#264 Ideas Travel. Bad Ideas Travel Farther.

A Week of Several PolicyWTFs, Agglomeration Effects in High-tech Industries, and How to Stay Sane in the Information Age

PolicyWTF: Sangh Sings The Blues

This section looks at egregious public policies

— RSJ

We had a mid-week edition after a long time. On Wednesday, we published a compendium of sorts for all the Policy WTFs we have compiled on these pages over the past four years. It is a pretty impressive list of muddled policy thinking that’s quite common in India. The list could have been longer, but, to be honest, we have become lukewarm about dissecting bad policy decisions of late. Either we find the policies are a rehash of the older ogres that we have written about, or they are so transparently badly thought out that there isn’t much to elaborate on. A sense of ennui had set in about PolicyWTFs in our lives. 

PolicyWTFs—A Hall of Shame

But no sooner had we published that glorious hall of fame of bad policies, which, kind of bookended our pursuit of them, our policymakers took up the challenge with a slew of policy announcements meant to encourage us to never give up on them. In a coordinated set of actions cutting across party lines, policymakers decided they could not let down our little newsletter. I have a reasonably long list of such announcements to choose from last week.

I mentioned in an earlier edition that we will have to wait and see what lessons the parties draw from the 2024 mandate. As I suspected, they have drawn all the wrong ones based on evidence thus far. We are back to announcing random welfare schemes that defy economic sense. They range from the U.P. government’s decision to have nameplates of owners for eating establishments during the ‘kawadia yatra’ - because the yatris should know which ones are Muslim owned and not have their dharm bhrasht - to a random scheme in West Bengal (called the Taruner Swapna scheme) where the state government will provide financial assistance to students who have passed Class 11th to buy smartphones. 

These apart, there’s the Maharashtra government, which stands alone in the business of announcing schemes in the last couple of weeks. There’s the Laadka Bhau Yojana that will provide a monthly stipend to young men through apprenticeship programmes coordinated through a government portal that will work like an online employment platform. I’m unsure what kind of demand exists for employing a million such unemployed men. Still, the government has earmarked stipends of Rs 6,000 for class 12 graduates, Rs 8,000 for diploma holders, and Rs 10,000 for bachelor's degree holders. Then there’s the Mukhyamantri Majhi Laadki Bahin Yojana in the budget, a scheme that’s a copy of the Laadli Bahen scheme of the Madhya Pradesh government, under which a monthly sum of ₹1,500 would be given to women in the age group of 21 to 60 who are either married, divorced or destitute (whatever that means). Then there’s the Maharashtra Mukhyamantri Teerth Darshan Yojana, which aims to provide an all-expenses paid trip to any pilgrimage site within Maharashtra for those over the age of 60. There’s also the Maharashtra Pink eRickshaw Scheme in which a maximum financial assistance of Rs. 80,000 will be provided to the women of the state to purchase an eRickshaw. And here’s the kicker - these Pink eRickshaws will only be used to transport women passengers from one place to another. I will be keen to see how this will be implemented. To round off a satisfying week of work, the state government also announced the Punyashlok Ahilya Devi Holkar Women Start-Up Scheme, where financial assistance ranging from Rs. 1,00,000 to Rs. 25,00,000 will be provided to all startup women entrepreneurs.

If announcing schemes were an Olympic sport, the Maharashtra government would have clinched a gold for us in Paris this month. The state elections are three months away. None of these schemes will see any real impact in this narrow time window. The exchequer will only lose money in these three months, and middlemen or fixers will work with the bureaucracy to dole out these funds in priority to whoever they think is eligible. This kind of tokenism is rife across political lines in India, and there’s little that ordinary citizens can do except possibly punish it at the polls.

