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Last Build Date: Tue, 16 Jan 2018 20:50:03 +0000


India state capacity graphs of the day - police and judiciary

Tue, 16 Jan 2018 20:50:00 +0000

From a Livemint article examining the slow pace of India's criminal justice system comes this graphic about India's policemen to population ratio.And this about judges to population ratio!We are stuck in a really bad equilibrium with respect to government. We have the classic "starve the beast" at work. The intellectuals, opinion makers, and media have to share the major part of the blame for creating an environment where anything government has become stigmatised and any plans of expanding the "bloated" bureaucracy is scorned upon. Even government officials aware of the gravity of the state capacity challenge being faced have become captives of this ideological hegemony. Leave aside the likes of teachers and medical personnel, recruitments to important regulatory positions in the government (judges and policemen, building and food inspectors, drugs and school inspectors, and so on) have been either frozen or are being done very parsimoniously. This has coincided with a period of dramatic expansion of the scale and scope of responsibilities of these regulatory officials. The result has been to make an already overburdened bureaucracy even more so, and in turn appear even more inefficient. And this makes the demands for privatisation and outsourcing grow louder.None of this is to suggest that we go ahead and hire people and things will be fine. It is not a good use of money to just hire people without more deep structural reforms of the bureaucratic system - process re-engineering, delegation of authority, right level of regulatory engagement, use of technology to make transactions more transparent and efficient, measures to contain politicisation etc.  But hiring more people should be right at the top of the agenda! There is just no need of being defensive about this! [...]

Uber and traffic congestion - two sides of the same coin?

Sun, 14 Jan 2018 22:06:00 +0000

I have blogged earlier pointing to the negative externalities of transport aggregators by way of increasing traffic congestion, drivers without social protections, and crowding in large number of drivers into a business whose commercial viability (especially in developing country markets) is still not established. 

But I am surprised that the case about traffic congestion is still contested.

Consider this. Cities suffer from traffic congestion. Public policy response to address them include congestion pricing, license plate auctions, high vehicle taxes, prohibitive parking fees and so on. All of these seek to make vehicle ownership and use expensive. In other words, reduce the number of vehicles on the road. There is nothing profound here - take vehicles off the road to reduce congestion! 

Now what does Uber do. It brings those idle vehicles into the road. In other words, more vehicles into the road. Exactly the opposite of what public policy tries to do to reduce congestion. 

So here is an innovation, which in the guise of enhancing efficiency (better use of investments already made), artificially increases vehicles on to roads, which are already choking with traffic, with limited prospect of any commensurate or reasonable accompanying infrastructure expansion. 

Note that the efficiency improvement argument too is biased - it takes into account the private benefit for the vehicle owner while overlooking the social costs from all the negative externalities. In fact, I will argue that far from promoting innovations that allow more optimal use of purchased vehicles, public policy should have made the vehicle ownership itself prohibitive. Having missed the first window, the least that one can do is to ensure that vehicle use is curtailed. Aggregators do exactly the opposite!

In simple terms, the likes of Uber increase our private convenience (we can easily summon a car at any time, not own a vehicle and so on) but at the far higher social cost of greater traffic congestion. 

The real efficiency improvement would be to encourage all existing taxis (individual and operators) to move into aggregator platforms (and individual taxis can even offer their own specific rates) and there is competition among the various platforms.

Development graphic of the day!

Sun, 14 Jan 2018 18:25:00 +0000

Stunning contrast of Doha skyline between 2006 and 2016.
This really is one small powerhouse of a country which punches way above its weight!

(HT: Spectator Index)

Priorities for a District Collector?

Wed, 10 Jan 2018 21:14:00 +0000

It would be a useful exercise to study the priorities of District Collectors or Municipal Commissioners across India. I will stick out my neck and claim that in general two priorities would stand out. One, effective implementation of important (as signalled by the Chief Minister or the Government) hand-me-down government programs. Two, pursue specific individual initiatives (mostly very narrowly defined) launched by them (which generally get dismantled by the successor). I am not sure that this is what they ought to be doing. Come to think of it, many districts are large enough to be equivalent to full-fledged countries. Imagine a world where the main priority of national governments (or Prime Ministers) is implementation of one-size-fits-all programs made by a distant multilateral entity like the United Nations. It does not need much convincing that it would be an extremely dysfunctional world. Yet we unquestioningly adopt the same approach for our Districts. Now, I don't want to get into the well-known debate on the pros and cons of program design for large countries. The objective is to figure out a more relevant set of priorities for the District Collector in today's world. It is useful for the government, at state and centre, to go beyond programs and signal to its officers a more broad-based set of expectations, with focus on outcomes. How about economic growth, job creation, human resource quality development, and a couple of issues specific to the district? How many Collectors have sought to address job creation or learning outcomes (beyond skill development  trainings or increasing attendance/enrolment) in a comprehensive enough manner? How about economic growth, affordable housing, and transportation planning and infrastructure for the Municipal Commissioner? How many commissioners have sought to address traffic congestion or affordable housing (beyond road widening and weaker section housing construction) in a comprehensive enough manner?Unfortunately these are not the typical uni-dimensional projectisable activities (though the components may be) nor possible to complete within the two-three year duration that is the tenure of officers. Further, meaningful attempts at addressing them demands comprehensive and multi-pronged strategies and their long-drawn implementation, not exactly the sort of things that District administrations typically do or prefer.It is therefore important that officers be encouraged to look beyond their limited tenures and focus on the big picture of creating the enabling conditions for achievement of each of the identified priorities. This involves preparing long-term action plans (or updating an existing plan, if required), mobilising stakeholder coalitions, dovetailing resources, institutionalising implementation protocols and monitoring frameworks, and so on. In other words, laying the foundations or creating the conditions for sustainable progress. They should view success or failure of their tenure in terms of achieving progress with the priorities.We need to make these the aspirational goals for young officers (and not claiming success with geo-tagging toilets or completing biometric attendance in schools or planting 1 million saplings in a day or getting the highest matriculation pass percentage). How about signalling accordingly with the likes of Prime Minister's Award for Excellence? How about retweeting and FB liking of achievements in these new areas (not the latter)?This paradigm shift cannot be achieved by individual District Collectors acting on their own in the prevailing regime. It will require State and central governments embracing this world-view of development and supporting the District Collectors as required both administratively and financially. For example, programs should have sufficient flexibility to allow District Collectors to shift resources across components (of the same program) or programs themselves, as well as tweak norms based on the local requi[...]

