the workers and make a case for their government. Despite such odds, the BJP had its best performance winning 74 seats out of the 121 it contested.   

What explains this?

Politics of Vishwaas

There are multiple theses here. The decision of AIMIM to field candidates across the state ‘cut’ the Muslim vote bloc is one. That women voted overwhelmingly in favour of the BJP is the other. These might have played a role in the electoral arithmetic but at a macro level the win reaffirms the strength of what Neelanjan Sircar has called the ‘politics of vishwaas’. As Sarkar writes:

“…is a form of personal politics in which voters prefer to centralize political power in a strong leader, and trust the leader to make good decisions for the polity – in contrast to the standard models of democratic accountability and issue-based politics.”

Sircar suggests two factors leading to this:

“First, like much of the world, there is an increasingly strong axis of conflict between those who believe in a unitary (Hindu) national identity for India and those who view India in ‘multicultural’ terms. This obliges supporters of Hindu nationalism to support political centralization to stymie federalism, which would require negotiation across regional, linguistic, caste, and religious identities. Second, the BJP’s control of media and communication with the voter, in tandem with a strong party machinery, give the party structural advantages in mobilizing voters around the messages of Narendra Modi.”

Vishwaas apart, the Bihar win suggests voters aren’t yet disappointed with the absence of achhe din the PM had promised in 2014. The charisma of the PM endures, and he’s still seen as an outsider upending the established order and the elites. This is a remarkable feat of narrative-building where even missteps like demonetisation or the severe lockdown are judged on their intent instead of their outcomes. The ‘politics of vishwaas’ is anchored on the personal charisma of the PM.

So, how should we think about this charisma? There are several ways.

Cometh The Hour

First, leaders build their charismatic appeal on the back of a deeply felt need in the society for change. In the run-up to 2014 general elections, two distinct needs coalesced. One, the simmering discomfort about how the constitution and its institutions had over the years infringed on the personal domain of Hindu lives while staying away from those of minorities (termed appeasement by many). Two, the shambolic performance of UPA 2 on economy driven by transactional corruption and policy paralysis.

All societies have inherent in them a set of core beliefs that in tandem with everyday issues of roti, kapda and makaan drive their choices and actions. Often, they are in opposition. Sometimes they coincide as they did in 2014.

Despite the liberal and secular constitution project that aimed at engineering a social revolution in post-independent India, the core belief, however suppressed, among the majority was always guided by their religion. This suppressed belief found a credible voice in the persona of PM Modi. They saw in him an agent of change who will restore personal belief and faith above the liberal ideas of the constitution. Those ideas were never in sync with our society anyway.

Therefore, so long as there are actions that suggest progress on this axis – CAA, revocation of Article 370 and building of the temple in Ayodhya – the relatively poor performance on roti, kapda, makaan issues will not matter. Even a raging pandemic and a 23% shrinking of the economy in Q1 hasn’t mattered. Charismatic leaders emerge in times of great need and so long as they deliver on their core promises (even those unstated but commonly understood), they will retain their hold on their followers.

Max Weber in his classic ‘On Charisma And Institution Building’ explained this eloquently:

“Charisma knows only inner determination and inner restraint. The holder of charisma seizes the task that is adequate for him and demands obedience and a following by virtue of his mission. His success determines whether he finds them. His charismatic claim breaks down if his mission is not recognised by those to whom he feels he has been sent. If they recognise him, he is their master – so long as he knows how to maintain their recognition through ‘proving’ himself. But he does not derive his ‘right’ from their will, in the manner of an election. Rather the reverse holds: it is the duty of those to whom he addresses his mission to recognise him as their charismatically qualified leader.”   

Charisma Trumps Economic Structure

The somewhat forced reforms carried out by the PM in the last 18 months have challenged the status quo. The success of these reforms will depend on their implementation. The opposition has protested against a few of them especially the farm sector reforms. But barring pockets in Punjab and Haryana where the MSP economy looms large, there isn’t a groundswell of opinion against these reforms. Even the poorly thought-through reforms in labour and the swerve towards atmanirbhar Bharat have been difficult to counter. It is politically infeasible to defend the status quo while being in opposition. The ruling dispensation has taken on the mantle of change despite being in power for over 6 years.

On the economy, the track record of this government is weak; yet PM Modi’s charisma stays above it. Pratap Bhanu Mehta writing in The Indian Express captures this well:

“Despite economic headwinds, it has not been easy to use the economy as a point with which to attack the Modi government. It has still positioned itself as a breaker of the status quo. The opposition will have to think more intelligently about the political economy of protest to counter the new political economy of reform.”

This is the unique feature of charisma. India Gandhi had it when she went about destroying the Indian economy to consolidate political gains in the early 70s. The mission of the charismatic leader subsumes everything else, even their glaring flaws. More so on economic matters.

Weber had considered this in his ruminations on charisma and this is particularly applicable to the ‘fakir’ narrative that’s often associated with charismatic leaders in India:

 “In its economic sub-structure, as in everything else, charismatic domination is the very opposite of bureaucratic domination. If bureaucratic domination depends upon regular income, and hence at least a potiori on a money economy and money taxes, charisma lives in, thought not off, this world. This has to be properly understood. Frequently charisma quite deliberately shuns the possession of money and of pecuniary income per se… (charisma) always rejects as undignified any pecuniary gain that is methodical and rational. In general charisma rejects all rational economic conduct.

..In its purest form, charisma is never a source of private gains for its holders in the sense of economic exploitation by making of a deal. Nor is it a source of income in the form of pecuniary compensation, and just as little does it involve an orderly taxation for the material requirements of its mission. Pure charisma…. is the opposite of all ordered economy. It is the very force that disregards economy.”

The Transfer Of Charisma

The primary challenge to a structure that’s based on charisma is in the determination of transfer of that authority. The transfer comes about through various means – bloodline (Nehru-Gandhi family), search (Dalai Lama), revelation (prophets) or through a new need for a change (Obama or Trump, PM Modi etc). The core question for BJP is what after 2024? Clearly, it’s difficult to see the PM continue for a third term after he turns 75. How will it transfer the charisma to an anointed successor? The work on it will begin soon.

This won’t be easy.

Because PM Modi hasn’t used his charisma to build institutions that will sustain it beyond his time. In his introduction to Weber’s Charisma and Institution Building, S.N. Eisenstadt writes:

“… the test of any great charismatic leader lies not only in his ability to create a single event or great movement, but also in his ability to leave a continuous impact on an institutional structure – to transform any given institutional setting by infusing into it some of his charismatic vision, by investing the regular, orderly offices, or aspects of social organisations, with some of his charismatic qualities and aura.”

This is where Nehru was a genius. For the opposition, the fact that Modi hasn’t been an institution builder in Nehru’s mould offers them their only ray of hope. That this charisma won’t transfer in the post-Modi polity.

But till then the electorate will continue to confound pollsters.  

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Economists Ila Patnaik and Radhika Pandey on Production-Linked Incentives (PLI) scheme.

* [Article] India’s defence financing crunch can’t be solved by the Ministry of Defence alone. Lt Gen Prakash Menon and Pranay explain what needs to be done.

* [Podcast] If Business-State relations interest you, listen to this Puliyabaazi with Rohit Chandra.

* [Article]: ‘Can Democracy Handle Charisma?’ Review of David Bell’s Men on Horseback by Ian Beacock in the New Republic.

That’s all from us, folks.

In case Indian subcontinent geopolitics interests you, tune in for this event in context of the recently concluded elections in Myanmar.

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

A topic we often like discussing in this newsletter is the role of unelected institutions like regulators in framing public policy. The usual defence of having a regulator is that not all laws can be legislated by elected members. There is not enough expertise available among them in the many areas of lawmaking nor do they have time to do so. The delegation of this role to regulators solves for this.

Perils Of Arbitrary Power

This delegation comes with its own risks. Both legislative and executive responsibilities are vested in these unelected regulators. In India, often, they have judicial powers too with limited freedom to appeal against their decisions. The benign view of a regulator is that of an enlightened referee who sets the rules of game and ensures an even playing field for all. But with almost unlimited powers at their disposal and with weak or absent feedback loops on their performance, it is no surprise the actions of regulators border on arbitrary in India.

Is there a better way to create regulators? Or, like many other features of democracy (indeed, democracy itself), is this the best among the worst options?

Two Examples

First, National Payments Corporation of India (NPCI), promoted by the Banking regulator, decided last week it will cap transaction volumes by a single third-party app (TPA) player to 30 per cent on its UPI platform. The reasons cited were to address the systemic risk of a single player dominating the payment ecosystem and to reduce likelihood of frauds. At the same time, NPCI approved WhatsApp to launch its payment service increasing the intensity of competition in this space. In parallel, the government at the start of the year had banned Merchant Discount Rate (MDR) for transactions on UPI which was the primary source of revenue for payment service providers.

Put together, we have a scenario where there’s a business with no revenue model because it is priced at zero for both the merchants and the customers. And there’s a market share cap beyond which players can’t grow. The unintended consequences of these aren’t difficult to anticipate. First, it will be a nightmare to implement because how do you cap someone at 30 per cent in a business where volumes and speed of transactions are key features. Will a payment service provider reject new service requests after they have reached the cap or will they temporarily deactivate their service to stay within the threshold? That will be a nightmare for customers. Second, with this, why will any player innovate on the UPI platform beyond a point? They will instead go back to the entrenched global payment networks and launch innovative products on them to gain market share or create revenues streams. Lastly, the players will be forced to use ‘sharp’ practices to monetise customer data that could be detrimental to the customers’ interests. Predictably, the two largest players have been up in arms against this ruling. But the die is already cast.