That brings me to the most discussed PolicyWTF of the week. The Karnataka state cabinet on Tuesday approved the Karnataka State Employment of Local Candidates in the Industries, Factories and Other Establishments Bill, 2024, which mandates a 75 per cent reservation in non-management jobs and 50 per cent in management jobs for “local candidates”. After some serious backlash from the industry and also from within the Congress party, the draft bill was put on hold. This kind of reservation is plain stupid and regressive. We wrote about this when Haryana had done something similar in 2021. A lot of writing about such repeated egregious PolicyWTF is to rehash what we had argued against in the past and just replace Haryana with Karnataka. Because these bad ideas don’t get old, and neither do our rants against them. 

India is a union of states. The federal structure enables better governance through devolution of power and accountability closer to the citizens. At least, that’s the design. The union enables free movement of citizens across the states, a common currency and monetary policy and control over a large part of the fiscal policy. Despite many flaws, this is an arrangement that’s worked. This reservation policy, left unchecked, will hurt it. Let me count the ways:

1. There’s nothing to redress: There are instances when the moral argument in favour of reservation overrides everything else. A long history of subjugation of a race, ethnicity or class of people is an example of it. Reservation becomes a tool to overcome prejudices and offer them a level playing field. Philosopher John Rawls called it justice as fairness that should take priority over the utilitarian lens to maximise social output. There’s no evidence to suggest the youth of Karnataka have been discriminated against for generations.

2. In the long run, employment in Karnataka will be dead: Does Karnataka have skilled unemployed youth to fill up 75 per cent of all new jobs created in the state? If Amazon were to open a large development centre in Hubballi with an intention of hiring 10,000 high-quality engineers, would Karnataka be able to serve 7500 eligible "locals" to them? The answer is no. Besides, why will Amazon constrain itself with this talent pool when it wants to tap the best engineering talent in India? Why will any company want to add capacity in Karnataka? They will take their business to another state.

3. Moral Hazard: What’s the incentive for the Karnataka youth to do well in studies in the medium run? The reservation would mean with mere threshold qualifications, they will be a shoo-in for most jobs. Once in a job, what’s their incentive to work hard? They can free ride because the 75 per cent ‘local’ metric will become the primary constraint for the company rather than competence. Karnataka youth will not be competitive, and the employers will lose productivity. It’s lose-lose all around.

4. Rent-seeking: The whole arrangement is tailor-made for a large but weak state to play its favourite sport—rent-seeking. The ‘business’ of issuing domicile certificates will take off at the lower levels of the administration. Companies will have to receive permits to hire for skills they can’t find in Karnataka. How will they prove this scarcity? The bureaucrat will be the overlord deciding on this. This absurd, arbitrary clause will be abused. This is but a step away from a bureaucratic nightmare.  

5. Partial equilibrium thinking: Karnataka is doing what it thinks is good for its citizens. How will other states respond? This will trigger similar populist moves in states that have one or more regional parties. If that comes to pass, labour mobility will be restricted across states. This will distort the labour market and reduce the competitiveness of states. Any company planning to invest in India will have to contend with a labour market that is ‘balkanised’. India isn’t an easy place to do business. If this becomes a contagion with other states joining in, we will struggle to attract investments. The general equilibrium effect will be terrible. Also, the other states could choose a tit-for-tat response by discriminating against candidates from Karnataka for jobs in their states. This is a slippery slope for our federal structure.

6. Over-regulation: Like is usual with the state, the eventual law will have threats, fines and punishment for non-compliance. As the political ends of this law become difficult to achieve because of the lack of logic in the law itself, the state will overreach. The law will become more stringent with worse results for everyone.

These are all the unintended consequences that can be anticipated. Yet we will see some distorted version of this bill come back because the basic task of creating an enabling environment with good infrastructure, easier laws and a quality labour market to help entrepreneurs create more jobs is the more difficult part. Dividing up the pie arbitrarily to help one section over the other is easier.