The challenge faced by small cities

Tue, 09 Jan 2018 20:44:00 +0000

Granted cities are the engines of growth, but it is not clear that urbanisation in the developing countries will involve big and small cities or mostly a few big cities. The context for this debate is the the perceived trend of hollowing out of small cities in countries like the US and the success of the larger cities. So what is the outlook for small cities? Two separate examinations by Paul Krugman and Emily Badger both raise questions about the future of small cities. Emily Badger points out that in earlier times, cities were built on the one or two big businesses that made the city their base. They created supplier networks and jobs which in turn supported significant economic activity not just in the city but its surrounding region. In contrast, the big modern companies have limited local supplier networks and are part of large global supply chains (or the digital ones do not even have a physical supply chain), and even have greater affinity with other similarly place global cities. Sample this,Such a picture, Ms. Saskia Sassen, a sociologist at Columbia, said, “breaks a past pattern where a range of smaller, more provincial cities actually fed the rise of the major cities.” Now major cities are feeding one another, and doing so across the globe. Ram Mudambi, a professor in the Fox School of Business at Temple University, offers an even more unnerving hypothesis, in two parts: The more globally connected a city, the more prosperous it is. And as such cities gain global ties, they may be shedding local ones to the “hinterland” communities that have lost their roles in the modern economy or lost their jobs to other countries...Those changes have come from multiple directions — from globalization, from computerization, from the shift in the United States away from manufacturing toward a knowledge and service economy. These trends have buffeted many smaller cities and nonurban areas... “The economic base has shifted in a way that highly favors cities — and big cities — because it’s now based on knowledge, on idea exchange, on agglomeration,” said Mark Muro, the policy director of the Metropolitan Policy Program at the Brookings Institution. Programmers benefit from having more programmers nearby, in ways different than when assembly line workers gather together. The forces of agglomeration, which big cities enable, are strongest in the kind of knowledge work that has become central to the economy... “The hinterland for Silicon Valley is Shenzhen,” said Timothy Sturgeon, a senior researcher at the M.I.T. Industrial Performance Center.Then Paul Krugman has a fascinating hypothesis on how Agriculture sustained small cities earlier and then it was the good luck of industrial development triggered off by the chance coming together into that area of one or two companies. Once upon a time, it was obvious what towns and small cities did: they served as central places serving a mainly rural population engaged in agriculture and other natural resource-based activities. The rural population was dispersed because arable land and other resources were dispersed, and so you had lots of small cities dotting the landscape. Over time, however, agriculture has become ever less important as a share of the economy, and the rural population has correspondingly declined as a determinant of urban location. Nonetheless, many small cities survived and grew by becoming industrial centers, generally specialized in some cluster of industries held together by the Marshallian trinity of information exchange, specialized suppliers, and a pool of labor with specialized skills.What determined which industries a small city developed? In some cases particular features of the location and nearby resources were important, but often it was more or less random chance at first, then a sequence in which one industry created conditions that favored another... Some localized industries created fer[...]

India state capacity fact of the day - fire safety

Mon, 08 Jan 2018 20:09:00 +0000

In the aftermath of the Kamala Mills fire accident, Livemint digs up this status report on India's fire safety preparedness,
A ministry of home affairs-sponsored study found that of the minimum 8,559 fire stations needed in the country, only 2,087 are in place, a shortage of 65%. Urban areas alone require an additional 4,200 fire stations just to meet the minimum standard for response time... As many as 17,700 Indians died—48 people every day—due to fire accidents in 2015, of which 10,925 (62%) were women.
Even where stations are available, the equipments available, they are insufficient and also woefully inadequate to fight fires in high rise buildings etc. 

And to pre-empt the natural inclination in such situations. No, I don't believe this should be outsourced. This is just one Exhibit. It has to be borne by the government. And local governments have to bear a significant share of the burden.

But how many states have transferred Fire Department to the local government under the 74th amendment?

Caution about globalisation and harmonisation

Sun, 07 Jan 2018 23:30:00 +0000

The very wise Dani Rodrik has this summary of his thoughts on globalisation.There is little question that multiple rounds of multilateral trade negotiations after the end of the Second World War did a lot of good. Import tariffs and quotas on trade in manufactured goods were back then extremely restrictive; relaxing them allowed the world to reap serious gains. Furthermore, at first, this liberalisation affected trade mostly among relatively advanced economies, where wages and working conditions were not so different. The first signs of trouble started after developing countries began to join the world economy: because their low wages began creating distributional tensions in the importing countries.All this is just as economics teaches. According to the celebrated Stolper-Samuelson theorem of trade theory, in places—like the US and western Europe—where skilled workers are plentiful, unskilled workers will see their wages decline under freer trade. Openness to trade always hurts some people in society, except in the extreme case (not relevant for any large economy) where the only things imported are things that are never produced at home. In theory, countries could always compensate their losers by redistributing from the winners, and in practice they sometimes did. With its extensive safety nets, Europe in the second half of the 20th century was relatively well prepared to deal with disruptive trade flows. In addition, trade negotiators initially carved out special regimes for garments and textiles exporters in the advanced economies, limiting their exposure.This explanation of the diminishing returns and rising distributional costs associated with increasing globalisation is less discussed but very important,Even in the best of circumstances, however, freeing up trade caused pain as well as gain. After the 1980s, the balance began to look worse and worse. When tariffs (like taxes) are too high they distort economic behaviour more, and do more damage to prosperity. Back in the 1950s and 1960s, tariffs were often very high and so their reduction did much to grow the overall economic pie. But four or five decades later, in a world where typical tariffs were in single figures, the picture was different. If you’re starting off with the tariffs of the post-war era, the standard economic models suggest that to achieve an overall net gain of $1 in national income through liberalising trade, you could expect to see around $4 or $5 of income being reshuffled across different groups within a particular country. But under the tariffs that applied by the end of the 20th century, achieving that overall dollar of gain would be associated with as much as $20 being redistributed, implying the creation of an awful lot of losers. And what’s more, by the 1990s we were into an era of welfare state retrenchment rather than expansion. So it became less plausible than it used to be to believe that those losses will be compensated.Let’s take Nafta, for example, which entered into force in 1994. A recent study of the labour market impact finds that an important minority of US workers suffered substantial income losses. Not surprisingly, the effect was greatest for blue-collar workers: a high-school dropout in heavily Nafta-impacted localities had 8 percentage points slower wage growth over 1990-2000 compared to a similar worker not affected by Nafta trade. Wage growth in the most protected industries that lost their protection fell 17 percentage points relative to industries that were unprotected initially. And the overall benefit of the agreement? According to most recent estimates, the net economic gain to the US was well below 0.1 percentage points of GDP—that is, less than one-tenth of one per cent of national income. On the "unfairness" of trade,Sometimes international trade involves competition that would be ruled out at home because it violates agreed norms. I[...]