The second example is the that of CCI initiating a probe against Google for abusing its dominant position in the mobile operating system with Android and app store markets to force app makers to use its billing system and to include its payments app in every Android phone sold in the country. As the Mint reports:

The two issues, which the CCI is investigating, relate to “exclusivity regarding the mode of payment for the purchase of apps and in-app purchases" and “pre-installation and prominence of Google Pay on Android smartphones".

While the complaints centre around Google Pay, its outcome could have a broader impact on how the company enforces its Play Store rules in India.

If CCI concludes Google has indeed violated rules, it would be a shot in the arm for Indian startups, which have been protesting against Play Store’s decision to charge a 30% commission for in-app sales.

We have written about this in our editions #75 and #76.

In summary, it is very difficult to prove platforms like Google are monopolies in the traditional definition of the term. Banning them from bundling their services or building an India or government app store are worse ideas. There’s more thought needed on how to regulate these entities. It is to be seen how the regulator will view these in India. Our view has been that the problem of unelected regulators with limited checks has greater repercussions in India. Invariably, things tend to go from bad to worse.

The Right Way To Designing A Regulator

So, what’s the right way to delegate powers to an unelected entity like that of a regulator? This is an important question to ask in India where regulators have proliferated over the last 20 years across sectors. The search for this brought me to Paul Tucker’s book Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State.

Tucker who had a long career in Bank of England knows a thing or two in being in position of unelected power. He blends principles of political philosophy with public choice theory in answering key questions that form the four parts of the book:

A. When is the delegation of powers to the unelected the right thing to do?

In this part Tucker lays out the seven Delegation Criteria (DCs) which should guide the legislature on when to delegate its powers. The key point here is Tucker’s assertion that an independent agency should not make 'choices on distributional trade-offs or society’s values or that materially shift the distribution of political power’. That is, they must not be tipping the scales either way. Separately, he outlines the Design Precepts (DPs) on how to design an independent agency or a regulator. These include mandate with clear objectives and instruments (DP1), political procedures for deciding how to pursue the objectives (DP2), operating procedures for the use of instruments (DP3), procedures for communication to the wider society (DP4) and procedures for dealing with emergencies not covered by the mandate (DP5).

B. How should this delegation withstand democratic objections?

This is the crux of the book. The key question here is how to check for the legitimacy of a regulator or how to ensure that the democratic decision to delegate doesn’t itself turn undemocratic. Tucker uses this question to take the reader through the major political traditions of the world and establishes that so long as the principles of delegation as he laid out in the earlier part of the book hold, the regulator will be in the realm of democratic process.

C. How to ensure the right governance structure that manages the regulators so that the unelected officials running them have the right incentive to behave in democratic fashion?

This is the how-to part of the book where Tucker looks to shoehorn the regulators into the constitutional frameworks of liberal western democracies. These frameworks then provide the way to have checks and balances on the officials.

D. What should the role of a central banker be while pursuing multiple policy objectives and how should the delegation criteria apply to them?

This is a more specific segment relevant for the discussion on the role of the central banker as an unelected body with unlimited mandate to manage monetary policy. In the light of GFC, this is a useful section to think about the mandate and the management of a central bank within a democratic setup.

This is a great book to reconcile the role of unelected, powerful regulators with the need to have democratic accountability within them while ensuring they don’t turn slaves of an ever-changing legislative body.

In many ways, I found similar points raised by Kelkar & Shah in their book In Service of the Republic (the most quoted book over many editions of this newsletter). They write:

The first element of this is governance of the organization by a board which has a majority of independent directors. The officials who run the organization must be accountable to this board, where a majority of persons are external experts and stakeholders.

.. Once a regulation-making project is initiated, the staff must be required to build a documentation packet, articulating the problem that is sought to be solved, demonstrating that it is a market failure, and demonstrating that the proposed intervention is the least intrusive alternative available. This documentation packet must be put into public consultation, in order to solicit the views of affected persons and intellectuals. This packet, and the responses from the public, should lead up to a discussion, refinement and decision at the board of the agency. Only the board should be able to release a new regulation.

Public choice theory predicts that the staff of a regulator will favour arbitrary power in the legislative and executive functions. Hence, the parliamentary law which defines the regulator must write down the processes of regulation-making, licensing, investigation and prosecution in considerable detail. At an early stage of state capacity, the regulator must be given low powers of investigation and punishment, so as to protect the feedback loops of the push-back against regulatory actions from the economy.

Unfortunately, as we add to the burgeoning list of regulators in India, we aren’t giving enough thought and attention to this critical piece of public policy. How must we create an independent regulator without the danger of (what Kelkar & Shah call) the ‘democratic deficit’  that is inherent.

Unelected power of regulators is the reality of today’s governance around the world. A structured framework that channels this power and stays true to the principles of delegation will lend legitimacy to them.

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Paul Tucker speaking on Unelected Power at the Watson Institute for International and Public Affairs.

* [Article] Building State capacity for regulation in India by Shubho Roy, Ajay Shah (NIPFP), B.N. Srikrishna (Retd. Judge, Supreme Court of India, Somasekhar Sundaresan (Independent legal counsel)

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

India Policy Watch: The Indian State — Too Big or Too Small?

Insights on burning policy issues in India

— Pranay Kotasthane

In edition #23, we tried to answer this question: how to think about the Indian state? Closely related is another question: is the Indian State too big or too small? And as it holds true for many other phenomena in India, the answer is both.

I’m sure most readers of this newsletter feel that the Indian state is bloated, overbearing, and huge. Is that really the case? Let’s look at four important parameters.

Size Measured by Government Expenditure: Relatively Small

A government has three instruments at its disposal in any policy issue-area: produce, finance, and regulate. All three instruments require government expenditure. So, one way to judge government size is to measure public expenditure as a proportion of overall economic activity. The higher this parameter, the bigger the government.

In 2018, India’s overall public expenditure as a proportion of its GDP stood at 27%. The US was at ~38%; Russia was at ~36% GDP; Sweden was at ~49%, and Pakistan was at ~21%. Clearly, the Indian state is no outlier on this measure. Have a look at how some selected countries at disparate levels of economic strength stack up.

Essentially, this parameter has been steadily rising for most countries across the world, ever since the welfare state became mainstream. Moreover, there is a strong correlation between government spending and income levels — the richer a country, the higher the government’s expenditure as can be seen in the chart below. This is known as Wagner’s Law in public finance literature.

Note the US government expenditure. The common perception is that because it is a capitalist country, the government would have a smaller role to play in the economy. That’s clearly not the case when measured on this parameter. As the country got richer, there were even higher demands to fulfil on health, education, defence, and infrastructure. Coming back to India, as a low-middle income country, its public spending is relatively small as well. Clearly, the Indian state isn’t at the commanding heights of our economy.

Size Measured by Government Employees: Small

Another caricature of the Indian state is a bloated, overstaffed organisation with a large number of employees. But the Indian state is relatively small on this parameter too. Here are some stats making this point from Devesh Kapur’s must-read paper Why Does the Indian State Both Fail and Succeed?:

“In the early 1990s, the global average of government employment as a percent of population was 4.7 percent. In countries of Asia, it was 2.6 percent. In India, it was 2 percent .. Core elements of the Indian state—police, judges, and tax bureaucracy—are among the smallest of the G-20 countries. Indeed, while the absolute size of government employment peaked in the mid-1990s, in relative terms, the decline in size of central and local governments began much earlier.”

“A comparison between the size of the civilian workforce of the federal govern- ment in India with that of the United States is instructive. Remember, India has a large number of public enterprises and public sector banks that are under the central government. Even so, the size of the Indian federal government is half the size of its US counterpart when normalized by population: specifically, the US federal government had 8.07 civilian employees per 1,000 US population in 2014, down from 10.4 in 1995, while India’s central government had 4.51 civilian employees per 1,000 population, down from 8.47 in 1995.”

Even on this parameter, the Indian state is a relatively small one.

Size Measured by Competence: Too Small

Nothing counterintuitive here. The Indian state lacks competence in fixing the most basic market failures, from law and order to public health and education. The competence gap has only widened over the years as many bright Indians now have the option of taking up a job outside the government, even outside India, with changing times.

Size Measured by Ambition: Too Big

This is really where the Indian state is overbearing. The aspiration of the Indian state has no bounds. Right from the outset in 1947, the Indian state sought to transform colonial India economically, politically, and socially. This revolutionary DNA meant that the Indian state set itself ambitious goals regardless of the capacity to achieve them. Over the decades, new goals were appended to this lofty project.

What Does All This Mean?

So the Indian state is big as measured by its own ambitions. Unsurprisingly, it continues to own airlines and soap factories. As an ambitious democratic entity, it also seeks to frame regulations and laws to constrain virtually every private initiative in every issue-area. The paradox is that on all other parameters, the state is quite small, neither having the capacity to enforce rules nor the ability to anticipate the consequences of policies beforehand.

Devesh Kapur writes that this “precocious” nature of the Indian state has also skewed what Indians expect from their governments in three ways:

“One, precocious democracy tends to militate against the provision of public goods in favor of redistribution. Countries that experienced economic development prior to the transition to democracy also tend to adopt democratic institutions that constrain the confiscatory power of the ruling elite. However, when countries pursue democracy prior to economic development, the democratic institutions adopted enhance the redistributive powers of the state.”

“Second, a precocious democracy with electoral mobilization along social cleav- ages favors creation of narrow club goods. A central puzzle concerning the poor provision of basic public services in India is seemingly weak demand in an other- wise flourishing electoral democracy.”

“Third, an imperfect democracy with noncredible politicians will tend to emphasize the provision of goods that are visible and can be provided quickly, like infrastructure, over long-term investments, like human capital or environmental quality.”

