#58 Mandir Wahin Banega. State Kahaan Banega?

Gold Rush, Confucius Institutes, Handloom Weaves, Trade Policy, and more

Aug 10, 2020

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?

India Policy Watch #1: PM’s Surplus Political Capital

Insights on burning policy issues in India

— Raghu Sanjaylal Jaitley

So, what are the policy consequences of the Ram mandir bhoomi pujan led by the PM this week at Ayodhya? This was the most significant socio-political event of India since 1992. There have been a few insightful commentaries on the political implications of the moment but none on what it means for policymaking by this regime.

We have written about our view of the Indian state in the past editions. This doesn’t change in large measure with a change in government. Like we wrote:

“A Republic of no, instinctive, reflexively socialist and privileging symbolism over substance – that’s what this crisis reveals about the character of Indian state. This is also useful to understand why the lines that divide political thought in the western democracies don’t have much relevance in India. Left versus right, liberal versus conservative or libertarian versus statist; these divisions don’t animate Indian political discourse as much. Our core beliefs, that which the state continues to nurture to retain its monopoly over violence, are to be statist, socialist and conservative. Those in opposition to these will remain a minority.”

It is one of the reasons why we aren’t interested in politics as a parlour game. However, we take a keen interest in political events and their policy implications in this newsletter.

The Three Narratives

The political op-eds have been on expected lines. There’s been the usual lament from the left-liberal group that saw this as an ‘end of something’. That something has ranged from the ambiguous ‘idea of India’, the tired old Nehruvian consensus or our indigenous confused version of a secular state. This is a fast-shrinking space restricted to a few opinion makers writing in English for print media and a handful of online news startups. The nature of this event and the groundswell of support it had precluded a lot of usual suspects to queue up this time.

On the other end of the spectrum were the ‘beginning of something’ columns. The argument here was this event marked a coming to terms of the Indian state with the long-suppressed but dominant strain of belief in the society. The pseudo-liberal nature of our constitution that was at odds with our society created a state of knowing deceit. With this act, we have unloaded the secular burden that impeded our progress. This is the dominant narrative today with the non-English print and almost all of TV media at the van of it.

Somewhere in between these two is an opinion that sees this for the event it is and nothing more. It is good that we are done with this festering dispute and we should get on with our lives now. This is, possibly, the view of the silent majority but this narrative is under-represented.

With these narratives in the backdrop and reflecting on the incentives of the party in power, we can think through the policy impact using three frames.

Splurge, Save or Invest?

For the PM and his party, this event was the culmination of the three-decade long efforts they invested in this movement. They are now sitting atop the largest corpus of political capital in our history. You can dispute their way of attaining it. But you can’t question this fact. This is a heady feeling that can turn the heads of the best among us. Like any financial advisor will tell you, there are three options available for anyone with surplus capital.

They could save it in low-risk assets and use them on the proverbial ‘rainy day’. This implies safeguarding the capital to be used for the big state elections and for 2024. On the policy front, the government plays safe and doesn’t push the agenda on structural reforms that could have negative political consequences. They continue to rely on the usual tools of symbolism, acronymising and a few big bang announcements to keep the pot stirring.

The other option is to splurge. This is a natural instinct. The government and the party could spend the surplus capital to pursue other ‘core cultural issues’ close to the hearts of the strident and vocal minority in their base. This overreach could mean social unrest and worsen the economic performance with policymaking held hostage to such issues. In the long-term, the Minsky cycle of boom and bust would apply. The seeds of a bust will be sowed in this boom through this splurge.

The most prudent option, like any good financial advisor would tell you, would be to use this capital to invest for the long-term. This is difficult. It requires setting strategic objectives, deferring gratification, and seeking advice from a variety of experts on where to invest the political capital. While we would like the government and the party in power to use this option, there’s very little incentive for such long-term thinking and nothing in the record of this regime has shown their enthusiasm to seek specialist advice.

We expect the regime to splurge a lot, save some and we will be happy with whatever little they invest. Their incentives work that way.

The Diminishing Marginal Utility Of ‘Identity Issues’

There is another problem. The dominant narrative among the partisans is about this regime closing out long-pending core issues of our identity that held the nation back. WhatsApp groups are full of such constructed messages. These include Article 370, Ram Janmabhoomi and CAA. The problem that’s going to confront the regime soon is that of diminishing marginal utility of such issues for its base. When such issues were open, they kept the base energised. The resolution of these has given them great satisfaction. But this will diminish with every additional core issue resolved.