Weekend reading links

Sat, 06 Jan 2018 10:15:00 +0000

1. Spurred by emerging Asia's voracious infrastructure building projects, sand prices are rising and the commodity itself is increasingly becoming scarce. SCMP has a nice article on sand scarcity,According to Price Waterhouse Coopers, Asia is slated to represent nearly 60 per cent of global infrastructure spending by 2025, mainly driven by China’s growth. In 2019 alone, Asia will need almost 11 million tonnes of sand, of which almost 8 million will be used in solely China, Freedonia Group says.Aggressive sand mining has led to the disappearance of wholesale islands, and devastated marine eco-systems and river beds. Many countries have banned exports of sand.Also as prices rise, high-silt and high moisture content sand with reduced binding strength will become available, thereby eroding the quality of construction.2. Fascinating essay in New Yorker about the efforts of China to assume global political leadership, efforts which have gathered pace amidst the vacuum created by Trump's abdications.In recent years, it has taken steps to accrue national power on a scale that no country has attempted since the Cold War, by increasing its investments in the types of assets that established American authority in the previous century: foreign aid, overseas security, foreign influence, and the most advanced new technologies, such as artificial intelligence. It has become one of the leading contributors to the U.N.’s budget and to its peacekeeping force, and it has joined talks to address global problems such as terrorism, piracy, and nuclear proliferation.And China has embarked on history’s most expensive foreign infrastructure plan. Under the Belt and Road Initiative, it is building bridges, railways, and ports in Asia, Africa, and beyond. If the initiative’s cost reaches a trillion dollars, as predicted, it will be more than seven times that of the Marshall Plan, which the U.S. launched in 1947, spending a hundred and thirty billion, in today’s dollars, on rebuilding postwar Europe. China is also seizing immediate opportunities presented by Trump. Days before the T.P.P. withdrawal, President Xi Jinping spoke at the World Economic Forum, in Davos, Switzerland, a first for a paramount Chinese leader. Xi reiterated his support for the Paris climate deal and compared protectionism to “locking oneself in a dark room."... China is negotiating with at least sixteen countries to form the Regional Comprehensive Economic Partnership, a free-trade zone that excludes the United States, which it proposed in 2012 as a response to the T.P.P. If the deal is signed next year, as projected, it will create the world’s largest trade bloc, by population.The article quotes, Daniel Russel, until March 2017, the Assistant Secretary of State for East Asian and Pacific Affairs, who has this portrait of what China thinks about Trump,“The Chinese felt like they had Trump’s number. Yes, there is this random, unpredictable Ouija-board quality to him that worries them, and they have to brace for some problems, but, fundamentally, what they said was ‘He’s a paper tiger.’ Because he hasn’t delivered on any of his threats. There’s no wall on Mexico. There’s no repeal of health care. He can’t get the Congress to back him up. He’s under investigation.”This hospitality as a strategy to weaken resolve is fascinating,In the mid-nineteen-eighties, the C.I.A. commissioned a China scholar named Richard Solomon to write a handbook for American leaders, “Chinese Political Negotiating Behavior.” Solomon, whose study was later declassified, noted that some of China’s most effective techniques were best described in the nineteenth century, when a Manchu prince named Qiying recorded his preferred approach. “Barbarians,” Qiying noted, respond well to “receptions and entertainment, after which they have had a feeling of appreciation.” Solomon[...]

The farm story repeats...

Wed, 03 Jan 2018 23:30:00 +0000

I have lamented here and here at the daunting challenge posed by India's agriculture. Indian Express has this article on the increased jeera cultivation acreage in Gujarat following record prices this year. Consider this,Prices of jeera (cumin seed) hitting record Rs 21,000 per quintal levels at Gujarat’s Unjha market... In a year marked by low realisations for most agricultural commodities — be it cotton, groundnut, potato or tobacco —... jeera has been an exception... The above spike in prices has led farmers in Gujarat to plant 3.48 lakh hectares (lh) under jeera in the current sowing season, which extends from November to early December. This area, which is subject to upward revision, is significantly more than the 2.79 lh of last year. All the major growing districts have recorded higher coverage: Patan (from 40,700 to 68,100 hectares), Banaskantha (from 64,900 to 67,800 hectares) and Ahmedabad (from 12,400 to 19,800 hectares) in north/central Gujarat; Porbandar (from 12,100 to 23,200 hectares), Rajkot (from 4,900 to 22,000 hectares) and Devbhumi Dwarka (from 4,800 to 20,400 hectares) in Saurashtra; and Kutch (from 23,200 to 29,600 hectares)... Ram Patel has sown jeera in seven out of his 10-bigha holding this time. Last year, he grew the crop only on three bigha, while dedicating the remaining seven bigha for mustard (six bigha make a hectare). Jeera is extremely sensitive to weather fluctuations, making its cultivation riskier relative to wheat, chana (chickpea) and dhaniya (coriander), which are the other major rabi season crops in Gujarat. Overcast skies or dew at the time of maturity — jeera is harvested from February to March — can sometimes even lead to complete crop loss.It is unlikely that policy actions can nudge farmers away from such herding based on previous year's prices.The binding constraint against shifting in response to such trends is unlikely to be information. After all a farmer is likely to have seen several such cycles in his lifetime. It is more likely a deep behavioural bias that attaches excessive weight to the immediate experience over the less immediate experiences. Accordingly, the high incomes from the past season weighs so heavily on the mind of the farmers that they are willing to gloss over the memories of pain from earlier experiences of market cycles. What can be done to overcome this cognitive bias?I would say precious little. Unless the farmer's state of poverty is alleviated, information supply will remain largely ineffective. This excessive preference most likely is a result of poverty and the desperation and insecurity arising from it. The farmer behaves like a poor person who fancies lottery tickets. It is the prospect of the windfall and the perceived favourable odds that make them take the bet.This is a cautionary note for those who are bought into the story that providing (some even claim to want to sell) information to farmers or the poor can be a solution to many of their deep underlying reasons for distress. They are most likely to be disappointed.Update 1 (06.01.2018)A comment informs that the Agriculture Department of the Government of Andhra Pradesh succeeded with an information and awareness campaign to moderate the extent of cotton crop sown this year based on an assessment that cotton is not likely to do well this year.Now there is a difference between good old public information campaigns (effectively done) and nudging  privately with information. The post was in the context of the latter, and did not make the distinction. Privately providing information as a nudge to farmers is qualitatively different from a massive public information campaign that targets the farmers as a collective. With the latter, mobilising a few influencers (or a platform like farmers groups) can swing the collective resolve towards the change.So let me reiter[...]