Resolving this high ambition versus low capacity paradox is central to improving governance in India. It must choose to do fewer, more important things, and build capacity to do them well. Trade-offs are inevitable.

India Policy Watch: Factions and Liberal Democracy

Insights on burning policy issues in India

— RSJ

There’s much handwringing on how fractious the US society has become over the years. The next few months don’t look good. The dangerous speech Trump made at White House yesterday peppered with lies and conspiracy theories that undermined the engine that keeps democracy going – election – is only the beginning. Even if Trump fails to mount a legal challenge, he has convinced enough right-thinking Americans (and a lot of Indians going by social media) that elections can be rigged in America.

This isn’t a genie you can put back into the bottle.

Shifting Sands Of Factions

What’s worse in the US right now is that no one can be sure about the traditional definition of factions anymore. Fractiousness works when you know your faction is distinct and different from the other. But that’s not so easy to claim in the US. If Trump’s domestic policies could be loosely labelled racist, buoyed by white supremacists, what explains the higher votes he polled across all minority groups including Blacks and Muslims this election over last? If California is the home of Bernie bros, capital of wokeness and full of bleeding heart liberals, how do you square that with the population voting in favour of proposition 22? That vote will continue to keep drivers of Uber and Lyft and other gig workers classified as independent contractors with the freedom to set their own hours but not receiving protections like minimum wage, health insurance or overtime. What explains the Republicans gaining seats in the House and almost retaining the Senate with probably the most inept President at the helm. Or the race being so close despite Trump’s lack of any redeeming feature. Had it not been for the pandemic that revealed how shambolic his administration was, he would have won by a landslide.

Factions Can Be Good

So, the factions aren’t homogenous anymore based on traditional parameters on which they were defined – race, identity or common passions or interests whose origins could be religion, shared experiences or class. There’s some other realignment of factions happening here which will need a deeper study. Be that as it may, the idea of factions in a liberal democracy is actually a feature and not a bug. The notion of competing groups of passions or interests that counteract each other instead of coalescing into a majority that dominates the regime is good for democracy.

This is why there’s a view that coalition governments have better track records of reforms and governance in India. Or that the consolidation of Hindu vote with the BJP that obliterated the caste, region or language factionalism so dominant in the past three decades might actually be bad for India. In that sense, this dead heat of a presidential race might put the US in a better place as a democracy than the almost absence of factions that India’s polity is turning out to be in recent times. So long as there are institutions that can make the factions come together and get them to work, the US doesn’t have lots to worry.

Madison On Factions

Aristotle in Politics had a suggestion for how to manage the extremes of oligarchy and democracy in a society. He advocates a mixed regime that combines the elements of both. He writes:

“Where the middling element is great, factional conflict and splits over the nature of regimes occur least of all.”

So, the question is what’s the best way to have factions in a society and yet not be consumed by its internecine wars of passions and interests? How do we ‘manage’ the factions because it is clear we can’t stop it. This question brings me to the Federalist Papers (#10) written by James Madison (1787).

Madison writes:

“By a faction, I understand a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.

There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.”

Madison soon establishes that removing the causes that create factions will mean trampling on the liberty of people and is fraught with terrible unintended consequences. So, he soon focuses his efforts on managing the effects:

“The inference to which we are brought is, that the cause of faction cannot be removed, and that relief is only to be sought in the means of controlling its effects.”

“If a faction consists of less than a majority, relief is supplied by the republican principle, which enables the majority to defeat its sinister views by regular vote. It may clog the administration, it may convulse the society; but it will be unable to execute and mask its violence under the forms of the Constitution. When a majority is included in a faction, the form of popular government, on the other hand, enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens. To secure the public good and private rights against the danger of such a faction, and at the same time to preserve the spirit and the form of popular government, is then the great object to which our inquiries are directed. Let me add that it is the great desideratum by which this form of government can be rescued from the opprobrium under which it has so long labored, and be recommended to the esteem and adoption of mankind.”

“By what means is this object attainable? Evidently by one of two only. Either the existence of the same passion or interest in a majority at the same time must be prevented, or the majority, having such coexistent passion or interest, must be rendered, by their number and local situation, unable to concert and carry into effect schemes of oppression. If the impulse and the opportunity be suffered to coincide, we well know that neither moral nor religious motives can be relied on as an adequate control. They are not found to be such on the injustice and violence of individuals, and lose their efficacy in proportion to the number combined together, that is, in proportion as their efficacy becomes needful.”

Madison is quite prescient about the need for a greater variety of parties to control the overzealous efforts of a single faction that seeks to flame passions. He writes:

“Hence, it clearly appears, that the same advantage which a republic has over a democracy, in controlling the effects of faction, is enjoyed by a large over a small republic,–is enjoyed by the Union over the States composing it. Does the advantage consist in the substitution of representatives whose enlightened views and virtuous sentiments render them superior to local prejudices and schemes of injustice? It will not be denied that the representation of the Union will be most likely to possess these requisite endowments. Does it consist in the greater security afforded by a greater variety of parties, against the event of any one party being able to outnumber and oppress the rest? In an equal degree does the increased variety of parties comprised within the Union, increase this security.

…The influence of factious leaders may kindle a flame within their particular States, but will be unable to spread a general conflagration through the other States. A religious sect may degenerate into a political faction in a part of the Confederacy; but the variety of sects dispersed over the entire face of it must secure the national councils against any danger from that source. A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it; in the same proportion as such a malady is more likely to taint a particular county or district, than an entire State.

In the extent and proper structure of the Union, therefore, we behold a republican remedy for the diseases most incident to republican government.”

In essence, factions are natural in a democracy and it is the republic that controls the effects of factions by restricting its spread to the Union. India hasn’t got credible political factions at the union but the factions in the states still offer hope of the state being taken over by a single party. The exit polls from Bihar (if they hold) continue to showcase this natural release valve of a liberal democracy.

A Framework a Week: Seven Stages of the Policy Pipeline

Tools for thinking public policy

— Pranay Kotasthane

This week’s framework comes from Vijay Kelkar and Ajay Shah’s In Service of the Republic. They argue that the ideal public policy process comprises these seven stages:

“Stage 1: the establishment of the statistical system. Facts need to be systematically captured. Without facts, the entire downstream process breaks down.

Stage 2: descriptive and causal research. This requires a research community which will study the data, establish broad facts and regularities, and explore causal connections.

Stage 3: the creative phase of inventing and proposing new policy solutions. A large menu of choices needs to be at hand, for possible policy pathways.

Stage 4: public debate where rival solutions compete with each other. This requires a vigorous process of debate and discussion, in writing and in seminars. A broad consensus needs to come about on what will work, within the analytical community. In the Indian context, this is often assisted by the expert committee process. The purpose of the expert committee process is to sift through an array of possible policy pathways that are in the fray at the end of stage 3, and filter down to a few which make sense.

Stage 5: the internal government process of decision making. This is where ministers and senior bureaucrats take stock of the range of possible policy pathways and make decisions. This is the zone of political economy, and the creative trade-offs that make progress possible.

Stage 6: the translation of the decisions into legal instruments. Most policy decisions must be implemented through law that is enacted by the legislature, or subordinate legislation in the form of rules or regulations. High technical quality, and subtle detail, of this drafting process is of great importance.

Stage 7: the construction of state capacity, in the form of administrative structures that enforce the law.”

— Kelkar, Vijay; Shah, Ajay. In Service of the Republic . Penguin Random House India Private Limited. Kindle Edition.

The most fascinating takeaway from this framework is that for better policy outcomes, capacity needs to be developed in all seven stages. For instance:

“A field is in poor shape on stages 1, 2 and 3 if we are not able to envision ten wise persons who can usefully be members of an important expert committee (at stage 4).”

This framework also explains why crises can produce terrible policies in the name of reforms. In difficult times, the willingness to do something is higher. But if there’s underinvestment in the early stages of the pipeline, crises can fast-track poor policies as well. A recent example of a poorly thought-out policy fructifying in the backdrop of a crisis is the Harayana government’s policy to reserve private-sector jobs for locals. As they further write:

“the possibilities in a crisis are the product of previous work that has been done in the early stages of the pipeline, and the human capabilities for stages 5, 6 and 7 that have been built ahead of time. The apparently high marginal product of crisis is partly grounded in misattribution; a lot of the credit has to go to the investments by the policy community of previous years. When we see the correlation between crisis and reforms, we are exaggerating the role of the runner who carries the baton across the finish line.”

This framework is a useful tool for thinking about effecting policy change in the Indian context.

HomeWork

Reading and listening recommendations on public policy matters

* [Video]: From Yale Open Courses, Prof Smith on Aristotle’s idea of polity to keep factions in check and how it presages Madison’s Paper 10.

* [Paper]: A useful guide to reading social science papers. Money quote: “Very few articles in a field are so important that every word needs to be read carefully. It's okay to skim and move on.

* [Article]: Marc Levinson’s latest on containers and mega-ships.

* [Report]: A detailed account of cesses & surcharges by Vidhi Centre for Legal Policy. Tip: both terms, though often used interchangeably, are quite different. The similarity is that both are evil.

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

India Policy Watch: Disinvestment — Aakhir Kyun?

Insights on burning policy issues in India— Pranay Kotasthane

On October 30th came the news that the government has modified bidding parameters to make the Air India disinvestment lucrative for buyers. Essentially, the government first made the sale difficult by inserting way too many conditions. Unsurprisingly, it found no buyers. Then hit COVID-19 and now the government is so desperate to raise resources that it is willing to finally remove the self-placed hurdles.

This got me thinking: what are the different narratives regarding the purpose of disinvestment? What stories do they tell and what policy actions do they imply?