Two scenarios could emerge.

One, the regime keeps a steady flow of new issues hoping the sheer quantum of them makes up for the reduced utility of each unit. This could lead to a steady drumbeat of smaller issues to feed the insatiable appetite of the base. Dismantling Bollywood mafia, replacing biased academics, rewriting history books, renaming monuments, reclaiming the purity of the language, finding newer disputed sites - the list is endless.

Or, the base asks for the more ‘impossible’ goals in their search of higher utility. This could mean possible mainstreaming of the fringe demands for fundamental amendments in and revisions to the constitution. These are real possibilities and they would push policy imperatives down the list of priorities.

Homogeneity Is Fragile

Lastly, there’s a trend over the last decade towards homogenisation of the Indian society driven by the party in power in consolidating a Hindu nationalistic platform. This is a great success in two ways.

The broad platform with nationalism at its foundation allows it to turn every failure or crisis into an opportunity for people to rally under the flag and stand with the PM. This strategy worked like a charm as the experience of countering the twin crisis of the pandemic and the Chinese incursions with ‘aatmanirbharta’ showed. This turns all policy-making deterministic. The focus won’t be to find an appropriate policy response. Instead, it will be to find a response that fits the narrative. This can’t be good.

The heterogeneity and the splintered nature of the social groups were our natural safety valves against majoritarianism. The phenomenon of sub-nationalism and politics of identity involving castes, sub-castes, language and other ethnic markers were countervailing forces that, arguably, slowed progress but provided stability and prevented concentration of powers. This obliteration of sub-groups within the majority is the other success of homogenisation. Its benefits are yet to be seen and the history of other nation-states does not inspire confidence about it. But its cost is a fragile society.

Will a counterpoint emerge to this homogenisation? Again, history suggests it should. But it will require political acumen and organising skills that are missing in the current political set up to buck this megatrend.

How Does 2029 Look?

Let’s take a decade-long view of the impact of the events of this week. The most likely scenario will unfold this way. The current regime will splurge its political capital to take up more contentious issues that offset the diminishing marginal utility of its base. This will hurt sound policymaking and its implementation. The government will save some of its surplus capital to win elections between now and 2024. As economic performance stalls, its policymaking will turn more nationalistic and inward-looking with a few big-bang reforms thrown in at times of crisis. Finally, as we mentioned earlier, the seeds of the decline will be sown today, and it will play out by the end of this decade.

Of course, there’s a possibility that the PM takes a long-term view, invests the surplus political capital in strategic areas and rediscovers his promises of 2014.

Don’t hold your breath on that though.

PolicyWTFs: Confucianism or Confusionism?

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

— Pranay Kotasthane

Carlo M Cipolla in his 1976 classic The Five Basic Laws of Human Stupidity says:

"A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses."

Now consider some of India’s responses to counter the PRC’s arrogance. First, India altered its FDI policy, making it difficult for Chinese investments to reach Indian companies. After the Ladakh standoff, India banned a few Chinese apps. Then came the increase in import restrictions.

And the latest arrow in this quiver is to make learning Mandarin difficult. The New Education Policy 2020 dropped Mandarin from its list of suggested languages for secondary schools. And then on July 29, India’s Ministry of Education sent a letter to institutions asking information about the activities of their Confucius Institutes (CIs) and Chinese language training centres. A magnanimous government official even had this to add:

“All we are doing is reviewing the functioning of institutes and operationalising the MoUs. It is not done with a pre-determined mind to close them. We want to know what is in it for Indian students and India”.

Using Cipolla’s definition, all the actions above can neatly be classified as being stupid — they might or might not hurt the PRC but all of them definitely hurt Indians. We have featured many of them in our previous PolicyWTFs so we’ll save you from some more scrolling and focus only on the latest one concerning Chinese Language Training.

The first argument in support of banning Confucius Institutes (CIs) is that these institutes act as conduits for espionage. These fears have led to closures of a few CIs in Belgium, Sweden, and Denmark. A closely related second charge is that such institutes offer a platform to disseminate the PRC’s propaganda and encourage censorship. So the argument goes, if these countries can ban CIs, India should follow suit.

Let’s take a step back to understand why the situation in India is quite different. CIs, unlike the Alliance Française or Goethe-Institut, don’t have a separate existence of their own. Instead, CIs are partnerships of Chinese universities with universities and colleges in a foreign country, partly funded by Hanban, an affiliate of the Chinese Ministry of Education. CIs are often housed as a centre within the foreign university premises offering Chinese language courses, scholarships, and organising cultural activities.