PS: Separately, I don’t worry about bad policy announcements in India beyond a point. There’s a reason for that. Long ago, when I was just about getting into a leadership role at work, a mentor gave me a 2X2 framework on how to assess the managers in my team. The framework was simple - on one axis, there’s the ‘strategic thinking’ ability (low or high), and on the other, you have the ‘execution’ ability (good or bad). The one set of managers he told me to be most worried about was those who went into the grid marked ‘low strategic thinking - good execution’. That’s the lot that can inflict serious damage. The Indian state falls into the other grid here: 'low strategic thinking - poor execution’. Here, the damage is limited because no matter how bad an idea is conjured up, poor execution means it will never have as bad an impact as it sounds. That’s what has saved us so far. That’s why I always look at the state getting better at execution with anxiety because any such improvement must be preceded by clearer thinking about policymaking.  

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India Policy Watch #1: We Shall Never Learn

Policy issues relevant to India

— RSJ

Three news reports for you.

First, from ET on June 22, 2024: India’s ‘sin’ is govt’s bounty: GST cess may deliver Rs 70,000 cr bonanza

The Centre is anticipating a significant surplus of approximately Rs 70,000 crore from GST compensation cess collections, even after repaying loans taken during the Covid-19 period on behalf of states. This unexpected windfall is due to robust collections from sin goods like pan masala, cigarettes, and automobiles. The GST compensation cess is levied on so-called sin goods over and above the peak 28% tax they attract.

Second, this sad news from The New Indian Express on June 22, 2024: TN hooch tragedy death toll climbs to 37; 'illicit liquor sale was rampant in Kallakurichi, police turned a blind eye'

Kallakurichi in Tamil Nadu, about 240 km from the state capital of Chennai, is enveloped in grief after the death toll in Wednesday's hooch tragedy rose to 37. The numbers are likely to go up with 14 more said to be in a critical condition.

The tragedy was waiting to happen. Locals say Illicit liquor sale was rampant in Kallakurichi. Police failed to take action against the illicit liquor sellers, they said.

Most of the victims are daily-wage workers. They cannot afford Indian Made Foreign Liquor sold in Tasmac (The Tamil Nadu State Marketing Corporation) outlets. Hence, they depend on spurious liquor, which comes at a cheaper price. The victims had consumed illicit liquor sold in two huts and fell ill.

The Union and the state governments can keep raising taxes on ‘sin’ goods or banning them. Such taxes or bans won’t change social behaviour. They will either send the market for such goods underground and make criminals of ordinary citizens or create a market for cheap, unsafe knock-offs for the poor to consume. This never ends in India because we don’t learn. 

And to the third news report.

From the Hindu Businessline, June 21, 2024:

The Telangana Cabinet has decided to waive farm loans (up to ₹2 lakh each) to the tune of ₹31,000 crore before the August 15 deadline set by Chief Minister A Revanth Reddy. Announcing this here on Friday after the Cabinet meeting, the Chief Minister has said that the Government would clear the loans in one go before the August 15 deadline. The decision is likely to benefit 47 lakh farmers in the State. The Chief Minister modalities for the loan waiver will be notified soon.

Well, who is going to pay for these waivers? What’s the point of having banks and financial institutions go into Bharat and build a ‘credit culture’ if borrowers know they won’t have to repay a loan because the government will offer a farm loan waiver soon? But who cares about moral hazards and the long-term consequences?

Hum dekehenge, again. 

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India Policy Watch #2: Some Marks Are Indelible

Policy issues relevant to India

— Pranay Kotasthane

RSJ has expertly given the Karnataka local reservations bill the ‘Anticipating the Unintended’ treatment. Small mercies that the legislation has been put on hold for now. But ideas travel, and bad ideas travel further. So, we will likely see many more such intuitive, simplistic, and outright harmful policy solutions for the unemployment problem.

However, I want to add one additional point that was missing in the debate over the bill—the significance of agglomeration effects.