I could think of three such narratives.

Narrative #1: Governments Should Sell Businesses it Can’t Run Well

The underlying story is simple: some PSUs incur consistent losses. Losses indicate that the government cannot run them well. Hence, these PSUs must be sold. The focus in this narrative is on numbers such as falling market caps to decide on companies to be sold. For example, the argument that Air India Makes a Loss of Over ₹ 20 Crore Per Day has repeatedly (and successfully) been used to rationalise Air India’s sale. The policy position implied (and unsaid) in this narrative is that it is okay for governments to run businesses as long as they are profitable. What’s also implicitly implied is that the sale of a government-run company first requires running it down into an incorrigible loss-making entity.

Narrative #2: Governments Can Raise Revenue by Selling Some Assets

The underlying story is one of urgency. Governments need money. One way they can make money is by selling the assets they own. Hence, divestment. Governments find this narrative quite useful. Every budget, the government sets a disinvestment target for itself with the aim of reducing its fiscal deficit.

The focus on a revenue target from disinvestment can lead to perverse incentives: when it can’t find genuine buyers, government coaxes government-run companies like LIC to purchase government-run companies on sale. This ‘sale’ shows up as revenue in the government accounts even though the government’s stake has not reduced in reality.

Narrative #3: Governments Should Sell What’s not-Strategic

In some sectors, markets might underproduce even though that sector is non-substitutable and vitally important to the nation-state. In such sectors, the government should continue to run businesses, regardless of the revenue a sale can generate or the losses made in running that business. Examples could be oil, rare-earth exploration or extremely critical defence equipment. Outside this reduced set, the government should sell all businesses. The focus in this narrative is on the reduction of overall government equity in non-strategic sectors, and not as much on the revenues raised by the sale of government assets.

A Battle of Narratives

Narratives 1 and 2 have enjoyed dominance in Indian policy discourse at various times. When the economy was chugging along, narrative #1 dominated: many PSUs were to be first put in a state of coma to enable an eventual sale in the distant future. Now, with almost a decade of poor economic growth, the revenue maximisation narrative has become more salient.

The third narrative is still on a weak footing. What's strategic and what’s not? What’s the marginal cost of public funds used for running a PSU? These questions rarely feature prominently in disinvestment discussions.

India Policy Watch: Growth, Liberty And Freedom

— RSJ

We have often argued for economic growth as a moral imperative for India. This opinion divides people. And we understand that. We get the usual questions thrown back to us. Should the pursuit of material wealth be such priority for any society? More so for one like ours where issues of equity, liberty and political rights aren’t yet settled; where there’s a chasm of everyday despair between the promise of our constitution and the reality that confronts us.

The pat response to this kind of argument is twofold. One, we (and others like us) make a point that growth is a precondition to solve these issues. Redistribution requires something tangible than mere lofty ideals to share with others. Putting it ahead of growth is putting the proverbial cart before the horse. Second, we can’t escape the trade-offs between growth and other social welfare objectives for our current stage of economic development. Of course, we must avoid the mistakes of other developed nations in our path to prosperity. But it will be futile to mimic policy actions they are taking now and apply them to our context while getting to where they are now. We have to bias our actions to achieve growth at the cost of other objectives. Else, we will achieve neither. This is the old Rostow (1960) ‘stage’ of development argument.

Sen’s Arguments

The philosophical challenge to this view comes from what we may term the Amartya Sen school of developmental economics. Sen has argued with passion about the need to invest in social infrastructure (education and health) that will build human capabilities across society. This is the only way to sustain growth. Like Sen once wrote:

“I know of no example of unhealthy, uneducated labour producing memorable growth rates.”

In other words, in Sen’s worldview people like us who prioritise growth are putting the cart before the horse. This debate can go on and on. As it has.

However, over the last few weeks, as I was reading Sen’s Development As Freedom (1999), I realised he has made more nuanced arguments on this than what my reductive reading of him has been so far. I haven’t read a lot of later day Sen and my views were informed by his interviews and columns in media since he started batting for an entitlement driven state-run programmes during the time of UPA-1. The book makes a strong case for freedom and views liberty from the perspective of a welfare state. I shook my head in disagreement often but far fewer times than I had anticipated. I nodded way more than I ever thought I would.

Freedom And Human Capability

As the name of the book suggests, Sen argues freedom is both the core objective and the primary means of development. Sen’s definition is wide and encompasses five types of freedoms that are distinct but related. These include political freedom, economic facilities, social opportunities, transparency guarantees and security. Like classical libertarians and enlightenment thinkers, Sen’s focus is the individual. He views individual freedom along the five vectors as the primary variable that determines their effectiveness and success. Compromising on any of these freedoms for economic growth cannot be considered a good outcome regardless of what the per capita income data might show. It will hurt in the long run.

Sen defines a ‘capability approach’ to freedom where he concerns himself with the individual’s ‘capability to lead the kind of lives we (they) have reason to value’. This freedom and this human capability when raised consistently is a net positive – it increases our choices, our wellbeing, our options to improve the society which should eventually lead to economic growth.

Sen supports markets, individual liberty and responsibility, and economic freedom as the factors that enable the increase in human capability. Social institutions and infrastructure should be built to support these especially in countries with low per capita income and a large workforce. The focus should be broader than enhancing mere human capital that views an individual as a means of production. Instead, a human capability frame sees the individual beyond being an agent for the production of goods and services. It takes a holistic view of what they could be.

The Need For Entitlement

This is where his focus on entitlement emerges. For him, an individual is poor when they are denied any of the five types of freedom he has outlined. This happens either because of path dependence or the nature of the state where they live. Either way, this has to be corrected and true freedom ‘to lead the lives they have reason to value’ should be an entitlement of every citizen.

The kind of thinkers Sen rounds up to make a case for freedom – Adam Smith, Montesquieu, Hayek – surprised me on one hand. After all, these aren’t the names you usually associate with him. On the other hand, it is difficult to make a case for individual and liberty without bringing these names into the discussion. Sen, as he came across to me through this book, is a believer in capitalism and the power of individual freedom to create value for the society. These attributes are important for what they produce but he also insists they are good even without being instrumental for growth.

Freedom is good. Period. That it also leads to growth, makes it better.

Benjamin Constant On Liberty Of Moderns

The book reminded me of the famous speech of Benjamin Constant, The Liberty of Ancients Compared with that of Moderns (1819). Constant used the word ‘commerce’ to broadly speak about economic growth. There were two insights in his speech about commerce and liberty that can be considered as precursors to Sen’s books.

First, he believed commerce is the perfect antidote to the arbitrary use of powers by the state. Essentially, economic growth leads to freedom which is one half of Sen’s argument. To use Constant’s words:

“But commerce also makes the action of arbitrary power easier to elude, because it changes the nature of property, which becomes, in virtue of this change, almost impossible to seize.

Commerce confers a new quality on property, circulation. Without circulation, property is merely a usufruct; political authority can always affect usufruct, because it can prevent its enjoyment; but circulation creates an invisible and invincible obstacle to the actions of social power.

The effects of commerce extend even further: not only does it emancipate individuals, but, by creating credit, it places authority itself in a position of dependence. Money, says a French writer, 'is the most dangerous weapon of despotism; yet it is at the same time its most powerful restraint; credit is subject to opinion; force is useless; money hides itself or flees; all the operations of the state are suspended'. Credit did not have the same influence amongst the ancients; their governments were stronger than individuals, while in our time individuals are stronger than the political powers. Wealth is a power which is more readily available in all circumstances, more readily applicable to all interests, and consequently more real and better obeyed. Power threatens; wealth rewards: one eludes power by deceiving it; to obtain the favors of wealth one must serve it: the latter is therefore bound to win.”

“… Commerce has brought nations closer, it has given them customs and habits which are almost identical; the heads of states may be enemies: the peoples are compatriots. Let power therefore resign itself: we must have liberty and we shall have it.”

The Danger of Trading Off Liberty For Growth

The other argument Constant makes is the danger of people getting immersed in individual pursuits and enjoyment that they easily cede their right to political power and transparency. This is what Sen would call sacrificing a few vectors of his definition of freedom for economic growth. The idea of a benevolent dictator who will curb some freedom but set things right that seduces many educated, well-off Indians. Constant warns:

“The danger of modern liberty is that, absorbed in the enjoyment of our private independence, and in the pursuit of our particular interests, we should surrender our right to share in political power too easily. The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying! They will say to us: what, in the end, is the aim of your efforts, the motive of your labors, the object of all your hopes? Is it not happiness? Well, leave this happiness to us and we shall give it to you. No, Sirs, we must not leave it to them. No matter how touching such a tender commitment may be, let us ask the authorities to keep within their limits. Let them confine themselves to being just. We shall assume the responsibility of being happy for ourselves.”

I will conclude with Constant’s final words on this which mirror those of Sen’s. And they are similar to what we have advocated when we have made a case for economic growth and liberty over the past year on these pages.

“The work of the legislator is not complete when he has simply brought peace to the people. Even when the people are satisfied, there is much left to do. Institutions must achieve the moral education of the citizens. By respecting their individual rights, securing their independence, refraining from troubling their work, they must nevertheless consecrate their influence over public affairs, call them to contribute by their votes to the exercise of power, grant them a right of control and supervision by expressing their opinions; and, by forming them through practice for these elevated functions, give them both the desire and the right to discharge these.”

Trivia: WLFPR in Bangladesh

Interesting facts and stats relevant to public policy

The Women Labour Force Participation Rate in neighbouring Bangladesh increased by nine percentage points in the last 15 years. India’s decreased by 11 percentage points in the same period.