The rote-learning trap

Tue, 02 Jan 2018 04:08:00 +0000

A very disturbing RISE study on the state of the high stakes high school assessment systems in India by Newman Burdett. Its verdict is damning, though not at all surprising,Overall the CBSE examination papers are heavily biased to rote-learning, do not test higher- order skills, and actively discourage students who try and display them... they are almost exclusively assessing a large body of facts and intimate familiarity with text books that is of very questionable use... The papers from CBSE and Pakistan do not match in any meaningful way what is considered necessary or good education in any of the available benchmarks.What is surprising is the magnitude of the problem and the fact that the quality is worse than in even countries like Uganda and Nigeria.  The study classifies questions in each subject in the national-level standardised examinations based on recall (having to recall a fact or piece of knowledge), application (understanding that knowledge and applying it), and reasoning (critically analysing and evaluating facts and potentially putting those pieces of knowledge together in novel ways). It then seeks to identify the share of questions belonging to each category in the different subjects in each of the standardised examinations for all countries. While the PISA, TIMSS, PIRLS and other international assessment benchmarks focus more on application and reasoning, minimising or even avoiding recall, India's CBSE assessments for 10th and 12th Grades have no questions that test reasoning and are skewed towards recall.Even those in the Level 2 category for Math is effectively reduced to a recall category given the repetition of questions (or at least their nature) over years. For reference, see the distribution for other major benchmarks...... and for Alberta, Canada Achieving learning outcomes of desired levels will take time. A good place to start would be to signal intent and shape expectations by making the requisite changes to the assessment system itself. And it can start now.I confess to having hitherto underestimated the depth to which our assessments have plunged and also the potential value of this as an important policy instrument in improving learning outcomes. This really is important and very useful practical lever to improve learning outcomes. Update 1 (02.01.2018)Karthik Dinne has a very good suggestion,The solution is to upgrade the quality of board exams but to avoid the political pressures during the transition, it would be good to initially conduct two versions (basic, advanced) of each subject, with the choice to the student to choose either. Gradually, one can work on bridging the gap between the two. The idea is that the advanced version will signal the higher expectations to schools and also creates demand from parents by providing them with an easily understandable metric gauge quality. Hopefully, this would lead to change in the status-quo. The splitting of the exam will also serve another problem of our board exam - the dual purpose of both certifying minimum standards and signaling the capability of students. The basic version can be taken by students who are interested only in getting the 10th certificate to demonstrate minimum competency.Please also see his blogpost on this here.[...]

Market participants game regulations, bureaucracy responds with more red-tape...

Mon, 01 Jan 2018 01:22:00 +0000

I had blogged just recently on India's private sector's collective propensity to game regulations wherever there is an opportunity and the associated bureaucratic response to err on the side of caution with restrictive regulations. Consider the latest example from the compensation scheme of the GST,Goods and services tax (GST) tax returns filed for the July to September 2017 period by firms under the ‘composition’ scheme suggest there is massive tax theft by smaller taxpayers. The composition scheme is a special one to make GST filing easier for small firms; apart from simpler tax procedures, the returns have to be filed once a quarter. To that extent, the government’s plan to bring in the e-way bill and other ways to plug tax theft are quite justified. While there are roughly 15 lakh small firms registered under the composition scheme today, the number was around 10-11 lakh in September. Of these firms, around six lakh filed their returns for July-September by December 24. The total tax they paid was around Rs 250 crore. Assuming a 2% tax incidence on their turnover — it is 1% for traders, 2% for manufacturers and 5% for restaurants — this means these firms had an average turnover of Rs 2 lakh in that period, or Rs 8 lakh for the full year if you annualise the data. The problem, however, is that firms that have a turnover of less than Rs 20 lakh a year, don’t even need to pay GST or file returns. In other words, these firms are understating their returns in a big way.Let's face this. This is not a problem at the margins - a small share of firms indulging in tax evasion. The sheer scale of evasion is staggering. It is clear that the major share of firms are complicit. In fact, not just in this case, corporate India has shown a consistent collective proclivity to game regulations to maximize illegitimate private gains. This story repeats. Government implements a reform. Private sector blames the reform regulations for being very restrictive. Government responds by relaxing the regulations. The private sector responds by collectively gaming the regulations to their benefit. Then why blame the government alone for excessive red tape, especially when at stake is a non-trivial share of the country's tax base?If this is the scale of gaming, how can we blame the inspections and reporting and other requirements of the Department of Revenue from becoming more intrusive?We forget that trust is the basis of well-functioning markets. Regulations and enforcement are built on trust, and are largely put in place as marginal deterrence - the vast majority comply on their own and only the small minority need the threat of enforcement to comply. However, when trust is consistently betrayed (or is deficient in the first place), then regulations and enforcement have to become the basis for ensuring compliance. In this repeat game with market participants, the bureaucrats have internalised a preference for excessive restrictions in anticipation of the inevitable deviation from businesses. [...]

New Year Greetings!

Mon, 01 Jan 2018 01:12:00 +0000

Wishing all readers a very happy year ahead in 2018!

Restoring the old glory of the IAS

Sat, 30 Dec 2017 02:09:00 +0000

I have a co-written oped with Dr D Subbarao in Indian Express which calls on reinventing the IAS - transform itself so as to be able to lead the social transformation, lead the movement to discard the chalta hai attitude and embrace a badal sakta hai attitude. 

Thoughts on NCLT and GST

Thu, 28 Dec 2017 03:00:00 +0000

The two biggest economic reform events in India in 2017 have been the roll-out of the Goods and Services Tax (GST) and the operationalisation of the Insolvency and Bankruptcy Code (IBC) through the National Company Law Tribunal (NCLT). A few observations on both. On GST, the government faced two challenges. One, achieve consensus among States through protracted negotiations involving give-and-take so as to get the Parliamentary approval. Two, operationalise GST among millions of enterprises through a very intrusive IT solution, the vast majority of whom had never used such systems.  Both these meant that the best GST policy design and implementation plan was off the table. The challenge was to negotiate and ensure the most satisfactory second-best solution. In a raucous democracy with high-stakes negotiations conducted in full public glare, that too in real-time and at frenetic pace to meet an imminent deadline, and given the confrontational collective attitudes and behaviours of all parties concerned, the government cannot be faulted for prioritising the achievement of consensus to get legislative nod over the purity of the GST design. After all, nothing about the design is set in stone. The implementation plan, while largely a bureaucratic exercise, is critically dependent on the design. When the design features were subject to negotiations till the last minute, the challenge of incorporating the changes, and testing and validating them in very aggressive timelines becomes formidable. In any case, as countless examples of such massive project roll-outs show (recollect the chaotic roll-out of the Affordable Health Care Act insurance exchanges in the US), the challenge is not so much to get the best solution out, but to respond swiftly to emergent challenges and rectify them at the earliest. The initial few months of adoption chaos is par for the course. A very active GST Council has been consistently refining the GST design elements since its roll-out. Given that these changes have to be incorporated into the IT system, almost in real-time, the implementation challenge looks even more daunting. I am not well-placed to comment on the basic software design features (not related to emergent GST design changes), including ease of use for the largely IT illiterate users, of the GST solution or on the implementation processes. On the former, given that one of India's leading software companies has been in charge of its development for a long-enough time, I would be inclined to hold them responsible for such technical failings. On the latter, we need to examine the robustness of decision-making and process protocols, within the implementation Secretariat, as well as engagement with State Commercial Taxes departments. Was the commitments made for incorporation of GST Council decisions into the IT solution based on judgements that accounted for technical considerations? The bureaucracy cannot absolve itself off the blame on failings in these areas. It would be very useful to study, compare, and learn from the decision-making protocols and processes associated with Aadhaar and GST, the two big IT solution roll-outs in the country's history.More changes on the GST design features are on the anvil. In any case, a year-long iterative process and an implementation stabilisation period of 12 months is not at all unreasonable for such roll-outs. The verdict on the whether GST roll-out was done well or not will have to wait till then. My initial reaction after the disastrous first case resolved under the IBC was one of dismay. But the government reacted swiftly to make changes to limit promoters gaming the resolution process and gaining control thro[...]