Of the many criticisms of the Karnataka local reservations bill, one is that companies will take their business to another state. Lokesh Nara, a minister from Andhra Pradesh, echoed this argument by amplifying NASSCOM’s statement that expressed disappointment with the bill, with this quote-tweet: “We understand your disappointment. We welcome you to expand or relocate your businesses to our IT, IT services, AI and data center cluster at Vizag. We will offer you best-in-class facilities, uninterrupted power, infrastructure and the most suitable skilled talent for your IT enterprise with no restrictions from the Government.” A couple of years ago, the then Telangana IT Minister made a similar pitch for Hyderabad in response to one of the countless genuine Twitter rants about Bengaluru’s multiple governance failures.

From a business perspective, it’s good to see this kind of competitive federalism play out in public. Before GST, this competition would have played out through “beggar thy neighbour” policies with promises of tax breaks and tax cuts. But since the tax rates are now fixed, states are trying to woo companies with measures that would actually make doing business easier across sectors. Three cheers to such competition.

But from a policy analyst’s perspective, I think that attempts to displace high-tech hubs like Bengaluru are unlikely to be successful. The reason is that agglomeration effects are way too strong in high-tech industries. In 2019, Anupam Manur and I explained this argument in Deccan Herald in 2019:

For instance, the high-tech industry in the US tends to be concentrated in a small number of expensive labour markets. Recent research by economist Enrico Moretti finds that more than half of all inventors in the US in three high-tech fields – computer science and information technology (70%); semiconductors (79%); and biology and chemistry (59%) – work in clusters of just 10 cities across the vast country. Moreover, this concentration has only become stronger over the last five decades, pointing to the benefits of increasing geographical agglomeration for inventors.

Investigating the reasons for clustering, the research finds that an inventor moving from a small cluster to a large cluster enjoys an increase in annual productivity, as measured by the number of patents produced in a year or the number of citations. Had the same number of inventors been uniformly distributed across the country, the industry as a whole would have been less innovative.

There is ample evidence for this clustering effect in other countries as well. For instance, economists Carrincazeaux and others found that six regions in France accounted for 75 per cent of all corporate R&D workers, compared with 45 per cent of the production workers.

The most likely explanation for clustering is that technological progress builds upon itself, with the expansion of invention in one domain propelling future work in linked fields. For example, Daron Acemoglu and others in a 2016 study found that a stable “innovation network” acts as a conduit of this cumulative process of technological and scientific progress.

Agglomeration effects occur in cities also due to the sharing of common inputs (from high-speed broadband to computer science engineers), a better quality of supply-demand matching in the labour market, spillovers of tacit knowledge from one firm to another, and finally the development of institutions and universities that create and sustain the technology clusters.

Thus, even in a large, developed country like the US, top Biotech and Robotics companies still prefer the Boston area. And Silicon Valley remains the magnet for many waves of computer science businesses despite other cities wanting to displace old hubs.

What it means for us is that in the IT sector, Bengaluru’s dominance is unlikely to be displaced soon. Many cities and governments have tried over the years—Pune, Gurgaon, Hyderabad, and Chennai, to name a few—but agglomeration effects have prevented a large-scale outmigration of firms from Bengaluru despite the many under-governance problems. Similarly, Mumbai continues to be a finance hub despite the many attempts to shift the centre of gravity away from it.

Important implications arise from this argument. If Karnataka were to implement the local reservation bill, it is unlikely that technology companies would shift to another Indian city. Rather, it’s more likely that companies will not make future expansions altogether or move crucial global business functions out of India. In other words, Bengaluru’s loss will not be another Indian city’s equivalent gain. It will be a deadweight loss for India as a whole.

This line of thinking also presents an alternate policy paradigm for the state government. The focus should be on making Bengaluru bigger and better instead of dissipating its advantages in the wild goose chase that goes by the name ‘balanced regional development’. The state government should also enlist support from the union government for the Bengaluru Project. The pitch should be that without Bengaluru becoming a bigger, better, more livable place, India will not be able to achieve its goal of a Viksit Bharat 2047. By joining hands with the high-tech companies here, the government should pitch for special grants commensurate to Bengaluru’s status as an irreplaceable growth engine not just for Karnataka, but the whole of India. Agglomeration effects need to be rewarded, not disincentivised.