Graph and Data: World Bank

HomeWork

Reading and listening recommendations on public policy matters

* [Article]: Bhagwati in the Mint on Why Amartya Sen Is Wrong

* [Article]: A summary by the Outlook on Sen and Bhagwati arguing on the pages of the Economist

* [Report]: On Bangladesh’s U-curve bending performance on Women Labour Force Participation.

* [Article]: An excellent data story on the five paths of disinvestment in India by Sudipto Banerjee, Renuka Sane and Srishti Sharma.

* [Podcast]: On Puliyabaazi, Pranay and Saurabh learn about the history of banking in India from Amol Agrawal.

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

Aap party hain, ya broker?

That line from Dibakar Banerjee’s sleeper hit Khosla Ka Ghosla (2006) sums up our attitude to middlemen. Indians have an instinctive distrust of business or ‘corporate’. But that’s small chhutta compared to our almost visceral antipathy to broker. We use dalal as a pejorative in polite conversations — it is someone who gets in the way of an honest transaction between two willing parties and takes a ‘cut’.

From the trader at the APMC mandis to the life insurance agent selling you a policy that you don’t need, the middleman is the easy policy target whose elimination is seen as necessary. Nobody can see what they produce or the labour they put in, yet they seem to corner most of the profits.

India might be an extreme case but elsewhere in the world too, the intermediary isn’t the most welcome of sights. For every business that has middlemen bringing the buyers and sellers together, there are scores of entrepreneurs building platforms to make them irrelevant. The billion-dollar start-up idea to disrupt any industry is to take out the intermediaries, drive the costs down, reduce ‘friction’ and offer customers a wider array of choices for free.

There are two questions that interest us here:

* Why did we have intermediaries in the first place if they add to friction, make a cut by buying low and selling high and, in general, viewed unfavourably by everyone?

* Is real disintermediation possible in any marketplace?

The Economic Case For Brokers

The usual arguments made for an intermediary are quite intuitive. There is the market-making role, to begin with. Take flowers for example.

There are customers looking to buy flowers but who don’t know flower-growing farmers. Even if they knew a few, those farmers might not be growing the variety of flowers the buyers need. In the same vein, the farmers won’t know their likely buyers beyond their immediate vicinity. The transaction costs of finding out each other for every individual farmer or buyer is just too high. The brokers step in to create a market. They understand the demand of the customers located in a specific area, search for farmers who grow those types of flowers, take the risk of buying them, then transport them to a market close to the buyers and provide an assortment of flowers as choices to the customers. There are various costs the broker incurs in this process – search, transportation, storage and risk capital. The broker makes the market ‘liquid’ – the transactions follow from there. Without these costs, there’s no market. Without a market, there’s no trade between the farmers and customers. No trade satisfying needs of two parties is a net negative for the society.

There’s more to this though. Once the broker repeats the transaction over time and attracts other brokers who compete for the same buyers and sellers, we have two additional benefits for the ecosystem. One, every broker looking to increase his business works to optimise the transaction costs which then translates to lower price for the customer. This dynamism of price discovery ensures there is a continuing relevance of the broker. Two, over a period of time, the broker is able to differentiate between the output of various farmers, rate them on quality and provide additional service of ‘certifying’ the product. This deepens the market with customers willing to choose their desired quality of product and paying a price for it.

However, even this example doesn’t quite capture the fundamental role of a broker in a society. Why? Because the above example is a win-win kind. Everyone benefits at the end of it. But what about instances where the size of the pie is fixed?

That brings me to R.A. Radford’s seminal paper, The Economic Organisation of a P.O.W. Camp written in 1945. This 11-page paper is a deep sociological study of life in a prison camp and from it emerges a truth that’s simple and profound.

The camp had over 2000 prisoners who received food parcels from the Red Cross. The parcels were exactly the same for everyone containing tinned milk, jam, butter, biscuits, beef, chocolate, sugar, etc., and cigarettes. The POWs in the camp were from various ethnicities and religions. It isn’t difficult to see what happened next. The prisoners had different preferences for the goods within the parcel. The non-smoker had no use of the cigarettes, many didn’t want the milk and the Sikhs didn’t want the beef. Soon trading started.

As Radford writes:

“At once exchanges, already established, multiplied in volume. Starting with simple direct barter, such as a non-smoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom.

Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect.”

There are two fundamental truths here. First, the gift economy doesn’t stay that for too long. People like to trade. Second, a broker (like the padre mentioned) can go around enabling exchange among prisoners because he’s seen to be trustworthy and could end up with more than what he started. This is a very powerful point. Everyone who traded with the padre did so on their own volition. All transactions were voluntary. They traded because they thought they were better off with that transaction. Yet after all the trades were done, the broker (padre) made a tidy profit of a complete extra parcel. This was a classic case where the size of the pie was fixed. The total parcels remained the same. The padre merely rearranged them on the basis of individual preferences. The prisoners ended up with less than what they had yet everyone felt they benefitted.

Differential preferences and different perceptions of value drive trade among people and anyone facilitating that will make a profit even in a ‘zero-sum’ scenario. This was a remarkable insight.

Also, over time as the prices were ‘discovered’, preferences became more varied and barters got more complex, a full-fledged exchange developed in the camp:

“…there was a lively trade in all commodities and their relative values were well known, and expressed not in terms of one another - one didn't quote bully (beef) in terms of sugar - but in terms of cigarettes. The cigarette became the standard of value. In the permanent camp people started by wandering through the bungalows calling their offers - "cheese for seven" (cigarettes) and the hours after parcel issue were Bedlam.

The inconveniences of this system soon led to its replacement by an Exchange and Mart notice board in every bungalow, where under the headings "name," "room number," "wanted" and "offered" sales and wants were advertised. When a deal went through, it was crossed off the board. The public and semi permanent records of transactions led to cigarette prices being well known and thus tending to equality throughout the camp, although there were always opportunities for an astute trader to make a profit from arbitrage. With this development everyone, including non-smokers, was willing to sell for cigarettes, using them to buy at another time and place. Cigarettes became the normal currency, though, of course, barter was never extinguished.”

This isn’t easy to comprehend. Nothing was being produced by anyone in the camp. Yet a market developed and some middlemen made profits. As Radford writes:

“It is thus to be seen that a market came into existence without labor or production. …the articles of trade - food, clothing and cigarettes - as free gifts - land or manna. Despite this, and despite a roughly equal distribution of resources, a market came into spontaneous operation, and prices were fixed by the operation of supply and demand. It is difficult to reconcile this fact with the labour theory of value.”

Despite all of this, the middleman still got a bad rap:

“More interesting was opinion on middlemen and prices. Taken as a whole, opinion was hostile to the middleman. His function, and his hard work in bringing buyer and seller together, were ignored; profits were not regarded as a reward for labor, but as the result of sharp practices. Despite the fact that his very existence was proof to the contrary, the middleman was held to be redundant in view of the existence of an official Shop and the Exchange and Mart. Appreciation only came his way when he was willing to advance the price of a sugar ration, or to buy goods spot and carry them against a future sale. In these cases the element of risk was obvious to all, and the convenience of the service was felt to merit some reward.”

There is no getting away from this. The broker adds value, even in zero-sum scenarios, while being simultaneously despised. This is hard-wired into us. In some cultural contexts, like in India, this is deeply entrenched.

What makes it worse in India is the idea that state can play the role of the broker and eliminate the profits made by them for the betterment of the market. Multiple problems stem from this. One, the state is a monopoly. It doesn’t have the incentive like that of an individual broker to lower transaction costs and keep price dynamic. Over time the cost of this lethargy is borne by both the buyers and sellers. The agents of the state who wield the power of the broker without the attendant risks turn into rent-seekers. The buyers and the sellers are at the mercy of the broker who sets the terms of the trade.

Lastly, the market gets distorted. The price loses its value as a signal. Side deals are struck. Licenses are scarce and get auctioned in informal markets. Black markets emerge. And the liquidity is held to ransom by a few people. This is exactly what happened in India when the government played the role of intermediaries controlling the APMC mandis. The government didn’t eliminate middlemen. Quite the opposite, it metamorphosised middlemen into odious, profiteering rent-seekers. A free market of brokers with regulations that prevented cartelisation would have served the farmers and customers better.

Is Real Disintermediation Possible?

That brings us to the question of disintermediation. The internet has reduced the search and information costs down to zero. This gives the impression that real disintermediation is possible like that done by Uber, AirBnB or TripAdvisor. But there are three flaws in this argument:

* Many of these platforms have turned into intermediaries themselves with almost monopoly powers in certain markets. Come to think of it even Google and Facebook are intermediaries who turn in enormous profits every year in their roles as market-makers. The one disintermediating an industry eventually becomes an intermediary.

* These platforms disintermediated by offering more choices directly to the customers. Over time the choices available on them multiplied to an extent that it paralysed the users. Anyone looking to choose a restaurant in an unfamiliar city knows of this problem. Soon enough you will need an intermediary to sort through the many highly rated restaurants all around.

* There are intermediaries whose role is exact opposite of what traditional brokers do. They keep parties apart to enable a transaction. Investment bankers and sports agents are examples of this. The intermediary keeps things on balance and doesn’t let a deal fall through by keeping the parties from directly interacting with another. As search and information costs fall, this role of keeping parties away from one another continues to remain relevant.

So long as there is trade and there are differential preferences, the broker won’t go out of business. The poor image they suffer is on account of a deeply held Marxian belief that visible labour is the real thing of genuine value and anyone trading only in information or whose labour is invisible is a mere opportunist. This gets compounded when the state intervenes to intermediate themselves or allows for cartelisation of brokers.