China facts of the day

Tue, 26 Dec 2017 13:04:00 +0000

The Economist has these figures on the Chinese appetite for lifts,
In 2000 some 40,000 new lifts were installed in the country. By 2016 the number was 600,000—almost three quarters of the 825,000 sold worldwide. China not only wanted more skyscrapers; it wanted taller ones. More than 100 buildings round the world are over 300 metres; almost all of them were built this century, and nearly half of them in China. The country is home to two-thirds of the 128 buildings over 200 metres completed in 2016. Other countries may content themselves with a few show-off pinnacles. China buys them by the dozen.
This is a fascinating (and disturbing) account of how Chinese digital companies are using personal data to score a person's social credit and offer the full spectrum of services covering the daily lives of Chinese. Sample this,
Alipay knows that at 1 pm on the afternoon of August 26, I rented an Ofo brand bike outside Shanghai’s former French Concession and rode north, parking it across from Jing’an Temple. It knows that at 1:24 pm I bought a snack in the mall next to the temple. It knows that afterward I got in a Didi car bound for a neighborhood to the northwest. It knows that at 3:11 pm I disembarked and entered a supermarket, and it knows (because Alibaba owns the supermarket, which accepts only Alipay at checkout) that at 3:36 pm I bought bananas, cheese, and crackers. It knows that I then got in a taxi, and that I arrived at my destination at 4:01 pm. It knows the identification number of the taxi that drove me there. It knows that at 4:19 pm I paid $8 for an Amazon delivery. For three sweet hours—one of which I spent in the swimming pool—it does not know my whereabouts. Then it knows that I rented another Ofo bike outside a hotel in central Shanghai, cycled 10 minutes, and at 7:11 pm parked it outside a popular restaurant. Because Ant Financial is a strategic investor in Ofo, Alipay might know the route I took.

The costs and benefits of transport aggregators

Mon, 25 Dec 2017 00:30:00 +0000

The beneficial effects of transport aggregators like Uber stand out, especially given the experience of consumers with business as usual taxi operators. They are much more convenient (lower wait times, ease of hailing, doorstep access etc) and far cheaper, which in turn induces more people to use such services.Peter Cohen et al used granular surge pricing data to estimate that the overall consumer surplus generated by UberX service in the US in 2015 was $ 6.8 bn, and that each dollar of consumer spending generates about $1.6 in consumer surplus. Chungsang Tom Lam and Meng Liu used Uber and Lyft data for New York City to show that platform users gain 72 cents per dollar spent on these platforms, with 64% of the welfare gains coming from dynamic pricing.But these studies are confined to the consumer side. How about the externalities - the impact on the urban transport eco-system? In particular, the costs of congestion are well documented, and how much does the addition of aggregators worsen it?CityLab points to a just released report by Bruce Schaller who found that during 2013-17 the number of taxi/aggregator vehicles in the Manhattan Central Business District (CBD) rose 59% on weekdays, and the number of such vehicles in the same area in late afternoon doubled to over 10,000 vehicles, and though taxi trips declined, total passenger trips rose 15%. He shows that aggregators contributed to a 36% increase in the amount of miles traveled by for-hire vehicles in the CBD, with lengthier trips and more "deadheading" (cars traveling without passengers). The result of all this was an 18-19% reduction in average traffic speeds.Another study of Regina Clewlow and Gouri Shankar Mishra of University of California, Davis used data from comprehensive surveys in seven US cities in the 2014-16 period and came to similar conclusions. They found that ride-hailing services led to an average 6% reduction in use of bus services, and that 49% to 61% of ride -hailing trips would not have been made at all, or by walking, or biking or transit. There is an even more damaging dynamic at play. Ridership of the New York mass transit system has been declining in recent years, on the back of poor service quality and safety concerns. Schaller's research suggests that aggregators are amplifying the decline, especially by drawing the more affluent passengers off trains into cars. As City Lab points out, this can trigger a death spiral - "fewer transit riders means less revenue and demand for improved transit" and a poor quality mass transit system used by the less well-off. This dynamic applies to cities in any developing or developed country.In simple terms, the assessment of such innovations are about whether the private benefits from them are commensurate with their social costs. The former are amenable to being quantified and often rigorously too. In contrast, the latter are very difficult to capture and have long-drawn general equilibrium effects. The resultant propensity to under-estimate the latter causes an exaggeration of the benefits of such innovations.More fundamentally, the biggest urban transportation challenge is to achieve the modal shift away from private vehicles to mass transit systems - increase the share of public transport and decrease the share of private vehicles. Therefore, any innovation or disruption that improves the efficiency and thereby increases the use of private vehicles, as transport aggregators like Uber appears to be doing, fails the first-order test of social benefit.[...]

Progress on tax base erosion

Sun, 24 Dec 2017 09:12:00 +0000

One of the big distortions in corporate finance, with increasing relevance in recent years, has been the tax deduction allowed on interest expenses. This has allowed companies in developed economies to lower their tax liabilities (and thereby boost profits) by leveraging the low interest rate regime and load up debt, even to the extent of using them to finance share buy-backs. Fundamentally, the favourable treatment give to debt has not only led to erosion of the corporate tax base but has also encouraged corporate indebtedness. Most worryingly, it has encouraged resource misallocation towards speculative financial market activities that have in turn furthered the trend towards excessive financialization. In this context, the G-20 and OECD's Base Erosion and Profit Shifting (BEPS) project to modernise international tax rules had in 2015 recommended that interest expense deductions be capped at a net interest/EBITDA ratio in the range of 10-30%, at the discretion of national governments. However, it allows for actual deductions in cases where the entire group’s ratio is higher than the fixed ratio, thereby acknowledging the supremacy of the principle of tax deduction on interest expenses.Accordingly, the UK Government led the way by promulgating a Fixed Ratio Rule as part of its tax rules. The Fixed Ratio Rule will limit the amount of net interest expense that a worldwide group can deduct against its taxable profits to 30% of its taxable earnings before interest, taxes, depreciation, and amortisation (EBITDA). A modified debt cap within the new rules will ensure the net interest deduction does not exceed the total net interest expense of the worldwide group. The Group Ratio Rule allows a ‘group ratio’ to be substituted for the 30% figure. The group ratio is based on the net interest expense to EBITDA ratio for the worldwide group based on its consolidated accounts.One of the less discussed, maybe even partially redeeming, feature of the Trump administration's tax reform plan is the introduction of limit on the tax deduction on interest expense. The rules state that the deduction shall not exceed the sum of the tax payer's business interest income and 30% of the adjusted EBITDA. The provision becomes tighter by 2021 by making it 30% of EBIT. However, it allows for "carry forward of disallowed interest" which allows corporates to deduct the remaining interest expense in the following years, upto the fifth year after the expense is incurred. Whatever the qualifications, these are undoubtedly positive developments to correct a serious distortion to corporate financing. It is expected to hurt private equity firms which have specialised on leveraged buyouts to generate returns. It is estimated that in the US, nearly 70% of companies with debt more than five times EBITDA would be negatively affected.[...]