This close linkage between universities and CIs has created problems in many western countries. Remember, these countries were not even willing to acknowledge the PRC’s nefarious designs until only a few years ago. Consequently, they allowed CIs to proliferate in their universities. Secondly, these countries threw their doors open to students from China, who soon became a significant source of revenue for the universities.

At the extreme end, it is this combination of a significant Chinese student population and the presence of a PRC-funded CI on the same campus that became problematic from an academic freedom angle. Views opposing the PRC (from Chinese and non-Chinese students) got clamped down in some universities. Meanwhile, CIs stayed true to their role of being touchy about any topic even remotely critical of the PRC.

Now return to the Indian case. Neither do our universities have any significant student population from China nor do the CIs here run sprawling operations. The key difference is that the perception of PRC as a strategic threat is not new for India. Consequently, India has always kept a distance from CIs. There have been no cases of espionage in the public domain. Even the three CIs that exist in Indian universities barely function as Chinese Language Centres for Indians trying to learn Chinese. For instance, here’s a description of the activities that the Chinese Langauge Centre at Vellore Institute of Technology (VIT). It hardly indicates any cause for concern.

As a Mandarin HSK-4 student, I have been to this VIT CI to take an exam. I found out that there were not more than four people in the centre. The Indian government was quite stringent when it came to the extension of work visas for the employees there. The key point is that the threat to India from CIs has been managed quite well and there is diminishing utility in stopping them further from teaching Mandarin to Indians.

The second argument in favour of such restrictions is that exercising this option is a part of an overall strategy to teach the PRC a lesson for their adventurism on the Ladakh border. To this, my response is that if the only options we can muster to counter the PRC’s military escalation are inward-looking bans that restrict choices of Indians, it shows our weakness rather than our strength. At any rate, these aren’t responses proportional to what the PRC has done on the border. India can and must do more, in a domain that hurts the PRC proportionally. The time for picking low-hanging fruits is long gone.

A third argument is that India can merely substitute CIs with language education centres from Taiwan or Singapore. To which I would say, it’s a case for the more, the better. The PRC is a structural adversary about which we know very little. It’s perhaps for this reason that our first instinct to Chinese aggression is to find fault with our own strategy. Efforts that can help more Indians understand the PRC’s state, society, and markets better will help bridge the knowledge gap. Learning China from different perspectives will help India and Indians counter the PRC better.

In sum, the threat of CIs that have motivated actions in the West does not quite apply to the Indian case. We need to tailor our response based on Indian conditions and priorities. The fear of PRC’s propaganda is overrated. The alienation with the PRC runs deep because of the CCP’s own doing. Finally, we can anticipate the unintended — banning CIs will merely move Mandarin teaching online. Will the government then ban apps teaching Mandarin next?

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” — Sun Zi

India Policy Watch 2: Macro Musings On Tariffs, Gold and Handloom Weaves

Insights on burning policy issues in India

— Raghu Sanjaylal Jaitley

Few random macro musings for the week.

The Panagariya Limit

This week we discovered the ‘Panagariya Limit’. It is the threshold where any further defence of something you love will hurt you.

As Business Standard reports:

Answering queries at India@75 Summit, organised by the Confederation of Indian Industry, he said though Aatmanirbhar Bharat policy of the government did not talk of restricting trade, tariffs have increased since then instead of coming down.
He said increasing tariffs would encourage micro and small firms to remain as it is since their domestic market will be assured. Pointing out that the notion of comparative advantage is bit subtle, Panagariya said the misconception is that if imports are substituted by local production, the economy will become big in size.
In fact, curtailment of imports reduces exports, he said, adding the economy will then produce what it is not good at producing and will not produce what it is good at producing. (emphasis ours)
The professor of economics at Columbia University said imports and exports move in the same direction if you see their long time series. (emphasis ours)

Such wise words.

After having defended demonetisation, dodgy GDP data, banking sector mess, a few lacklustre budgets and lockdown strategy, you could be forgiven to think the sky is the limit for the good professor in putting his politics over economics. Apparently not. When you have built your career as an advocate of international trade, defending protectionism will be akin to lighting up a giant bonfire of all your papers and books and dancing around it singing jhingalala hoom while Dharmendra sings hum bewafa hargiz na thae.

That’s where he draws the line.

p.s: We often recommend his books (co-authored with Jagdish Bhagwati) — Why Growth Matters and India’s Tryst with Destiny. They make a lot of sense.