A free market where broker competes on equal terms to drive transaction costs down, provide choices and keep the market liquid benefits all. Intermediaries came into play to reduce friction in transactions. Eliminating them won’t make things frictionless.

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Tim Harford’s Undercover Economist piece on the Radford paper in the FT: Rules of trading in a POW camp.

* [Article] “It’s chiefly rent-seekers who oppose our farm reforms”: Shruti Rajagopalan writing for the Mint on how governments legislate to create rents for middlemen that distort the market.

Being Pragmatic about ESG Norms, Lessons for India's Semiconductor Strategy, and Challenging Common Wisdom about India's Constitution-making.

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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

The Carnegie Endowment for International Peace in partnership with the research and analytics firm YouGov conducted the Indian American Attitudes Survey (IAAS) between September 1 and September 20, 2020. Sumitra Badrinathan, Devesh Kapur and Milan Vaishnav now have a paper titled ‘How Will Indian Americans Vote’ based on this survey that has a few interesting conclusions. 

The study is useful to test a few hypotheses that have emerged in India in the past few years. These include:

* Indian Americans have nudged closer to the Republicans on the back of Trump-Modi chemistry. The enthusiasm for PM Modi among NRIs and among BJP supporters in India for Trump has created a positive self-reinforcing cycle for both.

* Most Indian Americans have turned conservative over time going by their stand on domestic issues in India. This is drawn from the views of many vocal Indian Americans on social media platforms and the anecdotal evidence of friends and family on WhatsApp groups supporting the conservative or majoritarian stance of this regime. This has led many to assume a large defection of Indian Americans from the Democratic camp that leans liberal.

* There have been multiple instances of the Democratic leadership (Biden, Harris, Warren, Jaypal et al) being critical of India’s position on various core issues like revocation of Article 370, the clampdown in Kashmir and the handling of CAA protests. There’s been a feeling the Democrats will lose support among Indian Americans because of this.

* Lastly, Indian Americans are seen as a model minority that’s highly educated, law-abiding with twice the national average household income. Will the typical minority issues like immigration, race and identity politics animate them like they do for other minorities?

The key conclusions from the study are summarised below. It is quite an eye-opener when you consider the hypotheses outlined above.

* Indian Americans remain solidly with the Democratic Party. Recent anecdotal narratives notwithstanding, there is scant evidence that Democratic voters are defecting toward Trump and the Republican Party. Seventy-two percent of registered Indian American voters plan to vote for Biden and 22 percent intend to vote for Trump in the 2020 November election.

* Indian Americans do not consider U.S.-India relations to be one of the principal determinants of their vote choice in this election. The economy and healthcare are the two most important issues influencing the vote choice of Indian Americans, although supporters of the two parties differ on key priorities. “Kitchen table” issues dominate over foreign policy concerns.

* Indian Americans exhibit signs of significant political polarization. Just like the wider voting public, Republican and Democratic Indian American voters are politically polarized and hold markedly negative views of the opposing party and divergent positions on several contentious policy issues—from immigration to law enforcement.

* U.S.-born Indian American citizens tilt left compared to foreign-born citizens. While both U.S.-born and naturalized Indian Americans favor the Democratic Party, this tilt is more pronounced for U.S.-born Indian Americans. Political participation by naturalized citizens is more muted, however, manifesting in lower rates of voter turnout and weaker partisan identification.

* Harris has mobilized Indian Americans, especially Democrats. Harris’s vice presidential candidacy has galvanized a large section of the Indian American community to turn out to vote. On balance, while the Harris pick might not change large numbers of votes (given the community’s historic Democratic orientation), her candidacy is linked to greater enthusiasm for the Democratic ticket.

* A large section of Indian Americans view the Republican Party as unwelcoming. Indian Americans refrain from identifying with the Republican Party due, in part, to a perception that the party is intolerant of minorities and overly influenced by Christian evangelicalism. Those who identify as Republicans are primarily moved to do so because of economic policy differences with the Democrats—with particularly marked differences regarding healthcare.

* Political beliefs seep into perceptions of U.S.-India bilateral relations. Indian Americans believe Democrats do a better job of managing U.S.-India ties by a considerable margin while Republicans hold more favorable views of Modi.

Bottom line: That nationalist, majoritarian NRI friend on your WhatsApp group finds virtues in liberalism while making their electoral choice.    

Voter Apathy ≠ Political Apathy

— Pranay Kotasthane

Indian governments’ don’t do well on law and order, education, and public health. And yet there’s wide support whenever Indian governments and political parties promise new schemes to accomplish even grander things. What explains this paradox?

I have two hypotheses.

One, the political enthusiasm hypothesis. This is the reverse of the voter apathy idea. It means that the voters who have a disproportionate influence on setting the political agenda (read middle-income voters) were never apathetic to politics but only to government provision of public services.

They became apathetic towards government provision of public services because rising incomes meant that they could substitute the missing services with their own private solutions. Having done that, politics became a means to achieve other outcomes — those unrelated to market failures. Voting apathy never meant political apathy.

See this from the Exit, Voice, Loyalty thesis. Loyalty makes exit difficult. So the median Indian voter never really exited from Indian politics and instead chose to voice concerns unrelated to government provision of basic services.

My second hypothesis is more charitable to the Indian voter. I call it the expanding moral arc thesis. It is based on the book The Moral Arc by Michael Shermer. The book argues that the moral arc is continuously expanding because of science and reason.

The key insight for us is that Indian politics is being played out in the background of this increasing moral arc. This makes the Indian developmental challenge possibly more moral but definitely less fast. The inequality narrative in India is a reflection of this expanding moral arc. The government’s role in India is seen as a moral project, not a utilitarian one and hence we are okay to give its record on fixing market failures a free pass.

(Originally published at express.thinkpragati.com on April 2, 2019)

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Systematic Inequality and American Democracy by Danyelle Solomon, Connor Maxwell, and Abril Castro published by the Centre for American Progress

* [Article] David Brooks on social trust and moral convulsions in America

* [Video] This discussion on Raghuram Rajan’s The Third Pillar: How Markets and the State Leave the Community Behind is worth a watch. It will make you think harder about the distinct roles of the state, markets, and the community.

This newsletter is really a weekly 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 courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

Matsyanyaaya: Constraining the Pakistani Military-Jihadi Complex

Big fish eating small fish = Foreign Policy in action— Pranay Kotasthane

After a long time, India-Pakistan talks were back making the headlines last week. Moeed Yusuf, Special Assistant on National Security and Strategic Policy Planning to the Pakistani PM, hinted in an interview to The Wire that backchannel discussions about a political dialogue are in the works.

We don’t think political dialogues between India and Pakistan at the highest levels are useful. To the contrary, talks, especially at higher levels of the political spectrum, have a close correlation with terrorist attacks engineered by the Pakistani military-jihadi complex (MJC).

MJC is a framework we use to describe Pakistan’s seemingly duplicitous behaviour. That’s because Pakistan is not one geopolitical entity, but two. The first is a putative state which has all the paraphernalia that gives it a veneer of a normal state. However, this putative state competes with a multi-dimensional entity comprised of military, militant, radical Islamist and political-economic structures that pursues a set of domestic and foreign policies to ensure its own survival and relative dominance: something we refer to as the military-jihadi complex (MJC).

The status of the talks aside, I wrote a paper analysing the impact of some major recent political developments on the MJC and its India policy. I take stock of four developments, and analyse the risks and opportunities arising out of these developments for the MJC, and hence to India.

Development #1: The MJC’s External Benefactors Have Changed

Earlier, the MJC’s adventures were bankrolled indirectly by the US and directly by Saudi Arabia. Those days are long gone. The most important financier for the MJC now is China.

Risks and opportunities for India

The most prominent risk is that because the MJC is dependent on PRC like never before, and both are adversarial to India, it will continue to hurt Indian interests in order to prove its relevance to PRC.

The opportunity for India is that as PRC and MJC come closer, it will be easier to expose the structural flaws in their unequal relationship. As PRC increases its influence in Pakistan’s economy, nationalist forces (and even sections of the MJC) are likely to create fault lines between the two countries.

Countermeasures and Preparedness

India should prepare to face a diplomatic offensive of the MJC-PRC combine at various multilateral fora over Kashmir. Closer ties with the US, Japan, Australia and France are important to tackle this offensive. India also needs to be prepared for a rise in infiltration attempts and terrorist activity in Kashmir.

As a countermeasure, India’s messaging should aim to accentuate the underlying cultural, social, and economic differences between China and Pakistan in order to reduce the flow of capital from PRC to the MJC. The weaker the MJC’s external benefactor, the more constrained it will be.

Development #2: The US-Taliban Peace Agreement

The MJC has played a major role in steering and pressuring the Afghan Taliban to sign this agreement. In the process, it managed to partially repair flailing ties with the US. More importantly, it made major headway in its long-cherished aim of installing a pliant government in Kabul.

Risks and opportunities for India

The acceptance of the Taliban as a legitimate political force by the US is a moral and material victory for the MJC. The US-Taliban peace agreement is a tangible result for its policy of sustained terrorism in Afghanistan. Even a partial withdrawal of the US on the Taliban’s—and by extension, the MJC’s—terms will reaffirm the MJC’s faith in using terrorism as state policy. It might then apply this lesson to double down on terrorism against India as well.

India’s economic and diplomatic footprint will reduce in the short term. A case in point is the MJC’s attempt to designate four Indian nationals in Afghanistan under the UN 1267 Sanctions List accusing them of spreading terrorism in Pakistan.

Another risk is the MJC relocating its terror networks to Loya Paktika in eastern Afghanistan, a hotbed of anti-India activities in the past. This would allow the MJC to use terrorism against India while claiming that it has driven terrorists out of Pakistan.