Jonathan Haidt on the liberal outpouring

Thu, 21 Dec 2017 18:31:00 +0000

City Journal has a fascinating abstract of Jonathan Haidt's recent lecture at the Manhattan Institute. He talks about the wonder called a "fine-tuned liberal democracy", When we look back at the ways our ancestors lived, there’s no getting around it: we are tribal primates. We are exquisitely designed and adapted by evolution for life in small societies with intense, animistic religion and violent intergroup conflict over territory. We love tribal living so much that we invented sports, fraternities, street gangs, fan clubs, and tattoos. Tribalism is in our hearts and minds... Here is the fine-tuned liberal democracy hypothesis: as tribal primates, human beings are unsuited for life in large, diverse secular democracies, unless you get certain settings finely adjusted to make possible the development of stable political life. This seems to be what the Founding Fathers believed. Jefferson, Madison, and the rest of those eighteenth-century deists clearly did think that designing a constitution was like designing a giant clock, a clock that might run forever if they chose the right springs and gears... They built in safeguards against runaway factionalism, such as the division of powers among the three branches, and an elaborate series of checks and balances. But they also knew that they had to train future generations of clock mechanics. They were creating a new kind of republic, which would demand far more maturity from its citizens than was needed in nations ruled by a king or other Leviathan.He points to the rise of centrifugal forces and weakening of centripetal forces that hold together the social fabric. In particular, he points to the absence of a unifying enemy, divisive social media, growing immigration and attendant diversity, radicalisation of the Republican Party (fuelled by the likes of Fox TV), and the new identify politics of the Left. On the last, he quotes Jonathan Rauch to define identity politics - a “political mobilization organized around group characteristics such as race, gender, and sexuality, as opposed to party, ideology, or pecuniary interest.” He gives the example of Martin Luther King's speech as an example of good kind of identity politics "because it framed our greatest moral failing as an opportunity for centripetal redemption". He contrasts this with a new version of identity politics taught in universities since the last five years - intersectionality. The term and concept were presented in a 1989 essay by Kimberlé Crenshaw, a law professor at UCLA, who made the very reasonable point that a black woman’s experience in America is not captured by the summation of the black experience and the female experience. She analyzed a legal case in which black women were victims of discrimination at General Motors, even when the company could show that it hired plenty of blacks (in factory jobs dominated by men), and it hired plenty of women (in clerical jobs dominated by whites). So even though GM was found not guilty of discriminating against blacks or women, it ended up hiring hardly any black women. This is an excellent argument. What academic could oppose the claim that when analyzing a complex system, we must look at interaction effects, not just main effects?He describes its consequences, But what happens when young people study intersectionality? In some majors, it’s woven into many courses. Students memorize diagrams showing matrices of privilege and oppression. It’s not just white privilege causing black oppression, and male privilege causing female oppression; its heterosexual vs. LGBTQ, able[...]

The challenge with job creation in India

Tue, 19 Dec 2017 06:31:00 +0000

India's labour market problem is not one of literal unemployment, but of productive employment. Alternatively, we have a problem of disguised employment - employee claims education and skills beyond the requirements of their job. In more practical terms, it is one of sorely deficient well-paying  formal sector jobs. Let us be clear. In a large economy like India, where the vast majority of workforce is rural and informal, some form or other of bare subsistence employment is always likely to be available. The real problem is availability of (formal sector) jobs appropriate for a skilled workforce, much less the ones that meet their aspirations. So, for example, R Gopalan and MC Singhi are barking up the wrong tree. They quote Labour Bureau data from 200910 to 2015-16 to claim that "India's jobless growth is a myth". But they do nothing to refute the central problem. In fact, unwittingly, they end up substantiating it,The Labour Bureau survey (2015-16) has categorized workers according to their monthly income levels. Most of the workers, 84% of all, whether self-employed, regular wage earners, contract workers or casual workers, were getting an income of less than Rs10,000 per month (Figure 1). Regular wage earners or salaried-class workers were better off, with 57% having a monthly income of Rs10,000 or less. Finally, 96.3% of casual workers, including those who were employed for public works, and 85% of self-employed persons had a monthly income of Rs10,000 or less. Enough work was also not available for nearly 40% of the workers; they were being employed for only a part of the year. In terms of decent, productive and well-paid jobs, considerable gaps continued to persist.Given that nearly 90% of the workforce is employed in the informal sector, predominantly with less than regular wage incomes and more likely as casual workers, it is fair to say that the overwhelming majority of new entrants get an income less than Rs 10000. In fact, the vast majority would have monthly incomes far less than Rs 10000. Now, how much can Rs 10000 get you if you are a migrant, even if single though with a commitment to save something to send back home, in a big city? Not to speak of the deductions that come along with formality. Manish Sabharwal has been a constant chronicler of all these. So clearly we have a problem of inadequate supply of productive, and therefore well-paying, jobs.Gopalan and Singhi end up with suggestions that are unlikely to be relevant or actionable, much less effective,It is necessary, then, to evolve strategies to create supplementary opportunities for the self-employed, improve the female labour force participation rate, increase the ratio of female to male job seekers, and reduce interstate differences. No quibbles with the need to improve female labour force participation rate, but this is a second order challenge to more fundamental structural failings. But the suggestion to create supplementary opportunities for self-employed may be exactly the wrong path to follow as a job creation strategy (though maybe appropriate as a poverty alleviation strategy). As I have blogged earlier, India's problem is not too little entrepreneurship, but too much and mostly of the wrong kind. India's labour market is characterised by unproductive, informal, self-employment based subsistence entrepreneurship. Instead there should be a much greater share of workers employed in productive, formal sector jobs. In fact, India needs more of the dynamic entrepreneurs, of the type that creates productive jobs. As Ej[...]