Sona Kitna Sona Hai

Our regular reader Bappi Lahiri is smiling as he reads this. Gold price is at an all-time high. It is up 33 per cent since the start of the year.

Does it have any policy implications for India? Maybe.

Two things stand out in the rally. One, after a long time more coins and bars are being sold than jewellery. That means investment in gold is outstripping consumption. Two, the big retail markets of gold, India and China, are down on purchase this year because of the lockdowns. Once they get back to their usual consumption levels, the prices could go up further.

What does this gold (and silver) rally mean? The headline message is people are moving their money out of financial markets into gold as a hedge. Over the long-term (like 100 years), the real purchasing power of gold is on par with any other commodity. But during a financial crisis (not related to wars), gold maintains it purchasing power while other asset classes like stocks or bonds lose theirs. Also, the liquidity of gold has increased over time that has enabled easier trade leading to more speculation.

Anyway, the gold rally could continue for some more time. There are many things going for it:

Stock markets are shy of an all-time high. No one knows why. The one big reason given is the Fed going out of its way to hold up the US economy. The unemployment checks ($600 per week) the US treasury sent out during the last quarter meant personal income in the US rose by 7.3 per cent in Q2 over Q1. These checks will stop soon. Somewhere down the line, the markets will take note of the real economy. So, expect a correction and possibly, a switch to gold among retail investors when that happens.
US interest rates are the lowest they have ever been (current target rate is 0 to 0.25 per cent). The 10-year bond yields are at 0.56 per cent. This isn’t changing in a hurry.
The trillions of dollars that the Fed and Treasury are pumping into the economy will keep the spectre of inflation alive. Inflation will show up in the medium term. Also, there is another stimulus due and more printing of dollars. The dollar will struggle to stay at its current levels. It isn’t as safe a haven this time as it normally is during a crisis.
A combination of the above factors will increase the allure of gold as a safe store of value.

So, what’s the policy implication for India? The union government fiscal deficit will end up around 7-9 per cent of GDP for the current year. The revenue collections will fall short by a margin given the economic activity so far this year. The RBI has about 620 tonnes of gold reserves in its balance sheet (June 2019 data). The rally in gold so far this year has meant the unrealised gains on gold reserves could be north of Rs 2.5 lakh crores. The macro trends support a continuing gold rally.

Should this Rs 2.5 lakh crore gain be transferred to the government to help fund the deficit this year as an extraordinary measure?

Why not?

Handloom Weaves For Children

Here’s something to think about.

During the interaction attended by the Minister of Textiles, Sadhguru spoke about the need to encourage the Indian textile industry by introducing handloom products in schools, tourism circuits and aviation industry.
He also pitched for school uniforms to be made from handmade weaves.
It is a crime to wrap a child in a polyfiber. You do that to dead fish, not to living children. Especially a child's body is very vulnerable to this both their physical and psychological wellbeing is impacted by polyfiber entering into their system," Sadhguru said.

Sadhguru operates at a higher plane of consciousness. Plus, I haven’t seen a dead fish clad in polyfiber. So, I’m not qualified to comment on this.

But at the lower level, here’s the ‘National Nutrition Strategy’ document prepared by Niti Aayog in 2017. As this PRS report indicates:

India’s performance on key malnutrition indicators is poor according to national and international studies. According to UNICEF, India was at the 10th spot among countries with the highest number of underweight children, and at the 17th spot for the highest number of stunted children in the world.
Malnutrition affects chances of survival for children, increases their susceptibility to illness, reduces their ability to learn, and makes them less productive in later life. It is estimated that malnutrition is a contributing factor in about one-third of all deaths of children under the age of 5.

Before ministers and opinion-makers start worrying about the nature of fabric to wrap our children in, we must ensure we have all of them adequately fed and clothed.

Other things can wait.

Share Anticipating The Unintended

HomeWork

Reading and listening recommendations on public policy matters

[Paper] Arvind Panagariya on Debunking Protectionist Myths: Free Trade, the Developing World, and Prosperity, Cato Institute Economic Development Bulletin, Jan 2020.
[Article] Swapan Dasgupta on why ‘Ram Mandir doesn’t negate Constitution, it links antiquity to present’ in Times of India.
[Article] PB Mehta writes: Ayodhya’s Ram temple is the first real colonisation of Hinduism by political power in The Indian Express.
[Podcast] August 7th was Tagore’s death anniversary. Over at Puliyabaazi, Pranay and Saurabh discuss the treasure trove that is the Gandhi-Tagore written correspondence.

That’s all for this weekend. Read and share.