State Assemblies, India-US Relationship, Tax Policy, and Things Governments Do
|Pranay Kotasthane||Feb 9|| 3|
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?
PolicyWTF: State Assemblies as Glorified Rubber Stamps
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
With the union budget out of the way, state budgets are upon us. These budgets deserve far more scrutiny because nearly 60 per cent of total government spending happens through our states. This number is even higher for the high-income states.
Example: my colleague, Pavan Srinath wrote last year, Government of Karnataka spent ~₹34,000 per resident while the mean union government spending per Indian stands at ~₹20,300. This highlights why we should pay more attention to institutions at the state level.
I say that because we are regressing in terms of the oversight that state assemblies have over the executive. This eye-popping stat from PRS Legislative Research should scare us into action:
In India, the state legislatures meet for an average of 26 days a year. Of these 26, a majority of the sitting days are during the budget session (where they end up discusssing the state budget for the most part).
The comparable number for the Lok Sabha has been on the decline too and as of now, it stands at ~60. It’s still more than double the state average. Also, the Parliament has a working Standing Committee system which deliberates on many legislations outside the Lok Sabha/Rajya Sabha sittings. Such a standing committee system is missing or dysfunctional in most states.
So, we have a broken institution. State legislatures are hardly doing what they are supposed to. A second-order effect is that our state-level legislators end up doing the executive’s work. No wonder that MLA Local Area Development Funds are a hit then.
A Framework a Week: Things Governments Do
Tools for thinking about public policy
Whenever we consider government intervention, it is always useful to know the entire range of options available - a toolkit of sorts. Given any policy problem, say Alcoholism is leading to poor social outcomes, one should be able to go through this toolkit and ask - “might this be a better way to solve this problem?"
One such classification comes from Kelkar & Shah’s new book In Service of the Republic. They say there are three pillars of state intervention in most fields:
The government might produce a service. For example, governments run public bus transport in Indian cities.
The government might regulate private providers of a service. For example, Directorate General of Civil Aviation regulates private airlines.
The government might finance private persons buying services from private or government providers. For example, subsidies to consumers for LPG cylinders.
They also map these interventions to the market failure at hand: positive externalities justify financing. Negative externalities, asymmetric information or market power justify regulating.
A second classification comes from Eugene Bardach’s A Practical Guide for Policy Analysis.
There’s a third classification that we teach at Takshashila’s public policy courses. We classify all things governments do into eight categories and explain where each of these might work. The eight things are:
Engage in rhetoric
Marginally change incentives (taxes, subsidies)
Drastically change incentives (free provision, ban)
Do it yourself
Change ownership (nationalisation, divestment)
Pick any classification you find useful but think long and hard about. One, the unintended consequences of these actions. Two, the state capacity required for each intervention.
Matsyanyaaya: On the India—US relationship
Big fish eating small fish = Foreign Policy in action
The numerous Indian perspectives on the India—US relationship can broadly be classified into three categories. Classifying and reflecting on these viewpoints is a good point to start thinking about what India should do in this game of international relations.
The first school of thought is retaliatory in nature. The underlying principle behind this line of thinking is that why should India support the US when it continues to support and even encourage Pakistan’s military-jihadi complex, an irreconcilable adversary. Or why shouldn’t India impose import tariffs on US goods when the US afflicts the same treatment on Indian goods.
This position was conveyed, amongst others, by Bharat Karnad. He says:
the Bharatiya Janata Party government of Narendra Modi is not proving as adroit in maintaining distance from the US. Modi seems smitten by America, and losing the plot on how to further the national interest.
In my view, this school of thought is low on realism. Neither does it take into account the opportunity costs of not having the US on your side, nor does it consider the opportunity benefits of having it on your side.
Bandwagoning is the second school of thought. This position was conveyed most effectively by K Subrahmanyam, the most famous of India’s strategic thinkers. The perspective is as follows:
We don’t have any clash of national interest with the Americans. There are some issues that usually arise because of America’s dealings with third parties such as Pakistan. But at a time when the government-to-government relationship was not good, we still saw about two million Indians settling in America. If things improve, this trend will get stronger. India has to leverage this situation and change the US-EU-China triangle into a rectangle. Until then it is in our interest to help America to sustain its pre-eminence. After all, in a three-person game, If America is at Number One, China is at Number Two and we are lower down, it is in our best interest to ensure that it is America that remains Number One.
The idea here is that at least in the short term, India must align itself with the US and use this partnership to increase its own power. This assumption ignores the scenario that allying with the US can actually decrease India’s power if it is put on a collision track with China, or pushed to participate in conflicts of little interest or purpose.
The third school of thought is a marginal cost-benefit strategy which sees India’s role as that of a swing power. Pratap Bhanu Mehta speaks of this position when he says:
Its (India’s) interests have always been to do business with both countries so that both take it seriously. This is a sophisticated game. But an open declaration of a political and defence alignment with the US forecloses those options. We will come to be unwittingly identified with American rhetoric and designs for Asia. And the overblown rhetoric emanating from Washington about positioning India in its pushback of China will reduce our options.
My colleague Nitin Pai also agrees:
despite an alignment of interests, it must not always side with the United States. It must swing. To paraphrase Henry Kissinger, India’s options toward the United States and China must always be greater than their options toward each other… until New Delhi demonstrates that it can deliver pain for one and pleasure for the other, it won’t be seen as swinging. It will be mistaken for sleep-walking.
The cost of this strategy is that with neither the US or China backing India completely, their conduct with Pakistan becomes a determinant for India’s success as an international player.
Regardless of which of the three schools of thought the Indian government aligns itself with, the highest common factor for all the three is a substantial and rapid rise in India’s power — economic, military, maritime and political. Unless that happens, India’s options with any major power will always remain less than their options with each other.
India Policy Watch: What’s a Tax Policy For?
Insights on burning policy issues in India
I feel most of us are underestimating Indian taxpayer. If he has money in his hand, he is the best judge where he wants to put it — whether to save it or spend it on a house or vehicle or insurance… Indian taxpayers are now mature enough to make their savings and investment decisions independent of policy nudges by the government… the ‘old-fashioned’ way of directing investments to insurance policies and other products was limiting the options of tax-payers on what they could do with their money… We thought we should open it up and leave it to that person who has got the money to decide where he wants to put it.
At least, this narrative shift is encouraging. It’s one of the rare examples of an Indian government articulating the sentiment behind Hayek’s The Use of Knowledge in Society.
Multiple exemptions in tax policies in order to change personal investment behaviour distorts markets. I hope you haven’t forgotten how a sophisticated market of fake medical bills had arisen because of the exemption that governments provided for medical claims in the past.
This year’s budget hasn’t gone the whole hog in this direction though and has given an option to the taxpayers to move to the new tax regime. Hopefully, this is an intermediate step towards getting rid of exemptions and deductions altogether.
The mantra for tax policy should be: broaden the tax base and lower the overall rates.
Reading and listening recommendations on public policy matters
[Article] For a nuanced take on the Fifteenth Finance Commission recommendations, read this article by Dr Rao.
[Podcast] Anupam and I discuss why you are better off letting your financial advisor follow the budget. Economic policy doesn’t get made just on Feb 1 every year.
[Book] Gautam Bhatia’s The Transformative Constitution: A Radical Biography in Nine Acts brings to life the story of social revolution through the Indian constitution.
[Paper] This Nature paper has a core insight - Humans naturally prefer fair distributions, not equal ones. And that when fairness and equality clash, people prefer fair inequality over unfair equality.
That’s all for the week. If you like this newsletter, please do read and share.