Eco-system as a constraint on outcomes-based policies

Sun, 10 Dec 2017 22:25:00 +0000

I have blogged earlier here about the under-appreciated difficulties with targeting outcomes. Apart from the three challenges raised in that post, there is another equally important challenge. This concerns ecosystem constraints.It is commonly assumed that the existing ecosystem can be disciplined to achieve the desired outcomes through efficiency improvements, by getting human and physical capital to work more and better. What if this is not at all true?This post gives three examples of how outputs or outcomes-focused technology or process interventions disrupted entrenched equilibriums and raised difficult administrative challenges. Consider school education. We have no clear idea of how much of learning outcomes realisation is a function of early childhood education, classroom instruction, remedial support in classroom, peer-engagement, off-school hours engagement at home, and the grade-appropriate competency levels themselves. What are their relative weights? How do those vary across socio-cultural contexts?  What if the competency standards are too ambitious? Or what if home engagement is critical?Consider primary health care. This study found that doctors spend limited time and asked very few questions (as against what the medical protocol dictates) when treating patients. And it is pervasive across developing world, though nowhere as bad as in India. While unambiguously accepting the larger point about apathy and incompetence, it is also important to highlight the plumbing reality - the Out Patient load, when doctor is available, in PHCs can be far higher than what any systems can deal. Once this becomes the norm, a newly recruited doctor, over a few years, deeply internalise the challenge and forms a response that instead of treating the patient only tries to get done with the long-que of patients before lunch! Just imagine a GP in UK dealing with 30 patients turning up over a two-hour window with just one nurse for assistance. Nowhere is this more relevant than with state capacity. It is unrealistic to expect public systems as they exist now to deliver sectoral outcomes in scale and anywhere close to the defined benchmarks. Right now, these systems are entrapped in a low-level equilibrium of low human and physical resource allocations, unfavourable socio-economic conditions, and tolerance for and expectations of sub-par outcomes. Even the most incentive compatible financing strategy cannot be expected to have anything other than marginal effect on the system.  Fundamentally, this should have been simple. Development is hard. The resolution of complex problems demand multi-dimensional policies that directly and proactively address deep structural failings, and persistent effort in their implementation. So to expect outcomes-targeting to magically deliver the result is plain naive.But that we still fall prey to the lure of such apparently neat and simple solutions can be blamed on our psychological urges. We want to do something quickly about these complex problems. We find the logic of outcomes-based policies irresistible. So we seek refuge in them.But they will not work![...]

The alternative assets universe and India

Sun, 03 Dec 2017 19:38:00 +0000

The latest quarterly update of infrastructure funds from Preqin shows that the total dry powder held by unlisted infrastructure funds has reached a record high of $154bn as at September 2017. Most of this is routed to N America and Europe, with just $20 bn earmarked for all of Asia, including China and Japan. As regards India, the total dry powder currently available aimed at investing in India is just $3 bn. The vast majority of this comes from overseas funds, rather than domestic fund raising. In fact, India forms just 7% of the $65 bn unlisted infrastructure assets in the Asia-Pacific region. As to the entire alternative investment funds industry - private equity, venture capital, real estate, infrastructure, private debt etc - the total assets under management (AUM) as of December 2016 was $598 bn. India's share was $42 bn, of which $13.5 bn was the dry powder.The major share of the AUM in India went into PE/VC funds. The PE sector has been boosted by the pick-up in exits, $10 bn in each of 2015 and 2016, and $7 bn to date this year.While $7 bn of the $23.6 bn in the PE/VC sector is dry-powder available for deployment, a very small proportion of this is currently earmarked for buyouts. This allocation is contrast to elsewhere, including in Asia, where buyouts form the dominant share. Two observations1. The government has planned infrastructure investments in the range of $700-1000 bn over the coming five years. It is estimated that a significant share of the investments will come from foreign investors. But, as these numbers show, we would be happy if even 10% of these investments come from abroad. Therefore, expectations of the National Infrastructure Investment Fund (NIIF) being able to leverage its $3bn corpus ten-fold etc are simply unrealistic.One approach to attracting more infrastructure funds is by selling commissioned assets where revenue streams are predictable. Entities like NTPC and NHAI should consider divesting certain existing assets both attract infrastructure funds as well as mobilise resources to finance newer projects.2. The new Bankruptcy Code and the resultant wave of distressed assets sales promises to flood the Indian market with massive buyout opportunities. The domestic market may not be deep enough to absorb anything beyond the first few sales. Foreign buyout funds would be essential for the fair price discovery required to make these sales sustainable, both commercially (for banks) and politically. While the currently earmarked amounts India-focused buyout funds is negligible, this distressed asset sales present a great opportunity to attract a big volume of such funds and deepen India's alternative assets market. This may require more strategic approaches to some of these sales, including bundling assets into groups so as to make it large enough to be commercially attractive.As to the distressed assets sales themselves, two articles in Mint point to the challenges that are likely to be faced going ahead. One concerns the 26 GW of thermal power assets without any power purchase agreements, which makes them risky even after write-downs and restructuring. In these cases, as I have argued earlier, it may have to fall on NTPC to become a buyer of last resort.The other one relates to steel sector, where the problems are worse still and massive haircuts may be necessary. And, unlike with power assets, it may be very bad idea of have an inefficient SAIL buy them up. In this case, strategic sales by bundling assets assume relevance. &nbs[...]

The year of bubbles in a snapshot

Mon, 27 Nov 2017 21:45:00 +0000

As one more year of monetary accommodation draws to a close, John Mauldin has these bubble facts
  • A painting (which may be fake) sold for $450 million.
  • Bitcoin (which may be worthless) soared nearly 700% from $952 to ~$8000.
  • The Bank of Japan and the European Central Bank bought $2 trillion of assets.
  • Global debt rose above $225 trillion to more than 324% of global GDP.
  • US corporations sold a record $1.75 trillion in bonds.
  • European high-yield bonds traded at a yield under 2%.
  • Argentina, a serial defaulter, sold 100-year bonds in an oversubscribed offer.
  • Illinois, hopelessly insolvent, sold 3.75% bonds to bondholders fighting for allocations.
  • Global stock market capitalization skyrocketed by $15 trillion to over $85 trillion and a record 113% of global GDP.
  • The market cap of the FANGs increased by more than $1 trillion.
  • S&P 500 volatility dropped to 50-year lows and Treasury volatility to 30-year lows.
  • Money-losing Tesla Inc. sold 5% bonds with no covenants as it burned $4+ billion in cash and produced very few cars.
If all this is not enough to take the punch-bowl away, then we can be rest assured that real-world monetary policy will always be asymmetric - loosen when faced with economic weakness to ease conditions and stoke demand, and refrain from tightening when overheating for fear of bringing the house down. Prefix it with Greenspan or not, one cannot but not walk away with the feeling that central bank actions in recent years have released a moral hazard named Central Bank Put!