The long-term opportunity for India is that as the US reduces its presence, Pakistan will be left with the unenviable task of managing the volatile situation in Afghanistan. It will be drawn into the seemingly irreconcilable differences in the Afghanistan polity. If a civil war-like situation erupts, the MJC will be left with more problems in its hands.

Countermeasures and Preparedness

India needs to be prepared for a scenario in which the MJC attempts to eliminate all Indian presence in Afghanistan. India must act to help its friends, not just in northern Afghanistan but also in the anti-Taliban forces in the south. At the same time, India would need to look at opening links, if not already done, with sections of the Taliban that do not want to be beholden to the MJC’s control. Finally, India’s focus in Afghanistan over the long-term should shift towards eliminating Pakistan-backed terrorist outfits’ relocation to eastern Afghanistan.

Development #3: India’s Revocation of the Special Status of Jammu and Kashmir

Given how invested the MJC has been in fomenting trouble in J&K, it is unlikely to take the abrogation of Article 370 lying down. Any action in Kashmir helps the MJC prove its relevance to the Pakistani society in the short-term. Hence, it would be eager to use this situation to further destabilise J&K and spread unrest elsewhere in India citing India’s move as the reason.

Risks and opportunities for India

The MJC is likely to continue with its policy of abetment of civil disobedience and violent protests. It will continue to support cross-border terrorism and might even resume a new insurgency against the Indian State by creating new outfits. The MJC would also want to revive insurgencies in other parts of India. Finally, India will face diplomatic offensive from PRC and Pakistan in the coming months over this move.

The opportunity for India arising out of this development is a chance to change the nature of the social contract of Kashmiris with the Indian state once and for all. Previous attempts at growth and prosperity in Kashmir were opposed by fundamentalists who saw these as attempts to change the demographic character of the Kashmir valley. The change in the special status of J&K allows India to ignore such calls and bring economic opportunities to Kashmir.

Preparedness and countermeasures

One, India needs to shift to a surgical and “smart” Armed Forces Special Powers Act (AFSPA) approach whose provisions can be limited in time and space. A change in the AFSPA will signal New Delhi’s bona fides and invite Kashmiri political leaders to reciprocate.

Second, the Government of India should opt for marginal, and not maximal response. It should reverse the damage done to the morale of the J&K police. It should lift the communications blockade and allow public protests and demonstrations to resume as these outlets are key to reducing the importance of the MJC as the prime influencer.

Third, India can consider deploying a Special Task Force of highly capable middle-level civil servants from across India for a period of three years to restore broken governance delivery systems.

With COVID-19, the tourism economy of Kashmir has been severely hit. This could make the young more vulnerable to the MJC’s machinations. Hence it is important for India to find livelihood alternatives. One way to do that is to create Priority Development Areas for the promotion of agro-processing, premium bottled water, and premium handicrafts. In the Jammu plains, the government could invite investors in contract farming. Bringing in international expertise in this space would also be a positive step.

Next, India needs to develop a strategic communication plan to defeat false and competing narratives generated by the MJC.

Finally, conducting local and assembly elections in the medium term to restart the political machinery and reverting J&K to a full state under the Republic of India after announcing elections will take off the edge from the MJC’s misinformation campaigns.

As a direct countermeasure, India should draw the world’s attention to the atrocities the MJC has unleashed in FATA. The Pashtun Tahafuz Movement (PTM) — a protest movement poses a unique challenge to the MJC because of its mass support base and a nonviolent character. This movement has the potential to seriously challenge the MJC and India’s efforts in Pakistan should be to align with the Pashtun cause. The Baloch insurgency by itself is too weak to change the power equations in Islamabad.

Development #4: Pakistan’s economic downturn

This weak domestic economy, coupled with the MJC’s diminished inability to extract from its external benefactors, also affects the MJC’s fortunes. It is now forced to look inwards and corner more resources for itself.

Risks and opportunities for India

A weakened economy reduces the range of options available to the MJC and makes some elements of it risk-averse. This means that the MJC will continue to rely on low-cost asymmetric options such as terrorism to hurt India. Abetting and sponsoring terrorism in areas with active insurgencies, both in Afghanistan and India are likely to continue.

The opportunity for India is that a weak economy puts the MJC squarely against forces opposed to it. For instance, the Pakistani Army has been opposing a reform for a fair division of financial resources between the federal and provincial governments. This offers an opportunity for India because this fight over economic resources has a powerful ethnic dimension. Sindh, Khyber Pakhtunkhwa, and Balochistan — all three provinces that stood to gain from the 18th constitutional amendment see this controversy as another attempt by the overwhelmingly Punjabi Pakistani Army to amass resources at their cost.

Preparedness and countermeasures

Whenever the MJC’s popularity declines in Pakistan, tensions with India allow it to regain lost ground. So, India should be prepared to face new asymmetric warfare attempts.

To further constrain the MJC, India should utilise the FATF mechanism and press upon the member countries that Pakistan still remains a hotbed of institutionalised terror activity. FATF grey-listing will make capital inflows difficult in an already investment-starved economy.

Finally, studies to expose how the MJC corners economic resources of the Pakistani state might also help manufacture a public opinion within Pakistan that questions the MJC. The lynchpin of the MJC, the Pakistani Army, is still the most trusted institution in Pakistan. To get the two Pakistans to lock horns with each other, a public narrative needs to be built exposing the extractive nature of the MJC.

After discussing these four developments, I end with the warning that the extent to which India can deploy these countermeasure options is limited by its own domestic situation. For one, a weak economy means that India will become cautious in exercising options that demand considerable resources. Secondly, the communally charged domestic narrative that the Citizenship Amendment Act has unleashed allows the MJC to reciprocally exploit fissures in Indian society. Conversely, a fast-growing economy and a stable, peaceful society will allow India to exploit a wider range of options to tackle the MJC.

The full paper can be read here.

India Policy Watch: That Tanishq Ad

Insights on burning policy issues in India— RSJ

Tanishq, a Tata company, withdrew its latest ad for its new collection titled ‘Ekatvam’ (“oneness”) after #boycottTanishq trended on Twitter. The ad featured a pregnant Hindu woman being surprised by her Muslim mother-in-law who had organised an elaborate traditional Hindu baby shower ceremony for her. This was a generic feel-good ad that’s a staple during the festive season. The Hindu-Muslim angle is one of the more tried and tested variants of this genre. No one was shown in any bad light and Suraj Barjatya would have been proud of its cloying storyline.

Yet, There Was Outrage

There were three reasons for the outrage depending on the sophistry of people being outraged.

First, the ad was seen as an attempt to normalise ‘love jihad’ – a belief that Muslim men are being trained and supported by forces inimical to India to woo Hindu girls and marry them in a ‘fresh’ attempt to colonise India. The government in parliament has denied its existence. It doesn’t require a lot of common sense to see through the lack of logic of this notion. That Muslim men will organise themselves to colonise India one Hindu girl at a time seems like a lot of effort with many low probability events to come through. Love in India doesn’t bloom easily even among the young of the same caste and community. ‘Love marriages’ still account for less than seven per cent all marriages. There’s no proof that Muslim men are being trained on some kind of finishing school that specialises in wooing techniques. Importantly, this assumes Hindu girls to be devoid of any agency of their own to decide who to fall in love with and marry.

Despite these obvious logical flaws, the narrative around ‘love jihad’ has built up over the years. The Muslim stars of Bollywood who have Hindu wives are often indirectly cited as role models for Muslim boys. As an aside, generations of Muslim female actors have married Hindu men over the years in Bollywood (from Nargis, Mumtaz, Zarina Wahab to Sonam). Any incident of a Hindu girl falling in love with a Muslim boy is used as an example of ‘love jihad’ and played up. The parents of girls in India live with multiple anxieties regarding their safety, well-being and marriage even in this day and age. This is unfortunate. To such paranoia, it isn’t too difficult to add ‘love jihad’.   

The second lot of outragers followed good, old whataboutery. Their contention: if the ad was serious about Hindu-Muslim amity, it should have reversed the roles. The girl should have been Muslim in a Hindu household. Apparently, this would have triggered massive Muslim protests, violence and liberal outrage about Hindus cornering the minorities and obliterating their identity and customs. This is all too easy to puncture. There have been films galore in the past two decades that have stereotyped Muslim jihadi villains without much of an outrage. In fact, Indian popular culture is replete with stereotypical Muslims – from a do-gooder neighbour, to a pir or, of late, a radical or a jihadi – without much of a reaction from the community. It is a bit specious to believe a reversal of roles would have meant trouble.

Lastly, there are those who have accused Tanishq of being too ‘woke’ for their own good. The argument is they should focus on selling jewellery and stay from ‘social causes’ that they don’t have an idea about. These aren’t compelling arguments. Consumer brands draw from the society to shape their communications. They research behaviour pattern, track changing social mores, and take stock of the attitudes and values prevalent in the society on an ongoing basis. No wonder advertisements often capture the zeitgeist earlier than other forms of popular culture – from yeh dil maange more to kitna deti hai. To accuse them of not understanding ground realities is rich. The point on being too ‘woke’ doesn’t merit any discussion. Any decent or noble thought can be dissed as one these days.

Despite the flimsy outrage, Tanishq withdrew the ad:

"This film has stimulated divergent and severe reactions, contrary to its very objective. We are deeply saddened with the inadvertent stirring of emotions and withdraw this film keeping in mind the hurt sentiments and well being of our employees, partners and store staff,"

That a group like Tata, a model corporate citizen with long years of service to the nation under its belt, could capitulate to online trolls and withdraw an ad that promoted harmony triggered another cycle of outrage.

Well, a day in the life of India on Twitter.  