Jobs ಬೇಕು. Job Reservation ಬೇಡ. (We want jobs, not job reservations). That should be the pitch.

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A Framework A Week: Defence Against the Dark Arts in the Information Age

Tools for thinking about public policy

— Pranay Kotasthane

We live in the Information Age. Staying sane in this era of mass generation, consumption, and dissemination of information requires us all to take a course on the Defence against the Dark Arts in the Information Age. If I were to design such a course, a core module of this course would be the Illusion of Increasing Problems.

Read any newsfeed and it is filled with the things that are wrong with the government, society, and markets. Since government and market failures are well-understood, such reportage encourages us to design corrective actions and figure out policy alternatives. In contrast, the news items that expose social ills like those concerning discrimination and hatred only make us sad. Since solutions to social problems aren’t as well understood as government and market failures are, they make us despondent. They are the Dementors of the Information Age.

Once you see a report about some social wrongdoing, you cannot unsee it. Given how the Information Age operates, you will most likely find another instance of a similar kind in quick succession. Soon enough, you have concluded that the social problem is worsening, humans are becoming more evil, ruthless, and so on.

That’s why understanding the nature of information flows becomes important. Increase in reporting of a social evil is not the same as increase in the prevalence of that social evil. Most likely, it’s the reverse for two reasons.

One, media is in the business of information. The objective is to capture our attention, and nothing grabs attention quite like the unusual or unexpected. Common events provide less information and are less newsworthy, while rare events provide more information and are more likely to be reported. This finding follows from Claude Shannon's foundational work on Information Theory, in which he proved that the informational value of an event is inversely proportional to its probability of occurrence. Thus, the increased reporting of an issue might be reflecting this artefact of information; it does not directly imply that the world is becoming worse.

Two, the moral arc is expanding, as Michael Shermer writes. Two hundred and fifty years ago, no newspaper in the United States would have reported derisively that Thomas Jefferson owned slaves. This omission wasn't due to any vileness on the part of the newspapers, but rather because the practice of slaveholding among the wealthy was so commonplace that it wasn't considered newsworthy. That piece of news had low information content.

Fast forward to today, and any hint of forced labor or human rights violations would make front-page news. This shift in reporting doesn't mean that slavery has become more prevalent – quite the opposite. It's precisely because such practices are now rare and universally condemned that they warrant extensive coverage.

Consider, for example, reports of environmental pollution by firms. Decades ago, such incidents might have been so commonplace that they rarely made the news. Today, each report is treated as a significant event, not because these problems are more prevalent, but because our moral arc has expanded, and such occurrences have become less acceptable and less frequent.

Understanding this inverse relationship is crucial for maintaining our sanity and optimism in the face of seemingly endless negative news. It doesn't mean we should ignore social problems or assume that things are necessarily getting better. Rather, when we see repeated reports of a particular issue, we must ask:

1. Is this being reported because it's becoming rarer and thus more noteworthy?

2. How does this compare to the prevalence of the issue in the past?

3. Does the increased reporting reflect changing societal values?

By asking these questions, we can better contextualise the information we receive and avoid falling into the trap of pessimism.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] Over at Puliyabaazi, we recorded an insightful episode on Pakistan’s macroeconomy with Uzair Younus.

   पाकिस्तान का आर्थिक सफ़र। Understanding Pakistan's Economic Challenges ft. Uzair Younus

2. [Survey] There are not many good places to understand Indian public opinion on China. So, here’s a periodic survey by the Takshashila Institution on India-China relations that's open to everyone. The survey only utilises meta-data for analyses. Please consider taking it.

3. [Courses] There are three short, online, cohort-based courses on offer at OpenTakshashila that readers of this thoughtletter might enjoy—one on Space Power, another on Life Science Policy, and one on Sports Governance. These are cutting-edge topics in public policy and geopolitics. So do check them out, and get equipped. 

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