Managing organisations - the importance of trust and delegation

Thu, 23 Nov 2017 22:15:00 +0000

I have a simple hypothesis about managing organisations. There are several complex dynamics at play, but there is one non-negotiable attribute - trust and delegation. A good leader is one who has the instinct to trust the right people, the confidence to delegate, and the restraint to step in only when required. Consider the example of a District Collector in an Indian district. He is responsible for the administration of all development and regulatory activities in the jurisdiction. Take the example of  sanctioning and stage-wise approval of the release of payments for engineering works - school/hospital buildings, roads, irrigation structures and so on. In all these cases, the Collector has to exercise some judgement to make decisions. How does he know that all the 125 school buildings or 12 roads or 245 irrigation structures to be sanctioned this calendar year are the most appropriate ones? How can he be sure that the first instalment for the school building is being released only after the foundation stone has been completed? How can he be assured that the building or the road has been completed with good quality before sanctioning the release of the final payment? For sure, there is administrative guidance by way of formal delegation of powers, which though can be changed by following the due process, that define the sanctioning and payment release powers of officials at each level. But most often than not, even these are a very narrow and conservative delegation, more appropriate for a time when government was limited - there were limited number of such schools to be sanctioned and limited scope and sectors of administration. The modern administration and its scope demands further delegation. How do different Collectors respond? Some go by the official playbook. This leaves them with the dilemma of approving something which they have not physically seen, but based on what is on record. And given that what is on record can be aggregates, incomplete, irrelevant, misleading, or even plain incorrect, as is most often the case, the Collector has to exercise judgement calls. And the numbers of such files are huge in most districts. Faced with this dilemma, some, known as query masters, raise questions and insist on clarifications, which in turn cascades into more questions and so on. Some others, inspection masters, demand personal inspections, which can never be completed for even one round of approvals given the sheer volume of work. And even when they inspect, they are unlikely to be satisfied, since the contractors are likely smarter and the Collector likely does not have the professional competence to make conclusive assessments of malafide and fraud. The approval gets delayed and the work drags on. Cost escalates and contractors abscond, forcing re-tenders which come with multiples of the original cost. Then there are the corrupt, who approve everything as it comes, since the transaction has already materialised as planned before the file reaches their table. And they rationalise, and rightly so, with the argument that they are only sanctioning some thing as per the formal delegation of authority and they cannot be held accountable if the facts are contrary. There are also a few who decide to revisit the delegation of powers and either directly or indirectly delegate their own approval powers. The extent of delegation varies from context to context, and is made on the person's best judge[...]

More thoughts on Indian agriculture

Tue, 21 Nov 2017 22:17:00 +0000

I had written sometime back about the corrosive effects of loan waivers arguing that such "assault on incentives" are far more pernicious than giving electoral freebies. India has witnessed and explosion of farm loan waivers in the last year or so as part of electoral politics in states which held assembly elections. And with the next election season on, the trend continues unabated. But this issue cannot be seen in isolation. It has to be seen as part of the entire agriculture eco-system in India. Actually agriculture is a pretty complex system and conventional market solutions have been shown to not work. Gluts and shortages are inevitable - bad weather is a risk; good prices lead to excess cultivation next year and resultant drops, and vice-versa; global supply shocks and resultant price fluctuations are always round the corner; poor storage and other forward linkages make farm sales the only option etc. Pain and suffering follows. Developed countries, over decades, have sought to address this problem through less distorting approaches - mainly crop insurance and/or direct payments. It helped that they have good irrigation systems, farms are bigger, forward linkages are better, credit access simple, and markets are functional. We have none of the positive conditions, and crop insurance and direct payments are both very expensive and run into problems of effective administration.But we have this smorgasbord of inefficient and distorting things - subsidised crop loans and their recurrent waivers; procurement and MSP (which feeds into the PDS); fertiliser subsidy; free farm power; agriculture IT exemption; minor irrigation programs like PMKSY etc. Worse still, each one has generated its set of powerful entrenched interests, which reflexively gang up as a vocal electoral constituency whenever they are threatened. Making matters complex, it cannot also be denied that each one of these, in their very sub-optimal ways, contributes to mitigating, even if partially, the fundamental problem, and the resultant pain and suffering. So we have a very bad self-reinforcing and perpetuating equilibrium. A chakravyuha, from which exits appear very daunting.I have not come across anything satisfactory as a path out of this. Except the gradual process of development - build irrigation systems, transition people out of agriculture, consolidate farms, let linkages and markets develop etc - and the gradual introduction of things like crop insurance. In this dismal environment, doubling farm incomes may well be the government's most over-optimistic promise yet.There may be just a few avenues to manoeuvre. Given that the crop insurance scheme is one of the government's bigger initiatives, and one of the most progressive (as well as efficient), I think it should actually spend more energies and resources on it. As experience from across the world shows, premium support will always entail big subsidies and this may be worth paying. Can the government also think of phasing out some of these other subsidies and phasing in more of crop-insurance support? For example, it could encourage states which are willing to do farm power metering and a low agricultural tariff (to start with), to be provided a much higher premium support subsidy.But alternatively, there is some merit in reframing both the MSP and crop-insurance. Instead of government procurement (except, and only to the extent required, for wheat and paddy), th[...]

A primer on the rise of populism and a way forward

Sat, 18 Nov 2017 22:04:00 +0000

There are several narratives surrounding the rise of populism and events like the election of Trump and Brexit. I have written about it here, here, and here. This is an attempt at articulating the narrative based on news stories from the week.  1. What is happening? The remarkable post-war economic, social, and political stability across developed societies, especially in the US, was built on an underlying consensus on certain values. This consensus revolved around the commitment to the values of free-market capitalism, liberal social order, and democracy. Political positions converged to reflect this consensus. But as the fascinating graphic below shows, this consensus has been breaking down and the median liberal and conservative positions in the US has diverged significantly over the past decade.  allowFullScreen='true' webkitallowfullscreen='true' mozallowfullscreen='true' width='320' height='266' src='' class='b-hbp-video b-uploaded' FRAMEBORDER='0' />2. Why is it happening? But this consensus was accompanied by a less benign bipartisan elite convergence (more of it latter) which effectively ended up capturing the economic and political establishment. The rapid and fairly inclusive economic progress achieved in the period helped underpin this consensus and paper over fissures that were developing due to forces like trade liberalisation, globalisation, de-unionisation, and skill-biased technological changes. But once growth started slowing, for a variety of factors, these fissures started to show up.But mainstream political parties, captives as they had become of elite interests, failed to see the breakdown in social consensus. The liberal elites too became caught up in their rhetoric.    Nothing has been more emblematic of this isolation of elites from the electorate than the staggering levels of economic inequality, which has been widening at a rapid pace since the millennium. As the graphic below shows, in the US, the share of national income going to the top 1% has nearly doubled from 11% in 1980 to 20% in 2014. While trade, technology, de-unionisation, immigration, business concentration etc played a role, Jonathan Rothwell argues, Almost all of the growth in top American earners has come from just three economic sectors: professional services, finance and insurance, and health care, groups that tend to benefit from regulatory barriers that shelter them from competition. The groups that have contributed the most people to the 1 percent since 1980 are: physicians; executives, managers, sales supervisors, and analysts working in the financial sectors; and professional and legal service industry executives, managers, lawyers, consultants and sales representatives. Without changes in these largely domestic services industries — finance, health care, the law — the United States would look like Canada or Germany in terms of its top income shares.He also points to how the elite capture of institutions that sets the rules of the game have contributed to an elite premium and rapid widening of inequality,The United States also stands out in terms of how much money its elite professionals earn relative to the median worker. Workers at the 90th percentile of the income distribution for professionals make 3.[...]