This Is Different

The outrage, Tanishq’s reaction to it and its aftermath represent a distinct shift from the past. There’s something to learn from them about where we are as a polity now.

In this instance, we are in what can be termed the post-narrative phase engineered by the so-called cultural right-wing. Something nebulous like ‘love jihad’ has been crystallised over the past few years through multiple stories, myths and fake outrage. It even turned into a minor election issue in UP sometime back. Now this myth is so firmly established that its veracity isn’t in question. The reason for outrage instead is the ‘normalisation’ of it. That it is the ‘truth’ is already established. We are in the world beyond it. This will give a fillip to other such myths (multiple wives, high fertility rates to name two) that abound in this space. Sudarshan TV had recently run a programme titled UPSC jihad that alleged a conspiracy by the same elements who ran love jihad to now infiltrate the civil services in India. The Supreme Court had to intervene. But the seed has been sown. Now every time a Muslim candidate clears the UPSC test, expect UPSC jihad conspiracy theory to be revived. The trajectory for the future has been established.  

This apart, the outrage will deepen the ‘chilling effect’ in media and popular culture. The takedown of the Tanishq ad represents a win for a modus operandi that’s become common across the world – employ numerous bots to get the flywheel of outrage going, the flywheel then attracts others with imagined grievances or hate, it soon trends on social media that in turn creates fear of repercussions for the brand or the individual. Soon, they capitulate. From cancel culture on the left to right-wing conspiracy theories, this approach is a winner. It will take enormous courage for a brand or a film director to contemplate an inter-faith script in future.  

Lastly, there is something particularly odious about this outrage. There have been protests against ads, books or films in the past because of the alleged disrespect shown to a religion or a community. From banning The Satanic Verses, renaming a film Padmavat to not using Chattrapati Maharaj before Shivaji, the grievance is always about an insult – real or mostly imagined. This is the first case where the grievance is about harmony. It is about the alleged sinister machination underpinning this harmony. This is new and a significant step in the process of ‘othering’ where even coming together of communities cannot be countenanced.

Something to reflect on for every right-thinking Indian.

PolicyWTFs: The Tax Base Problem

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

Tax Revenue = Tax Base * Tax Rate

This simple equation implies that when revenues need to be raised, governments can do three things: raise the tax rate, increase the number of people paying the tax, or do both. However, in low state-capacity democracies like India, governments always seem to pick the first option. After all, it is always easier and faster for the governments to charge the same people more by increasing the tax rate than get more people to pay by increasing the tax base.

Following on, be prepared for calls to raise tax rates across the board. State and city government finances have gone for a toss due to COVID-19 and the union government’s chicanery on GST. They now have no other option but to raise their own revenues. Enter the dragon: tax rate hikes.

For instance, in Bengaluru, the local government is contemplating an increase of 15 to 30 per cent in property tax rates. On the surface, targeting property tax collections is prudent. The Economic Survey 2016-17 claimed that Bengaluru was collecting just a fifth of its property tax potential. Moreover, property taxes are paid by residents and hence this tax has a higher linkage compared to other taxes, between those who pay, those who benefit, and those who decide.

Where the government is getting it wrong is that instead of increasing the property tax base, tax rates are being hiked. Even if we ignore the ethical dimension given the pandemic, hiking rates is counterproductive. There is a negative correlation between tax rates and tax base i.e. high tax rates disincentivise people from paying taxes and create a parallel tax-avoidance economy in turn. The tax-avoidance economy is lucrative for the revenue collectors as well — higher the rates, higher the number of evaders willing to pay a lower amount bribe to them.

Whether it’s property tax rates or GST, the same policyWTF is repeated: first, a new tax gets levied with a low tax-base but a high tax rate. Next, the already high tax-rate is increased steadily because the tax base is low and finally, when increasing rates is no longer enough, raising the tax base is contemplated.

The approach should be the reverse. Every new tax should aim to cover the largest number of people first through extremely low tax rates. Once that’s done, technology should be used to prevent underpayment. Finally, tax rates can be revised incrementally. We are a long way off this ideal and we don’t seem to be learning even in this crisis.

HomeWork

Reading and listening recommendations on public policy matters

* [Article] David French writing for the Persuasion on The Hate at the Heart of Conspiracy Theory. The lede sums it up: Liberty can survive intense disagreement. But it cannot survive pure hate.

* [Article] Govinda Rao on why the GST saga is terrible for the future of federalism in India.

* [Podcast] India’s armed forces still don’t operate under unified theatre commands. Why is ‘jointness’ beneficial and how should India’s theatre commands look? The latest episode of Puliyabaazi with Lt Gen Prakash Menon has the answers.

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?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

PS: If you enjoy listening instead of reading, we have this edition available as an audio narration courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us. Listen in podcast app

- RSJ

The Trump administration is negotiating another stimulus package with Democrats that could be upwards of US$ 1.8 trillion. The Federal Reserve’s balance sheet continues to expand since the beginning of the pandemic. There’s a possibility it could touch US$ 10 trillion by the end of the year as it buys up treasuries, corporate bonds, mortgage-backed securities and muni bonds. With all this liquidity in the system and money in the hands of the average American, the macroeconomic puzzle is: where is the promised inflation? And if there’s no rise in inflation after such a dramatic increase in the deficit, why should the US bother about financial prudence? Why not just print money and spend your way to growth and prosperity?

The Indian Case

This has some resonance for India too. The loose monetary and fiscal policy regime we ran for longer than necessary after the global financial crisis (GFC) leading to high inflation in 2012-14 still casts a long shadow. That experience led to the flexible inflation target (FIT) that was set by the government for the Monetary Policy Committee (MPC) of the RBI. The results of the FIT regime have been mixed. It had become clear a couple of quarters before the pandemic began that this policy needed a relook. Growth had slowed down to a 4-5 per cent range while inflation remained at 4 per cent in the second half of last FY. But members of MPC-1 (whose term ended in September 2020) paused on rate cuts for the fear of inflation going beyond 6 per cent bound. Even at the peak of demand destruction in August, the MPC-1 had taken a hawkish stance on inflation that had the bond market worried.

The slew of measures announced by the RBI last week to keep the liquidity high in the system and to improve transmission from banks to borrowers to spur growth coupled with the commentary from the newly formed MPC-2, suggested it is willing to look past inflation running above 6 per cent. This came as a relief to the bond market as yields fell and spreads narrowed. The inflation question for India is relevant too. Will the quantitative easing done so far by RBI and its promise to continue to do more lead to higher inflation?

What To Make Of Inflation?

At the heart of these questions is whether the Friedman doctrine on inflation that has guided the actions of central banks for the better part of the last four decades still valid. He wrote:

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

The experience in the decade since the global financial crisis (GFC) doesn’t seem to bear Friedman out. Inflation has remained persistently low despite multiple rounds of quantitative easing by the Fed. There are structural reasons including a change in demographic composition, technological progress and innovation, productivity increases and global trade that account for this. This low inflation period in the developed world has meant there is a significant change in inflation expectations because of quantitative easing measures this time around. How do we know this?

Let’s look at the US 10-year yield movements over the past decade. In the aftermath of the GFC between 2009-13, on all occasions when the Fed pulled the QE lever (QE1, 2 and 3), the yields rose sharply on its announcement and fell when it ended. This showed there was a strong expectation of future inflation which led to people switching to short-term bonds from the longer ones. The pandemic related QE hasn’t seen this though. So far in 2020, the QE announcements by the Fed have hardly moved the needle on bond yields.

People no longer believe a loose monetary policy will lead to future inflation.

Central Banks’ Actions During The Pandemic

However, there is one significant difference in stimulus this time around. During the GFC, there was no significant fiscal stimulus provided by the US Treasury. It was a financial crisis, not a broader economic one. And it was solved by pumping more liquidity into the system. This time the quantum of fiscal stimulus to prevent destruction of demand has been enormous. Once the economy recovers and demand comes back organically, this extra money supply in the system will lead to future inflation. To what extent and when is still unknown. But the Fed is willing to have that kind of ‘heating’ up of the economy to support growth. And it doesn’t want to be forced to act when that happens. That’s the reason it moved to an average inflation targeting regime last month to give itself greater manoeuverability to take steps that could push inflation beyond the target of 2 per cent. It also signalled its intention of not raising the almost zero-bound interest rates anytime soon even if the inflation crosses 2 per cent.

In India too the message seems to be similar. We haven’t had a fiscal stimulus to match that of the US. But the RBI wants to signal it is willing to live with inflation running above ‘comfortable’ level in the coming days. The MPC report last week claimed almost 80 per cent of the increase in inflation beyond the 4 per cent target can be attributed to supply chain disruptions and increase in fuel prices. This it believes is a short-term phenomenon and inflation will be in the 5 per cent range next year. This is underlined to give comfort to bond investors to buy government securities without the fear of a near-term interest rate hike to contain inflation. Further, the other step announced by RBI in extending the HTM (hold-to-maturity) limits by another year to March 2022 is to protect any bondholder from the volatility of prices and booking losses on account of it. The overall RBI signal is it doesn’t want the worry of rising inflation and a consequent rate increase to come in the way of growth. It’s focus now is on improving the transmission of rate cuts to the borrowers to stimulate growth.

All of these point to two distinct shifts in thinking in monetary policymaking in both US and India. One, mere monetary expansion isn’t sufficient to trigger high inflation. Two, central banks are looking beyond price stability to include nominal GDP growth, currency management and employment as their objectives. This will be tough to manage but it is a more realistic set of goals to pursue in the current environment.    

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Why is Inflation so low? by Juan Sanchez and Hee Sung Kim published by the Federal Reserve Bank of St. Louis.